ISM Gets Significant Whack

From the ISM

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "The PMI registered 53.5 percent and indicates expansion in the manufacturing sector for the 22nd consecutive month. This month's index, however, registered 6.9 percentage points below the April reading of 60.4 percent, and is the first reading below 60 percent for 2011, as well as the lowest PMI reported for the past 12 months. Slower growth in new orders and production are the primary contributors to this month's lower PMI reading. Manufacturing employment continues to show good momentum for the year, as the Employment Index registered 58.2 percent, which is 4.5 percentage points lower than the 62.7 percent reported in April. Manufacturers continue to experience significant cost pressures from commodities and other inputs."

Here's a chart from Bloomberg:


That's a big whack, an indicates the slowdown is real, confirmed, and pretty big.

The rest of the report is actually pretty good. 14 of 18 industries are expanding, and most of the "what participants are saying" focus on rising prices, indicating strong demand. The main problem with this report is the size of the drop in the macro number and its various components, which indicates a fairly strong, abrupt slowdown is occurring.

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Deficit Reduction Math

Over at the Streetlight, Kash demonstrates that cutting spending is not always a bright idea.

Read the whole thing.

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Expect a poor nonfarm payrolls report tomorrow

- by New Deal democrat

As I type this, the consensus is still for a payrolls gain of about +150,000 tomorrow. Based on the poor performance of initial jobless claims in the last month, I am expecting a considerably poorer report, on the order of only +50,000. I base this on the difference between how payrolls behave in the face of rising initial jobless claims vs. falling claims.

Below is an update of my scatter graph comparing initial jobless claims vs. nonfarm payrolls that I first ran several weeks ago. I included the deterioration in jobs leading up to and into the recession in red. Note how the red line traces a very different path than that of the recovery:



This is why I dismissed the straight line Prof. Delong drew at 400,000 jobs as the dividing point between job growth vs. losses. It simply makes a world of difference whether you are deteriorating into recession, or in recovery coming out of recession, leading to very different scatterplots as above (the same pattern is true for every other postwar recession).

But how should we expect jobs to behave in the face of seriously climbing initial claims? We only have one true example, of a double-dip, and that is the failed 1980 recovery turning into the 1981-82 recession. Here is the scatter graph for that double dip, showing the abortive recovery (blue) and the double-dip (red):



Even with the "summer stall" last year, where GDP only fell to +1.7%, nonfarm payrolls fell into and remained in 5-digit territory. Hence my expectation for tomorrow is that nonfarm payrolls retreat into 5 digits.

If that happens, watch Oil and see if it falls to a new post-April low. Only the real fear of a double-dip will cause the chokehold to loosen.

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Quick Update on the Equity Markets

On Monday, I wrote the following:

The good news in these charts is we are not seeing a massive sell-off; instead the selling is disciplined and meandering. I believe traders are treating the current economic slowdown with a "wait and see" attitude. However, as the sell-off continues, keep your eye on important technical levels as they might indicate a good shorting opportunity. I would not be long right now.

Given yesterdays price action, I'd keep your eyes open. Below are the longer charts of the major ETFs and crucial, short-term support areas to keep in mind. But remember -- keep an eye on the fundamental situation as well. Yesterday's sell-off was caused by the culmination of several weeks of weakening manufacturing news. Friday's employment report will be key. With all of these charts, I'd be using the 200 day EMA as a price target

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Thursday Oil Market Analysis

Last week I wrote the following about the oil market:

While I gave 96 as a shorting level least week, this week I would make it the 200 day EMA. In addition, I would still wait until prices moved about the 104 price level as this would get them above technical resistance and through the EMAs.

Little has occurred this week to change that opinion.


The 5-minute chart shows that prices have been moving between roughly 99 and 103. In addition, the 104 level still appears to be providing upside resistance to prices, as evidenced by yesterday's drop.

On the daily chart, I've added two areas at roughly the 96 and 104 level to show where support and resistance are. Prices have not moved beyond eight area in any meaningful way. Also note the 50 day EMA is still providing upside resistance for prices.

The oil market is still trying to figure out a direction. On the upside, we are moving into the summer driving season, which is typically a period of rising oil prices. However, with retail gas prices still near $4/gallon and the economy slowing, traders are also aware that gas can't go much higher without killing US demand. At the same time, developing markets are providing a demand floor; as their respective middle classes have grown, so has their respective oil demand. As such, there is little reason to see a significant price decline -- hence, the reason I thing 96 will provide support going froward.

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The Greek Tragedy - Moody's Downgrade Debt

Greece continues to endure further public humiliation as Moody's downgraded Greece's debt, by three notches to Caa1, placing it at the very bottom of its European league table.

The Telegraph reports that the downgrade happened, as if by magic, whilst German ministers were trying to reassure markets that the EU and IMF are both committed to another bailout.

