* PredictIt and Betfair are tracking each other almost exactly. After bottoming below 30% in the middle of last night, Biden's odds of winning soared to 87% this morning, but fell to 80% when Arizona moved from certain to highly likely. There was a reporting error that 99% of the ballots had been counted, when it was only 84% counted right now. In the past hour, however, Biden's odds have rallied to 85%, as WI has been called for him and favorable results trickle in elsewhere. Currently, he's 82% in AZ, 86% in NV, 90% in MI, 62% in PA, 49% in GA, and 11% in NC according to PredictIt.

Thanks for reading my Diary today.

On Fox News, Chris Wallace just said the WI pickup is key for Biden: "It's real simple math now. Six votes in NV, 16 votes in MI, and he reaches precisely the magic number."

* The New York Time's Nate Cohn:

• The likeliest outcome by far in Arizona is that the remaining ballots are good enough for Biden. But I don't think we can be 100 percent confident until we've seen some of them.
• We've gotten a bit more data in Pennsylvania, which narrows Trump's lead to 8 points. To my mind, everything there is still consistent with Biden eventually taking the lead. 

*Key 538 blog posts:

• I'm keeping a close eye on Pennsylvania. In the 26 predominantly rural counties that are reporting more than 98 percent of their expected vote, I estimate Biden to be outperforming Clinton's 2016 performance there by 1.4 percentage points, on average. Philadelphia also just dropped new ballots, bringing Biden's total up to 414,499 in the city with no fewer than 140,000 mail ballots waiting to be counted. Trump has already logged 110,000 votes from the city, just about his total from 2016. I think Biden may not reach the 584,000 votes Clinton won here and may have to hope he can make up the lost ground elsewhere, most likely in the suburbs. If Philadelphia's turnout is down in part because college students aren't at Temple, Drexel or Penn, some fraction of those votes might be cast elsewhere in the state.
• With the latest updated votes in Pennsylvania, Trump's raw lead drops below 400,000 votes. If the Secretary of State's website accurately reflects outstanding mail ballots, there are roughly 1 million mail ballots still out, which excludes those that arrived most recently.
• Although ABC has said Biden is the "apparent winner" in Wisconsin, the Trump campaign has also vowed a recount, which is possible as long as the margin is within 1 percentage point. Biden's current lead is very close to Trump's winning margin in the state in 2016, though - and a recount in that year just confirmed Trump's win, with the vote totals barely budging from his initial count. That's in line with what we know about recounts more generally - they rarely swing enough votes to change the winner. Earlier today, former Wisconsin Gov. Scott Walker, a Republican, tacitly acknowledged that reality in a tweet, noting that in two state recounts (including the one in 2016) the totals only changed by a couple hundred votes. So a recount would be highly unlikely to change the situation for Trump, who is currently lagging Biden by about 20,000 votes.

* 538 update on key states:

What's Left To Count

Here's the latest picture in every undecided state:

· Arizona: Biden currently leads here by 93,518 votes, but there are around 600,000 left to count, according to the Arizona Republic. About 450,000 of those are in Maricopa County, which says it will release two batches of results tonight: one at 9 p.m. Eastern and one sometime after 12:30 a.m. Eastern. Some outlets, such as Fox News, have already projected Arizona for Biden, but our colleagues at ABC News have not yet done so.

· Nevada: Biden leads here by only 7,647 votes, and an estimated 14 percent of the vote is still uncounted. However, those votes will all be either late-arriving mail ballots or provisional ballots, which should lean Democratic. We won't be getting another update here until noon Eastern on Thursday.

· Wisconsin: The Wisconsin Elections Commission has announced that all votes in the state are counted, and Biden has a 20,510-vote lead in the state. The Trump campaign has requested a recount, but that has not stopped some media outlets like the AP to project Wisconsin for Biden. ABC News has not issued a projection here, as the decision desk won't project races that are within 1 percentage point.

