David Rosenburg's Take on the ISM "Number"

AS I wrote immediately yesterday the ISM number was just BS. The bigger question is even if you know that you know that you know this, what do you do with that knowledge? My biggest problem right now is how bearish the sentiment indicators seem to be. When your that bearish you start looking for a big turn because it usually has legs. The sentiment was this bearish several days ago but there was no wash out and I figured we would at least test 1010. The fact that we bounced so hard could we possibly go down again and break 1040 with sentiment this bearish? Seems to be a very difficult proposition which makes me think we go up or chop higher for a couple of weeks. Yesterday's rally was just miserable for bears or for those looking for clarity because it leaves everyone in no man's land.

From Rosenburg:

STRANGE ISM NUMBER ... DOESN’T PASS “SNIFF TEST”

Here’s why:

1.Most of the regional reports were very poor in August. Either they collectively all wrong or the ISM is.

2.The share of respondents saying the experienced "growth" was 61%, the exact same as a year ago when the ISM was sitting at 52.8.

3. The ISM gain was led by employment (58.6 to 60.4 - best since December 1983) in the same month that ADP manufacturing fell 6,000 (second decline in a row - it was -11k in July when ISM employment was 58.6, so clearly the latter is proving to be, at least for now, an unreliable labour market barometer). Production also ticked up to 59.9 from 57.0 and inventories rose to 51.4 from 50.2. These are all coincident indicators, as an aside (but an important aside).

4. According to the ISM, 76% of the manufacturers surveyed said that their customer inventory levels were either “too high” or “about right". At the turn of the year, just ahead of the big inventory swing that bolstered the GDP data, this metric was sitting at 60%. As a result, it would be folly to assume that the inventory and production categories will contribute to further ISM increases in the near- and intermediate-term. Norbert Ore, who presides over the ISM survey, had this to say about inventories: “If the inventory build isn't voluntary then we have a huge issue on our hands.”

5. Meanwhile, the more forward-looking components dropped, though were hardly a disaster. But orders slipped for the third month in a row, to 53.1 from 53.5 in July, 58.5 in June and 65.7 in both April and May. That is still a sharp squeeze in the growth rate of capital goods-related order books. At 53.1, ISM orders index is down to levels last seen in June 2009 (but when they were rising in “green shooty” fashion).

6.Backlogs were down as well, to 51.5 from 54.5 in July, 57.0 in June and 59.5 in May (and peaked in February at 61.0). At 51.5, order backlogs stand at their low-water mark of the year.

7. Supplier deliveries (measure of production bottlenecks) eased for the fifth month in a row — to 56.6 from 58.3 in July and well off the March peak of 64.9.

8. Looking at five decades worth of data, the share of the time in which we see orders, backlogs and vendor deliveries all decline in tandem, and the headline ISM index rise, is the grand total of 1%. No wonder equities rallied so much — we just witnessed a 1-in-100 event! Bring your camera.

9. Export orders dipped to 55.5 from 56.5 — the lowest they have been since last December. If the overseas economy is rocking and rolling, then why onearth would this component be declining? Not only that, but it looks as though yet again, a good part of the inventory boost we still seem to be getting is being filled by imports — that sub-index jumped four points in August and does not bode well for the trade deficit, which subtracted 3.4 percentage points from headline GDP growth in Q2.

In a nutshell, ISM did smash consensus expectations in August but the composition left much to be desired. The coincident indicators firmed but the categories that actually lead manufacturing activity softened across the board.

As we said at the outset, the ISM index was at complete odds with the regional surveys. Philadelphia, New York, Milwaukee, Richmond and Kansas City were all down. Dallas and Cincinnati were up. In the past, when we had a 5-to-2 ratio to the downside, the share of the time ISM managed to eke out an advance was 4%.

It would be wise to lean against the market's initial dramatic reaction to this data. The ISM orders/inventories ratio is a decent leading indicator and it sank to 1.033x from 1.065 in July. 1.278x in Julne and 1.441x in May. The hidden nugget in today's report is that this ratio has decline to levels not seen since February 2009. And the last time it fell this fast to this type of level was in the September to December 2007 period (1.03x from 1.30x) when once again, there was tremendous confusion and intense debate over whether it was a recession/soft patch in the economy and the bear market/corrective phase in equities.

Suffice it to say that in the past 30 years, with eleven observations, ISM dropped to 47x in the three months after such a decline in the orders/inventory ratio to such a low level as is the case today. That is the average, the median, and the mode. The highest ISM reading three months hence was 51.9, so if past is prescient, today's data was likely a huge headfake.

