Market Talk

August’s ISM manufacturing survey last month helped spark a 250-point rally by the Dow Industrials, as investors figured that ended any concern about a double dip. Today’s Sept ISM gauge fell, as expected, and is far from the all-clear signal last month’s reading was perceived to be.

All the indexes in the September report show growth slowing (or contracting, in the case of order backlog), except inventories and prices. Calculated Risk notes with new order growth slowing and inventory piling up, “further declines in the ISM PMI are very likely.” The blog points out Norbert Ore, chair of the ISM survey committee, noted these indexes are “sending strong negative signals of weakening performance in the [manufacturing] sector.”

Inventory building is now starting to look a lot less intentional, and a sign of still-sickly demand. And comments from the ISM survey respondents weren’t exactly gushing, either.

There’s an upbeat one from the chemical products arena (“Business results [top and bottom line] continue to meet or exceed our operating plan and exceed prior year performance by double digits”), but overall tone from the others remains restrained.

In computer & electronics, a commenter said “strategic customers reducing order quantities,” while a transportation equipment respondent said “customers seem to be pulling back on orders. I suspect that they are trying to reduce their inventory for the approaching year-end.” Another in food, beverage & tobacco said business is flat and “expected to remain flat.” Commodities “continue to be the main concern heading into 2011.”

ISM non-manufacturing (services) index   — arguably the more important gauge, considering the orientation of the US economy — due out Tuesday.

- SEC narrowing its investigation into Lehman on its questionable accounting practices makes sense. “Lehman has long looked to be the poster child of likely accounting fraud,” Yves Smith writes at naked capitalism. But she notes that while Lehman looks like a “textbook case of excessively creative accounting…I would not hold my breath about obtaining criminal indictments.”

- Reflecting push for ever-shorter trading horizons, CBOE has asked regulators permission to list options expiring daily. Contracts’ lifetimes would be between one and four days. Move follows growing interest trading options that expire weekly. “I guess the question isn’t why, but why not?” asks Adam Warner at Daily Options Report.

- “Growth is slowing when it should be surging,” at this point, former labor secretary Robert Reich complains on his blog. “We may or may not fall into another hole, but a so-called ‘double dip’ isn’t really the worry,” he says. “The worry is we’re not getting out of the giant hole we fell into.”

- Adobe (ADBE) wastes little time celebrating Apple’s (AAPL) move to loosen the reins over its software developer rules.

- Nokia (NOK) replacing its CEO is a long time coming, but Digital Daily blogger John Paczkowski questions timing of the move. It comes ahead of Nokia World and the company’s major product launch. That means new CEO Stephen Elop isn’t starting off with a clean slate, “but a full one overflowing with a new software platform and a new smartphone portfolio.”

- Reuters blogger Felix Salmon is concerned that the average American remains pretty pessimistic about the US economy, and these viewpoints could manifest as self-fulfilling prophecies. “It would be nice to see the bulls out there come up with some good explanation of how their forecasts are consistent with these survey results,” Salmon says. “Because on the strength of these answers, the double dip is coming.”

- But contrary to Salmon’s belief, Business Insider’s Vincent Fernando says when everyone’s sour on the economy, it’s actually in better shape than many think. “When most people are reported as being extremely negative, your contrarian alarms should be going off as an investor.”

- Our colleague Kristina Peterson hits a home run in today’s C1 story on the Briargate traders who trade at the market’s open and close and chill out for the rest of the day. What a life.

- St. Louis Fed President James Bullard says the central bank has moved closer to providing additional support to the economy, although he added he doesn’t expect that action to become necessary.

- With tomorrow marking the ninth anniversary of 9-11, take a few minutes to read Todd Harrison’s reflection of the horrific day. A well-written and extremely moving piece.

Investors have kicked September off on a strong note. But significant technical resistance, as well as fundamental negativity, continues to plague S&P 500 at current levels.

From a technical perspective, it’s tough to make a bullish case for the broader market right now, even after yesterday’s run-up, according to Bespoke Investment Group. Firm notes the S&P 500 is currently sitting just above its 50-day moving average. But it’s still lingering too close for comfort as it hasn’t been able to significantly shoot higher all morning.

“The 50-day acted as a point of resistance (yesterday) that just couldn’t quite be broken,” Bespoke says. “For those hoping that the upside momentum will continue, it will be important to see a close above the 50-day in the next couple of days.”

S&P 500 was recently up 5 at 1086, with the 50-day at about 1080.

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You get the feeling the economy's missing something.

