The Institute of Supply Management (ISM) has again graced us with another two reports on the Manufacturing and Non-Manufacturing ISM Report On Business®. In this and other posts on the ISM, we wish to delve deeper into the raw numbers and get a better degree of understanding of the underlying currents in the macro-economy. Along the way let us also look at other voices and opinions of the macro-view.
Headline Numbers of ISM Report On Business®.
The PMI index {manufacturing index} was reported as 56.2% and NMI (non-manufacturing index/composite index) was reported as 53.8%. Both numbers missed Market Watch’s Economic Calendar consensus numbers with ISM Manufacturing consensus at 59% and Non-Manufacturing at 55.3%. Econoday reports ISM Mfg Index as 59 consensus and the range as 57.6 to 59.7 and ISM Non-Mfg Index as 55 consensus and the range as 53.5 to 56 which indicates that only non-manufacturing fell within the range of consensus.
Both reports are remarkably similar in that the composite chart is marked most prominently in “Slower” under the rate of change. The indexes and indicators are mostly growing but are growing at a slower pace. Considering the number of months of trending growth especially in the manufacturing report, this slow-down could just be head winds slowing progress or just a small hill that will easily reverse and accelerate the growth in future months. I am just not certain that the slow-down is worth wringing hands over, but could easily frighten the equity markets as they appear to have done prior to this past week. Econoday notes the possible reaction from markets.
Today’s report is not good news for the stock market which may continue to discount economic slowing for the months ahead. Today’s report will also increase talk that new rounds of government stimulus may be in order.
Not sure another stimulus is a prudent move at least at this time. I also want to quote from both reports on the recent cooling episode.
Peak growth may have already come and gone, a worry of the global markets and indicated by the ISM’s June report on non-manufacturing.
…
The acceleration in manufacturing cooled but only slightly in June, according to the Institute for Supply Management’s composite index which slowed to 56.2 from May’s
Much has been made about the recent action in the bond market. Yields have fallen to unheard of levels. The inflationistas and curve steepener traders are bewildered. It’s clear that bond investors are expecting very low inflation in the coming decade, but some fear it is portending far worse. Famed bond guru Bill Gross is worried about the action in the bond markets – so much so that he says the current environment is pricing in a depression. The Cleveland Fed recently released a note on the predictive nature of the yield curve. Their conclusions – a slowdown is on the horizon, but no double dip will follow:
“Since last month, the three-month rate has dropped to 0.09 percent (for the week ending June 18) from May’s 0.17, and this also comes in below April’s 0.16 percent. The ten-year rate dropped to 3.26 percent from May’s 3.33 percent, also down from April’s 3.85 percent. The slope increased a mere 1 basis point to 317 basis points, up from May’s 316 basis points, but still below April’s 369 basis points.”
“Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.00 percent rate over the next year, just up from May’s prediction of 0.98 percent. Although the time horizons do not match exactly, this comes in on the more pessimistic side of other forecasts, although, like them, it does show moderate growth for the year.”
“the expected chance of the economy being in a recession next June rises to 12.4 percent, up from May’s 9.9 percent and April’s 7.1 percent, despite the slight rise in the spread. Recent data has shifted the predicted value upward, though it still remains low.”
So, very slow growth, but no double dip. Of course, this is all assuming the recession actually ended which I think is absolute nonsense. This is and remains a consumer driven balance sheet recession. The reason policymakers have failed to solve the problems on Main Street is because they have failed to properly diagnose this as a problem rooted on Main Street.
As for the predictive nature of the yield – I think we have to seriously wonder if this time isn’t different. Monetary policy has proven to…
Bonds are signaling that the recovery is in trouble. The yield on the 10-year Treasury (2.97 percent) has fallen to levels not seen since the peak of the crisis while the yield on the two-year note has dropped to historic lows. This is a sign of extreme pessimism. Investors are scared and moving into liquid assets. Their confidence has begun to wane. Economist John Maynard Keynes examined the issue of confidence in his masterpiece "The General Theory of Employment, Interest and Money". He says:
"The state of long-term expectation, upon which our decisions are based, does not solely depend, therefore, on the most probable forecast we can make. It also depends on the confidence with which we make this forecast — on how highly we rate the likelihood of our best forecast turning out quite wrong….The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention."
Volatility, high unemployment, and a collapsing housing market are eroding investor confidence and adding to the gloominess. Economists who make their projections on the data alone, should revisit Keynes. Confidence matters. Businesses and households have started to hoard and the cycle of deleveraging is still in its early stages. Obama’s fiscal stimulus will run out just months after the Fed has ended its bond purchasing program. That’s bound to shrink the money supply and lead to tighter credit. Soon, wages will contract and the CPI will turn from disinflation to outright deflation. Aggregate demand will weaken as households and consumers are forced to increase personal savings. Here’s how Paul Krugman sums it up:
"We are now, I fear, in the early stages of a third depression….And this third depression will be primarily a failure of policy. Around the world … governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending. … After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.