· Georgia: Trump currently leads here by 79,509 votes, and the secretary of state said during an 11:30 a.m. press conference that there were still 200,000 mail-in votes and 50,000 early votes to count, mostly in Democratic-leaning counties like Fulton and DeKalb. Fulton is hoping to finish all its counting by 9 p.m. tonight.

· Michigan: Biden currently leads here by just 37,350 votes, but it will be difficult for Trump to close that gap because most of the uncounted ballots are in very blue Wayne County (Detroit). At 2 p.m. Eastern, Wayne said it had only 16,000 ballots left to count, which it plans to complete by 6 p.m.

· Pennsylvania: Trump currently leads Biden 53 percent to 45 percent in Pennsylvania, but this one is a long way from over - 19 percent of expected votes are still uncounted, most of them Democratic-leaning mail ballots. Counties are working around the clock to finish counting, but we're looking at Thursday or Friday before results are semi-final.

· North Carolina: North Carolina has counted every ballot it had in its possession as of yesterday, and Trump leads by 76,737 votes among them. However, the state has announced that about 117,000 mail-in ballots are potentially outstanding, plus an unknown number of provisional ballots. Mail-in ballots have until Nov. 12 to arrive, and only at that point will more results be released.

I hope it was helpful.

Enjoy the evening.

Be safe.

Though one day does not a market make, the weak breadth (Composite: 1,773 advancers/1,330 decliners) should be a signal that the character of the rally is fading a bit.

I own neither SPDR S&P 500 fund (SPY) or the Invesco QQQ fund (QQQ) , and I am large long in exposure based on the belief that most of my investment holdings are more attractive than the market, but I am starting to think about hedging out a portion of my portfolio as we move toward overbought and a rally whose breadth is not ideal.

Stay tuned.

Update 1:50 p.m.

Stocks appear to be approaching some interim internal resistance. Dow 28300 to 28350; S&P 3500 and Nasdaq 11700.

More complete resistance slightly above but for now, they are probably going to need a different headline to move them past those levels.

We will watch them carefully.

Stay safe.

Arthur

Here is my Bloomberg interview at the 17 minute, 35 seconds mark!

* As of right now, PredictIt and Betfair both still have Biden 81-83% likely to win. WI looks to be final, though nobody's called it yet, and Biden is favored in AZ (79%), MI (93%), NV (86%), PA (65%), plus he has shots in GA (34%) and NC (18%). We will likely to have a much better picture by later today.

* Here's 538's update as of noon: 

What We're Watching: Lots Of Votes Still To Count In Crucial Battlegrounds

Here's a look at what we know about the outstanding vote in each still-to-be-decided battleground state, as of 12 p.m. ET:

