The Empire State Manufacturing index is a second-string
economic report, not on par with the main “roster” of reports we get on GDP, employment,
retail sales or inflation.
It’s kind of like preseason NFL football, actually. You
normally don’t need to pay too much attention, because the scores don’t matter
and many of the guys battling it out on the gridiron right now will be out of a
job come Labor Day.
But every once in a while, something strange happens. You
get a reading that’s so out of the ordinary … so shockingly bad … that you have
to sit up and take notice. That’s precisely what we got today.
Specifically, the Empire Fed index collapsed to NEGATIVE
14.9 in August from positive 3.9 in July. That was much, much worse than the
average forecast of +4.5… the third drop in the last five months … and most
importantly, the worst reading since April 2009.
Yes, April 2009. The tail end of the last recession. A month
where the Dow Jones Industrial Average was going for around 8,000. It wasn’t
just the headline number that stunk up the joint, either. Sub-indices that
track new orders, shipments, inventories and employee workweeks all plunged
into negative territory.
This is what it looks like in chart format. That shaded area
from 2008-09 represents the last recession. So basically, this number is so bad
that it’s typically something you see only when the economy is shrinking.
[Source: Federal Reserve Bank of New York] Source: Federal
Reserve Bank of New York
So what’s going on? Well, let’s go through the challenges
we’re facing one by one:
The energy sector is in the midst of a nasty pullback, with
layoffs, bankruptcies and investment all plunging …
Several emerging-market currencies, stock markets and
economies are collapsing, with some declining at their fastest rates in decades
…
The dollar has been rallying for several quarters, and China
is now devaluing its currency. That puts U.S. multinationals and manufacturers
at a big disadvantage versus foreign competitors.
As a matter of fact, the Atlanta Federal Reserve publishes a
“GDPNow” indicator that is updated frequently as new data comes in. Its latest
estimate for GDP growth in the current quarter? A pathetic 0.7%. That would be
a major slowdown from 2.3% in the second quarter — and far below the average
“expert” prediction of economists, currently 2.6%.
In short, it’s not just one minor problem or threat the
economy is up against. It’s several converging at one time. That’s why this
Empire index reading is worth paying attention to. IF it’s a harbinger of
what’s to come from bigger, more widely followed reports, the stock market
could be in for even rougher sledding.
So what do you think? Is the Empire reading something to
worry about? Or a tempest in a teapot? Do you think the problems overseas are
going to wash up on our shores, and that will hurt the broad averages? Or will
we remain relatively healthy even as the rest of the globe catches an economic
cold? Let me know at the Money and Markets website.
Our Readers Speak
It’s a new week, but many of last week’s worries are still
weighing heavily on investors like you. There’s definitely a higher level of
concern about the stock market now than we’ve seen in some time, and in my
opinion, for good reason.
Reader T. said: “U.S. markets can only hold up so long – and
will start crashing or at least declining in September, I think. There’s much
skepticism, so there is an ability for markets to ‘climb the Wall of Worry.”
But it’s not worried enough with the VIX around 13 – my read on it for now.”
Reader Novice T. added: “I am buying some inverse 3X ETFs
like SPXS, YANG, NUGT. Start collecting as insurance and take profit on some, if
any, opportunity and keeping some for the major correction.
“At the beginning of the year, I had 75% invested in stocks.
Now I have only 35%. With a six-year bull market, one has to know when to take
profit and be ready for ‘bottom fishing’ when the market correction is a year
or more old.”
Reader Henry A. also said: “The foreign market deterioration
was predictable. The Third World has been borrowing cheap U.S. dollars, doing
the carry trade, for development. And now, they will be paying their debt with
expensive U.S. dollars. Things will get much worse before they get better.”
But Reader Tom suggested there may be some opportunity out
there, saying: “Let me be the contrarian here. While Mike and others are saying
dump stocks, I say buy into high-quality stocks with not a lot of China
exposure. Google (GOOGL) comes to mind. This is a great buying opportunity if
you know the right stocks to look for.”
It’s always nice to hear differing opinions, so thanks for
weighing in, Tom. But it should be clear from my recent columns that I’m more
aligned with what Henry A., Novice T. and others are saying right now.
More and more global markets are outright crashing. Yet U.S.
stock investors are just going along their merry way as if nothing’s happening.
That kind of dichotomy is hard to maintain for long, and I’m very concerned our
markets are doomed to play “catch down” soon. We shall see.
Any comments you’d like to add? Then don’t miss out. The
website is there as your outlet. I hope to hear from you soon.
Other Developments of the Day
The emerging-market meltdown I wrote about last week
continued overnight, with EM currencies collectively suffering their worst
declines since 2000. Turkey, Malaysia, and Brazil led the latest slump. So I
will pose the question again: How can the U.S. remain an island of prosperity
in a sea of market sickness?
How much pain and volatility is China’s economic slowdown
causing? Quite a bit, as last week’s currency devaluation demonstrated. After
all, the yuan move was meant as a form of economic stimulus.
The Wall Street Journal goes into more detail in this story
from late yesterday, noting the wide range of U.S. corporations warning about
China weakness and the impact on their earnings. It lists everyone from
Weyerhaeuser (WY) to Cummins (CMI) to Juniper Networks (JNPR) as victims of the
slowdown.
Liberty Interactive Corp. (QVCB) agreed to buy Zulily (ZU)
for $2.4 billion, adding the online retailer to its home shopping network
empire. Liberty is the parent company of long-time retail company QVC, while
Zulily is a 5-year-old upstart whose shares have struggled in the past several
months.
An Indonesian airplane carrying 54 people crashed in a
remote region of that island nation, and a combination of rugged terrain and
lousy weather is making recovery efforts difficult. Indonesia has a history of
accidents and crashes, and the Trigana Air Service company that owned the plane
in question is banned from flying in Europe due to safety concerns.
Any thoughts on the latest bout of EM weakness, and the
implications for our markets here in the U.S.? What about the latest deal in
online retailing … is the combined QVC/Zulily company a bigger threat to the
likes of Amazon.com (AMZN)? Let me hear about these or other topics online and
I’ll do my best to address your comments and questions. Until next time, Mike
Larson
Market Roundup Dow+67.78
to 17,545.18 S&P+10.90 to 2,102.43 NASDAQ+43.46 to 5,091.50 10-YR Yield-0.046 to 2.15% Gold+$4.30 to $1,117 Oil-$0.62 to $41.88
Source:
Money and Markets
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