Saturday, October 2, 2010

Should You Wear Clothes In A Sauna Suit

my usual mustard on the current market situation 2:10:10

Hello, register me after a short hiatus back.
Friday was first of the month and thus ISM day. For me, every time the most important day in the macro data calendar.
The most decisive for me is in principle but not the headline, the rush on the media. Much more interesting is the composition of the Index:

The most important I've marked in bold, namely the change. Too much attention will be given to the level and the question of whether over or under 50 How do I after the last ISM data at 5.9. (Apparently not entirely successful, when I think of some question I got last month) have tried to explain, the subcomponents are terribly gebiased, as the company shows in the survey generally too optimistic and New Order's obviously generally high and inventories generally low state. Nevertheless, the use of the data makes sense if you are the bias is conscious, as shown below.
(Previous ISM comment at 5.9. )

So now, but the general trend. ISM was a little weaker, as expected. That alone is not the problem. Looking at just the change in the sub-components of, we see that just two factors increased precisely to those in which one would rather see no increase, namely, pricing and inventory levels. Everything else is massively weakened. This results in the 4th Consecutive increase in the inventory growth (the highest level since 1984!) While the 4th Decline in a row for the New-order growth and backlog orders (backlog of orders). And that is absolutely not a good sign for the future. Thus, the often-used New Orders / inventories ratio (green, right scale) has dropped dramatically. So far, as in the last decades, only in advance of a recession. This shows the image of an economy that increasingly lack of new jobs produced more and more to dump. One time was good because were dismantled after the severe recession, the stocks, but slowly things get tight. (For Bias: not the data would be gebiased, the ratio would vary by 1 If it does not bother clearly now but not really...)

Personally, I've recently (see 5.9.) Pleased at the difference of the New Order to headline number, as this New Order / Inventory Ratio runs slightly ahead. Statement at the time: A value of below -3 since the late 60's was always a recession. (And in the decades before it came to such a mismatch between orders and the current industry growth also needs to a massive economic downturn, although in average growth rates of around 5% pa was in the 50s and 60s, some recession avoided. But here we are now Unfortunately not.) This difference is very volatile, but this month remained at -3, even fell slightly. (Again, the bias to see clearly: The series does not fluctuate around 0, as it should not matter,..)

Both confirmed to me what I fear for some time: The U.S. economy is expected soon (perhaps in the 4th quarter) slip back into recession. (And Europe will follow sometime in 2011, I guess.)

The stock market's stage appears to be no matter. The S & P 500 has broken through 1130, however, depends now on the January high at 1150 for now.

Still's order was the best September for the stock markets in 70 years. More was modified only in September 1939 (just the month in which the outbreak of World War 2. Hopefully not a bad omen.)
The bond market sees the moment everything obviously something different. Update the chart of 31.7. ( ). At that time I was referring to the divergence between rising stock prices and falling bond yields in the long run seems to me not to go well. In fact, it came in August after the Fed meeting will be a price drop. This has changed at the mismatch, however little, the last few days has increased the divergence clear again:

The stock market is hoping for the Bernanke Put, and thinks with a new quantitative easing (QE) Program at the next Fed meeting on 3 November will get all asset classes. This has been after the decision on 10 August out to be wrong, even though the decision of the Fed to buy government bonds has been unexpectedly time. (See my last comment QE from 29.8. )
is interesting addition to the development in government bonds but the last few days even those with the corporates. In the U.S., the spreads of AAA corporates in the last few days and have increased massively risen to its highest level this year. (Blue, left scale, inverted) usually not a good sign for the stock market.

Another thing about the current mood. The next is extremely bullish. The current stock market online survey is stung me there again in the eye:

The fact that the DAX has the year not quite over the resistance at 6340 and it comes out the last 3 weeks has failed, the mood seems to do no harm apparently.

This has not changed my assessment of the situation: Very bullish mood continues significantly increasing risk of recession. This can not end well.

And so until next time!


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