• Arizona: While Fox News and the Associated Press have projected Arizona for Biden, the other outlets - including ABC News - have not. Before the election, officials did warn that any super-close races might not be resolved until the last votes are counted on Thursday or Friday. Biden has a 3-point lead over Trump, with 86 percent of the expected vote reported. Maricopa County, where the largest remainder of uncounted ballots are, has finished tabulating all its in-person Election Day votes and will release more results at 9 p.m. tonight.
• Nevada: The race is very tight - Biden has a very slight lead - and all in-person votes have been counted. But a count of late-arriving mail ballots and provisional ballots, which tend to be Democratic, is still to cometomorrow.
• Wisconsin: The Wisconsin Elections Commission Administrator has told NBC reportersthat all the votes are in. If there's nothing more to count, then Biden would seem to have won that state by 20,697 votes, but that's still within the 1 percent margin that would allow the Trump campaign to request a recount, though. Also, just in case you're seeing one of the many disinformation scams out there, Wisconsin has 3,684,726 active voters and counted 3,288,771 votes. ABC News has not issued a projection here, as the Decision Desk won't project races where the margin is within 1 percentage point.
• Georgia: Trump is ahead in a tight race, but significant votes are outstanding in the Atlanta metro area. The big holdups here appear to be Democratic-leaning DeKalb County, Fulton County, Gwinnett County, and Cobb County. We could have some more information relatively soon, though - Secretary of State Brad Raffensperger said that he expects most of that vote to be tallied later today, per the Atlanta Journal-Constitution.
• Michigan: Biden holds a narrow 0.7-point margin here, and Secretary of State Jocelyn Benson saidaround 11:30 a.m. Eastern that there are still tens of thousands of ballots to count. But the place that appears to have the most outstanding votes is heavily Democratic Wayne County (Detroit), which may make it difficult for Trump to recover here after leading throughout much of the night.
• Pennsylvania: Trump is ahead by 9 points with 79 percent of the expected vote in, but the state has "millions of ballots" left to count, according to Secretary of State Kathy Boockvar. This includes about half of its mail-in ballots, which the state was not allowed to start processing until yesterday morning. Many of these votes come from Democratic-leaning areas, like Philadelphia and its collar counties, plus a handful of more Republican-leaning counties in the northwest part of the state. Going into the election, many county and state election officials predicted that results wouldn't approach completion until Friday.
• Maine: Biden leads here by about 12 points statewide, with 76 percent of the expected vote having been reported. And the ABC News Decision Desk just projected Biden to win the state's two statewide electoral votes. He also leads in Maine's 1st Congressional District, 61 percent to 36 percent, so Biden looks on track to get three of Maine's electoral votes. However, Trump leads 51 percent to 45 percent in Maine's 2nd Congressional District, so he may be able to hold onto its one electoral vote. It appears that the 2nd District, which is mostly in the northern reaches of the state, is where much of the unreported votes are from. But it's tough to say when we'll know more, as election officials are taking much longer here than they originally expected. Moreover, because of the state's ranked-choice voting system, any race where no candidate has a majority of first-place votes would then have to go through the reallocation process, which would take a while to complete.
• North Carolina: Ninety-five percent of the expected vote has already been counted here, so it seems quite possible that all we're waiting on are late-arriving mail-in ballots, which have until Nov. 12 to arrive. That means we could be waiting over a week for a call here.

This morning I suggested buying banks in the pre-market under the weakness caused by the preliminary voting results.

(XLF) , my Trade of the Week, has just turned green on the day.

The betting shop odds continue to grow in favor of Biden.

Added further to my long book. 

Now large-sized in net long exposure.

* That is perhaps the only certainty today!

* "Good field, no hit"

Perhaps the only thing I would say with authority, especially during these uncertain times, is that the pollsters hit below "The Mendoza Line."

For those who aren't into baseball, it's an expression in baseball deriving from the name of shortstop Mario Mendoza of the Seattle Mariners - whose poor batting average is taken to define the threshold of incompetent hitting. The cutoff point is most often said to be .200. Mendoza's career average was slightly better than that over his career. 

Speaking of those pollsters, I am reminded of what baseball scout Mike Gonzalez said of Moe "The Catcher Is A Spy" Berg... "good field, no hit."

Back to the mundane! 

The October ISM services index fell by +1.2 points month over month to 56.6. The estimate was 57.5. The inventory build was apparent as this component rose by +4.3 points to back above 50 at 53.1. New orders fell by -2.7 points to 58.8 but backlogs got back some of what it lost in September. Employment fell by -1.7 pts to 50.1, essentially at the flat line. Some comments on employment, on the heels of the ADP report, were: "Minor increase, filling positions" and "Slowly bringing back employees and investing in some areas as business returns." Export orders rose +1.1 points and imports were up by 5.9. Prices paid grew by +4.9 points to 63.9, just below the highest since November 2018. 

Of the 18 industries asked, 16 saw growth, the same number seen in September. 

The ISM said, "Respondents' comments are cautiously optimistic about business conditions and the economy. There is a degree of uncertainty due to the pandemic, capacity constraints, logistics and the elections."

The continued economic recovery is evident but we'll see how much any further Covid related business restrictions will impact this in the winter. There is clear optimism that a vaccine is close and that 2021 will be a much better year than 2020. Again though, this data is only measuring the direction of growth, not the degree and we still expect the Q4 2019 GDP number to be exceeded not until Q4 2021 or Q1 2022. 

