Friday, December 1, 2006

ISM Sinks Below 50

The ISM manufacturing index sank to 49.5 indicating a contraction in manufacturing. The weakness in the economic data doesn't come as a complete surprise given the severity of the housing crunch. This is again a sad commentary on the head-in-the-sand mentality of many economists with respect to the impact that the housing meltdown is having on the broader economy - chief among them, Fed chairman Helicopter-Ben Bernanke.

With today's data, interest rate futures are now fully pricing in a Federal Reserve interest rate cut of a quarter point to 5% before the end of 2007's first quarter. Lower rates are bearish for the dollar, and as you might expect the buck is falling again. Gold is only modestly bid higher by about $1 on the December contract - fighting overbought headwinds and word of another ECB gold sale. But we still remain VERY bullish on gold.

The stock market, basis the cash Dow, is showing a dip of only 40 points as Wall Street players remain rather sanguine about the economic outlook; how long that can last is of concern. With volatility near multi year lows and a put to call ratio down near .60, we're looking at the increasing likelihood of another short and sharp correction - especially if the dollar weakness accelerates.

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