Martin Kotthaus, German finance minister, said:

"It was designed jointly. It will be evaluated jointly, and I also assume that it can only be continued jointly, including when it comes to the question of payouts of future tranches."

Neither the markets, nor Moody's, believe this; as there are reports that the IMF (sans DSK) will not sanction the next tranche in the bailout.

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Chicago PMI Drops But Still Positive

From Bloomberg:

A big slowdown for month-to-month growth in new orders helped pull down the Chicago PMI by 11 points in May to 56.6 to indicate the slowest rate of monthly growth since November 2009. New orders fell nearly 13 points to 53.5, still over 50 to indicate an increase compared to April but the weakest reading since September 2009. Growth in backlog orders almost entirely evaporated while inventories surged which may suddenly may indicate an unwanted build tied to slowing activity. Delays in deliveries shortened, which is also consistent with general slowing, while production, at 56.0, is still strong but well down from a run of 70 readings. Prices for raw material inputs, at 78.6 and in contrast to most of the readings, did not slow very much. A plus in the report is a comparatively mild slowing in employment, down nearly three points to a still strong 60.8 to indicate solid month-to-month growth in total payrolls as this report includes all areas of the economy. Markets are showing no significant reaction to the report.

Let's look at the data from the report:


Click for a larger image

Notice the drop across the board in the major categories -- production, new orders and order backlogs. While the overall number is still positive, the internals are very concerning. Not only do they confirm the slowdown we've seen, but also indicate the need to be very watchful of the manufacturing numbers going forward.

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Oil Prices and the Recovery (revisited)

- by New Deal democrat

I've been writing about this topic for well over a year, and here we are again.

Reading the punditry is an excellent exercise in watching cognitive psychology at work. If you are a gold-bug like Mish, then the slowdown is about money printing. The Fed must be abolished and the gold standard re-adopted. If you are the Calafia Beach Pundit (Scott Grannis), then the slowdown is about the failure of Keynesian stimulus. To the contrary, if you are Paul Krugman, then the slowdown is about the inadequacy of the stimulus. And if you are Robert Reich, it is about failure to put spending power in the hands of ordinary Americans.

In short, the slowdown is like a Rohrshach blot onto which pre-existing worldviews are projected.

It ought to be clear that my political sympathies are with Krugman and Reich, but I'm not sure we need a particularly sophisticated explanation for the slowdown. Making use of Occam's razor, we can simply say that it is all about Oil prices. Here is a graph for the last 6 years of inflation-adjusted Oil prices where January 2010 prices = 1, where Oil analyst Steve Kopits' metric of Oil at 4% of GDP = $90 (blue). Real GDP growth is in red (*25 to make use of the same scale):



Over that time period, simply knowing the "real" price of Oil has been an excellent forecasting tool for GDP in the same or next quarter. (You may recall that Prof. James Hamilton found that his energy price shock model explained about half of the decline in the great recession).

As to other suggested contributing factors, Japan has just shifted demand back a quarter or two. If production slows now due to an availability of parts, it will make up the difference once the parts supply returns to normal.

As to Europe, if it were a real problem, we would see financial fear spiking again. To the contrary, as I pointed out last week, both the TED spread and LIBOR are comatose.

So the stop-and-go recovery comes back to a lack of a sustainable strong increase in consumer demand. Part of that is housing still being flat on its back, part of it is stagnating if not declining household wealth and near-deflation in wages. And how much consumers do have to spend in the productive economy depends very much on the wildly fluctuating price of Oil, which in turn is serving as a choke collar, cutting off the oxygen flow every time the recovery starts to run.

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Dr. Copper Knows All

Last week, I posted on copper. Today we have a great chart from Dr. Ed on the relationship between copper prices and the stock market.


That chart is one of the reasons copper prices are so important.

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FSA Behind The Curve Again

In a staggering display of ineptitude, the hopeless and hapless FSA have taken umbrage at banks allowing some of their struggling mortgage debtors to switch to interest only deals, extend their mortgage term, or permit payment holidays (aka debt restructuring).

Why is the FSA so worked up over this?

It seems that the FSA is worried that banks are using this restructuring to flatter their bad debt provisions.

Maybe so.

However, the FSA may care to actually engage its brain before castigating the banks.

- Mortgages are secured on property.

- The property market is fucked!

- Were banks to sit back and allow struggling debtors to default on the mortgages, the banks only resort would be to either write the debt off and/or repossess the home.

- A repossessed home in a failing market is unlikely to clear the debt, plus the family that the bank dispossess from their home would still have to find somewhere else to live. This is not good for the economy, the bank or the family.

Why does the FSA not see this?

It is a rare occasion that banks are actually seen to be doing the right thing. However, the FSA has its head up its arse and refuses to see the bigger picture.

As I have asked before, why is the FSA still in existence?

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