Markit also released its PMI services index and it rose to 56.9 from 54.6. They said, "While fourth quarter GDP will invariably fail to match the strong rebound seen in the third quarter, the economy looks to be continuing to grow at an above trend rate. Encouragingly, future business optimism showed a record surge, pulling prospects for the year ahead up to the highest for more than two years. Hopes of a brighter outlook were pinned on a vaccine ending the Covid pandemic over the coming year and additional stimulus supporting the economy in the meantime." We'll obviously soon see to what extent and when on the latter and hopefully this month on the former. 

U.S. Treasuries didn't respond to the data as it continues to unwind the Blue Wave stimulus trade. To this, the 10 year inflation breakeven is falling by 8 bps to 1.65%. 

Here is a six year chart on ISM services: 

Here is a six year chart on inventories: 

Here is a six year chart on new orders: 

Here is a six year chart on prices paid: 

Here is a two year chart on ten year inflation breakeven: 

Recent adds Alphabet (GOOGL) and Amazon (AMZN) are +$163 and +$111, respectively.

For most of 2020 it has paid to be unemotional, bold and anticipatory - and not reactionary - in response to the market's gyrations and new regime of volatility.

Still medium to large-sized net long exposure but getting closer to large-sized. 

As I wrote, I added to banks and some other value stocks. 

Should Biden prevail with a Republican controlled Senate - we could a positive scenario for stocks over the near term in light of defensive market participants' positioning, likely seasonal market strength, we move closer to a vaccine and therapeutic solutions, less fear of a hike in the capital gains tax and perhaps no rise in corporate tax rates. 

These factors could materially offset the reduced probability of a large stimulus bill.

Here is the latest Predictit odds - the move has been quite sizeable over the last 30 minutes, indicating an 85% chance of a Biden victory. 

The other betting sites have a similar outcome.

My pal Peter moves on:

While we haven't yet learned who the winner will be, we were reminded again that with all the 21st century technological advancements, the polling business and methodologies need to be revamped. As for the eventual outcome of this election, I'm keeping this conversation solely focused on policy, not personality. Regardless of the presidential winner, it does look like the Republicans will keep control of the Senate. Thus, there will be no $2-3 Trillion spending package but that doesn't mean we won't get something. It will be up to Pelosi as to how much she will give in on with the amount and timing. Obviously too, we won't get higher taxes, outside of what the Executive branch can do with tariffs which we know can be a lot. Now let's move on.

The 'Blue Wave' big spending bond trade is unwinding as Treasuries rally and yields fall. The 10 yr yield is lower by 10 bps to .80% but that just puts it back to where it was last week. The 30 yr bond yield is lower by 11 bps to 1.57%. Because I still expect fiscal spending on top of the $3 Trillion already spent along with the Fed monetizing it and hopefully with good vaccine news in the next month, I still think 2021 will be a story of higher inflation, higher long rates and a paralyzed Fed. The US dollar is not moving much and the S&P futures are back to where they were in late August. Also evident is the buy 'growth' trade if we won't get big fiscal spending as people bid up those companies with growth notwithstanding, with the NASDAQ futures up sharply.

The MBA said mortgage apps rose 3.8% w/o/w but it was all due to refi's which were higher by 6.4% w/o/w and 88% y/o/y. Purchases fell by 1.3% w/o/w and have clearly plateaued here while still up 26% y/o/y. I say plateau because they are no higher than in late May. See the chart. I believe and have been speculating that maybe the aggressive price increases have tempered demand on the lower end from 1st time home buyers that are offsetting the benefits of historically low mortgage rates.

PURCHASE APPS

Ahead of the US services October PMI today, we saw some from overseas. China's private sector focused Caixin services index rose 2 pts to 56.8 and that was better than the estimate of 55. Caixin said "the rate of expansion was the 2nd quickest for over a decade, driven by a substantial increase in total new work. However, the resurgence of coronavirus disease cases across a number of export markets led to a quicker decline in new work from overseas. The strong improvement in overall demand conditions nonetheless led to a further rise in staffing levels, while confidence towards the year ahead strengthened to the highest level since April 2012." The Shanghai comp was up .2% and the H share index up by .3%. I hope we get some resolution from the Chinese authorities quickly on the Ant Financial IPO for the sake of the reputation of their capital markets.

