The market is looking up this morning, with investors poised to scoop up stocks that were pummeled in last week’s downdraft. Britain's FTSE 100 index was 1.7 percent higher at 4,905.16 and Germany's DAX was up 1.6 percent at 5,909.57. France's CAC-40 gained 2.2 percent to 3,405.98. Asian markets closed higher, too as buyers stepped in to take advantage of the lower valuations.
But while the prospects for a short term bounce look good, fundamentals are another matter altogether. True, the Institute for Supply Management (ISM) reported on manufacturing activity for the month of June Thursday. The Purchasing Managers Index, at 56.2%, marked the 11th month of expansion, and the reading implies economic expansion of 14 straight months. But that just about marks the end of the good news. While anything in excess of 50% signifies an expansion in the economy, the print was nonetheless considerably weaker than May’s 59.7%. And the pre-holiday data showed unequivocal signs of a sharp slowdown in housing: U.S. Census Bureau report of a 30% decline in new house sales in May was a shocker for many, (although others had anticipated the worst and who sold off home builders' stocks over the past two months by 20% to 50% the CME lumber contract (LB) by nearly 43% in the same time period). As for employment, while the unemployment rate was reported decreased, to 9.5% in June, from 9.7% in May, nonfarm payrolls noted a net loss of 125K jobs, as temporary census workers completed their work and were let go. True, employment is a lagging indicator, but the simple fact is that it is hard to kick start an economy that kind of unemployment level. Reflecting that, consumer sentiment fell through the floor in June, with the Conference Board's Index falling nearly 10 points to 52.9. Also weighing the market down were reports of a slowdown in motor vehicle sales, from 8.9 million in May to 8.4 million in June, a 1.4% decline in Factory Orders and a surge in Weekly Jobless Claims to over 470,000.
Meanwhile the Fed continues to print money as if it was confetti – a prescription for recovery that even arch-Keynesians in the Socialist Republic of Great Britain have been obliged to recant. And while the Federal Reserve may be temporarily losing the race to the bottom with the European Central Bank, it can’t be too much longer before the majority of investors wise up to the idea that the only fair price for any fiat currency is parity. There is no “safe haven” in a currency whose central bank is on a “quantitative easing” binge that should be familiar territory to any self-respecting Banana Republic.
The bottom line: by all means play the bounce, but only for the very short term, and be prepared to head for the hills at the first sign of trouble. Longer term, i.e. over the next couple of years, the balance of opportunities are to the short side in both US and European equities.
[Disclosure: Systematic Strategies LLC is a high frequency hedge fund is market neutral, and holds no positions overnight].
Tuesday, July 6, 2010
Sunday, July 4, 2010
Goldman: The Second Half Slowdown Has Begun
Goldman chief economist Jan Hatzius warns that "the second half slowdown has begun." Hatzius says: "This is consistent with our long-standing forecast of materially slower growth of just 1½% (annualized) in the second half of 2010.
According to Hatzius:
The economic data have weakened noticeably over the past few weeks. This is consistent with our longstanding forecast of materially slower growth of just 1½% (annualized) in the second half of 2010. This forecast is based on a very simple idea, namely that final demand growth has remained at just 1½% since the middle of 2009. There is little reason to expect a significant acceleration, and the inventory cycle is ending. All this is illustrated in Exhibit 1, which shows the growth rate of real GDP, the growth rate of real final demand, and the contribution of inventories to growth (the difference between the two).
Manufacturing Starts to Slow…
One implication of our story as illustrated in Exhibit 1 is that the slowdown should be concentrated in the goods-producing sector, which previously enjoyed a disproportionate boost from the inventory cycle. This implies a significant decline in measures of factory growth such as the ISM manufacturing index. Historical experience would point to a drop to around 50 by early 2011.1 The drop in the index from 59.7 in May to 56.2 in June-?much of which was due to a sharp decline in the new orders index from 65.7 to 58.5?is the first significant step on this path.
The economic data have weakened noticeably over the past few weeks. This is consistent with our longstanding forecast of materially slower growth of just 1½% (annualized) in the second half of 2010. This forecast is based on a very simple idea, namely that final demand growth has remained at just 1½% since the middle of 2009. There is little reason to expect a significant acceleration, and the inventory cycle is ending. All this is illustrated in Exhibit 1, which shows the growth rate of real GDP, the growth rate of real final demand, and the contribution of inventories to growth (the difference between the two).
Manufacturing Starts to Slow…
One implication of our story as illustrated in Exhibit 1 is that the slowdown should be concentrated in the goods-producing sector, which previously enjoyed a disproportionate boost from the inventory cycle. This implies a significant decline in measures of factory growth such as the ISM manufacturing index. Historical experience would point to a drop to around 50 by early 2011.1 The drop in the index from 59.7 in May to 56.2 in June-?much of which was due to a sharp decline in the new orders index from 65.7 to 58.5?is the first significant step on this path.
The economic data have weakened noticeably over the past few weeks. This is consistent with our longstanding forecast of materially slower growth of just 1½% (annualized) in the second half of 2010. This forecast is based on a very simple idea, namely that final demand growth has remained at just 1½% since the middle of 2009. There is little reason to expect a significant acceleration, and the inventory cycle is ending. All this is illustrated in Exhibit 1, which shows the growth rate of real GDP, the growth rate of real final demand, and the contribution of inventories to growth (the difference between the two).
