Monday, July 3, 2023

Morning Note: Quite the Disconnect

This morning's release of the ISM June manufacturing survey, alas, jibes with our current economic thesis:

Here's from the report:

“The U.S. manufacturing sector shrank again, with the Manufacturing PMI® losing ground compared to the previous month, indicating a faster rate of contraction. The June composite index reading reflects companies continuing to manage outputs down as softness continues and optimism about the second half of 2023 weakens.
Demand eased again, with the (1) New Orders Index contracting but at a slower rate, (2) New Export Orders Index moving into contraction and (3) Backlog of Orders Index remaining at a level not seen since early in the coronavirus pandemic (May 2020).
A potential bright spot: The Customers’ Inventories Index dropped into ‘too low’ territory, a positive for future production. Output/Consumption (measured by the Production and Employment indexes) was negative, with a combined 7.7-percentage point downward impact on the Manufacturing PMI® calculation.
Panelists’ companies reduced production and began using layoffs to manage head counts, to a greater extent than in prior months, amid mixed sentiment about when significant growth will return. Inputs — defined as supplier deliveries, inventories, prices and imports — continue to accommodate future demand growth.
The Supplier Deliveries Index continued to indicate faster deliveries, and the Inventories Index dropped further into contraction as panelists’ companies try to mitigate inventories exposure. The Prices Index fell further into ‘decreasing’ territory. Manufacturing lead times improved again but remain at elevated levels.

“Of the six biggest manufacturing industries, only one — Transportation Equipment — registered growth in June.

“Demand remains weak, production is slowing due to lack of work, and suppliers have capacity. There are signs of more employment reduction actions in the near term. Seventy-one percent of manufacturing gross domestic product (GDP) contracted in June, down from 76 percent in May. More industries contracted strongly, however, as the share of manufacturing GDP registering a composite PMI® calculation at or below 45 percent — a good barometer of overall manufacturing weakness — was 44 percent in June, compared to 31 percent in May,”

Yes, as we've been pointing out, there remains quite the disconnect between the fundamental backdrop and the pricing of your tech-heavy equity averages. 

And here's your weekly sector, regional and asset class results update:

Asian stocks were green nearly across the board overnight, with 15 of the 16 markets we track closing higher.

Europe's leaning slightly green so far this morning, with 10 of the 19 bourses we follow trading up as I type.

US equity averages are mixed to start the session: Dow down 4 points (0.01%), SP500 up 0.03%, SP500 Equal Weight up 0.34%, Nasdaq 100 down 0.09%, Nasdaq Comp down 0.03, Russell 2000 up 0.49%.

As for last Friday’s session, US equity averages closed higher: Dow by 0.8%, SP500 up 1.2%, SP500 Equal Weight up 0.9%, Nasdaq 100 up 1.6%, Nasdaq Comp up 1.4%, Russell 2000 up 0.4%.

This morning the VIX sits at 13.56, down 0.22%.

Oil futures are up 0.35%, gold's up 0.45%, silver's up 0.76%, copper futures are up 0.92% and the ag complex (DBA) is up 1.31%.

The 10-year treasury is down (yield up) and the dollar is up 0.08%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 22 -- led by Albemarle, OIH (oil services stocks), MP Materials, EWZ (Brazil equities) and DBA (ag futures) -- are in the green so far this morning... The losers are being led lower by J&J, XLV (healthcare stocks), URNM (uranium miners), TLT (long-term treasuries) and XLK (tech stocks).

"I can't tell you how it came to take me so many years to learn that instead of placing piking bets on what the next few quotations were going to be, my game was to anticipate what was going to happen in a big way."

--Jesse Livermore 

Have a great day!


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