As the month of August has ended, on a suspiciously positive note, lets take a look at some recent undertow, and expectations for tomorrow’s PMI data. The real story looks quite gloomy, particularly since some much economic data has been falling, quickly.
The chart below illustrates T-Bill rates intraday yesterday as the market was continuing a low volume rally post Bernanke’s comments on Friday. Note that both the 4W and the 3M T-Bill rates posted negative prints. Hmmm, I don’t know about you but I find it hard to believe that the stock market is such a good value when so many people are willing to lose 1 bps to own a US T-Bill for a month or two. Historically this happens just before we go off a cliff.
Note the chart below offers a general perspective on sovereign currency risks as measured by the Option Adjusted Spread of the G-8 currencies. Story seems to be short the Euro and go long everything else. Guess we can confirm where this disaster is about to emanate from. Makes sense if the European banks are in as bad shape as many have been reporting. Funny though, I don’t recall a time where banks distinguished their risks by borders. I don’t see how the European banking system would not take down the US.
And then there is the widely anticipate Manufacturing PMI number due tomorrow. This will be the first data point to illustrate how much the tail has wagged the dog, and how much real damage the August roller coaster did to the US economy. I’m also surmising that Bernanke in his infinite wisdom chose to punt to the September meeting to avoid taking action and then have the data come in so anemic. Note that the Consensus estimate will mean that the economy actually CONTRACTED in August. Any number below 50 represents a contraction. Also interesting to note that only a handful of economists think we will print a number above 50. Certainly at least worth a hedge, ay? Might mean the recession has already begun. Crazy stuff.
Note that the last time this data came in with estimates this low we were watching the aftermath of Lehman’s failure.
While the Manufacturing PMI is not as important as its half-brother the Non Manufacturing PMI due next week, it has often been a leading indicator preceding both economic contractions and expansions. This chart illustrates periods when the two data points were at their widest. Make your own judgements. Orange line is tomorrows Manufacturing PMI series. The white line is next week’s Non-Manufacturing PMI series. The crossover we are seeing is indicative of past recessions. Since the market is up about 10% from its recent lows, and the DOW is about even to positive for the year, for the market to price a recession in, we need to drop at least about 20%. And that would be a mild one. September will be a very long month on Wall Street. I think we will know better next year how it all has affected Main Street.
No matter how pricy puts look, they are cheap if you are on a precipice.