LPL: BE PREPARED FOR A DISASTROUS ISM MANUFACTURING REPORT

If the “whisper number” for this week’s ISM Manufacturing report is correct then we can expect a disastrous report.  According to LPL Financial the regional manufacturing reports are consistent with a contracting ISM figure:

Based on weakness in various regional ISM and Federal Reserve manufacturing sentiment surveys already released for August (Philly Fed, Empire State manufacturing, Richmond Fed, Dallas Fed), the consensus expects the August reading on the ISM to dip below 50 (to 48.5), from the 50.9 reading in July. The so-called “whisper number” among traders (who often informally have their own forecasts for key economic data and events that differs from the consensus estimate culled from economists) is probably closer to 44.0 or 45.0. Thus, expectations for ISM are quite low. A reading below 50 on the ISM has historically corresponded with contraction in the manufacturing sector, while a reading about 50 suggests an expanding manufacturing sector. The last time the ISM was below 50 was in July 2009, the first month of the current economic recovery.

They warn, however, that it’s unwise to overreact to the negative number.  As they show, it’s not unusual for the ISM to contract during an economic expansion:

As noted in Chart 1, it is not unusual to see the ISM to approach, and dip below, 50 in the midst of an economic expansion. The index dipped below 50 in the middle of the long 1982–1990 expansion and did several round trips above and below 50 in the 1991–2001 recovery, notably in 1995 and again in 1998. In the 2001–2007 expansion, the ISM dipped back toward the 50 level in 2004, before reaccelerating in 2005. More recently, we point out that manufacturing activity/output—vehicle production, industrial production, durable goods shipments and orders, manufacturing employment etc.,have held up much better than measures of manufacturing sentiment like the ISM and the regional Federal Reserve manufacturing indices.

As sustained reading of 42 or below indicates recession, and the ISM did get to that level in both the 1991 and 2001 recessions. It got as low as 33.3 at the worst of the 2007–2009 Great Recession.

 

Source: LPL

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Peter Fairley

    “whisper number probably 44 to 45″ What is your source for this probability?

  • prescient11

    A disastrous ISM number is all that is needed for Fed. action.

    Thus, I expect to see one.

  • Oz

    Looks like a win-win doesn’t it?

    If its 48 – great – we were expecting 44 so rally on. If its 44, great – bring on the pointless stimulus and rally on.

  • Cowpoke

    Agreed, with Low volume News that Paris Hilton will be buying a new cell phone should be just enough positive news to push the Nasdaq up 1.2% dragging the rest of the indices up with it despite the bad ism number.

  • Chad M

    People seem to be forgetting it isn’t just economic numbers weakening that put the FED in action. They need deflation. Read Bill Dudley’s speech from a couple weeks ago, or Bullards, or Fishers. They all say the same thing, we need to see deflation as well as a weakening economy to act. Not there yet.

  • Mercator

    And the other shoe… if Europe is quiet, markets go up.

  • VRB II

    Futures up. We are exiting all stocks today.
    Will keep
    10% fpacx
    15% hsgfx
    4% Pauix
    6%Dblfx
    6% gld
    6% Asia currency
    6% other currency
    48% cash after sales today.
    Selling 17% spy…trade entered from my porcelain throne

  • jswede

    chart ISM components ‘NEW ORDERS’ – ‘INVENTORIES’ for a pretty accurate 1mo lead on ISM headline direction. a little further modeling gets a relatively confident projection:

    approximately 44 on next ISM reading.

    (full disclosure – 1yr ago, this model was wrong: it projected 47 for Aug, but then Jackson Hole was announced and the Index reversed and bounced off 55.1 on its way to 61.4. beyond that it’s been very accurate)

  • http://PragmaticCapitalism Dude

    I read somewhere that “R” is not for recovery, in the current state of the economy it stands for recession. Yep, there will be a QE3, but that’s not what we need. Leave it alone.

  • Roger Ingalls

    Thanks VRB II!! (am I correct as seeing VB II and VRB II as the same person?)

    I’d been looking for a little extra push to exit some positions (both wins and losses). Doing it today.

    For those that want a little common knowledge in the AG area,(from a previous discussion) here’s a bit from seeking alpha.

    http://seekingalpha.com/article/290761-fertilizer-companies-with-near-and-long-term-value-a-conversation-with-charles-niebert

    Just have to mention that the stock I mentioned the other day (scpzf) went up by 10% yesterday…I had no idea I was so influential! Wish I’d have bought prior to the jump!

    One question…when you say cash…do you mean CASH like money market, or cash like treasuries?

    You must have one serious hi tech loo…

  • KB

    All of us, being devoted readers of Hussman, should remember that ISM below certain level only means something in connection with other economic data. According to his latest piece, the combination of data points to recession. Also, according to him, it is not really important whether we see 44 or 48.