"I don’t think this is really about Greece, or indeed about any realistic appreciation of the tradeoffs between
Could the world economy be headed for a depression in 2011?
As inconceivable as that may seem to a lot of people, the truth is that top economists and governmental authorities all over the globe say that the economic warning signs are there and that we need to start paying attention to them. The two primary ingredients for a depression are debt and fear, and the reality is that we have both of them in abundance in the financial world today.
In response to the global financial meltdown of 2007 and 2008, governments around the world spent unprecedented amounts of money and got into a ton of debt. All of that spending did help bail out the global banking system, but now that an increasing number of governments around the world are in need of bailouts themselves, what is going to happen? We have already seen the fear that is generated when one small little nation like Greece even hints at defaulting. When it becomes apparent that quite a few governments around the globe cannot handle their debt burdens, what kind of shockwave is that going to send through financial markets?
The truth is that we are facing the greatest sovereign debt crisis in modern history. There is no way out of this financial mess that does not include a significant amount of economic pain.
When you add mountains of debt to paralyzing fear to strict austerity measures, what do you get?
“We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.”
Regular readers know my position. I never thought the secular bear ended or that the credit crisis was over. This has become abundantly clear as unemployment has remained stubbornly high and the credit crisis evolves into a full blown sovereign debt crisis. The recent evolution of the Greek crisis and scare mongering of certain market participants is almost certainly walking us off the edge of the cliff. Policymakers have misdiagnosed this crisis from the very beginning so it’s not surprising to see them continue down this same path.
It’s unfortunate that this is all unraveling with Greece at the epicenter. Policymakers have utterly failed in understanding that the Euro currency system is fundamentally different from the others around the globe – specifically in Japan, UK and USA. We’ve all become convinced that we are the next Greece (which is utterly insane). The Euro crisis is staggering and beyond frightening in my opinion. As I have maintained for years there is no true fix in Europe that doesn’t include full unity (a United States of Europe – which is impossible) or partial or full restructuring (full restructuring is inevitable in the long-run in my opinion). There is no bailout that can fix the inherent flaws in the single currency system. It is destined to fail in my opinion. That’s a terribly frightening thought and the Euro’s death might very well be on our doorstep. A swift death would be preferable in my opinion. Unfortunately, I see this crisis playing out for a very long time…
We are halfway through the year (where did the time go?) and it is time to make some predictions about the last half of the year. This week we look at what the leading indicators are telling us, size up a new indicator, drop in on banking data, and do a whole lot more.
Quickly, I will be on Larry Kudlow’s show next Tuesday, which is at 7 pm Eastern. Larry has promised that we will spend some quality time on some of the current issues facing us. See you there! And now, let’s jump in.
The Risk of Recession
I am on record as saying I think there is a 50-50 chance we slip back into recession in 2011, as I think the economy will soften in the latter half of the year and a large tax increase in 2011 (from the expiring Bush tax cuts) will tip us into recession.
This was not based on data, but rather on research which shows that taxcuts or tax increases have as much as a 3-times multiplier effect on the economy. If you cut taxes by 1% of GDP then you get as much as a 3% boost in the economy. The reverse is true for tax increases. Christina Romer, Obama’s head of the Council of Economic Advisors, did the research along with her husband, so this is not a Republican conclusion.
If the economy is growing at less than 2% by the end of the year, then a tax increase of more than 1% of GDP could and probably would be the tipping point. Add in an almost equal amount of state and local tax increases (and spending cuts) and you have the recipe for a full-blown recession – at least the way I see it.
I was asked at my recent speech in Milan, what sorts of things could make me wrong? There are a few. First, it could be that tax increases and cuts don’t matter. Some very smart people (like Paul McCulley) feel that tax increases on the wealthy don’t really figure into Romer’s analysis.
Or maybe bank lending starts to pick up and the economy is actually growing at 3-4% by the end of the year – although the chart below…
Paul Krugman has been on a nonstop rant in favor of fiscal insanity in the past few weeks. Thankfully, Europe is listening and doing the opposite of what Krugman suggests.
Princeton University Prof. Krugman caused a stir in Germany this week with a stinging critique of Bundesbank President Axel Weber, who is considered a frontrunner to succeed Jean-Claude Trichet as head of the European Central Bank when Trichet’s term expires in October 2011.
