Wednesday, December 16, 2009

More on Jobs...and of course the ISM reports.

The start of the new year always presents opportunities to reflect on the past year and to look toward the future of what can come about and to explore that "undiscovered country." Beyond our personal challenges, the question on many investors minds now is what information do we have now to help predict the future events in the markets. The nice bounce on Monday of about 1.5% gain on the Dow Jones Industrial Average had me thinking back to the old adage of "as goes January, so goes the year" and starting off with a bang could not hurt to at least portend positive results for January. But Mark Hulbert says "First trading day of year may mean little." He also expands the reasoning in "January's questionable predictive powers."

Mark does provide a good case to not make investment decisions based on just the tiniest of blips in the data and poorly correlated events. I will take his word on the significance levels although details might help make his case more fully. The question I would pose him is whether his expanded sample {1896-2009} is relevant. At some time whether it was a slow process or rapidly changed with advancements in technology the structure of the markets has to be taken into account. I am pretty certain that there are differences in the equity markets between a bunch of men under a tree and the electronic markets we have now that nearly everyone {with money} can make bids or offers at any time of the day or night.

That being said what news has driven the markets?
David Brown in the latest ‘What the Market Wants’ entitled What the Market Wants: Market Opens New Year with a Bang stated the following:
The news fueling the market, while not sensational, has been steadily positive. My favorite was the ISM last week, a full point above consensus at 55.9 and 2.5 points above its previous reading. Consumer confidence, while just meeting expectations at 52.9 last week, was well above the previous reading of 49.5. Best of all, I suppose, was last week’s initial jobless claims of 432,000, which was the lowest level in some time and well below the expected 460,000 and the previous reading of 452,000. PMI was also positive while construction spending and retail sales were just okay. No real disappointments here.

Like noted above, the December 2009 Manufacturing ISM Report On Business® was positive and was continuing with its streak of increasing output in manufacturing for the 5th consecutive month and 8th consecutive for the overall economy. The positive thing to note on the first table of the ISM report is all the "faster" rates of change which has 10 out of the 13 indicators. Which is positive except for two exceptions. The first is the price index rising to 61.5 up from 55 in November. I am not sure at what point do we need to worry about this translating into inflation but it should be noted that there is a lot more industries that are experiencing higher prices and the net for the index was 23 seeing higher prices. Still the Fed is saying that slow recovery still most likely scenario. But more importantly than the headline is the part from the article stating:
There was a sharp divide among officials about the forecast for inflation longer-term. The argument was so intense that the discussion about the price outlook continued long after the formal vote on policy, which usually signals the end of the closed-door gatherings.

They are obviously seeing some signs of inflation as the ISM report may suggest. The second rate of change that should be of interest is that while export index is still positive at 54.5 which indicated the rate of change is slowing, the imports index rate of change is rated as faster for jumping from 51.5 to 55. But since both are expanding then it may not be enough to worry about.

While the employment index went up to 52 up from 50.8 and the rate of change is faster, I still see that the gainers are battling with the losers. The industries that are gaining is 7 and the losers are 8. And the net percentage is -1. This signifies that the ones with employment increases are increasing at a faster rate than the industries in declining employment. Will this group still be able to keep up with expansion? In a way this is sort of expected as some industries expand and some contract but there is a lot in the middle ground that could be expanding employment also if we are to see job recovery this year. But I must say that the surprise was new orders jumped more than 5 points to 65.5 and ongoing production at 61.8 up from November's 59.9.

But what about the Service Sectors of the Economy?
The Non-Manufacturing ISM Report was not so upbeat but still positive with an index of 50.1 which is below the forecast of 51 that MarketWatch Economic Calendar shows but within the general range that Econoday Reports on the ISM Non-Mfg Index January 6, 2010. They state the consensus range as 48.3 to 51.0 and the consensus as 50.4. This most definitely showed the contrast with the Econoday Report: ISM Mfg Index when the final number was above the consensus range of 52.0 to 55.5 at 55.9.

Continuing on the non-manufacturing data, the sample respondents were not too positive. Business activity {production} was up and a positive sign but employment while up is still well below the 50 mark at 44 which marks its 23rd contraction for the last 24 months. The price index also rose to 58.7 which as noted in the manufacturing index that the Fed and others might need to start being concerned about inflation. Export and import index switched sides on positive and negative 50 point range. Export index decreased to 46 from 54.5 and import index rose from 46 to 52.5.

