Friday’s GDP and Today’s ISM Worse than expected

The Institute for Supply Management reported the PMI at 50.9 indicating expansion in the manufacturing sector, but just barely.  A number below 50 indicates contraction.  The New Orders Index registered 49.2 percent, indicating contraction for the first time since June of 2009, when it registered 48.9 percent.

“Today’s decline in the manufacturing ISM to the lowest level since mid-2009 in combination with last Friday’s highly disappointing GDP report unequivocally makes it very hard to even remain slightly optimistic for the future economic outlook in the U.S.” – Harm Bandholz, Chief U.S. Economist, Unicredit Research

 The ISM, combined with anemic GDP (shown in the following chart from Econoday) reported last Friday, is cause for concern.  While most of the talking heads on CNBC said, “No problem, it’s just a soft patch….” (paraphrasing).  That is far from certain.  Both the ISM and IDP were surprises and not very good ones.

Here’s the GDP chart from Econoday at

http://mam.econoday.com/byshoweventfull.asp?fid=446920&cust=mam#top

Wells Fargo's senior economist Mark Vitner pointed out that since 1950, year-over-year growth in real GDP has dipped below 2% on 12 occasions. In 10 of those instances, the economy was already in recession or quickly entered one. The exceptions were 1956 and 2003.

Unfortunately, the Debt problem has not been dealt with at all.  The politicians are falling all over themselves declaring victory.  That’s absurd.  So they cut 2-trillion over 10-years?  That’s only 200-million dollars per year.  Our deficit will be more than 1.4-trillion dollars for this one budget year, (2011) alone…and after all this debate, panic, and crisis our politicians managed to cut $200-billion with no tax increase to trim the deficit further.  I agree with John Hussman’s comment below.

“I continue to believe that the primary drag on the economy is not "uncertainty," or taxes, or budget concerns, or health care reform, or regulation. No. What is weighing the economy down, and what will continue to weigh the economy down, is bad debt that our policy makers are transfixed on making whole rather than restructuring. This will eventually happen, because it has to happen. Yet even with that expectation, it will be an extended process, and meanwhile, I believe that we'll have numerous opportunities to take constructive investment stances amidst it all.” –  reprinted from the 1 Aug 2011 Weekly Market Comment by John Hussman, PhD. http://www.hussman.net/wmc/wmc110801.htm

When he says, “…we'll have numerous opportunities to take constructive investment stances…” he means the market will be in trouble and we’ll be able to “buy low”.

I am still not certain our Sell signal last week was really an error.  The NTSM system is based on closing data from all exchanges.  Yahoo is my source (and they get it from elsewhere – I’ve forgotten where) for the “all-exchanges” volume for the S&P 500.  Since there was a discrepancy, it is hard to know if the “closing number” was wrong or if the “historical” data published later was wrong.  At this point, I suppose it doesn’t matter.  I sold and I remain only 30% invested in the stock market.

Market action was surprisingly good today when you consider the bad GDP and ISM numbers. 

I am worried that “Breadth” looks bad as the number of advancing stock continues to decline.  Deteriorating market internals are not good.  The NTMS remains unconvinced with another HOLD value.

It’s late and I am going to bed.  Here’s the final run-down.

 
The NTSM analysis was HOLD today.  I am 30% invested and will watch market action before I move back in.   Frankly, I am in no rush and I may just wait for the market to improve enough to give us a buy signal.