02 Sep MANUFACTURING INVENTORIES ARE AT AN ALL TIME LOW…
The ISM Manufacturing Index rose to 56.0 in August from 54.2, indicates that the manufacturing sector has continued to recover at a solid pace. But the recovery in production is badly lagging the stronger turnaround in spending, with the result that inventories are now looking very lean. The inventories index fell to a record low.
In my view, this points to further gains in production in the months ahead and probably upward pressure for goods inflation, an environment that is unusual at this stage of the cycle.
The improvement was driven by a further jump in the new orders index to a 16 year high of 67.6, from 61.5. According to Capital Economics, the data is suggesting a rebound in manufacturing output of about a 50% annualized rate. I must again write these rebounds are from very depressed levels but does indicate a “V” shaped recovery.
Some may write there is a V shaped recovery in the equity markets. Maybe if one indexes as the indices are entirely dominated by 5 or 6 issues. Data point after data point indicates the historical gap between small cap value and large cap growth, currently over 42% for 2020 alone. Large cap growth is up over 24% and small cap value is down over 18% YTD. Wow!
According to Miller Value Advisors, the “crowdedness” of the large cap growth trade is beyond record proportions, a gap that has grown exponentially in recent weeks.
There will be a change but the operative question is when? Data point after data point suggests the environment is prone to a sharp and sudden reversal. What will be the catalyst? Inflationary fears amplified by the new Fed policy of permitting inflation to run above the 2% speed limit for a period of time?
The issue with this statement there is no boundaries. How high and how long? As noted many times every time the markets declined over the past 10 years was the result of greater than expected growth that questions monetary policy.
Indexing is now the market and many bulge bracket firms are waring about the unprecedented risk that is possibly at hand.
Just as aside, Bloomberg writes there are roughly 9,000 companies in various indexes that track the broad global stock market. Of these 9,000 companies, 30 of them produced more than 70% of the gain over the past five years, another Black Swan event. Ten stocks were responsible for more than 50% of the gains and three were over 25% of the gain.
Commenting about yesterday’s market activity, technology firms continued their relentless advance, oil is around a five-month high on a pickup in economic activity as China signaled a pronounced recovery in oil consumption, the dollar fell to a two-year low and bonds nominally advanced.
Last night the foreign markets were up. London was up 1.51%, Paris up 2.19% and Frankfurt up 2.20%. China was down 0.17%, Japan up 0.47% and Hang Sang down 0.26%.
The Dow should open nominally higher on economic optimism and dovish fed. The ADP Private Sector Employment survey is released at 8:15. The consensus view is 1 million jobs were created in August. This data may influence the outlook for Friday’s BLS data.
The 10-year is off 4/32 to yield 0.68%.