A Harsh Economic Reality

On Monday morning, as I watched the popular media pumping up the market on the prospect of a Greek debt buyback and economic data from China, I thought, gee that sounds fantastic. I almost bought into it, though it was before I had my first coffee of the day, a time when I’m relatively useless to the world. A few minutes later, with a sip of Joe and a glance at the latest ISM Manufacturing Index, and then while recalling the more recent stream of unemployment reports and the durable goods orders data of last week, I think I said out loud, “What are they smoking!?” Even putting fiscal cliff concern aside, the economic reality of today does not reflect something supportive of any sort of celebration.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Economic Reality

Back in mid-November, I warned readers of my column that the fiscal cliff posed more than just a threat post January 1st. I said that with each and every passing day, small businesses were withholding capital investment and were not hiring new employees. I suggested that businesses large and small were also more likely to consider labor force reductions given the new healthcare costs they were about to commit to with the President’s reelection. Whether right or wrong, and while I assure you I am in favor of health care for all, the cost issue is a new economic reality we’re going to need to adjust to. So I did my best to raise alarm about the current economic costs of fiscal cliff fear, versus the tendency of most to focus on the result of certain end of year actions or inactions. With a vulnerable economy continuing to lack support from international demand (mostly Europe), and with unemployment still elevated, I said recession was again threatening. I think any reasonable investor with a sense of the realities of Main Street today can concur with that view.

A few voices yesterday did direct attention to the importance of the ISM Manufacturing Survey result, but the information was mostly drowned out by noise at television media. Though, you should take note, because the stock market took notice yesterday. After a gap open higher on the hype of the day, the SPDR S&P 500 (NYSE: SPY) reflected economic reality as trading progressed, ending the day down a half of a percentage point. The Powershares QQQ (Nasdaq: QQQ) was down by a lesser fraction, but the SPDR Dow Jones Industrial Average (NYSE: DIA) was off 0.4% (after benefiting from a closing spike) due to its sensitivity to the industrial sector measured by ISM. In that regard, a closer inspection of stocks shows the Industrial Select Sector SPDR (NYSE: XLI) fell by a more significant 1.1%, and the iShares Dow Jones Basic Materials (NYSE: IYM) showed the sensitivity of basic material names to the data with its 1.6% decline on the day.

Chart by Yahoo Finance

Last week’s Durable Goods Goose-Egg concerned me, because of the details of the data, which we discussed in the linked to article here. So, ISM’s Manufacturing Survey for November, showing an index under 50.0 at 49.5 and therefore reflecting contraction, compounded on concerns. November marked a sharp drop from October’s read of 51.7, and it was off the economists’ consensus for a similar reading (51.7). November marked the fourth month in the last six showing contraction, though it followed two months of growth. Furthermore, the reading marked the lowest level in the index since July 2009, which you’ll recall was a really tough economic time. Add to this information the fact that the last several weeks of Initial Jobless Claims have measured near or above 400K (though certainly affected by Hurricane Sandy), and you have more than enough cause for concern.

Thus, I remind investors that the economic reality of today remains less than perfectly represented by media commentary and even by the rise of stocks in 2012. The earnings season just passed served as a wake-up call to that economic reality, but investors remain hopeful that a fiscal cliff compromise will serve as adequate support for stocks. Unfortunately for profit seekers in equities, hopeful valuations are regularly checked by economic realities in times like these. A meaningful fiscal cliff compromise might offer the market a holiday gift (I doubt it), but these realities will nonetheless persist and continue to weigh in 2013. Economic report coverage remains a key topic area for my column here, so econo-watchers may want to follow along.

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