The ISM is due tomorrow at 10:00 AM and this is a pretty important number because it may confirm whether or not we are seeing economic expansion or not. The estimates are for a print of 53, but many are expecting a number below that print. I am in the camp of a number below 53, perhaps closer to 50, but any number above 50 is considered economic expansion. However, if we get a print below 52 it will show a downward trend since the cash for clunkers program ended and proof that without government intervention the economy cannot stand on its own.
I urge everyone to read beyond the headline number when the report comes out, regardless of the number. The underlying data is important since it will give you a gauge of employment, orders, inventory and a bunch of other important information that will help you figure out what is going on in the real economy. My feeling is that if this number disappoints it will not be good for the markets and, in my opinion, even if the number is met it may not be good enough because of the lofty valuation of equity prices.
On Friday there were several people on the TV saying how healthy this correction is for the “new bull market” and they are right about the correction being healthy. However, I disagree on the whole new bull market theory simply because of a lack of participation from retail investors and the weak volume we have seen all the way up. Even if you look at GDP estimates moving forward you will see that 3Q09 is the best that most economists expect and from here until 4Q10 they expect GDP to decline into a negative number once again, even Goldman expects this to happen.
No one knows what will happen in the future, but what we do know is that the foundation for a meaningful recovery is not here yet. Credit is contracting, not expanding, unemployment has leveled off at severely negative levels and that is not good and is a leading indicator. The only thing that was positive in 3Q09 was earnings and all the growth was from overseas which proves the US is in poor shape at best. If things were getting better the Fed would raise rates to at least .25%, but they cannot because that will kill banks who are buying treasuries right now. If you are an economist I guess statistically things look OK, but the problem with economists is they are terrible at real world observations and see what they want to see.
In the real world, things are very bad and the recession is not abating in any way shape or form. In fact, from the folks I talk to most feel this is a depression, not a recession. This is confirmed by the recent consumer sentiment numbers that came out last week as well, again if things were so good why did the sentiment index fall so much? If you have a secure job things are great I am sure, but if you are a regular person or your firm depends on financing from CIT, well, too bad because you are too small to save, sorry. I guess you should have given more to the winning political party or unionize to win favor and get a seat at the table with the big boys. Oh, let us not forget that an astounding 40% of some $7T in US debt has to be rolled next year on top of the new debt we need to issue to keep the lights on. Regardless of that ISM number I am staying short.
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