Complete BS Number

ISM just came out at 56.3. There is no way. Completely BS number. I don't care if you think the bears are on crack or if you think the world is full of tooth fairies and santa clauses, the ISM numbers do not come anywhere close to reality. Either the ISM number is wrong or about 10 other numbers are wrong.

A - the ISM is made up of regional manufacturing reports. Most of these regional subindex get reported. The Philly Fed, Kansas City, Dallas, NY Empire, etc. etc. These indexes all showed dramatic slowing if not downright contraction. The strongest sector for various reason has been autos. That gets caught up in the Chicago PMI. Even that slowed down in August as portrayed yesterday.

B - the ISM number is also split up into various components. One of those components is employment. The regional reports were showing contracting employment pretty much across the board. The ADP employment report that came out today showed contraction for the month of August. You had a large spike in jobless claims. How in the world does ISM employment go to 60.4 from 58.6??????? Makes no sense.

Some of the important components didn't look so hot. New orders went down. As did backlog of orders. And inventory up.

For today the bears get blown out of the water. The bulls get to romp and play. And a jacked up world remains jacked up. The conspiracy individuals can have some fun today also. Did somebody known yesterday what the ISM number was going to do? Remember that last MASSIVE surge in volume and futures the last 120 seconds of the trading day yesterday? And how did this ISM number come in so far from any sense of reality?

How does this play out going forward? I don't know. The rest of the day and the way the market trades will be interesting. Definitely puts 1100 back on the table as a possibility. Like I said, the big boys put high emphasis on the ISM number. We could have a few good weeks. Or this is a spasm. I guarantee you it sure killed several bears.

Bloody Wednesday?

Shzzz, the market pressure is palatable. You can feel it. Tomorrow is going to be one interesting day. Technically, tomorrow starts in a few hours with the release of China's PMI. Than you have the ADP employment report tomorrow morning before the market opens. The really big one other than the China PMI is the United States ISM released at 9:00. Anything below 50 on China PMI and below 52 on United States ISM should be a major event.

Technically the market is on a precipice. We have bounced off of the 1040 S&P area countless times and on the upside bounced off of 1070 countless times. We are going to break up or down very very soon. If we break higher I think up we go again to see 1100. I was shorting today though it is far from clear that we break down. Right now if your short you just need strong hands being willing and able to sit through a week or two of rally before once again we come back down to potentially break through the 1040 levels.

While yesterday the volume did not exist, today the volume was the highest in over a week and may have been the busiest day for all of August. It is end of the month so that may be part of it but what is interesting was the heavy volume and the market basically finished flat. Two ways to look at that. The bears used alot of bullets and couldn't get the market to move down or the bulls used alot of defensive maneuvers and couldn't get the market to move higher. Take your pick. I did not like the very end of the day (like last 120 seconds) surge in volume in the e mini futures and push higher. If it wasn't for that I would be alot more comfortable than I am currently.

So we have a few more hours to wait. 1,100 or 1,000? It makes sense the market closed at 1049.33. The market rarely likes to give clues.

Is there any chance a horrific ISM number causes a big bounce. You know, the worse the number the more the government has to intervene type of thing? I don't think so. The big money on Wall St. look at the ISM as one of the most important numbers. If it falls apart (like I said below 52, expectations are around 53 I think) the big money I think will start moving and selling. It is possible there is a lag of 24 hours or something but I think as the knew ISM number gets loaded into models that selling will take hold in a major way.

Hussman Annual Letter

Dr. Hussman of the Hussman funds came out with his annual letter over the weekend. Can be found here. He runs several mutual funds so most of the 52 pages is financials and other information required for regulatory purposes. The first few pages however has some of Dr. Hussman's thoughts which are always worth considering.

Starts with:

I continue to be concerned about credit conditions and the underlying fundamentals of the U.S. economy. In recent months, fresh deterioration in leading economic measures, narrowing compensation for credit risk, and rich stock market valuations have increased the vulnerability of equities and corporate bonds to price weakness. These concerns are reflected in the restrained exposure to risk that the Hussman Funds presently accept.

I continue to be concerned about credit conditions and the underlying fundamentals of the U.S. economy. In recent months, fresh deterioration in leading economic measures, narrowing compensation for credit risk, and rich stock market valuations have increased the vulnerability of equities and corporate bonds to price weakness. These concerns are reflected in the restrained exposure to risk that the Hussman Funds presently accept.

