Durable Goods Orders Lays a Goose-Egg

Durable Goods Orders were reported unchanged in October. So is it a bad economic signal or just a monthly anomaly? You’ll find the answer in the paragraphs that follow.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Durable Goods Orders

Durable Goods Orders were unchanged in October, and September’s rapid rise was revised lower to +9.2%, from the initially reported +9.9%. No change month-to-month after such a huge increase the month before shouldn’t be something we complain about. It should in fact be expected, but there were several things that bothered me about the report and should also concern the rest of the investment community.

We always look beyond the headline figure in our study of the durable goods data, because of the high ticket costs of transportation goods. These high ticket prices skew the data. That is evident in the latest data, with durable goods orders less transportation up 1.5% month-to-month (versus the much bigger change in the headline figure), after marking a 1.7% (revised) increase in September. Considering the information less transportation, the report would seem much less concerning. It’s also notable that each discussed data point exceeded economists’ expectations, with the ex-transportation forecast average set at negative 0.4%.

However, all is not well. I say this because of the year-to-year change in durable goods orders less transportation. This data line was down 1.8% (revised) in September and lower by 2.3% in October. With the trend continuing through the two month period, we see that there is an issue year-to-year, and it likely marks important economic decline. I think it’s safe to say Europe has weighed against American multi-nationals more this year than last year, with Germany and France both contaminated now. It has also been evidenced by the reported numbers and warnings by industrial players including the likes of Caterpillar (NYSE: CAT). Caterpillar’s outlook and EPS estimates have come down substantially, and other stalwart industrials like General Electric (NYSE: GE) have seen analysts adjust EPS estimates downward as well.

Looking more closely at the data, we see that when excluding the defense industry, new orders only rose by 0.1%. Knowing that the fiscal cliff issue and sequestration pressures defense spending, this data proves meaningful as a predictor. It’s because defense spending is likely to decrease further, barring new and major war, and so some of the supports of durable goods orders and American industry could be removed. The earnings outlooks of Honeywell (NYSE: HON), General Dynamics (NYSE: GD) and others have seen appropriate adjustment as a result. More of the American manufacturing workforce may be displaced as a these companies act to protect the investment interests of their shareholder owners. It is concerning without a replacement channel for workers, and alternative energy is not filling production lines in the U.S. just yet, though domestic energy production is offering some support.

Nondefense new orders for capital goods, an area seen as an integral economic indicator and a measure of business capital investment, rose by 0.8% in October. Also, nondefense capital goods orders excluding for civilian aircraft from the likes of Boeing (NYSE: BA), which has done relatively well over the last few years, rose by a solid 1.7%.

Looking at industry specifics, orders for computers and electronic products increased by 0.9%, as Apple’s (Nasdaq: AAPL) reinvention of computing has driven demand for tablets and new types of computing products, supporting economic activity, but is creating more jobs overseas than at home in my view. Still, the quality of life at home has improved in some respect, and other ancillary job opportunities have resulted beyond the manufacturing of these goods; for instance, in the design and marketing of applications of these products. New order activity in this segment appears to be seasonal, given the prior two months of decline and on recent new product introductions from Apple and competitors ahead of the holiday shopping season. New orders for appliances and electronic equipment were up 4.1% after a similar decline the month before, certainly supported by reviving real estate and on demand for the appliances that fill homes. Demand for flat screen televisions is also robust, as homeowners replace old technology as product prices come down.

The auto industry saw a lull in October, with new orders down 1.6% after a 1.9% decline the month before. Still, Ford (NYSE: F) and General Motors (NYSE: GM) will continue to benefit from burgeoning demand for autos in Asia, especially as Japanese tensions are exacerbated with China over territorial issues.

In totality, I’m concerned about the latest durable goods orders data, especially when considering what the effects of likely higher taxes for some in the United States will have on demand. Europe’s ongoing decline and its lightening demand for American exports remain troubling as well. And so the answer to my rhetorical question is, yes, there is a negative signal in the latest Durable Goods Orders Report. Due to our regular coverage of economic issues, readers may follow this column if interested in similar research and analysis.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Manufacturing Bouncing Like a Dead Cat

The manufacturing segment of the economy has been especially dynamic of late and so demands review. We know that over the past few years, manufacturing, assisted by international demand and a mild recovery here at home, has helped support the economy. We also know that nascent demand decline caused by European recession (depression in some areas) and slowing in the China Asia Pacific region have caused a recent contraction in the American manufacturing segment. However, more recent data have shown a mild bounce. What we must determine from here is whether the sector will bounce robustly or more like a dead cat.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Manufacturing Review

This week ushered in new global manufacturing data, offering information about the U.S., Europe and China. The data produced by Markit Economics showed the manufacturing sector in the U.S. expanded at a faster pace, China contracted at a slower pace and Europe contracted at a faster pace in October. On net, the news was improved, especially for America. The news very likely helped to lift the Dow Jones Industrial Average in early trading Wednesday, but by the close the SPDR Dow Jones Industrial Average ETF (NYSE: DIA) had succumbed to new pressure. The same was true for the Industrial Select Sector SPDR (NYSE: XLI). The catalyst for the turn downward was likely the Monetary Policy Statement of the Federal Open Market Committee (FOMC), through which it continued to intimate concern.

Region	PMI	Change
U.S.	51.3	+0.2
Europe	45.3	-0.8
China	49.1	+1.2

We knew Europe was getting worse when earlier this week the German Finance Ministry warned about an especially difficult fourth quarter for Germany. We noted that the German Chancellor was asking her countrymen to stand behind an economic stimulus plan that stood in complete perfect contrast to what the German led EU is asking of Greece. Markit Economics reported this week the Flash Germany Composite Output Index contracted a full point to 48.1, and the Flash Germany Manufacturing Output Index fell much further, dropping to 45.9. Each measure under 50.0 marks economic contraction, and so Germany is increasingly looking vulnerable to the contagion that is decimating its Southern brothers.

The improvement in China still marks contraction, and in a little less than two weeks, Mitt Romney might be a lot closer to labeling it a “currency manipulator.” While Romney is certain China’s dependence on the American end market will prevent a trade war, the market is probably not completely on board yet. Whether that happens or not won’t have any impact on soft European demand for Chinese made goods.

The American PMI data published by Markit Economics showed the New Orders Index declined to 51.6, from 52.3 in September. Now, that’s not a change that is necessarily worth getting up in arms about, but it may prove to be an early sign of a dead cat bounce in manufacturing. The last report published by the Institute of Supply Management showed a growing PMI, up 1.9 to 51.5, but that was for September. We’ll get October’s data on November 1st. ISM’s New Orders Index increased by 5.2 points on its way to 52.3 in September. Still, if this early data from Markit Economics holds true, the gains of September may not be long lived. At least one economist was skeptical of the ISM report the day it was published.

Anecdotal evidence or information from companies in the goods producing sector of the economy has mostly been contentious. Caterpillar (NYSE: CAT) revealed its concerns about the global economy in late September, sending its shares tumbling. The shares have fallen some more since reporting results at the start of this week and reducing its near-term forecast. General Electric (GE) finally made us look wise on our warning about it in June when it recently declined after reporting its third quarter. While GE met analysts on its third quarter EPS result, a trend of quarterly earnings outperformance ended. Also, analysts’ earnings estimates have been coming down almost without exception. The same is true for other industrials like Caterpillar, Cummins (NYSE: CMI), 3M (NYSE: MMM) and others. Though, there are segments of the sector where it is harder to find signs of trouble in earnings estimates, like in aerospace with Boeing (NYSE: BA) and in autos with Ford (NYSE: F).

In conclusion, it’s still too soon to say if this bounce will resemble that of a robust rubber ball or of a dead cat. However, as readers of this column know, I’m looking for the furry feline sort of fall. Today’s GDP data for Q3 showed better than expected growth of 2.0%, exceeding the economists’ consensus for 1.9% and Q2 growth of 1.3%. However, the GDP Price Index increased by a higher than expected 2.8% over the immediately preceding quarter. Though, the increase was mostly attributable to food and energy prices; but as you know, we think those prices matter to Americans as well. With an Iran event near certainly looming, Europe deteriorating, and tensions with China heightening, I see heavy weights against the sector. Finally, while I’m expecting the next employment report to appear positive on the headline unemployment rate, I continue to view the data misleading and incorrect. Thus, watch out for feline road kill on this segment highway.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Healthy Skepticism of ISM Manufacturing Strength

Monday’s reported improvement in the ISM Manufacturing Index confounded the popular wisdom of the day, which sees manufacturing on the downslide. The critically important data point offered a message that seemed to counter many other manufacturing and related data points, including last week’s Durable Goods Orders data. It also countered the negative tone still emanating from the Philadelphia and New York Fed regions, but truth be told, data from Chicago and other Fed regions had hinted at stabilization. Still, I think there may be a fly in the ointment not yet noticed, and that is the impact of higher pricing on the overall PMI and on New Orders. Because the index is created through survey of purchasing managers, who are bottom line oriented, I believe higher prices paid are being passed through to end product and presenting an improved image in the clouded minds of managers.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

It’s also important for investors to remember that this is one month’s data which counters the trend of the prior three months; it also reflects gains over those downtrodden periods (softened base). Finally, the global macroeconomic environment is still slowing in Asia and deteriorating further in Europe. With today’s interdependence of economies, it would be naïve to assume foreign havoc cannot do more damage here at home, where we remain underemployed and where price matters most among consumer decision factors.

My perspective of the current state of the economy is one of issue, and of higher forward concern. Make no mistake about it, the fiscal cliff issue and election uncertainty will put a hold on business activity over the next month or three. Also, war with Iran is highly likely over the next 1 to 6 months, in my view, and should be factored into economic and investment scenarios. I believe it is negligent to completely ignore the issue at this point.

The Manufacturing ISM Report on Business showed its Purchasing Managers Index improved by 1.9 points, enough to take it above 50.0, to a mark of 51.5. The news had the SDPR S&P 500 (NYSE: SPY) up more than half of a percentage point through midday. The SDPR Dow Jones Industrial Average (NYSE: DIA), whose components would seem to be better represented by this data, was up nearly a full point. The Industrial Select Sector SPDR (NYSE: XLI), which is definitely represented by the data, was up to a lesser extent, by 0.6%, which I believe is quite telling. See today’s market report for more on this.

The ISM data showed its New Orders Index, a forward looking measure of interest, moved up by a sharp 5.2 points to 52.3, and into expansionary territory. The Production Index improved as well, rising 2.3 points, though it remained in contraction territory at 49.5. We might say the production index is less reliant on prices, where the orders index can be measured by dollars or units, but is likely thought of in dollar terms by managers. Purchasing managers indicated a renewed propensity to hire, with the Employment Index up 3.1 points to 54.7.

Despite the above listed improvements, there was more than enough reason provided by the report to temper enthusiasm on manufacturing and the economy. Leaving the most important factor for last, we noted Customer Inventories only improved slightly by a half point, and stuck in territory reflecting contraction, at 49.5. Also, Order Backlogs were deeply mired in the mud at 44.0 (+1.5). The Export environment remained difficult as the index improved by 1.5 points to just 48.5. Imports edged up only 0.5 points to a still insufficient 49.5 mark.

Finally, a key factor that could have played an important role in the rise in both new orders and in the overall PMI, may reveal a misleading index. A great many more purchasing managers reported increases in prices paid in September. The Prices Index rose by 4 points to 58.0, which indicates a faster rate of price increase in September than in August. If you survey industrial commodities, you find that some industrial metals declined in price, which reflects poorly for goods demand. Meanwhile, prices for important food components, gasoline, and packaging materials rose, which weigh on manufacturers, increased. Of the 18 manufacturing industries, 10 reported paying increased prices during the month of September in the following order: Food, Beverage & Tobacco Products; Plastics & Rubber Products; Printing & Related Support Activities; Wood Products; Chemical Products; Primary Metals; Furniture & Related Products; Machinery; Fabricated Metal Products; and Miscellaneous Manufacturing.

The indexes are based on survey, and purchasing managers are bottom line driven. They want to meet budgets, and they are of course acutely aware of sales activity in dollar terms. In my view, the increase in prices paid is probably being passed through to some extent, and is directly inflating the new orders and overall PMI data found here. Also, I believe they are indirectly affecting the employment perspective of managers. The other data reported, which was not as dramatically improved, seems to offer a different message.

I suspect the tempered enthusiasm of the XLI offers a check on the gains of the broader indexes today. Investors in this sector will not soon forget the warnings of major players, including Caterpillar’s (NYSE: CAT) of just a week ago. It’s noteworthy that after an early lift, Caterpillar’s shares are lower nearing the close of trading. Though, the shares of most other major industrials are still celebrating the data. This is because capital will not find the sector representative which reported issues. Rather, it will drive in a hopeful manner into the stocks of others, many of which I believe will also eventually report issues.

Company & Ticker	Monday’s Change 2:30 PM
GE (NYSE: GE)	+0.8%
Ford (NYSE: F)	+0.8%
FedEx (NYSE: FDX)	+0.5%
Boeing (NYSE: BA)	+0.8%

It’s my view that this celebration will be short-lived because it is disproportionate to the improvement of September over August and being misled by the price factor. A realistic view of the state of the economy and manufacturing should offer only tempered support to the manufacturing segment. Investors should be skeptical of this data and its staying power given all other information.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

ISM Manufacturing Report Raises Alarm

The light-hearted in economic denial received a wakeup call this morning. As we return from the long holiday weekend, perhaps feeling good about our lives and maybe even the economy, the first economic report to reach the wire offers a slap in the face. ISM’s Manufacturing Index for the month of August, reported Tuesday morning, deteriorated even deeper into territory reflecting sector contraction. While ISM disagrees that it means economic recession, it cannot deny that the situation has deteriorated. As I surveyed the data, I see only signs for concern.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

ISM Manufacturing Report

ISM’s Manufacturing Report on Business for the month of August 2012 produced a headline index, the Purchasing Managers Index (PMI), of 49.6%. Readings below 50.0 reflect sector contraction, and this reading also marked deterioration from July’s 49.8 level. Economists, perhaps having had one too many pina coladas this past weekend, were looking for a reading of 50.0, or improvement. Stocks, which started the day lazily without direction, turned decidedly lower after the report. The SPDR S&P 500 ETF (NYSE: SPY) was down a half point just a few minutes after the release.

August marked the third consecutive month of economic contraction within the manufacturing sector, and this latest reading was the lowest since July 2009. The measure is therefore marking a tough trend. And the deeper we look into the details, the worse signs we find of an economic red tide.

The New Orders Index, a forwarding looking component, dropped significantly to 47.1, down 0.9 from a level of 48.0 in July. This signifies contraction at a faster pace than seen in July, and clearly reflects poorly on global demand for American made goods. The Backlog of Orders Index fell to a sickly 42.5, from 43.0 in July. So, new orders and order backlogs were deteriorated; this is obviously disconcerting. Customers’ Inventories fell a half point to 49.0, but that signifies customers holding less inventory then they should. It also shows a higher level of anxiety among customers of surveyed purchasing managers. Purchasing managers’ inventories are stacking up, with that index now reading 53.0, from 49.0. Given the trends in order backlogs, it’s difficult to see this as a positive.

Production fell 4.1 points, to 47.2, and signs are building that layoffs may be around the corner. This ended a streak of growth that crossed several years. With production lagging, you have to then wonder about employment. The Employment Index eased to 51.6, from 52.0, as the lagging indicator starts to see impact. Take note, as this was the lowest reading for the index since November of 2009. Global demand for American goods remains soft, as the Export Index reached 47.0, up 0.5 points from July, but still reflecting contraction. Imports fell 1.5 points, to 49.0.

There’s no denying any longer that the global disease founded in Europe is spreading to our shores. Eight of eighteen industries are reporting contraction now, as eight report growth and two were unchanged. Anecdotal evidence supports the case we’ve made as panel participants mostly expressed concern about global economies and noted decreased demand for goods.

Only prices seemed to be rising, which is obviously not healthy when demand is declining. Some of the respondents indicated that the drought in the U.S. affected prices in August. Certainly, corn prices increased in August, but fuel prices did as well. Industrial metals continued to mostly decline in price, with nickel, copper, aluminum and steel lower. These are bad signs for the likes of Alcoa (NYSE: AA), BHP Billiton (NYSE: BHP), Rio Tinto (NYSE: RIO), Vale S.A. (Nasdaq: VALE) and Freeport McMoRan Copper & Gold (NYSE: FCX). Investors are not missing that point today either.

Company & Ticker	Midday Price Change
Alcoa (NYSE: AA)	-1.4%
BHP Billiton (NYSE: BHP)	-1.2%
Rio Tinto (NYSE: RIO)	-1.5%
Vale (Nasdaq: VALE)	-2.6%
Freeport-McMoRan (NYSE: FCX)	-1.6%

Industrials are down in concert, with the Dow Jones Industrial Average Index ETF (NYSE: DIA) off 0.8% and the Industrial Select Sector SPDR (NYSE: XLI) off 1.4% at the hour of scribbling here. Major manufacturers are split, depending on industry, with General Electric (NYSE: GE) down 0.7%, Caterpillar (NYSE: CAT) off 3.1% and Ford (NYSE: F) higher by 1.0%, as autos report monthly sales.

I advised on the sale of industrial stocks and basic materials shares two months ago. In the near-term, there may be some lift ahead of and into the September Federal Open Market Committee meeting. After that, I expect global deterioration will only accelerate, especially if geopolitical triggers are pulled as I also expect.

What we’ve recorded here is the worst of the last three months’ contraction in the overall PMI and the New Orders Index. It is therefore a bad sign for the economy, but because the manufacturing sector represents a small portion of the economy, historically, it has not been associated with recession at similar levels. Still, I think the writing is on the wall and deterioration is evident. In my view, layoffs will be the next news driver from the sector, though perhaps not as soon as Friday’s employment report. Construction would seem to be offering a stabilizing factor, but the latest data reported today for the month of July showed a 0.9% drop in construction spending. So, all the news is bad today for the economy, and stocks are pulled by that red tide.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

The Report that Changed Everything

The market wanted to open higher Monday, but a 10:00 AM stunner forced an about face. ISM’s Manufacturing Report on Business showed the sector contracted in June. Surprising as it may seem to Wall Street Greek readers, some market mavens had not even considered the possibility. However, we wrote Europe is Already Hurting the U.S. Economy in January, and first began warning of a slowing manufacturing sector in August of 2011. We hope you will get on board so as to not miss our latest forecasts.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

The World Shook

Ala Muhammad Ali, ISM’s Manufacturing Index shocked the world. The Purchasing Managers Index fell to 49.7%, down from 53.5% in May. It certainly shook up economists, who had forecast the index to slip only to 52.0%, based on Bloomberg’s survey. The most negative forecast did not even predict contraction, viewing downside at 51.0% for the index. On the high end, one economist thought the PMI would mark 53.4%. At least none of them had forecast an expansion of manufacturing activity, but who could, given the poor data coming out of regional Fed districts over the past few months. The SPDR S&P 500 (NYSE: SPY) had resurfaced by late afternoon, but the SPDR Dow Jones Industrial Average (NYSE: DIA) was having a harder time getting its head above water. Indeed, major components of the Dow were dazed, with Boeing (NYSE: BA) down near 2%, Caterpillar (NYSE: CAT) cut 1.6%, and Exxon Mobil (NYSE: XOM) and United Technologies reduced by a half point. The Industrial Select Sector SPDR (NYSE: XLI) was hurt 1.3% near the close.

The details of the report were downright dire, with the New Orders Index shredded 12.3 points to 47.8. Order Backlog was likewise reduced 2.5 points to 44.5. It looked near certain that international demand was weighing, with the Exports Index down 6 points to 47.5. The report indicated that comments from the panel ranged, with some purchasing managers expressing continued optimism and others focusing their concern on slowing activity in Europe and China.

One positive aspect was that if exports weigh on manufacturing, it doesn’t necessarily kill our service driven domestic economy. Manufacturing only makes up 10% of American economic production. That said, no new layoffs here at home could be absorbed by an already ailing labor market. The employment component lagged as is typical for employment, with the related index down only fractionally to 56.6. Consumer spending and consumer confidence are already showing significant damage, and so we could easily be led into economic recession.

Prices fell sharply for the second straight month, with the Prices Index down 10.5 points to 37.0. This measures the prices paid for raw materials. Commodities reported down in price included: Aluminum; Aluminum Products; Brass Products; Copper; Corn; HDPE; Oils; PET Resin; Plastic Products (2); Polypropylene Resin; Propylene; Soybean Oil; Steel (4); Steel — Carbon Sheet; Steel — Cold Rolled; and Steel — Hot Rolled. That has got to impact the operations of companies like Alcoa (NYSE: AA), BHP Billiton (NYSE: BHP), Rio Tinto (NYSE: RTP), Vale (NYSE: VALE) and Freeport-McMoRan (NYSE: FCX). I would be selling the names now if I held industrial metals and materials producers to begin with.

It’s the first time the manufacturing sector has contracted since July of 2009 or roughly three years. The reasons are clear, economic contraction and slowing production from Europe, and also from China now as well. The interconnected global economy is feeling the effects of contraction in the EU, the world’s largest economy. It’s infecting everything, and so the world woke up today, though it looks to me like stocks are missing the point I’m making as they recover into the close. I hope at least the readers of my column take heed, because this is the best reason you’ve had yet to believe. You don’t have to be shocked with the world when GDP contracts and stocks retrace ground; you can start hedging today.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

European Disease Infecting U.S. Manufacturing

The latest Empire State Manufacturing Survey, produced by the Federal Reserve Bank of New York, indicates a pickup in May manufacturing activity on the surface. Closer inspection always adds color, and in this case, we believe reflects growing concern about the outlook. It also shows a bifurcation developing within the sector, as mixed messages are delivered about the trend of business. We believe the report intimates infection from European markets reaching relative U.S. exporters. Given the data we’ve reported on around the industrial sector and manufacturing and international trade, and based on what we see developing globally, we view the headline improvement as just a blip in a trending dip.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Relative tickers include the SPDR Dow Jones Industrial Average (NYSE: DIA), Industrial Select Sector SPDR (NYSE: XLI), BHP Billiton (NYSE: BHP), Vale S.A. (NYSE: VALE), Alcoa (NYSE: AA), General Electric (NYSE: GE), Caterpillar (NYSE: CAT), United Technologies (NYSE: UTX) and UPS (NYSE: UPS).

Europe Infecting U.S.

The market celebrated Tuesday morning’s early release of the Empire State Manufacturing Survey because of the headline index increase. The SPDR Dow Jones Industrial Average (NYSE: DIA) rose to start the day, before other considerations (read Greece) weighed. The Industrial Select Sector SPDR (NYSE: XLI) traded choppy, though higher. Major industrial names including General Electric (NYSE: GE), Caterpillar (NYSE: CAT), UPS (NYSE: UPS) and United Technologies (NYSE: UTX) were each convincingly in the green. The NY Fed’s measure of area business showed its General Business Conditions Index gained to a mark of 17.09, up from 6.56 in April. Bloomberg’s survey of economists pegged the increase at a lesser level of 10.0 based on past performance and other indicators that reflected an uncertain direction.

The sub-index measuring new orders, which is a tangible indicator of how the business environment might be developing, inched higher to 8.3, from 6.5 in April. Shipments, however, were significantly higher, with the component measure rising to 24.1, from 6.4. Price increase has been contributing to gains here and likely continued to do so in May. That said, the indexes measuring both prices paid and received showed some moderation of the increases.

While the data showed overall gain, closer inspection shed light on a sort of bifurcated manufacturing environment. Something is developing, as the gain hid the fact that while many businesses reported improved activity, there was a similar increase in the number of manufacturers reporting less business activity. Even as 40.5% of those surveyed reported better business conditions, a gain over April’s 27.9%, 23.4% reported deteriorated business, versus 21.3% in April. Worse yet, 31.6% of those surveyed saw decreased new ordering activity, versus the 22.7% that said the same in April. That contrasted with the May gain in those who saw improved new ordering, where 39.9% saw improvement versus the 29.2% that said so in April.

The weird changes were fueled by decreasing numbers of managers reporting no change. The divergence of data may be reflective of specific markets served by manufacturers. Perhaps those serving Europe to a greater extent are now seeing decreased business. The latest International Trade Report reflected a wider trade deficit between the U.S. and Europe, which we intimated could be due to decreased European demand for U.S. goods and services. Of course, we now know that Spain is in recession as Greece falls into depression. Trouble seems to be spreading as an ill-timed austerity movement is implemented too aggressively across the euro region.

The NY Fed’s report also showed a perception among manufacturing managers that business conditions might deteriorate over the next six months. The forward looking indicators for General Business Conditions, New Orders, Shipments and Employment all decreased in value. Also, expectations for capital expenditures and technology spending declined. This all portends trouble, as the expert ear on the rail is feeling a bad vibe coming. Ironically, given the expected business slowdown, price increases are seen by manufacturing managers. I see inflation coming too, but I believe it will be selective and dynamic, and will follow nearer term deflation in industrial commodity prices. As a result, I’m not a fan of names like BHP Billiton (NYSE: BHP), Alcoa (NYSE: AA) and Vale S.A. (NYSE: VALE) over the short-term, though I believe scarcity, global demand and a breakdown of global trade, combined with fiat currency devaluation, will eventually drive the price of all materials and goods much higher.

This article should interest investors in Boeing (NYSE: BA), Raytheon (NYSE: RTN), Digital Globe (NYSE: DGI), GenCorp (NYSE: GY), General Dynamics (NYSE: GD), Goodrich (NYSE: GR), Northrop Grumman (NYSE: NOC), Honeywell (NYSE: HON), