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Buh-Bye Goldilocks

Why are Businesses inventories increasing? Some pundits have claimed this is a bullish sign, an "anticipation of increased demand." I doubt this. We have seen recent CEO surveys which point to major negative sentiment amongst the usually cheery Execs; Durable Goods tumbled 8%, and Housing and Autos are likely already in a recession. My guess is that Just-in-time-inventory is easier to ramp than it is to slow down.

And while Reuters reported that "Business spending on inventories rose, increasing sharply to a $58 billion rate from the $50.7 billion earlier estimated." Inventories builds have increased at a faster than usual pace -- implying that this was  (whoops!) unintentional.

Given the drop in both Durables and Capex, I am somewhat incredulous over Business spending being revised upward to show a 7.2% gain (versus 6.4% advance)

Friday, December 01, 2006 | 10:28 AM | Permalink | Comments (48) | TrackBack (2)
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Worst month for construction spending since 9/11 just reported, with nonresidential spending getting whacked in addition to residential ... ISM at worst level since just after the Iraq War began ... dollar turning into confetti before our eyes. Yep, looks like a nice, soft landing to me.

http://interestrateroundup.blogspot.com

Posted by: Mike_in_FL | Dec 1, 2006 10:42:23 AM

Bob Pisani: "The soft landing is in tact, only a little more tattered than it was."

Um, no.

Posted by: Barry Ritholtz | Dec 1, 2006 10:44:39 AM

What comes after Goldilocks???? THE THREE BEARS!

Ouch...

Posted by: BOB | Dec 1, 2006 10:45:29 AM

It's funny how the grey and gloomy sky makes today seem peculiarly ominous.

Posted by: Aaron | Dec 1, 2006 10:46:45 AM

I'd have to say, if this market comes back after this data, it will be the biggest bull trap in history.

Any and every short would just have to throw in the towel after getting validating with recessionary data yet seeing the market hit a new high.

Posted by: Michael C. | Dec 1, 2006 10:57:32 AM

So is 0.6 an out-sized revision from 1.6 % reported in the 'advance'? Is it to be taken seriously in light of the coming 'final' report on Dec 21? (I only have so much seriousness to go around, you?) Is this a variation on the them 'the worst is over'? (the advance was worse and this is better, ergo TWIO)
I am not seeing the dent that the housing slowdown (ok, decline, dropoff, plunge) should be making on this report. Autos get specific mention as do computers, but surely housing deserves more respect, yes?

Posted by: calmo | Dec 1, 2006 11:00:48 AM

My Uncle who works at the Texas Instruments Fab here in Stafford, texas , told me last week over thanksgiving dinner that they have high inventory and the company has already let go all contract workers and they are planning to cut permanent staff too. He said the inventory started going up in the last 3-4 weeks.

Posted by: Jacobs | Dec 1, 2006 11:03:38 AM

I can't wait to look back on the "goldilocks" commentary from '06 and laugh the same way I do at Cramer's and other idiots "new economy" commentary from late '99 and early '00.

Posted by: joe | Dec 1, 2006 11:05:05 AM

The woman from Federated wanted to come on CNBC to assure us all that ISM falling below 50 is positive since it means the FED won't be hiking any time soon. Amazing how the long only guys always have a creative way to spin what is clearly negative for equities into a positive.

Can't blame them for wanting to preserve those assets under managment. That's how they eat.

My guess is, it's in everyone's best interest to try desperately to hold the market up until year end. The hedgies will all get their big fat gluttonous performance bonuses and the mutual funds will hold onto their AUM. Then a major flush in 1Q.

Posted by: S | Dec 1, 2006 11:18:28 AM

Barry, you still haven't answered my question. To paraphrase...

"Whose definition of 'recession' are you using?"

Posted by: tj & the bear | Dec 1, 2006 11:24:53 AM

Semis generally are yet again building too much capacity. Dunno what the fab in Stafford makes, but I could look it up. DSPs?

While the data definitely are (finally) tilting more towards flat growth, I'm not ready to join Roubini and our host in a greater-than-fifty-fifty recession call, yet -- but then my portfolio should outperform in either a slowdown, flat production or an actual recession. The one thing that would kill me would be a growth rebound.

If nothing else, this PMI should keep the markets from rallying as if growth is back.

Posted by: wcw | Dec 1, 2006 11:25:43 AM

USD Descending Triple Bottom Breakdown

King George II ...the peasants will be revolting soon lol

Posted by: The Bear | Dec 1, 2006 11:41:23 AM

It seems that part of the Goldilocks "fairy tale" is that as soon as the bad data piles up too high, everyone falls back on being saved by the Fed. Lower rates as some kind of magic bean.

That this somehow all by itself will bring growth?

I don't buy it. I would be very curious what other folks think?

Posted by: advsys | Dec 1, 2006 11:49:57 AM

The come back kid is at it again.

This one has more stamina than a pitbull in heat.

There is just no indication yet that any data points are causing a shift in big money allocation.

What will it take to trump performance anxiety? From "I gotta catch up to this market" to "I gotta protect my capital?"

Posted by: Michael C. | Dec 1, 2006 11:56:36 AM

My opinion on definition of recession: the definition itself is secondary. It is always obvious when recession comes.

If one of the existing definitions somehow miss a recession it should not be used.

Best way is to use the different definition every time - pick the one that will give the timeframe that matches the obvious timeframe.

Posted by: bob | Dec 1, 2006 11:59:18 AM

dow will be positive soon so what!

Posted by: tired-bear | Dec 1, 2006 12:03:20 PM

Fairly high oil prices despite a US slowdown, thanks mainly to Asia, coupled with a falling dollar will increase inflation further. This, alongwith concurrent recession, will result in stagflation.

We'll be lucky if we merely have a recession, me thinks (infrequently and often incorrectly - me thinks nonetheless).

Posted by: Bluzer | Dec 1, 2006 12:12:57 PM

"What comes after Goldilocks???? THE THREE BEARS!"

That is a great line !

I've been sitting in cash since October watching this go on. Yes, I missed a big rally, but it didn't make sense to me to see all the housing stuff going bad and yet have a rally in the stock market. I'm shocked the market isn't reacting stronger to this. My sense is that the market won't react at all until it hits EARNINGS. Then it will really react !

Posted by: someguy | Dec 1, 2006 12:30:59 PM

I can't believe some of these home building stocks. All green today, and breakout out to multi-month highs.

They are basically pissing and shitting on the construction data today.

Maybe this is true from a commentary on RM from Aaron Task though he is a reporter not an analyst.

===============================

"Amid all the dour economic data and commentary, it's interesting to note the ECRI's U.S. weekly leading index rose 1.5% for the period ending Nov. 24, marking the fourth-straight week of increases.

This string of gains did follow a streak of over a dozen declines, but the index's recent upturn could signal (maybe) the data we're seeing now will prove to be closer to the end of the slowdown vs. the beginning. "

===================================

Posted by: Michael C. | Dec 1, 2006 1:06:39 PM

As I recall, ECRI's leading economic indicator has a significant lead time (8 months or more IIRC), so it's recent upturn is saying nothing about first half '07 although it is encouraging to think a downturn may not last longer than that. Historically though, downturns preceded by credit expansion and real estate inflation tend to be more prolonged than not, so I guess we get to see whether ECRI or history wins out this time.

Posted by: RW | Dec 1, 2006 1:19:57 PM

too many shorts out there for the market to go down. they will hold it up til year end at least.

Posted by: cleanupDSNY | Dec 1, 2006 1:26:56 PM

Michael C...

Thanks for pointing out the ECRI index rise. Don't count Goldi out yet folks...

Do you get recessions with the stock market near highs, unemployment so low, tight credit spreads, and a robust CP market?

Posted by: JoeyB | Dec 1, 2006 1:28:27 PM

cleanupDSNY, you seem to lack a basic understanding of how shorts participate in the market. Shorts only hold up the market with covering. When they get emboldened by technicals and economic data (as they are now), shorts are not covering. They're shorting more. That has exactly the opposite effect of propping up the market. When they get scared, they cover, and that holds up the market. That's what happened to close out the autumn. With too many shorts having covered, it actually removes a lynchpin of support as the market drops, since they aren't there to cover into declines.

What's propping up this market are the dip buyers and the Santa Rallyers. They'll break. Trader Mike pointed out yesterday an incipient 'falling three methods' that seems to be spot on today. That's a rather bearish formation. This market is toast. It's helped by the fact that nobody wants to sell now and book taxable gains, but that will change. Come Jan 2, look out below as all that postponed tax selling kicks in.

Posted by: jjr | Dec 1, 2006 1:48:10 PM

Well noted on the ECRI. In addition, no one seems to have noted that the most comprehensive house price index, the OFHEO, suggested that house prices in aggregate rose againin Q3, albeit at a modest 0.9% q/q pace.

This is consistent with the housing slowdowns observed over the past few years in other countries.

While the stock market probably is due for a reasonable shakeout, IMO it is too early to say sayonara to the soft landing scenario. Given the much-discussed troubles in Detroit, it hardly comes as a shock that manufacturing has stagnated. However, the vast bulk of economic activity in the US is in non-manufacturing industries which continue to grow.

The corporate sector remains in good shape, though profit growth will probably slow. And funny enough, when consumption slows, the trade deficit improves, which is additive to GDP.

Even with this week's revisions, income growth remains fairly solid, and lower energy prices have produced a nice bump in disposable income.

Inventories have risen, but inventory/sales rations remain at historically low levels.

None of this is particularly suggestive of a hard landing, thougn of course things may change. But vis-a-vis the homebuilders , isn't it possible that they were oversold in the early autumn? How much of a housing calamity is it appropriate to discount? I mean, if this is the 'wrong' price, what is the 'right' price?

Furthermore, what would the recession-callers need to see before abandoning their view? I ask this out of genuine curiosity, not out of any wish to be a troll.

Personally, I am in the soft landing camp. What I would need to see to abandon that view is a) a more significant rise in inventory/sales ratios caused by a sharp decline in sales; b) a sharp deceleration or outright decline in profits; c) evidence that consumers will rebuild savings more aggresively than they have to date; d) ISM sub 47 and non-manufacturing ~50.

Until at least a couple of these come to pass or appear likely to, I'd suggest that while Goldilocks may have a cold, rumours of her death may be greatlky exaggerated.

Posted by: Macro Man | Dec 1, 2006 2:11:00 PM

I was heavily shorting yesterday (actually investing into double-inverted nadaq QID). Damn, it was risky, it was my first short position in 3 years.

I was mostly looking at jump in claims yesterday morning and dollar decline. I was expecting that employment is in sync with drop in housing starts, so construction must be weak.

I won. Will I cover? Maybe as far as 2 years from now.

Btw, trackback from my blog to here from:

http://theroxylandr.wordpress.com/2006/12/01/recession/

Posted by: theroxylandr | Dec 1, 2006 3:19:38 PM