Really incredible the level of silliness that was reached in less than a year from the massive move down in the markets. And this is just amazing even if you previously knew it:

Given that GDP growth over the past year has amounted to $563 billion, while Federal government debt has increased by $1.6 trillion, there appears to be little evidence that the positive economic growth of recent quarters was driven by much else but the deficit spending of government and to a lesser extent, the aggressive purchase of mortgage securities by the Federal Reserve.

Talk about low return on your money.

There is much more related to valuation of the equity markets and additional thoughts on the current economic situation.

UK Home Prices Begin to Fall

Back from a nice vacation. Took until Wednesday before mentally I was able to slow down and enter vacation mode. Was kind of nice to be out of the office last week as I would have been very frustrated with the bleakness of the economic news and the way stocks for the most part shrugged them off. Very very big week for economic data with China PMI, United States ISM, and United States BLS employment numbers. It will be interesting if the market can hold it together through Labor day. Leave Wednesday for a wedding in the Northeast so will be on the road again shortly. Probably post a few things I have read that caught my interest.

Remember all that QE that was supposed to be highly inflationary for England? Well U.K. house prices dropped the most in 16 months according to Hometrack Ltd. From Bloomberg:

U.K. home values dropped in August by the most in 16 months as the housing market endured a “modest re-pricing” that is likely to last as long as a year, Hometrack Ltd. said.

The average cost of a home fell 0.3 percent from the previous month to 158,200 pounds ($246,000), the London-based property researcher said in an e-mailed statement today.

and

The report adds to mounting evidence that the housing market is weakening, and economists predict data tomorrow may show that banks granted the fewest mortgages in more than a year last month.

England and Australia remain the biggest two residential housing price bubbles. Canada is close by. Jeremy Grantham argues that England home prices are 3 standard deviations overpriced.

Another Week of Travel

Hey all - going to be out of the country all next week. Yet another trip. I have about 3 more weeks of this before hopefully things calm down.

This week should be very interesting in the markets. In fact it could be the most interesting week since June. Last week I thought was a win for the bulls. Yes the market went down but overall I thought it was very frustrating from a bear perspective. The market could have gone down alot more breaking some major resistance but the bulls were able to hold on one more week.

Coming into Monday I would not be surprised to see strength from the markets as the bounce that started late Friday morning potentially continues. Going into Tuesday though, watch out. Existing home sales could really shock some people. The market is expecting a drop in home sales but maybe not enough. From Bloomberg:

Home sales probably plunged in July, and orders for long-lasting goods climbed for the first time in three months as the U.S. strained to sustain the recovery from the worst recession since the 1930s, economists said before reports this week.

Purchases of new and existing houses dropped 12 percent to a 5.01 million annual pace, the lowest since March 2009, according to the median forecast of 54 economists surveyed by Bloomberg News. Durable-goods bookings climbed 3 percent last month, the survey showed.

Wow, a 12 percent drop. Pretty big fall but hardly a plunge.

Compare this to calculated risk.

Housing economist Tom Lawler's preliminary forecast was 3.95 million SAAR (based on a bottom up analysis).

Many of the regional reports showed sales declines of 20% or more from July 2009 when the NAR reported sales of 5.14 million SAAR. A 20% decline from July 2009 would be in the low 4 millions ...

Now that is a plunge. If that number is anywhere near correct, the market may throw one hissy fit. In general I think you sell any strength on Tuesday. Friday also could be a day the market doesn't like if GDP gets revised much below 1.5%.

Sticky Equity Prices

I found today to be extremely frustrating. I am usually pretty laid back when it comes to how the market is trading but was agitated all day today. I felt like today should have been death for equities. If I was dreaming the night before I couldn't have thought up worse data. It is scary how fast the economic numbers appear to be falling and the equity market just refuses to budge. They remain sticky up near this 1100 area. Yes the Dow lost 144 points and yes the S&P 500 was down 1.69% but we ended up right back where we were late last Friday. Above resistance. Getting a 5 handle on jobless claims I thought would have sent the market down 2% on its own. Combine that with the Philly Fed index showing manufacturing was contracting and just an across the board slaughterfest and it should have created the volume to get the market back below resistance. Instead we are sitting above resistance going into two days with no economic data and option expiration tomorrow.

I really have no idea where the next two days of trading are going to go. If I had to guess options expiration combined with geopolitical risk going into the weekend (Iran switching the switch on nuclear power) causes stocks to surprise some people on the downside breaking through resistance. Than Monday surprises everyone and reverses going back above resistance. I really have NO IDEA. I remember a similar setup in September 2008 but what you just read should be considered just interesting speculation.