The rebound in China as their consumers get closer to resuming pre Covid behavior helped the Hong Kong PMI rise 2.1 pts to just below 50 at 49.8. That is the highest level since March 2018 as they further recover too from the protests and crackdowns. The China strength also spilled over to Singapore where its PMI rose 3.5 pts m/o/m to 48.6, the best since January. Markit said "The recovery in activity is broadening, with output growth seen in manufacturing, services and construction. Consumer services in particular saw an especially strong rebound...Longer term prospects remain positive, with firms expecting Singapore's move towards Phase Three of reopening and government economic support to boost output over the coming year. Nevertheless, the slow pace of recovery and a global resurgence of Covid cases remain key concerns." The Straits index rallied by .8% but is still down 22% year to date. With that market trading at just 13x 2021 eps with a 4% dividend yield, it is true value. I'll repeat again that I believe Asian stock markets will outperform the rest of the world in coming years.

Also, India's services PMI jumped to 54.1 from 49.8 and Australia's rose to 53.7 from 50.8.

The October Eurozone services PMI was revised to 46.9 from the initial print of 46.2 but that is down from 48 in September and 50.5 in August. We know the rise of Covid spread has led to more mobility restrictions and store closings. Markit said "Service providers have been hit especially hard, led by intensifying weakness in consumer facing sectors such as hospitality, offsetting the brighter news seen in manufacturing during the month. Optimism about the future also slumped sharply lower, sliding to the gloomiest since May as companies grew more anxious about the damaging impact of 2nd waves of infections." While the number was revised up, the euro is little changed and bond yields are lower (but following the move in the US) but stocks are bouncing after the past two day strength notwithstanding the shutdowns. I think that's the case because people know the Covid count will go back down again and things will slowly reopen in December.

The UK services PMI was revised to 51.4 from the 1st read of 52.3 and down from 56.1 in September and 58.8 in August. The same story here as seen in the shutdown countries in the Eurozone. According to Markit, "November's lockdown in England and a worsening Covid situation across the rest of Europe means that the UK economy seems on course for a double dip recession this winter and a far more challenging path to recovery in 2021." Notwithstanding this, the FTSE 100 is also hanging in there and I believe also for the reasons stated above. The pound is little changed too, just above $1.30 while gilt yields are lower in sympathy with the region and US Treasuries.

I will be on Bloomberg Radio at about 9:45 am this morning.

ADP said in October that a net 365k private sector jobs were created, well below the estimate of 643k and down from 753k in September (revised up by 4k). The job adds were about evenly distributed among business size while the service sector contributed almost all of them, 348k. Construction and manufacturing each added 7k. That construction number follows an increase of 60k last month. Manufacturing followed 131k last month. With services, there was a slowdown in the pace of hiring in transportation/trade/utilities and in healthcare of note, but a slight pick up in leisure/hospitality...but how sustainable as we go into the winter? 

ADP said, "The labor market continues to add jobs, yet at a slower pace. Although the pace is slower, we've seen employment gains across all industries and sizes."

After losing 19.7 million private sector jobs in March and April, we've since added back 9.6 million according to ADP. Thanks to strength in housing, construction jobs have gotten back 800k of the about 1 million lost. Manufacturing has recovered 745k jobs of the 1.3 million lost. The service sector has hired back 1.52 million jobs after losing 2.38 million. Within this, the leisure/hospitality sector, the hardest hit, has added back 3.6 million jobs after losing almost 7.7 million. Healthcare has gotten back a little more than half of what was lost. The timing of the vaccine will be the most important factor in determining how fast we recapture these lost jobs, no amount of fiscal and monetary policy will change that.

* The likely election outcome is bullish for bank stocks

The modest weakness in bank stocks in pre-market trading could be shortly reversed - and I am bidding for more shares. 

