- - Thursday, November 3, 2011


October generated one of the best returns of any single month, with the S&P 500 up 9.1 percent, but one of the key drivers — what was thought to be progress in the eurozone bailout — is increasingly called into question. That growing uncertainty reflects the somewhat vague nature of the proposed solution; questions about Italy, Portugal and others as well as Greece’s decision to call a referendum on its several-day-old bailout are pressuring global markets.

Making it even more complex, the latest data on the eurozone continue to point toward a recessionlike environment. The final Markit Eurozone Manufacturing Purchasing Managers Index (PMI) for October fell to 47.1, revised down from a preliminary reading of 47.3 and down from 48.5 in September. This is backed by anecdotal commentary in recent days by companies such as Paccar Inc., 3M Corp., Illinois Tool Works, BASF, Scania AB and others that points to a growing slowdown in Europe.

As questions continue to swirl over the eurozone, China’s purchasing managers index registered at 50.4 for October, making it the lowest reading since February 2009, according to the China Federation of Logistics and Purchasing. Breaking down the October results, we find that all of the key components of the index — new orders, production and new export orders — fell month over month. The drop in new export orders reflects the growing weakness in Europe and lackluster growth domestically.

On the domestic front, the ISM Manufacturing Index and the Chicago Purchasing Managers Index, both of which contracted month over month in October, confirm a slow economic recovery. As such, it came as little surprise that the Federal Reserve lowered its growth expectations and bumped up its unemployment forecast this week. It now expects gross domestic product, or GDP, to be in a range of 2.5 percent to 2.9 percent in 2012, down from the previous estimate of 3.3 percent to 3.7 percent, and the jobless rate to be in a range of 8.5 percent to 8.7 percent in 2012, up from the previous forecast of 7.8 percent to 8.2 percent. All in all, not much different from the current environment.

Despite its updated outlook, the Fed’s 2012 view remains more optimistic than others. IHS Global Insight expects the world economy to expand just 3 percent this year and next. Breaking down that forecast, IHS expects the U.S. to grow just 1.4 percent in 2012, while it predicts the eurozone will flirt with a recession in 2012 as it projects growth in the region to be slightly above zero. Backing the IHS perspective on the eurozone in 2012, French President Nicolas Sarkozy is set to announce more austerity measures for France after the government lowered its growth forecast to just 1 percent next year from 1.75 percent.

While the third-quarter GDP report topped expectations with a reading of 2.5 percent last week and alleviated concern over a near-term double-dip recession, we will see later this week if that translates into any meaningful improvement in non-farm payrolls and the unemployment rate. With little to no meaningful improvement in weekly jobless claims over the past several months, current forecasts call for the October unemployment rate to remain at the several-month-old reading of 9.1 percent.

One set of metrics that I am watching is insider selling, particularly given the combination of the October stock-market move, slower global growth expectations and questionable employment growth. Insider selling tracks the selling of a security by those who have access to material nonpublic information about the security. Insiders tend to be members of a company’s management team and board of directors. According to the research firm TrimTabs, insider selling averaged $178 million worth of transactions per day in October, which was double that for September, and insider buying has been extremely weak. Per TrimTabs, those figures equate to an insider sell-buy ratio of 21.5 for October, up dramatically from 3.1 in September and 2.4 in August.

More as it develops.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at [email protected] Follow him on Twitter at https://twitter.com/#!/ChrisjVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.



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