Tuesday, August 05, 2008

ISM Non-Manufacturing Rises More Than Estimates

- ISM Non-Manufacturing for July rose to 49.5 versus estimates of 48.8 and a reading of 48.2 in June.

BOTTOM LINE: Service industry activity in the US exceeded economists’ estimates during July as employment gained, Bloomberg reported. The New Orders component fell to 47.9 from 48.6 in June. The Prices Paid component fell to 80.8 from 84.5 the prior month. The Employment component jumped to 47.1 from 43.8 in June. Weekly Retail Sales rose 2.9% year-over-year this week, which is back to long-term average levels and the best showing since the week of April 10th, 2007, despite the diminishing effects of the tax rebate checks and numerous perceived headwinds. Weekly retail sales have averaged 2.75% gains over the last month, up from a .6% average increase during the month of February. This is a large positive and now food and energy prices are falling dramatically. Investors are significantly underestimating the positive ramifications for the US economy from the recent plunge in commodities, in my opinion. This is likely for two main reasons. The overwhelming majority of investors don’t believe the commodity bubble has really burst and expect prices to inflate again. As well, the global economy is currently slowing too much and investors are worried about another down-leg developing in the US economy as a result of slowing exports. However, if the commodity bubble continues to deflate, the hugely positive ramifications for global inflation and growth could prevent the global economy from slowing much further. This would result in a massive move higher in developed market stocks, in my opinion. Emerging market stocks will participate, as well, but would likely underperform developed markets as their economies are heavily dependent on commodity exports. Most investors expect the Fed to leave rates unchanged and adopt slightly more dovish rhetoric this afternoon. However, I wouldn’t be surprised to see rhetoric regarding inflation concerns remain about the same as the last announcement. This may initially pressure stocks, but would be a longer-term positive as it would likely boost the US dollar further and pressure commodities even more, which should help keep long-term rates low as inflation expectations continue to fall at a meaningful rate. There are many reasons why the financial sector ETF(XLF) has a negative -.95 correlation with oil. Thus, this would also help the financial sector, in my opinion, which is of great concern to the Fed.

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