How about some more positive thinking?
I am not sure if we need some more prayer this year but the Wall Street Journal maybe hinting at such. Under the front page article entitled "World's Factories Rebound" they have a picture with the caption:
Miracle Workers: Japanese businessmen pray for good business at Tokyo's Kanda shrine on Monday. Tokyo stocks rose on the year's first trading day, with Japanese exporters helped by a stronger U.S. dollar.

On to more substantial material, Larry Kudlow points out at Kudlow's Money Politic$: {that} The Yield Curve Is Signaling Bigger Growth. And if that does not make you an optimist Alan S. Blinder presents The Case for Optimism on the Economy. Remember he also provided some econometric data to support that 25% of all jobs could be outsourced.

Another article of positive news about the US equity markets is at "5 quiet signs of a rebound". Looking toward corporate suites might not tell us great detail about how the economy is headed but it could provide clues as to where growth might occur.

Samuel Fromartz provides us with 5 bullet points that point to a potential rebound in the economy. The first is rising cash and it clearly is the most important for sustained economic growth in that resources need to be diverted towards productive enterprises. The question is whether there are enough projects out there that will increase profits when outlook for business does not look rosy. The second is mergers increasing in frequency but as economist this would be more like transfer payments and have little direct effect on the economic growth of a country. While in the long run mergers will reallocate resources to more productive sectors and businesses, it does not have an immediate effect on the economy. The third is considered both dividends and buybacks of company common stocks, which again is merely transfer payments from one individual to another and has little economic effect on the economy. The fourth is the upswing in IPO offerings, which is a positive sign looking forward. Not only it signifies as stated that investors are more willing to take on more risky investments but also that the companies offering the IPOs also see that investors would appreciate their business opportunities as well as the company seeing broader investment potentials in their businesses moving forward.

The fifth and last sign is insider buying. Naturally this is great time to point out that:
Sabrient uses data on insider buying and analyst upgrades to create an "insider sentiment index" of the top 100 companies where these trends are strongest.

An exchange-traded fund, the Claymore/Sabrient Insider ETF (NFO), tracks the index. Since the market low in March the ETF has risen 117%.

While this is great, the 100 stocks might not be a representative sample to signify the results of the direction of the whole economy. But Scott Martindale does state in the article that:
"Buyers are outrunning sellers at the moment and that's definitely a net positive sentiment,"

Martindale also posted on the Sabrient Blog some more information about how Sabrient created the index as well the reasoning for building it at: Net Insider Trading loses direction.

What does this all mean?
Basically the manufacturing sector seems to be taking off but non-manufacturing still has some problems especially in the aspect of increasing employment which will continue to be a drag on the economy as noted in other blog posts. We should continue to look for green shoots of recovery but be cautious to the downside risks.

Disclaimer: The writer does have a small stake in the ETF NFO and does not have any plans on selling the shares.

5 quiet signs of a rebound

Calculated Risk: Construction Spending Declines in November

That 1937 Feeling

Answering the wrong questions | The Economist

Calculated Risk: PIMCO's McCulley: Three Major Issues for 2010

Manufacturing index rises to nearly 4-year high ISM index rises to 55.9% in December

Econbrowser: The Prospects for Global Imbalances: A View from the IMF

In the Aftermath of the Great Recession By Robert Samuelson

Bernanke's Speech to the AEA, Arnold Kling | EconLog | Library of Economics and Liberty

Calculated Risk: What Bernanke Didn't Say

Why Import Workers Now? by Patrick J. Buchanan 12/08/2009

Aughts were a lost decade for U.S. economy, workers -


The Capital Spectator: WILL A NEW YEAR BRING NEW JOBS?

What is 'woman's work' really worth? Calculating the value of care-giving isn't child's play
Possibly principle/agent problems?

Health care and Iraq

Kudlow's Money Politic$: The Yield Curve Is Signaling Bigger Growth

Happy Keynesian New Year « Organizations and Markets

Sticking to the Official Narrative - William L. Anderson - Mises Institute

macroblog: Better news on the jobs front: Layoffs down, temp hiring up

The Capital Spectator: DID THE STIMULUS WORK?

The Capital Spectator: IS THE STIMULUS STYMIED?

Tough times for Chicago | The Economist

The end of the revolution is nigh | The Economist

Red hot China | The Economist

The truth about all those excess reserves | The Economist

Pending home sales index plunges 16% Expiration of federal subsidy drives sales lower, NAR says

Positively Giddy:
Alan S. Blinder: The Case for Optimism on the Economy -

An Optimist’s Prediction for 2010 - Maggie's Farm

Daniel Henninger: A Rodney Dangerfield America? -

12 Dr. Dooms shred 2010 investing optimism Paul B. Farrell - MarketWatch

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