Don’t be fooled by the stock-market reaction, that revision to 2Q GDP reported today was awful. Commerce Department now says gross domestic product in the second quarter rose at a 1.6% annual rate, down from the 2.4% it originally report. For the vast majority of Americans, an economy that is growing at a 1.6% rate is barely distinguishable from a recession, no matter what spin anybody puts on it.

What do these numbers say to you? 5%. 3.7%. 1.6%. That’s GDP for the past three quarters. See a trend there? Those numbers have been steadily falling as the government’s varied and myriad stimulus programs have been running out. The problem is, nothing has come along “organically,” as the wonks like to say, to replace the stimulus. The plan all along was, the feds would spend freely, the Fed would lend gratuitously, and the economic would restart, at which point the stimulus and liquidity programs could be withdrawn.

It hasn’t worked that way, and this morning’s report clinches that, and raises the specter of the “double-dip” (if you believe the first dip ever ended, that is.)

“Certainly the GDP report is better than expected,” Miller Tabak’s Dan Greenhaus wrote this morning. “However, taking a step back reminds us that 1.6% growth is, simply put, atrocious. It is not enough to meaningfully affect the unemployment rate and we repeat our belief that GDP will not settle into a 1-2% ‘steady state’ for six or eight quarters.

“If that happens, and it looks like for now it might as we currently believe 3Q GDP will grow at most 2% with not much more expected for 4Q, a move one way or the other will have to occur. For now and absent meaningful monetary or fiscal stimulus, we are inclined to believe that move will be to the downside.”

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Inventory's getting pretty low at the Rainbow Shop.

You thought the Fed statement was a bummer?

Get a gander at today’s report on the June trade deficit. The deficit blew out to $49.9 billion, a 21-month high, as imports rose 3.1% and exports fell 1.3%. The Street pegged the deficit at $42.3 billion. Bulls will point and say, hey, look, imports are up, that means demand is up.

Uh, sure, guys, have fun with that one.

The real takeaway here is that this was the June report, still in the second quarter, and as such, it will have an effect on the revised GDP numbers that come out at the end of August. Depending upon whom who read, that could mean a badly revised number, or a drastically badly revised number.

“The BEA estimated a fairly large drag from net exports and indeed, the deficit reported in today’s report is even larger than they estimated,” Miller Tabak’s Dan Greenhaus wrote, “suggesting that 2Q GDP is indeed likely to be revised down closer to 1% or 1.5%.”

Ugly, right? Wait, it gets better.

“The deterioration in the trade balance in June was much sharper than had been assumed by the BEA in the advance Q2 GDP report,” Peter Newland at Barclays wrote. “As such, Q2 GDP growth is now tracking just 0.3% q/q (saar), relative to our previous tracking estimate of 1.6% and the initially reported 2.4%.” This ain’t Roubini’s crew saying this, by the way; Barclays is a relatively bullish camp on the Street.

Zero point three percent, can you imagine that? GDP in the second quarter coming in ultimately at just 1%, or 0.3%? And everybody expects the second half is going to be worse than the first half, so where’s that leading the third quarter to?

Can you say, ah, double-dip?

Addendum: Josh Brown over at the Reformed Broker nails it: “It was simply so awful that almost no one in the mainstream was ready for it.  The implications of this number will work their way into GDP calculations and recalculations and the end result will not be pretty.”

Stocks crater after Congressional testimony from Fed Chairman Ben Bernanke disappoints investors who’d hoped for some concrete steps to counter the slowdown in the recovery. The market worked up a rumor yesterday that Bernanke was going to announce some policy change, cutting interest payments on banks’ excess reserves was the most cited, that would somehow be bullish. They probably would’ve just been happy with the helicopter drop, too.

DJIA slides as much as 164 points to 10065, before recovering some ground to finish down 109 (1.1%) at 10121. S&P 500 loses 14 (1.2%) to 1070, Nasdaq Comp falls 35 (1.6%) to 2187. NYSE volume below average, but higher than it’s been on the rally days. The losses erase most of Monday and Tuesday’s gains.

Not sure why the market convinced itself Bernanke would make some big announcement, not really the right forum for it, and in fact the testimony seemed downright bearish for the cautious central banker. He allowed as that the risks of a double-dip have risen, although he still thinks the likely path is recovery. CNBC reported that he also said the unemployment picture is the worst since the Depression (although I personally wasn’t watching at that point, so if he said that, I missed it.)

Apple’s stellar earnings don’t provide much lift, for itself or the wider market, amid heavy calendar of reports. Apple shares rose just about 1%. Morgan Stanley swings to a profit helped by, of all things, trading revenue. Wells Fargo sees a sequential gain in both earnings and revenue, but a decline from a year ago. For Wells, as for so many banks, consumer demand remains an issue. Coke had a nice report, too, and ended up being one of only three of the Dow’s 30 components to log a gain on the session.

