Interesting Divergences

by Michael Panzner, Financial Armageddon. October 1, 2009

Many people (including me) have been talking about the death of the U.S. consumer. But if you look at personal consumption expenditures relative to personal income and nominal gross domestic product, both ratios have just hit new record highs. No doubt spending in recent months was bolstered by the government’s “cash-for-clunkers” scheme, as well as a heavy promotional push by nervous retailers and other durable goods makers. That said, once consumers start coming to terms with the fact that circumstances won’t be returning to “normal” and the so-called recovery is an illusion, we can expect to see a dramatic about-face in spending.

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In fact, if today’s weaker-than-expected auto sales data for August is anything to go by, it appears that the government’s quick fix for the beleaguered sector is fading faster than a spray-on tan. Aside from the fact that the pace of sales is nearly back to the lows of last February, the ratio of sales of domestically-made vehicles to those that were manufactured overseas held relatively steady, suggesting that at least some of the “benefits” of the stimulus program did not go where intended.

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Otherwise, tomorrow brings the release of one of Wall Street’s most widely anticipated economic indicators, the monthly employment report. Of course, nobody really knows for sure whether the net change in nonfarm payrolls for September will be better or worse than expected, especially given the interesting “birth/death adjustments” government statisticians have been making lately. Still, it’s worth noting one unusual divergence: the ever-widening gap between the ADP tally of nonfarm payrolls and the one published by the Bureau of Labor Statistics. Two sets of books, perhaps?

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Each day, Bloomberg publishes its Financial Conditions Index, which “combines yield spreads and indices from the money markets, equity markets, and bond markets into a normalized index. The values of this index are z-scores, which represent the number of standard deviations that current financial conditions lie above or below the average of the 1992-June 2008 period.” Based on this measure, the financial world is not only in better shape than it was when Lehman Brothers went belly up just over a year ago, it is also doing better than average! If this isn’t evidence that markets are (still) broken, I don’t know what is.

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Another development that gives cause for concern is the strong correlation that seems to exist in the performance of various risky assets. Whether you are talking about technology stocks, junk bonds, or emerging market shares, they have all been tracking each other rather closely since the panic ended in early March. With that in mind, a cynic might suggest that when the big bounce is over -- if it’s not already -- a lot of speculators are going to be heading for the exits at the same time -- like elephants running through a revolving door?

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Stocks ended sharply lower, hurt by a weaker-than-expected ISM manufacturing report and fears that many investors will be looking to take profits after back-to-back, double-digit quarterly gains.

At the close, the Dow Jones Industrial Average shed 203 points, or 2.1%, to 9,509.28. The S&P 500 Index slid 27.23, or 2.6%, to 1,029.85. The Nasdaq Composite Index tumbled 64.94, or 3.1%, to 1,983.20.

December gold futures lost $8.60 to $1000.70/oz., while the U.S. Dollar index rallied 0.6%. Ten-year Treasury yields fell 13 basis points to 3.18% and November WTI crude oil futures edged slightly higher to $70.82/bbl.

Michael Panzner

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