Regardless of the Presidential election outcome, the Republican party will maintain control of the Senate. Moreover, as I mentioned in my pervious post, the Democratic party could move back towards the center. 

This means fears of tighter and more onerous banking industry regulation are unlikely - something that has mightily weighed on the group.

* President Trump appears likely to be on the road to a close victory
* A market non event (?) as "The Trump Bump" - not the anticipated "Biden Bump" - could clear the air of uncertainty and replace it with clarity of outcome
* Stay tuned andstay pat in the markets.

In a surprising election evening, it appears that while it is too early to call the results of the Presidential election, President Trump appears likely to be on the path to a close victory. 

While the President has indicated his intention to take legal action (in the Supreme Court) against further vote counting, I don't believe the election results will be contested. 

The uncertainty of a litigated election might now be cleared - not by The Biden Bump - that I anticipated - but by The Trump Bump that few expected. 

As in was the case in 2016, the predictive ability of betting shops, internal political forecasts, which I and others have depended/keyed on, and even internal party polls on the part of both parties, failed. 

* There was no repudiation of President Trump policy, nor will his devotees be cast out as lepers as some expected. While Trump may be emboldened, the slim margin and makeup of Congress will be something of a limiting factor, from a policy standpoint.

* The inroads of the progressive Left of the Democratic party were overstated and roundly renounced in the election. A soul searching period of message and policy recalibration likely lies ahead for the Democratic party, who could seek a message that has broader appeal. 

Regardless of outcome, it is clear that our country is divided and that wide sweeping policy initiatives are unlikely over the next few years. 

From a stock market standpoint, the very certainty of a house divided is something of a modest positive for the markets but close to a non event - because clarity will reduce uncertainty. Indeed, with positioning into the election defensive/negative and given the expected upcoming late in the year seasonal strength in the markets - the growing "certainty" of a Trump win looms as a potential mild positive, setting the stage for some modest gains ahead over the next few weeks. On the other hand, a larger than expected stimulus package is unlikely. 

As of 5:45 am, the S&P futures were modestly higher +15, but still below my last sale on Tuesday afternoon and below my day's average. However, Nasdaq futures were rocketing ahead (+245) - both absolutely and relatively. 

Though this appears to counter the pivot from growth to value that I have been expecting -- my suspicion is that the overnight divergence could be fleeting. 

My intention is to watch today as the final votes are hopefully tabulated and a decisive outcome is reached. 

I do not intend to alter my current portfolio composition or exposure. 

After selling out my (SPY) long rental on Tuesday, I start the day between a medium-sized and large-sized net long exposure in the markets.

Danielle DiMartino Booth:

• Though markets expect a 5.6% annualized quarterly gain in productivity, at least 10% could be seen on Thursday; with nonfarm output up 40% quarter-over-quarter and hours worked north of 30% due to the reopening impulse, we expect to see the highest print since Q1 2010
• Conference Board's consumer survey for October yielded an Economy Curve-Labor Curve spread of 4.8 in Q3 vs. 3.8 in Q2 as z-scores, a proxy for rising productivity; past cycles show a gain typically precedes a recovery in both corporate profits and capital expenditures
• The 1980s double-dip recession stands as a warning given its initial productivity rebound reversed, a risk today given the shock of COVID-19 is still dragging on the economy; GDP returning to contraction would erase the productivity "V" in train and replace it with a "W"

Dewey "Ox" Oxberger: It doesn't seem fair.

John Winger: Fair? Who cares about fair! The world isn't fair! Truth isn't fair! Is it fair that you were born like this? No! They're not expecting somebody like you in there, Ox! There expecting one of these slugs! You're different! You're weird! You're a mutant! You're a killer! You're a trained killer! You're a lean, mean...

Winger and Ox together: ...fighting machine!

Dewey "Ox" Oxberger: I'll do it!