Manufacturing Starts to Slow…
One implication of our story as illustrated in Exhibit 1 is that the slowdown should be concentrated in the goods-producing sector, which previously enjoyed a disproportionate boost from the inventory cycle. This implies a significant decline in measures of factory growth such as the ISM manufacturing index. Historical experience would point to a drop to around 50 by early 2011.1 The drop in the index from 59.7 in May to 56.2 in June-?much of which was due to a sharp decline in the new orders index from 65.7 to 58.5?is the first significant step on this path.
The June employment report also points to a meaningful factory slowdown. While manufacturing payrolls logged another (small) gain, the manufacturing workweek fell by ½ hour, as shown in Exhibit 2. This is a very big drop by historical standards?in the 4th percentile of month-to-month changes using data that go back to 1936. This may be a sign that the manufacturing sector may be losing steam even more quickly than suggested by the June ISM report.
…and the Labor Market Softened in June
Even beyond manufacturing, the June employment report was weak. This was most obvious in the household survey, where the drop in the unemployment rate from 9.7% to 9.5% was entirely due to a big decline in the labor force. A more accurate gauge is the decline in the employment/population ratio from 58.8% in April to 58.7% in May and then to 58.5% in June, shown in Exhibit 3. (We note the April number in order to illustrate that the weakness cannot just be explained by Census-related ups and downs?after all, the level of Census employment was higher in June than in April.)
According to Hatzius:
The economic data have weakened noticeably over the past few weeks. This is consistent with our longstanding forecast of materially slower growth of just 1½% (annualized) in the second half of 2010. This forecast is based on a very simple idea, namely that final demand growth has remained at just 1½% since the middle of 2009. There is little reason to expect a significant acceleration, and the inventory cycle is ending. All this is illustrated in Exhibit 1, which shows the growth rate of real GDP, the growth rate of real final demand, and the contribution of inventories to growth (the difference between the two).
Manufacturing Starts to Slow…
One implication of our story as illustrated in Exhibit 1 is that the slowdown should be concentrated in the goods-producing sector, which previously enjoyed a disproportionate boost from the inventory cycle. This implies a significant decline in measures of factory growth such as the ISM manufacturing index. Historical experience would point to a drop to around 50 by early 2011.1 The drop in the index from 59.7 in May to 56.2 in June-?much of which was due to a sharp decline in the new orders index from 65.7 to 58.5?is the first significant step on this path.
The economic data have weakened noticeably over the past few weeks. This is consistent with our longstanding forecast of materially slower growth of just 1½% (annualized) in the second half of 2010. This forecast is based on a very simple idea, namely that final demand growth has remained at just 1½% since the middle of 2009. There is little reason to expect a significant acceleration, and the inventory cycle is ending. All this is illustrated in Exhibit 1, which shows the growth rate of real GDP, the growth rate of real final demand, and the contribution of inventories to growth (the difference between the two).
Manufacturing Starts to Slow…
One implication of our story as illustrated in Exhibit 1 is that the slowdown should be concentrated in the goods-producing sector, which previously enjoyed a disproportionate boost from the inventory cycle. This implies a significant decline in measures of factory growth such as the ISM manufacturing index. Historical experience would point to a drop to around 50 by early 2011.1 The drop in the index from 59.7 in May to 56.2 in June-?much of which was due to a sharp decline in the new orders index from 65.7 to 58.5?is the first significant step on this path.
The economic data have weakened noticeably over the past few weeks. This is consistent with our longstanding forecast of materially slower growth of just 1½% (annualized) in the second half of 2010. This forecast is based on a very simple idea, namely that final demand growth has remained at just 1½% since the middle of 2009. There is little reason to expect a significant acceleration, and the inventory cycle is ending. All this is illustrated in Exhibit 1, which shows the growth rate of real GDP, the growth rate of real final demand, and the contribution of inventories to growth (the difference between the two).
Manufacturing Starts to Slow…
One implication of our story as illustrated in Exhibit 1 is that the slowdown should be concentrated in the goods-producing sector, which previously enjoyed a disproportionate boost from the inventory cycle. This implies a significant decline in measures of factory growth such as the ISM manufacturing index. Historical experience would point to a drop to around 50 by early 2011.1 The drop in the index from 59.7 in May to 56.2 in June-?much of which was due to a sharp decline in the new orders index from 65.7 to 58.5?is the first significant step on this path.
The June employment report also points to a meaningful factory slowdown. While manufacturing payrolls logged another (small) gain, the manufacturing workweek fell by ½ hour, as shown in Exhibit 2. This is a very big drop by historical standards?in the 4th percentile of month-to-month changes using data that go back to 1936. This may be a sign that the manufacturing sector may be losing steam even more quickly than suggested by the June ISM report.
…and the Labor Market Softened in June
Even beyond manufacturing, the June employment report was weak. This was most obvious in the household survey, where the drop in the unemployment rate from 9.7% to 9.5% was entirely due to a big decline in the labor force. A more accurate gauge is the decline in the employment/population ratio from 58.8% in April to 58.7% in May and then to 58.5% in June, shown in Exhibit 3. (We note the April number in order to illustrate that the weakness cannot just be explained by Census-related ups and downs?after all, the level of Census employment was higher in June than in April.)
Subscribe to:
Posts (Atom)