$$ Pessimism Still Rampant……

• Posted by ToddSullivan
• on September 1st, 2010

From the WSJ…

Today (emphasis mine)

Some Wall Street prognosticators are scratching their heads over the latest report on U.S. manufacturing activity, suggesting investors may be getting a little carried away with stocks ahead of Friday’s key employment report.

The Dow has now gained nearly 250 points, or 2.4%, while prices of safe investments like Treasurys have sunk, pushing the yield on the benchmark 10-year note up to 2.60% from Tuesday’s 2.58% close. We’re clearly in “risk on” mode today: Crude-oil futures are 2.5% higher at $73.75 a barrel, and the euro has advanced nearly 1% against the dollar.

But there’s also a good deal of chatter out there warning that investors may be getting ahead of themselves. Here’s a round-up of what some folks are writing:

Ian Shepherdson, chief U.S. economist at High Frequency Economics: “We do not expect a double-dip recession, but we do think the ISM (manufacturing index) has further to fall; enjoy this while it lasts.”

Hmmm. No big conversion to optimism there.

Tony Crescenzi, a portfolio manager at PIMCO: “The ISM index is somewhat difficult to reconcile against the regional manufacturing surveys as well as other recent data.”

And here’s Thomas Simons, an economist at Jefferies & Co.: “The strength in this month’s report contrasts with the weakness in nearly every regional manufacturing survey, which makes it difficult to make inferences on the sector going forward. The ISM tends to be a more reliable and consistent indicator than the regional surveys, but the data today is confusing nonetheless … The legitimacy of the strength is modestly suspicious.”

Read the very last 2 sentences again…..

While admitting that the ISM is “more reliable and consistent” than the regional surveys, Simons is still giving the regionals more weight and doubting the ISM number. This is akin a cop at a crime scene taking the account of three unreliable drunks of what happened over the sober person simply because “there are more of them”.

My view of this would be that the historically unreliable surveys are proving they are, well, unreliable.

This gives us some insight into the pessimism still rampant in the market. Even really good news from reliable gauges is being doubted and looked at skeptically while those from historically unreliable or trailing gauges that back a negative view are treated as gospel. It isn’t just Simons, pick almost any data point and you will find similar views. The pessimists, who largely outnumber the optimists IMO are picking the data points they agree with and ignoring those counter to their thesis. Now, this is normal human behavior, we all do it. The problem here I feel is that the data points they are clinging to are the less reliable ones while they ignore those that are more accurate.

Even rail/waste traffic, historically one of the most accurate gauges of economic activity is being totally ignored both by analysts and the media. Anyone watching the results there is not surprised by August’s ISM number…… not surprised at all as August rail traffic surged. In order to be shocked you’d have to either ignore the rail numbers, OR believe that we can see increased rail traffic in the US without a corresponding increase in manufacturing activity. Doesn’t happen..

Now, we are not talking about a one week surge in rail traffic. What we have seen is 2 of the best weeks of the year in August AND the 4 week average climb to the highest levels of the year. That is a material improvement.

The temporary staffing index which has lead non-farm payrolls by ~3 months historically is telling us we will see payrolls improve into the fall into winter. How much of an indicator is it?

Since 1992:

Both staffing employment and sales grew in 93% of the quarters in which GDP increased by 1.3% or more. With one exception—the fourth quarter of 2007, when the current recession started—both staffing employment and sales grew whenever GDP increased by 2% or more. Because of that sole exception, however, the probability of staffing growth with GDP at 2% or more is 97%.

Current staffing/sales are at the highest levels of the year……..

What does it mean? If I am right and the general economic data continues to improve (not surge, run, just simply improve), we are nowhere near where this market can go to the upside. There is big short interest, a bond bubble etc…all waiting for “proof” things are better before moving.

Well see…..

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