Thursday, September 4, 2008

An interesting dilemma

Making sense of the senseless
As we await the the August employment report we are faced with conflicting reports and increasing nervousness. Stocks (DJIA) falling by nearly 350 points in one session counts as extreme nervousness. And this drop was over what?
  • Over a jump in jobless claims after three weeks of their declining?
  • Over weak chain store sales after we already had been treated to monthly auto sales that were slower than a Model-T?
What was the catalyst of disappointment? Was it that discount stores hit the cover off the ball while more upscale retailers whiffed?

In the morning we had a report from ADP that had suggested job losses would not be so severe. ADP has been a pretty reliable report but today ADP's signal was set aside.

The Non MFG ISM report was up, a bit of an unexpected development, but its job gauge was weaker. Are markets selectively cherry-picking the news they want to react to? That is always a dangerous hypothesis.

Maybe it's not even all about US?
Overnight the BOE and ECB held rates steady. Meanwhile a host of Europeans were discussing economic prospects in a bad way. German industrial orders have been reported down sharply. Eddie George former Governor of the Bank of England weighed in saying essentially that recession could not be ruled out in the major industrialized countries. Not being an office-holder his word carries a bit more weight. The Netherlands's Wellink said the financial crisis would drag on. Almunia warned of weakened in the e-Zone but hastened to dispatch talk of recession. In German the Economics ministry admitted weak growth then Steinbrueck said it was too quick to jump from one quarter of negative growth to talk about recession.

Off course that is the clsssic trick of the magician: mis-direction. It is not the one quarter of negative Euro or German GDP growth that has people talking about recession in Europe. It is the declining retail sales, the dropping industrial orders, the fading consumer confidence across all the major EU states. The drop in GDP in 2008-Q2 was only one symptom, and in some cases that drop did follow a strong quarter of growth. Nonetheless the euro-economy is in difficult straights.

The more that Europe and Japan and other countries begin to echo the trends we have seen in the US, the less easy it is to deny them. I know some already want to forecast a rebound as oil prices are off peak. But high oil prices have to do their damage first.

Stocks and their broken field running
The stock market, after fall its requisite 20% from its peak, has been staging various sorts of recoveries. Maybe Thursday was the market giving up the ghost and realizing that still-tough times lies ahead. Housing may be giving off some bottoming signals but it probably is not really bottoming yet. The conflicted job market signals do not make anything any easier to react to. Stocks are supposed to be one step ahead. But it looks like they have gone a few steps in the wrong optimistic direction and that is what this pull back is likely about.

The sell off not really about any of the day's data but about the picture these new reports are making the more likely one to unfold before our very eyes. The economy still has a path of weakness ahead of it and that 3.3% GDP number (with the 0.2% rise in domestic demand) was the fluke not the signal. Too many were fooled by the fluke. We'll see how hard reality is biting when we get that employment report on Friday morning.

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