What I think could put a death nail in equities next week is the existing home sales on Tuesday and GDP revision on Friday. If existing home sales come in weak enough that months of supply of housing inventory comes in above 12 months, watch out. Also GDP revisions usually mean absolutely nothing but if it gets revised all the way down from 2.4% to less than 1% (a possibility) again watch out.

It feels like the market knows it is headed lower but it is the dog days of summer with many traders on vacation and like a lazy dog it is waiting for slightly cooler temps before it starts moving.

Jobless Claims - Market Killer?

If this doesn't send the market down I give up. Jobless claims just reported. Hit 500k. The four week moving average was over 482,000. The highest number since December of 2009. This is real time data and shows what I have been saying now for weeks pointing to the leading indicators, the U.S. economy is falling. The market should be down alot but should and will are two different things. We got the bounce I chickened out waiting for but I was shorting more yesterday. Let's see if once again the market can shake off another bad number.

Consolidation

Since the last time I did a blog post the market has changed fairly dramatically as equities have been falling like a hot knife through butter . I came into today expecting some sort of bounce in the early part of this week. We had a gap down at the open and I covered some within the first hour of trading. Well we bounced but it was the most pathetic worthless bounce I may have ever seen. The lightest cumulative NYSE volume day of the year, including holidays. We sold off into the afternoon. Now the S&P future volume wasn't nearly as bad which I tend to thinks drives more of the action. Anyway, by the end of the day, while I think the odds are still for us to move higher, the potential to miss something on the downside I felt was to great so put right back on all the short exposure I took off. Very rarely I trade like that but even if we do a several day pop I do think we are headed lower. Anywhere between 1090 and 1110 is very possible for a bounce. I will be shorting most likely if we do get there.

This week is a light week for economic data which should also add to the bullish bias. Tomorrow has several economic releases but looking back to July and not terribly important. Wednesday has virtually nothing. Than you have Thursday with jobless claims and Friday with another regional manufacturing index in the Philly Fed release. That last Philly Fed release is important because it looks at August data. The jobless claims number is extremely important. We have had two gooseggs in a row. Another goosegoog and move towards 500k jobless claims could start the next move down in a serious way. Anyway, would not be surprised at a sideways action or up action for another day or two but I don't want to be to cute and potentially miss out on that not happening.

The fireworks going on lately hasn't been the equity market but the bond market. Massive gap up in bonds. So massive in fact I wonder if it wasn't some sort of exhaustion gap that you see occasionally in equities. Either way it seems to be screaming a warning to equities which try to play deaf some times.

My bigger question is if the markets can really break down before labor day or if much of Wall St being on vacation will keep the market propped a little longer as people making big money decisions just won't be around to sell if the economic data looks really bad.

Quick Take

Well today was definitely frustrating for many. Scenario A started to play out. That burst what many bulls were hoping for, a spike to take some profits. The bears didn't really get to play either. We are left wondering.

The S&P future volume surged. Yesterday we didn't break a million contracts trading hands. Today we broke 2 million. Up 100%. However, the NYSE volume was still a pathetic 980 million shares traded. Up about 25% or so from yesterday bust still did not even clear a billion.

My quick take today was that it was a win for the bears. Unfortunately, instead of being a 4th down conversion, I feel like it was just a 3rd down stop. We still have fourth down ahead of us. The interesting stuff to me was actually not the Fed release but everything going around it. The Euro was very weak early this morning. Some weak data out of Europe and sovereign bond spreads started widening out again. European government bond spreads have very quietly moved to two and three week highs. Copper was weak as was oil.

There is very little economic data tomorrow so the attention shifts to the jobless claims number. It is only significant if we have another big spike. If it stays the same or declines a little, I don't think it will mean much. The decline won't mean much because it will confirm that the spike last week wasn't significant and it is still stuck in this no man's land of 450 to 460k ish number.

So the jobless claims number could be a catalyst for a move lower as could be the June retail number on Friday. Or it could come out of Europe. Watch the Euro and European government debt spreads. Or maybe we go back to no volume, inching our way up until Labor day. Without a break below 1110 (maybe 1100), 1140 is still a very real possibility. Nothing is ever easy is it? I was shorting some today (both pre and post release) as the Fed mess is passed us at least for awhile.

I am traveling again tomorrow so not sure when I will be back blogging.