  • VII

    Good morning Roger-
    VII, VRBII both me.I’ll fix it soon to VII(ipad,iphone user issue)

    We are constrained in areas many don’t think about.
    We have transaction fees hitting on buys and sells. some hit me some clients.
    That is one issue..that affects us. It is something I think about. Not big but an annoyance for clients. No matter how much money they have.
    2. I generally like treasuries at a higher yield when wall st. thinks the sun will shine like 7 eleven(365 days 24 hours)So I’m avoiding treasuries…I don’t want to get hurt for a short term position. That’s how I see them. Not safe for me.
    Plus…my levels are 1250(I always sell early like today)
    But always cash…plain old Ben Bernanke devaluation Cash. Worth less today then yesterday but hopefully more than holding SPY past today.
    I am not one to short Treasuries..but I’m not buying them here either. Totally agnostic on them right here.

    Remember our models call for on average 12% here..were close from the 8/8 low. But our time frame is longer..end of September for this to happen. But tomorrow sucks…ISM should come in bad then Friday news. And..like some have said..markets could rally because 1. they are whispering the number to be -4000 and lo and behold it comes to 48..oh my god it is better than orginally thought..buy buy..and 2. Yes…things suck the Fed who’s policies havnt’ worked has another great idea…..so it sucks. I could be right and still be on the other side of this trade.
    So I get some more grey hair and eat some more Peanut M&Ms to soothe my inner voices.

  • VII

    Dr. Hussman helped me alot during 2007-2009.
    I’d go so far as recomending the word lighthouse be changed to Hussman.
    And yes…we stuck with him when his long term process did not perform as well for 1 year. I wouldn’t bench Peyton Manning or Tom Brady if they had a bad game. And were not firing Dr. Hussman for throwing some errant passes.

    That being said. I get the feeling after reading Rosenberg this morning as well as hearing the Chearleaders from the Bulls just located there microphone and pom poms. That the Bulls are a hard group to keep down. So I feel like this is one of those times…September-December 31. Were all on our own. It could go either way. Things could get so bad the market rallies due to hope of another hit to the junkie Mr. Market. Or it could roll over.

    Hell…when Rosie tells you the bulls could be right and the S&P at 15x $100 EPS is worth 1500 or they could be wrong and we tack on 12x at $81 and were looking at below 1000. So there you have it…1500 up below 1000 down. Howz that for confusion.

    Hussman-says stocks are a claim on future cash flows. Today priced for 5.1% per year. Not the start of anything great and worse if profit margins come down that number goes up quickly.

    But..Dr. Hussman had a bad 4th quater 2010. Well I’m sticking with him. But it seems the next 4 months were all on our own. Lets do our best to help each other out. Not with lecturing or deep rooted political biases but with actionable investment ideas and data. We need each other this next 4 months.

    Express your view with body and conclusion. As well as stats. We will all benefit if we assist each other here.

    Cheers TPC.

  • KB

    Well, the fact that someone is very good economist does not necessarily mean he is exceptionally good investor. Timing and gut feeling is everything in this business. I think Hussman is correct regarding his recession prediction. Do not have any numbers to prove it, it’s just my understanding after reading a lot of opinions on the subject, both wall street and outcast’s…
    The precise timing of equity market movements is quite different matter though. My feeling is that, besides various swans, earnings, guidance and operating margins will play critical role here. I expect compression, but do not really know when it happens – 3Q or 4Q, maybe even going to 2012.
    … and Rosenberg was a goldmine for me in his advice regarding PMs and UStres, not that much in equities…..

  • VII

    KB-
    “Well, the fact that someone is very good economist does not necessarily mean he is exceptionally good investor. Timing and gut feeling is everything in this business.”

    Very true statement.

    I do have an obligation to perform for my investors. Thus I believe he is both. I think the problem is not he is one or the other but rather one of patience.

    My clients who have made “I’ve made a killing in my Real Estate investments..but stocks…” Well for Farts sake you held the thing for 35 years Jake. Ever think about that. Hold Hussman for 35 years and he’ll do 7-10% a year and your real estate will do 6.5% per year.

    Specifically about Hussman. If I thought he was just an economist I would have sold him. My job is not to buy the best economist. I think he’s both. We trade actively but I keep him at 5% in good times like 2009 and I took him to 10% at the end of 2010 and 15% when the market hit 1350. Were at 15% today.

  • George H

    Funny.

    “vehicle production, industrial production, durable goods shipments and orders, manufacturing employment etc.,have held up much better”

    All July data. Regional Feds and ISM are leading.

  • George H

    I am going to liquidate all my accounts to buy call options tomorrow at open. Since anything better than 44 is a beat and above expectation, odds are we will exceed it by a mile.

    So I fully expect the market to go up 2% tomorrow. If we actually get 48.4, up 3%. If we get 50, we will be up 5%.

    It is no lose situation.

  • Roger Ingalls

    Cool! A bold, simple prediction, with an actionable plan.

    Good luck George H. Let’s see how it plays.

  • Bb

    Hmmm…I guess I am selling calls tomorrow!

  • DSG

    Looks like this figure came in at a respectable number.

    ISM Manufacturing index eased to 50.6 in August, beating estimates and avoiding a contraction.
    The ISM employment index came in at 51.8 in August, down from 53.5 in July.