Good News Everywhere!

Good news was flowing today. MarketWatch is reporting Services growing at best pace in a year.

ISM index rises to 59.7%; 50th consecutive month of growth. The nonmanufacturing side of the U.S. economy grew at the best pace in a year in May, the Institute for Supply Management reported Tuesday. The ISM nonmanufacturing index rose to 59.7% from 56% in April. It's the highest since April 2006.

"This further reinforces that the trough in business sentiment, and likely peak of the inventory downdraft, was in the first quarter, said Mike Englund, chief economist for Action Economics.

Twelve of 15 industries were expanding in May, led by mining, recreation, information, and management. Even retail and construction were growing in May, although they were the weakest of the growing industries. Two industries were contracting: accommodations and wholesale trade.

"Members' comments in May are mostly positive about business conditions," the ISM said. "There is continued concern with rising fuel costs."

The new orders index rose to 57.4% in May from 55.5% in April. It's the highest since last June. The prices paid index rose to 66.4% from 63.5%.

The inventory index rose to a record 61% from 52%, indicating firms were expanding their inventories rapidly. About a third of the firms have no inventories at all, however. The employment index rose to 54.9% from 51.9%

Twelve of Fifteen + Gas

That's a lot of good news. Does it get any better than 12 of 15 industries expanding? Yes it does. I see that Gas prices fall 5 cents to $3.20 on average.

Average gasoline prices fell by 5 cents per gallon to $3.20 last week, the Energy Department reported Monday. It was the second decline in a row after prices had risen for 15 out of the previous 16 weeks to a record $3.26. Prices plunged by 9 cents in the Midwest to $3.26 per gallon on average. Prices ranged from $3.07 in the Gulf Coast states to $3.37 in the West Coast.

Capital Spending

But wait. I have still more good news: Capital spending revised higher in April.

Businesses boosted their capital spending in April at a faster pace than previously reported, the Commerce Department said Monday. Orders for core capital equipment goods rose 2.1% in April, revised up from 1.2% reported two weeks ago, the government said. Shipments of core capital goods -- which exclude both defense goods and civilian aircraft -- increased 1%, ahead of the 0.7% previously reported.

The report lends credence to those who say the economy is growing robustly again after a six-month slump that brought first-quarter growth in at just 0.6% annualized.

"The gains in the April factory data extend the March bounce, and the sequence both diminishes concern about the January and February drop in equipment spending, and reinforces the assumption that the inventory cycle turned in the corner," wrote Mike Englund, chief economist for Action Economics, in an email. Morgan Stanley economists David Greenlaw and Ted Wieseman boosted their second-quarter growth estimates to 3.6% from 3.4% because of "the upside in capital goods shipments and overall inventories."

Market Irony

The market has been rising on a tide of ever increasing bad news (led by housing, jobs, and a plunging GDP) for what seems like forever. I have been waiting to see how the market would react to a bout of good news. Today is our first test in quite a while. While it's far too early to draw in conclusions (we need to see the close and whether or not there is any follow through over the next few sessions), the preliminary results as of 11:30 AM Central aren't very pretty.

It is fitting that just today Jeffrey Cooper penned an excellent article about The Irony of the Market just this morning before any reaction to this "Good News" could be seen. Here are a few of my favorite clips:

Isn’t it ironic that last week as the dollar rose against the Euro in response to FOMC minutes from May 9th which cooled speculation about a rate cut that would only further erode the dollar, that the market rallied anyway?

Isn’t it ironic that gold woke up rallying sharply at the end of last week – at the same time that the dollar rallied?

Isn’t it ironic that the dollar has rallied throughout May closing above its 50 day moving average on Friday at a time when the real economy is slowing meaningfully – Friday GDP was reported up just 0.6%?

Isn’t it ironic that the bond market has been declining since just after the February/March Shanghai Swoon?

It’s ironic that yields and the dollar are moving in the same direction.

It is one thing for the stock market to rise in the face of rising yields from historically low and relatively low levels. But, it is another for stocks to rally in the face of yields breaking out above resistance.

The point is – there is a point at which every straw breaks a camel’s back. No one knows exactly where this level is or what the precise timing is. Suffice to say a threshold is being flirted with. Since last March the bond market has been accelerating lower while the stock market has been accelerating higher. I call this pattern Jaws. It’s a literal depiction of the two markets, the bond and stock market’s moving meaningfully in opposite directions. When is the last time I recall months of a parabolic stock market and yields breaking out? 1987.

It’s hard to pinpoint when the Jaws will snap shut, but they always do. Just like when the jaws of a crocodile snap, it happens all at once. When the jaws shut you want to make sure you don’t have any limbs nearby.

Isn’t it ironic that after four years of a nonstop bull market some famous market watchers who have been relatively cautious if not outright bearish are now just now expecting a third vertical phase to erupt where the public comes clamoring in? However, I see a five-year bull phase from 1982 to 1987, and a five-year bull phase from 1995 to 2000 and a five-year bull phase from 2002 to 2007 which may or may not be ending. Perhaps it’s typical, but nonetheless ironic that this possibility is not being talked about. But it’s ironic that people are talking about a third phase at this point in time.

Isn’t it ironic that many market observers expect the public to drive the market higher in a brave new phase from here. Why? Well, the public was sucked into the internet bubble. The public is still licking their wounds from the real estate condo flipping bubble. The public is strapped by the cost of living - gasoline, health care, cost of education, etc... Finally, demographics suggests that the baby boomers embraced risk in the last bull market mania and are now more interested in capital preservation. Perhaps it will take until the Gen X-ers inherit wealth to spawn a new risk mania.

It is ironic that even as asset prices go up, the real economy slows down. As you know, on Friday it was reported that the economy grew at a meager 0.6% in the last quarter. It is ironic that at the same time money growth is exploding at a 13% annual clip, GDP growth is only 0.6%. Twenty years ago 1% money growth translated into 1% GDP growth. That’s not ironic, that’s frightening!

Perhaps the ultimate irony, and one I am positive that Jeffrey Cooper is aware of, is that bull markets typically do not end on bad news. Bull markets end on good news, when the news is as good as it's going to get. Perhaps this is it, perhaps not, but it sure would be fitting if it was.

Mish Addendum.
This post was written around noon for Minyanville but did not appear there until late in the day. The market is now closed having regained some but not all of what it was down, with the Naz regaining nearly everything, and with Amazon and Google flying. I am not calling anything here but I do want to say....

After fighting off repeated bad news everywhere for months, this current bull run seems destined to end on good news, someday (not necessarily today). One day does not make a trend change even if every trend change has to start one day.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/