Rudi's View | Jul 30 2010
By Rudi Filapek-Vandyck, Editor FNArena
For those who have missed my TV appearance this week: when asked by a viewer on the phone about my views on where the share market was heading in the short term, I said this rally, like every other rally, will ultimately be defined by how investors can deal with disappointments and negative news.
I also said I believed the week ahead was likely to provide investors with some interesting disappointments. So if I am correct, it's going to be interesting to see how the markets will respond.
I'll zoom in on three key releases between today and Tuesday (Sydney time). First up will be the second quarter GDP in the US. Market consensus seems to be concentrated around a similar growth figure as in Q1 when (after two grave revisions) the ultimate number ended at 2.7% – way too low for an economy that is coming out of the depths it has been in, but that's a story for another time.
Should the Q2 number not come out lower than the Q1 number? Realistically, yes, but that still doesn't mean this will actually be reflected in what US statisticians come up with. I have already seen some suggestions that a sudden pickup in energy equipment buying and overall drilling activity might give the GDP number a little boost – just reminding everyone there's more to GDP than simply consumer spending.
However. Consumer spending has remained weak and I mentioned recently an alternative indicator which suggests consumer spending is really much weaker than suggested by the official statistics. Yes, of course, it remains the age-old mantra about statistics and damn lies.
For now, however, I am going to stick to a reproduction of consumer spending, over the US internet, as registered and tracked by the private Consumer Metrics Institute. To bring you all up to speed on how to read the chart: on display are year-on-year trends in consumer purchases over the internet in the US with 2010 compared with 2006 and 2008.
As you can see on the chart, there has been no uptick in the present slowdown (despite all stimulus and government efforts) and the situation has simply got worse and worse up until the point that the consumer spending slump is now exceeding the slump in 2008 at a comparable point in time.
The key difference is, however, that at this point the trend was going upwards back then, while now it is still going down.
Will this show up in tonight's release? Don't know. But you can bet your money that Wall Street economists will be searching for the consumer components in tonight's Q2 GDP release – no doubt.
Tonight's calendar has various other interesting data on offer, such as more labour market and consumer spending data, the Chicago purchasing managers' index plus another survey into consumer confidence. (The recent ones have all disappointed.) Enough to keep investors on the edge of their seats one would think.
The next key release, in particular for commodities, will be the July purchasing managers' index for Chinese manufacturers. The “official” survey will be published on Sunday. The “private” one, financed by HSBC, will follow on Monday.
Last month, HSBC's index stayed just (but only just) above 50. I suggested at the time the next update (which will be on Monday) might see a number below 50, thus suggesting (mild) contraction.
(Some) economists are preparing their readers for such prospect this week. Main ingredients are a usually weaker seasonal pattern for the China PMI in July plus the fact that -let's face it- growth is slowing.
Next up will be monthly manufacturing indices around the world, including Australia and the US. Investors better prepare themselves for the usual commentary: yes, it is lower than the previous one, but it is still positive.
I don't think I have seen one economist suggesting the July survey will not show another fall in the US ISM on Monday. So that leaves two key questions: how low exactly will the index fall? And when will it finally start rising again?
The latter question will remain key throughout the second half of the year, in my view. There is only so long that commentators can maintain “but it is still in positive territory”. If the trend does not turn eventually, this will at some point simply no longer apply.
Consider, for example, the following prediction in a report by National Australia Bank this morning (not in the camp of the double-dip forecasters): “US double-dip talk is likely to get louder in the months ahead (before eventually dissipating), if the ISM dips below 50, as seems likely.”
Might be an idea to forget about technicals for a week and focus on forward looking economic indicators instead. Oh, and as far as corporate results in the US are concerned: despite all the daily media hoopla about how fantastic these results are, fact is -and this is going to surprise quite a few among you- earnings expectations globally, including for the US, are still falling.
This surprised market strategists at RBS this week and it has also been picked up by the likes of Tim Rocks at BA-Merrill Lynch. I intend to dig deeper into this subject and will report in more detail next week.
In the meantime, let's find out what the next few days will bring us, and equally important, how markets will respond.
I have written a few times on the ISM and PMI indices this year. Here's one snippet from a story I wrote on May 11 this year – "Beyond The Relief Rally", Weekly Insights:
Here are the previous five references (all calculations done by BTIG), note that 1987 is oft regarded non-representative by many an economist:
– date ISM first crossed above 60: 31/12/2003 – return year prior: 26.38% – return year after: 8.99% – return two years after: 12.26%
– date: 30/09/1987 – return year prior: -23.23% – return year after: -15.51% – return two years after: 8.49%
– date: 29/07/1983 – return year prior: 51.80% – return year after: -7.32% – return two years after: 17.45%
– date: 31/05/1978 – return year prior: 1.22% – return year after: 1.84% – return two years after: 14.34%
– date: 30/01/1976 – return year prior: 31.02% – return year after: 1.16% – return two years after: -11.51%
Note that BTIG sees strong similarities between our current experience (US equities rallied 37% prior) and what happened back in 1983 and 1976. In both cases the strong rally prior to the peak above 60 for the US ISM was followed by either a negative result (1983) or a barely positive result (1976).
Subscribers can access my previous story on the US ISM Index, published in March this year, titled "Why A Global Peak Could Be Near" on the FNArena website under Rudi's Views.
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