ISM Index Sinks Stocks
By now you have read that the ISM index printed a nasty number this morning. What was not reported on too much was the fact that the report came out a full hour early due to a possible "breach of information". What the heck does that mean? Did Ben BernanSpan try and get an early peek at the data? Has some major hedge fund been able to hack the database that collects this information to use as a trading edge? I do not know, but if I was invloved with this system at all I would sure as hell try to figure out what went wrong. My new poll question asks who may be responsible for the "breach of information" debacle.
Back to the report, from Yahoo Finance:
Stocks Plunge on Service Sector Weakness
Tuesday February 5, 5:36 pm ET By Madlen Read, AP Business Writer
Stocks Tumble As Weak Service-Sector Report Stirs Concerns About Economy's Health
NEW YORK (AP) -- Wall Street plunged Tuesday, driving the Dow Jones industrials down 370 points after investors saw an unexpected contraction in the service sector as evidence the economy is sinking into recession. It was the Dow's biggest percentage drop in almost a year.
The volatility that pummeled stocks in January returned with the news that the service sector shrank last month for the first time since March 2003. The report from the Institute for Supply Management wiped out the nascent optimism about the economy that had sent stocks surging higher last week.
"The report drives a nail into the coffin from investors' minds that we're in a recession," said Todd Salamone, director of trading at Schaeffer's Investment Research. "That doesn't mean stock prices in the months ahead will be lower. But when you see headline numbers like this, there tends to be a reactionary sell."
The ISM said its index of service sector activity, which accounts for about two-thirds of the economy, dropped below 50, a level that indicates contraction. The market had expected another month of growth, and the disappointment contributed to Tuesday's $500 billion loss in the Dow Jones Wilshire 5000 Composite Index, an index that measures the movement in 5,000 U.S. stocks.
According to JPMorgan equities analyst Thomas J. Lee, the three worst readings on record in the ISM's service sector index are associated with stocks rising in the ensuing three months -- on average, by 6 percent.
I was a bit taken aback by the market reaction to this data point. The ISM is a pretty choppy number, and the article itself says there was a contraction number printed in 2003 which did not mean a recession. Perhaps it is because the bullish sort have steadfastly denied that anything from the housing and banking issues would spread to the "real economy" they were a bit upset with the number.
You have to love the people Yahoo talks to though. If the lower than expected ISM really means there is going to be (or is right now) a recession, you MUST be in stocks ahead of the recovery! It is always the right time to buy stocks (and houses right?) so rush out today and get great companies at a huge discount! The desperation from the stock folks is becoming more evident.
My take; I will need to see another months ISM come in below 50, maybe even 45 to believe this is a trend and not just noise. Again, financial moves are slow and ponderous. Do not be surprised to see lots of talk about another emergency FED (only 300bps left!) rate cut based on this number start in earnest tomorrow, with a rally right behind it. Too boring I know.
Look at the Mess We Made!; Now Clean It Up or The Smell Will Kill Us All
I love the online financial world. So many opinions and so many different views on things. I came across an article written by Wall Street Examiner today that was really good. I recommend reading the whole piece here: http://wallstreetexaminer.com/blogs/cutting/?p=148
The Examiner takes a recent Bloomberg article which covered the G7 meeting in Tokyo, and it is chock full of juicy tidbits on what the big central bankers are planning for the future. In light of the housing bubble crashing, massive bank losses, and problems with monoline insurance here is a short list of some ideas the geniuses have put together:
- Offering government-backed loans to U.S. homeowners with adjustable-rate mortgages, whether prime or subprime (I thought it was contained to subprime?)
- Advocates a tax credit for people who buy homes this year that would triple the current benefits mortgage holders receive. (Priming the pump?)
- Stephen King, chief economist at HSBC Holdings Plc in London and a former U.K. Treasury adviser, says the crisis may get so severe that governments will be forced to bail out homeowners who fall behind on loan payments and to buy up worthless assets that are hurting banks. (Its soooo simple don't you see?)
- Bernard Connolly, global strategist at American International Group’s Banque AIG unit in London, even predicts authorities will eventually have to buy up stocks to prevent a crash. (Again, soooo simple!)
So there you have it. Homes are so overpriced that nobody can buy them. Solution? Put everyone into a 50 or 60 year loan they can afford and let them be debt slaves. Still not good enough? People will walk away anyway? No promlemo! The governments and central banks can simply BUY all the distressed property held by the banks and presto! No problems. Stock market getting ugly? Step right up and have the central banks BUY stocks to stop a crash! Where were these guys during the Depression? F#ing brilliant!
Sorry for the vicious sarcasm, but this stuff is really over the edge. And annoying. And silly. And everything I have come to expect by people in high positions.
I can sum up the game being played right now with a simple analogy. Here goes:
The banks and lending institutions were force fed a huge diet of fat and lard (read as easy money via 1% interest rates) by the FED. They happily gobbled it all up, and went back for second and third helpings. They even invented new and creative ways to prepare the fatty foods to consume even more. They pretended that they could do this forever without any problems.
Eventually the intake was too great and the system had to be relieved (read as housing prices finally exhausted themselves)and relieved quickly. The banks then proceeded to take a huge dump right in the middle of the living room on the brand new carpet. The explosive diarhea was so voluminous that all the rooms of the home (read as the economy) are in danger of being stunk up by the mess.
Now the big banks and the central banks want to force the citezenry to clean up the mess under the guise that if the mess is left out, the smell will kill us all! First they soil the carpet, and now they want someone else to clean up the mess just like tha little babies that they are. No admision of guilt. No responsibility taken for the accident. Just great banks that are in trouble and need to be bailed out at any and all costs.
Sorry banks. If I had my way I would rub your noses in it just like an animal to teach it not to do these kind of things. Alas, I will not have my way. There is going to be major bailouts of all shapes and sizes coming down the line over the next year. They will all have a common vein that misses the core issue: Home prices and yes even stock prices are wildly overpriced (even now). By backstopping any asset class loss the government is setting a precedent which will be repeated time and time again. If there is no downside, only a fool will not join in! Can any of these ridiculous ideas ever get off the ground? I dunno, but they will try!
Monoline Insurance Downgrade - More Bluster Without Action
Calculated Risk (you do stop there evry day right?) has a snippet up tonight about Fitch allegedly threatening to cut the insurers ratings regardless of capital position:
I say a big "Yeah Right" to that one. Why change anything now? The lunacy of retaining the AAA rating has been thoroughly exposed, so why Fitch deems it necessary to even make such a statement is lost to me.
Again, bear with me as the Blogger spell checker has ceased to function. Hopefully they will resolve the issue soon.
Have a good night.