- Nokia’s (NOK) adding its own twist to the Apple/Gizmodo iPhone 4 controversy earlier this year. Nokia’s getting Russian police involved in asking Eldar Murtazin, editor-in-chief of Moscow-based mobile-review.com, to return the prototype N8, a device he gave an unfavorable review earlier this year.

- “Investors have this week been buying up names that have been hit the hardest in recent months, which is usually the case when we see bounces like this,” Bespoke says.

- Banks and regulators must take “appropriate action” to strengthen banks’ resilience to shocks and safeguard the health of Europe’s financial system, ECB President Jean-Claude Trichet says.

- Whatever happened to all those toxic assets on banks’ balance sheets that garnered so much attention a while back?

- Jobless claims dropping 21,000 to 454,000 represents a “tactical victory for the bulls,” James Picerno writes at The Capital Spectator. “But until and if the trend rolls on it’s only marginally encouraging. The strategic outlook, in other words, is still up for grabs.”

- Silicon Alley Insider says the real reason Google (GOOG) is worried about Facebook is that people buying things are more inclined to trust their friends than strangers or search ads. SAI says that’s the key message in a presentation prepared by Google researcher Paul Adams for company execs who are plotting the company’s next social network initiative, rumored to be called “Google Me.”

- Individual investors are turning more bearish, which contrarians could actually view as a bullish indicator. Only 25% of AAII’s respondents are bullish on stocks, compared to 42% who say they are bears. “I always prefer actual buy and sell driven data — prices, volume, asset allocation, etc. — versus mere surveys,” Big Picture blogger Barry Ritholtz says. “They can be useful, but have huge limitations. Us humans are notorious for saying what we hope, rather than what actually is.”

- Double-dip has dominated the market chatter in recent days. While pundits keep saying the economy won’t fall back into a recession, Reuters’ David Gaffen isn’t so sure. “It may not happen — but when a lot of people are trying to convince you that something’s not going to happen, it can make you believe that it’s more likely than not.”

- The commercial real estate market hasn’t collapsed because of a strategy known as “extend and pretend,” essentially banks giving troubled borrowers time to make good on their bets until the economy recovers. “Sometimes, it actually works. But, usually it doesn’t — especially when practiced on an industry-wide scale,” Henry Blodget writes at Business Insider.

- The LeBron James surreality show is about to begin. He’s “leaning” toward Miami, but we still have faith he’s coming to the Big Apple. Let the “LeBronference” begin.

- Big Picture blogger Barry Ritholtz wonders if the crowd can accurately predict a double-dip recession. He reminds there have only been three double-dip recessions during last 150 years and just one (1980-82) in post-war era. “When was the last time the crowd correctly forecast an ordinary recession?” he asks. “Given this track record, why should we believe they can forecast a double dip recession?”

- “The American political class will have to face up to the new reality of a semi-permanent slump for a decade or more that will blight a great number of lives,” Ambrose Evans-Pritchard writes at the Telegraph. “The cyclical recovery that normally makes it possible for most Americans to find a job if they want one is not going to happen this time because the overhang of debt, fiscal tightening, and a liquidity trap have combined to jam the mechanism.”

- Eric Jackson, founder and president of Ironfire Capital, has some advice for Microsoft (MSFT) CEO Steve Ballmer: run the software giant like a bank. “Not a modern basket-case bank with improper capital levels and a stack of bad loans,” writes Jackson, who acknowledges he’s long MSFT. “[Ballmer] should run Microsoft like an old-fashioned bank that expanded conservatively and paid out a fat dividend attracting lots of widows and orphans.”

- Paul Krugman says he’s not surprised that corporations are reluctant to spend, while hoarding tons of cash. “With huge excess capacity, why invest in building even more capacity,” he says. Time to put that cash to good use.

- The debate over whether the economy needs a second stimulus package just won’t go away. Add Goldman Sachs chief economist Jan Hatzius to the growing group of stimulus advocates who believe more help is needed.

- Baltic Dry Index drops for a 29th straight session, its longest losing streak in more than six years, and no one seems to care. This a story that might otherwise make front-page headlines, but “it appears there are some growing concerns about [the index's] usefulness today versus its usefulness say two years ago,” FT Alphaville says. “And it’s all down to shipping supply.”

- Stock market’s recent swoon off the late-April highs shows the market’s “beginning to take a path of fear rather than traversing the path of fundamentals,” writes Doug Kass of Seabreeze Partners. “My baseline expectation is that, despite the hyperbolic dire market warnings and the admittedly poor price action in the markets around the world, the domestic economy is simply decelerating from a V-shaped recovery toward moderate expansion.”