Knute Rockne and Herb Brooks had nothing on John Winger who gave the pep talk to end all pep talks in the 1981 comedy Stripes. The excerpt above, which we encourage you to indulge your inner patriot by streaming on this day after Election Day, featured Winger (Bill Murray) whipping Ox (John Candy) into a frenzy to put his boot camp skills to the test by mud wrestling multiple women. If you were in your formative years in the early 1980s - with no YouTube - you too memorized the punchline from the scene and shared it with friends with the same gusto that Winger and Ox delivered it: "You're a lean, mean fighting machine!"

U.S. companies don't land in Ox's compromising positions during recessions, but they do get lean which manifests in surging productivity, or real output per hour. For the most part, the acceleration in the annual productivity trend reaches a high point soon after recessions end and recoveries begin. The initial aftermath of the COVID-19 shock, a critical distinction, is turning out to be no different.

Because it compares previously released data on nonfarm output from GDP and nonfarm hours worked from the Employment report, productivity is a residual indicator. Investors tend to collectively yawn when the figures hit the tape because they're observing statistics from the prior quarter that ended two months ago. It would take a sizable surprise to get traders' attention.

For what it's worth, Thursday's third-quarter productivity report could do just that. Market expectations call for a 5.6% annualized quarterly advance. We beg to differ and anticipate a near doubling to at least a 10% sequential gain. Nonfarm output rose over 40% quarter-over-quarter annualized; our estimate for nonfarm hours worked should be north of 30% when factoring in the reopening impulse from payroll employees and the self-employed. Translating the quarterly noise to the smoother year-over-year trend should yield at least a 5% increase, the highest since 2010's first quarter.

The arithmetic aside, U.S. households have already sniffed out the upside. The red line in the left chart depicts the spread between the Economy Curve ("bad" present business conditions minus "worse" future business conditions) and the Labor Curve ("jobs hard to get" minus "fewer jobs"); all data are courtesy the Conference Board's consumer confidence survey. When the outlook for business conditions improves, the Economy Curve steepens. But the Labor Curve might be slow to catch up initially. That's another way to extract a productivity proxy from "soft data." For ease of comparison with the official productivity stats, we used z-scores. The Economy Curve-Labor Curve spread was at 3.8 in the second quarter and 4.8 in the third quarter, while Productivity should reach 2.2 in the third quarter.

Past cycles dictate that productivity accelerations are followed by rising corporate profits with both S&P operating earnings (green line) and economic profits from the GDP accounts (dark blue line) in tow. The productivity signal should give equity strategists higher conviction in an earnings recovery. Moreover, the right chart puts a profit recovery in the context of a broader recovery in capital expenditures. Business investment draws the contours of the business cycle. Further gains would clearly be a bullish economic development.

Now for a reality check. None of this has happened yet. According to the October Bank of America Global Fund Manager Survey, a net 56% of buy-siders polled prefer balance sheet discipline compared to 30% who want increased capex. In an economic expansion, capex expansion would be the preferred use of cash.

Firm-level productivity enhancements were all over Nike's announcement yesterday. Instead of a planned 500 reduction, the Beaverton, Oregon behemoth will cut 700 jobs at its headquarters, or more than 5% of its corporate workforce. In a statement, Nike said it's building a flatter, nimbler company and pushing the company to a faster transformation to define the marketplace of the future.

Recessions are C-suite executives' collective excuse to cut out the fat they didn't realize they had. It stands to reason that larger companies have more than their small counterparts and thus have greater capacity to get lean and mean. For the survivors, the realized productivity gains create lean, mean cash flow generating machines.

Wichita, Kansas based Spirit AeroSystems' announcement was of quite a different ilk. The Boeing supplier that's felt the supply chain ripple effects from downstream is reducing headcount by 8,000, or 44% of its workforce. This is not productivity enhancement. It's recognition of permanent demand destruction brought on by an economic shock that's still very much with us today. As is the case with every other economic indicator, GDP returning to contraction will erase the "V" in train in productivity and replace it with a "W." That's exactly what the case was in the (not illustrated) double-dip recession of the early 1980s when Stripes was being committed to memory by countless Generation X-ers.