Wednesday, September 7, 2022

Morning Note: Service Sector Holding Up, Per ISM Anyway

The closely watched ISM (Institute for Supply Management) Services Survey (a component of our PWA Index) results for August were released yesterday; the following, taken from the report, sums it up nicely:

"The services sector had a slight uptick in growth for the month of August due to increases in business activity, new orders and employment. Based on comments from Business Survey Committee respondents, there are some supply chain, logistics and cost improvements; however, material shortages remain a challenge. Employment improved slightly despite a restricted labor market.”"

I.e., the latest service sector sentiment jibes with our present mild-recession thesis (although a score above 50 [August's was 56.9] denotes expansion, not recession). It also, however ("material shortages remain" and "restricted labor market"), comports with our inflation-higher-for-longer thesis as well.

Here are the reports featured respondent's comments. Definitely not all that rosy, I must say:  

“Starting to see some cost pressures relief; the overall supply environment is healthy.” [Accommodation & Food Services]

“Some pullback on projects by clients, but activity is still strong for our company. This has alleviated some labor availability issues. Generally, there has been improvement in lead times and prices, but still longer and higher, respectively, than in 2021.” [Construction]

“Supply chain issues continue to significantly extend lead times, with a shortage of materials to build scientific equipment and machinery contributing to the issue. Purchases need to be made three to six months in advance, in addition to the normal lead time. As for the higher education industry, it is breaking records for student applicants.” [Educational Services]

“The supply chain and labor continue to be significant issues. Repair parts are nonexistent. Lead times for durable goods are extended, and the less-expensive, mass-produced products are breaking at increased rates — no QC (quality control). The FDA (U.S. Food and Drug Administration) must be reeling because we have been reporting sometimes daily. I’m concerned that a certain percentage of faulty products are probably discarded, which adds to the cost of doing business. Surgery and other hospital products cannot be culled, so it’s a complete loss — if they are red-bagged, that is another cost.” [Health Care & Social Assistance]

“The supply chain challenges affect a portion of our buys as they include products and components made outside of the U.S. that are subject to shipping delays and other issues.” [Management of Companies & Support Services]

“COVID-19 still affecting many businesses. Also, there is a labor shortage.” [Professional, Scientific & Technical Services]

“Lingering concerns about inflation and price increases. Still having difficulties hiring staff to fill many positions.” [Public Administration]

“No major changes. Concerns about the macroeconomic climate and consumer confidence.” [Retail Trade]

“Very long lead times from major equipment — Original Equipment Manufacturers (OEMs). Commodity price escalation appears to be leveling.” [Utilities]

“Business is pretty steady month to month, but we expect seasonal supply increase by September that will moderate prices.” [Wholesale Trade]

The continued angst expressed above notwithstanding, the equity market saw only the better than expected headline print (55.4 was expected) as a positive for the economy, and, therefore, a negative for the bulls who are looking for the Fed to lighten up on their inflation-fighting efforts. I.e., stocks sold off yesterday on the release... While apparently ignoring the Markit Services and Composite PMI survey releases (also yesterday), which came in at 43.7 and 44.6 respectively -- recession readings for both! 


Asian equities leaned red overnight, with 12 of the 16 markets we track closing lower.

Europe's mostly down so far this morning as well, with 13 of the 19 bourses we follow trading lower as I type.

US stocks are a bit mixed to start the session: Dow down 39 points (0.12%), SP500 up 0.04%, SP500 Equal Weight up 0.07%, Nasdaq 100 up 0.20%, Nasdaq Comp up 0.36%, Russell 2000 down 0.10%

The VIX sits at 26.73 down 0.67%.

Oil futures are down 4.40%, gold's down 0.21%, silver's up 0.38%, copper futures are down 1.13% and the ag complex (DBA) is up 0.39%.

The 10-year treasury is up (yield down) and the dollar is up 0.21%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 24 -- led by utilities stocks, AMD, Dutch Bros, Disney and silver -- are in the green so far this morning. The losers are being led lower by  energy stocks, base metals futures, base metals miners, Brazil equities and Asia-Pac equities.

You've seen this quote before herein, but it's a great (and timely) one from one of history's greatest investors:
"...the big money was not in the individual fluctuations but in the main movements—that is, not in reading the tape but in sizing up the entire market and its trend.

And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!"
--Jesse Livermore

Have a great day!

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