- Netflix trades for more than 40 times this year’s earnings, which prompted Crossing Wall Street blogger Eddy Elfenbein to call it “the absolute worst stock to buy” back in April, when it traded at $87. He didn’t exactly have the best timing, it’s risen since then and today jumped 10% to $118.49. Nevertheless, he’s not changing his tune. “I still think Netflix is wildly overpriced. Only now, it’s even more so.”

- Bearish sentiment this week jumped to the highest level since July 2009, Bespoke Investment Group reports, citing the Investors Intelligence weekly survey of adviser sentiment. Ironic, especially since the S&P 500 rose more than 3% today, its third-biggest gain of the year.

- LeBron’s decision is about 24 hours away. Ochocinco and current NBA player Jared Dudley believe he’s going to the Knicks. Here’s to hoping King James makes the concrete jungle his new home.

- Financial stocks have hit bear market territory, while materials, energy, industrials and consumer discretionaries are getting close. “Unsurprisingly, it’s the defensive sectors that have held up the best since the market peaked on April 23rd, if declines of 9% to 14% can be characterized as holding up,” Bespoke says.

- It’s tough to ignore the increasing deflation risks filtering through the market. “The sure-fire economic solution to the mounting deflationary risk is a strong and sustained rebound in job growth,” James Picerno says at The Capital Spectator. “Unfortunately, the odds look high for a jobless recovery at the moment, thus the market’s outlook for a new round of disinflation, perhaps outright deflation.”

- All the bailout money that was dished out to the banking sector simply allowed the financial sector to avoid a vast restructuring. “The can was kicked down the road,” Barry Ritholtz writes, noting banks weren’t allowed to suffer the same destiny that happens to other insolvent businesses. “This was a terrible error, the greatest financial tragedy of the 21st century.”

- Despite the widespread opinion that double-dips are rare, data and indicators are warning that one is coming, John Hussman of Hussman Funds points out. His own firm’s recession warning composite is showing the same combination of factors that appeared in November 2007 and October 2000.

- ISM’s non-manufacturing report shows service sector activity slowed last month. “In yet another sign the economy is cooling substantially, three components of the June Services ISM are now in contraction,” Mish says. “This report was weakest where it matters most: employment, imports and exports.”

- Yahoo’s still searching for an ad sales chief. “We’ll see how it turns out, but as Yahoo just closed its second quarter, it’ll be important for some clarity around its most important business in its most important market, especially as its stock continues to its lackluster performance,” Kara Swisher writes.

- The likelihood of a “double dip” recession may be low, according to economists, but as Catherine Rampell points out at NYT’s Economix blog, the general public still seems pretty worried. Google searches for “double dip” have soared this year, she notes, with a specific spike beginning in May.

- Out of all the long-term unemployed, the older, more educated workers have the highest length of unemployment, Calculated Risk reports, citing BLS data.

- AgBank IPO totals $19.21 billion, still in the running for the biggest IPO ever.

- Brian Cashman says LeBron is going to be a Knick. Keep your fingers crossed. Oh yea, and LeBron starts a Twitter account today, tweets ONCE and has 114,000 followers and counting. Hey LeBron, how about throwing Market Talk some of your followers, eh?

Over at MarketWatch, chief economist Irwin Kellner notes the economy is poised on the edge of expansion and recession, and he thinks it’s headed toward the latter:

There is no longer any doubt that economic growth has petered out. Growth in the first quarter, at 2.7%, was less than half of the fourth quarter’s 5.6% pace. Data available since then suggest that the second quarter was even weaker.

As a matter of fact, considering the recent declines in housing, employment, consumer spending, exports and local government spending — not to mention the plunge in stock prices — about the only thing keeping the economy from slipping backward in the quarter just ended was a rise in business inventories.

This is not good news for the nascent recovery.

This morning’s ISM report on the services sector just adds one more discouraging data point to the mix. Overall growth fell back, albeit remaining in expansion territory, and key components like employment fell into contraction territory. Actually, every component, new orders, employment, inventories, prices, export orders, everything fell except for supplier deliveries, which was flat.

The stock market paid no attention. In fact, it rallied to session highs immediately after the report. But that’s increasingly looking like just what Tomi Kilgore called it this morning: a dead-cat bounce. DJIA rose about 155 points this morning, then gave it all away as it slipped into the red. Lately up 37. Wherever stocks are at the closing bell, all this volatility, and the fact that equities can’t hold a one-day rally after two weeks of selling, isn’t a very good sign.

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