From the desk of David Rosenberg:

• Mortgage applications index 2.8% for the week of September 25th (with the refinancing index down 6.2%).

• Initial jobless claims jumped 17,000 to 551,000 for the week ended September 26th, well above consensus projections was 535,000. Initial claims for the prior week were revised up, yet again, this time from 530K to 534K.

• Consumer confidence not only surprised to the downside in September but the Conference Board index actually fell to 53.1 from 54.5 with both the ‘present situation’ and the ‘expectations’ component failing to build on the August rebound. Historically, by the time the S&P 500 rebounds 60% from the trough, the confidence index is sitting at 92; the month recession ends, the index is, on both an average and median basis, sitting at 72.

• Consumer buying plans receded significantly. According to the Conference Board Consumer Confidence Survey, plans to buy a home fell to 2.3% from 3.0% (the effects of unwinding the $8,000 tax credit?); plans to buy a major appliance slipped to 23.8% from 26.2% in August (what happened to cash for washer-dryers?) – a level last seen in January; auto intentions slid to 4.4% from 5.3%, the lowest since last March (when the market was hitting 12-year lows) – the post cash-for-clunker hangover.

• The ISM index fell in September for the first time this year, from 52.9 to 52.6 in September. We are certain that the ISM has very likely peaked (as auto production crests) because the best leading indicator for the index lies in two of the components — orders which dropped to 60.8 from 64.9, and inventories which rose to 42.5 from 34.4. In other words, the orders/inventory ratio tumbled to 1.43 from 1.89 in August. That is the largest one-month decline in the ISM orders/inventory ratio since December 1980! The ISM was 53 that month – the next month it went to 49.2 (is that in the market?) and seven months later, we were in the early stages of the famed double-dip recession (which nobody saw coming at the time).

• Auto sales collapsed 35% in September to 9.2 million annualized units (below consensus calls of 9.5 million), a 35% slide from 14.2 million August – - TIED FOR THE SECOND WORST MONTH FOR AUTO SALES IN THE PAST 28 YEARS!

• Indeed, it pays to note that real personal income excluding government transfers fell 0.3% in August to a new cycle low. As we saw in 2002, there is no V-shaped recovery that occurs without incomes rising (and a 26x trailing and 16x forward P/E ratio is discounting something that’s pretty good).

• Now, nominal consumer spending did rise 1.3% in August and real (inflation adjusted) expenditures rose 0.9% – thanks to the cash-for-clunkers program which incentivized consumers to fund their outlays by dragging their savings rate down to 3% from 4%. This is Uncle Sam at his best trying to play around with Mother Nature because the natural course of events will keep the savings rate on a discernible uptrend, especially when one deploys a demographic overlay to the analysis. The government can step in sporadically as it just did, but it can’t reverse the trend — only briefly disrupt it. When we do the calculation, if households had not run down their savings rate as they did in August as they were lured into the auto market, we have news for you — nominal consumer spending would have barely eked out a 0.1% advance and in real terms we would have seen a 0.2% contraction.

• Total factory orders fell 0.8% MoM – again, well below consensus estimates for a flat reading. Core capex shipments (non-defense capital goods excluding aircraft – a proxy for business investment) were revised down to show a -2.0% MoM reading. The re-stocking theme remains an illusion – in fact, inventories are still subtracting from GDP – as manufacturing inventories fell 0.8% MoM which was the 12th decline in a row.

All of this, combined with the sharp 0.5% in the aggregate hours worked index in September suggests that (i) the Q3 “bounce” was likely no better than a 2.5% annualized increase in real GDP and (ii) there is so little momentum and so little visibility that it is highly likely we may see 0% real GDP performance in Q4. The consensus, meanwhile, is much closer to 3.0 to 3.5%. This is eerily similar to what happened coming out of the recession at the end of 2001 and into 2002 – a huge rally in equities and risk assets in general, lots of hype over a V-shaped recovery and 3.5% growth expectations for 2002Q4. What did we end up seeing? A 0% growth GDP quarter and the S&P 500 going back to new lows (at 776).

Source: Gluskin Sheff