Today's Market Observation  09.03.2009  Mon  Tue  Wed  Thu  Fri  Panzner Archive

A Matter of Perspective

BY MICHAEL PANZNER | september 3, 2009

Talk that the economy is on the road to recovery is growing louder. On Monday, for example, MarketWatch reported that “economists say the recession is over.”

Not surprisingly, Wall Street has been quick to jump on the bandwagon. A recent Bloomberg survey of U.S. users, many of whom work in the financial industry, found that optimists on the economy nearly equaled pessimists for the first time since its Professional Confidence Index was introduced in November 2007.

Yet ordinary Americans aren’t buying it. In fact, a new CNN/Opinion Research Corporation poll reveals that 87% of those surveyed say the country remains mired in recession, a 13 percentage point jump from June’s tally.

Given how much closer-to-the-mark average Joes have been during the past few years when it comes to reading the economic tea leaves, especially in comparison to those who are supposedly in the know, it makes sense to bet on the amateurs.

Indeed, some of the data points released this week suggest the so-called recovery is less than it seems. Take the U.S. factory orders data, reported yesterday. Despite the fact that July’s total came in at a less-than-expected 1.3%, the bulls were quick to note that the increase was the biggest in a year and the monthly measure has been in the black for four straight months. Regardless, when you compare the headline series to the year-over-year trend, it paints a different sort of picture.

Speaking of differences, the Institute of Supply Management today announced that its index of non-manufacturing businesses, which measures activity in the service sector, beat analyst expectations and rose to its highest level in nearly a year. But again, just because the largest part of the economy appears to be doing better doesn’t mean it’s time to break out the champagne. For one thing, a reading below 50 indicates that the sector is still contracting. Moreover, based on the historical relationship between this gauge and the ISM’s manufacturing index, some might conclude that today’s result is the harbinger of renewed weakness to come.

Another area where an interesting divergence has opened up is in the residential property market. Although the history is somewhat limited, it’s apparent that the decline in mortgage applications has not really tracked the collapse in housing starts. While there may be another explanation, I wonder if this disparity reflects the fact that financing is harder to come by and, thus, prospective borrowers are being forced to submit many more applications than they used to? If so, the fact that the gulf between the two has widened substantially during the past year could be the smoking gun that proves the mortgage market remains frozen, despite all the official efforts to “rescue” it.

On another note, gold bulls got pretty worked up by this week’s spike to six-month highs and a near-breakout around the $1,000 level. But the real action in the precious metals sector has been elsewhere. Since gold futures bottomed on November 13 of last year, the yellow metal has gained 40%. Platinum futures, meanwhile, are up 54% over the span, while silver has soared 83%. Perhaps gold is just playing a bit of catch-up?

Stocks ended higher, aided by light bargain-hunting and short-covering after stocks were hit earlier in the week, as well as a sharp rebound in Chinese share price after a four-week, double-digit decline.

At the close, the Dow Jones Industrial Average was up 63.94, or 0.7%, to 9,344.61. The S&P 500 Index tacked on 8.49, or 0.9%, to 1,003.24. The Nasdaq Composite Index gained 16.13, or 0.8%, to 1,983.20.

December gold futures jumped $14.30 to $992.80/oz., while the U.S. Dollar index ended mixed. Ten-year Treasury yields gained three basis points to 3.34% and October WTI crude oil futures finished slightly higher at $68.14/bbl.

Michael Panzner
Author, When Giants Fall and Financial Armageddon

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