“If you are looking for someone who is aiming for zero inflation while unemployment is rising to 13%, then Weber is definitely the right guy,” Krugman said in an interview published in German with the business daily Handelsblatt.
“Weber is concerned about inflation, when there is no inflation. I would rather see an ECB President who gives more weight to deflation risks and the risk of a protracted stagnation,” Krugman said, adding that he doesn’t know Weber personally. Before joining the Bundesbank Weber was an economics professor in Germany and fairly well known in U.S. academic circles.
Krugman didn’t stop with Weber. He has taken on Germany’s plans to rein in its budget deficit, which is already considerably smaller than the U.S.’s as a share of GDP. “German austerity will worsen the crisis in the euro area, making it that much harder for Spain and other troubled economies to recover,” he wrote in his New York Times column.
Wolfgang Franz, who heads the German government’s economic advisory panel known as the Wise Men, tore into Krugman — and the US — in an op-ed in the German business daily Wednesday, titled “How about some facts, Mr. Krugman?”
“Where did the financial crisis begin? Which central bank conducted monetary policy that was too loose? Which country went down the wrong path of social policy by encouraging low income households to take on mortgage loans that they can never pay back? Who in the year 2000 weakened regulations limiting investment bank leverage ratios, let Lehman Brothers collapse in 2008 and thereby tipped world financial markets into chaos?” he wrote.
So if Krugman really wants to keep Weber from the ECB presidency, or at least cool some of his support in Germany, he might want to consider damning the Bundesbank
Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere, including the United States, where 52 senators voted against extending aid to the unemployed despite the highest rate of long-term joblessness since the 1930s.
Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession. And here in Germany, a few scholars see parallels to the policies of Heinrich Brüning, the chancellor from 1930 to 1932, whose devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.
But despite these warnings, the deficit hawks are prevailing in most places — and nowhere more than here, where the government has pledged 80 billion euros, almost $100 billion, in tax increases and spending cuts even though the economy continues to operate far below capacity.
What’s the economic logic behind the government’s moves? The answer, as far as I can tell, is that there isn’t any. ….
How bad will it be? Will it really be 1937 all over again? I don’t know. What I do know is that economic policy around the world has taken a major wrong turn, and that the odds of a prolonged slump are rising by the day.
An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon. Perceptions of a large U.S. borrowing capacity are misleading.
Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.
Paul Krugman is quite upset with the deficit hawks at the G-20, so much so that he says Lost Decade, Here We Come
The deficit hawks have taken over the G20.
It’s basically incredible that this is happening with unemployment in the euro area still rising, and only slight labor market progress in the US.
The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.
With all the heated debate and every country doing what they want, inquiring minds just may be asking "How the heck can you call this a success?"
That’s a good question so let’s highlight the positives.
Defining G-20 Success
Merkel and Trichet politely told Geithner to go to hell. Given that Geithner needs to be fired, this is a positive event.
Europe is more concerned about sovereign debt issues than stimulating growth. Only fools like Geither and the IMF would argue against that.
No one paid any attention to Geithner or the Keynesian clowns at the IMF, most notably, IMF Managing Director Dominique Strauss-Kahn.
There was no agreement on a universal bank levy. A universal tax is the wrong approach to risk management and it punishes banks with good lending practices.
Geithner made a complete fool out of himself.
A dozen cheers for German Chancellor Angela Merkel who said “We can only spend what we receive in income.” Finally someone gets it.
For some time now, the U.S. government, business leaders, and top economists have been trying to pressure China into allowing its own currency, the renminbi or yuan, to gain value versus the dollar. The thinking is that a higher yuan would make American products more competitive.
Meanwhile, China has been cautioning the U.S. that a free-floating yuan could result in a lose-lose situation in which both economies would be damaged.
We think our government should be careful what it wishes for. In particular, the U.S. should consider that China may be much more right about the U.S. economy than its own economy.
Let’s assume for the moment that the Chinese want the yuan to rise but know that a higher yuan will create havoc in the developed world.
Being highly intelligent, the Chinese know that they shouldn’t unilaterally let the yuan rise. If it did, China would be blamed for the fallout. Just like the hustler who wants the mark to feel like a victim of his own greed, China wants the revaluation of the yuan to look like an act of reluctant self-sacrifice which it does to appease U.S. demands.
It will look like self-sacrifice, thanks to people like noted short seller Jim
"It is no exaggeration to say that since the 1980s, much of the global financial sector has become criminalised, creating an industry culture that tolerates or even encourages systematic fraud. The behaviour that caused the mortgage bubble and financial crisis of 2008 was a natural outcome and continuation of this pattern, rather than some kind of economic accident...And yet none of this conduct has been punished in any significant way."
~ Charles Ferguson, Inside Job
"I know that my retirement will make no difference in its [my newspaper's] ca...
We are discreet sheep; we wait to see how the drove is going, and then go with the drove. We have two opinions: one private, which we are afraid to express; and another one – the one we use – which we force ourselves to wear to please Mrs. Grundy, until habit makes us co...
The S&P 500 got off to weak start and, after retracing a modest morning rally, spent most of the day in the shallow red with an intraday low of 0.63%. But in the last seven minutes of trading, the index recovered enough to a make a small gain of 0.14%. This is the fourth advance, the first was Monday's 1.60 surge, but the last three have ranged from 0.05% to 0.17% with today's close near the high of the miserly three-day series.
The index is now up 5.02% for 2012, which is 6.93% off the interim closing high.
From an intermediate perspective, the S&P 500 is 95.2% above the March 2009 closing low and 15.6% below the nominal all-time high of October 2007.
Below are two charts of the index, with and without the 50 and 200-day moving averages.
TIF - Tiffany & Co., Inc. – A surprise earnings miss and a reduced full-year profit and sales forecast from luxury jewelry retailer, Tiffany & Co., took some of the luster out of its shares today, with the stock trading down 8.5% at $56.55 as of 11:50 a.m. in New York. Options activity on Tiffany this morning suggests mixed sentiment on the st...
RealNetworks, Inc. (NASDAQ: RNWK) today announced that it has reached an agreement with the Washington State Attorney General over discontinued e-commerce practices. In accordance with the settlement agreement, RealNetworks has committed to:
Discontinuing the use of pre-checked boxes for purchases of RealNetworks subscription products; Spelling out more clearly the material terms of RealNetworks product offerings; Offering online cancellation of subscription offerings; Enhancing RealNetworks customer support guidelines regarding cancellation. Statement from Thomas Nielsen, President & CEO of RealNetworks:
"About two years ago, the Washington State Attorney General's Office contacted us regarding concerns they had with some of our e-commerce practices.
To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...
First we'll go to the technicals. Back in mid April I had opined a 'bear flag' formation was being created. [Apr 17, 2012: Potential Bear Flag Forming] But the market being the difficult beast it is, head faked everyone and rather than a break down from said flag it first went UP and nearly touched yearly highs. This caused everyone to think the bear flag had failed…. only to lead to a horrid May in the market. Generally a bear flag will resolve relatively quickly but the longer...
Despite the fact that U.S. equities are well-positioned and well-supported to go up, once again it is the headlines out of Europe—especially Greece—that are scaring off investors. Some are saying that it is now likely (and even desirable) that Greece will default on all its sovereign debt, withdraw from the euro, and severely devalue its domestic currency (Drachma?). This will allow them to operate a balanced budget while pumping cash into growth initiatives, rather than suffer the ravages of Germany-mandated austerity.
Some say, so what? Greece makes up only about 2% of the Eurozone’s overall economy. Nevertheless, you might say that t...
Markets died and then rallied to flat again as European leaders “prepared contingencies” for a possible Grexit
Markets died hard and fast earlier today as major indexes registered as much as 1.5% of losses after news that Euro zone officials were unofficially “preparing contingencies” for a Greek exit from the Euro. Unofficial statements were not enough to keep markets down however, as major indexes rallied back to flat levels by the end of the day.
So the world continues to wait on Europe, as the SPDR S&P 500 ETF (NYSEACA:SPY) gained .05%, the SPDR Dow Jones Industrial Average ETF (NYSEARCA:...
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In this article, please revisit an article written two years ago titled, "The Calm Before the Storm." This article focused on the patent cliff that was looming in the pharmaceutical industry, that was later picked up by the New York Times and several other bloggers! Subsequent articles were written about big pharma company's revenue streams, and the pros and cons of of their later stage pipelines. Other articles have also attempted to identify smaller biotechs with the potential to reap big reward...
My last weekend update is dated from January 30 so after a long hiatus, here is an update of our virtual portfolio. Since the last update, we have closed the AA Money portfolio due to a lack of enthusiasm (and activity) and I have stopped tracking the FAS strangle as the low VIX makes it hard to get rewarded for the risk! But we have added a small $5KP virtual portfolio which does not use any margin.
FAS Money
We have had to recover from a big move up by FAS and a low VIX which keeps option prices low. But the portfolio has gaine about 10% since the last update.
Last update P&L - $5499.00
IWM Money
Not a lot of activity in this portfolio where the main focus is on the large IWM BCS. But the portfolio has grown over 20% since the last update.
Last update P&L - $1998.00
$5KP Portfolio
This is the virtual portfolio that replaced the AA Money portfolio. It does not use margin and we will keep holdings under $5K.
AAPL $50K P...
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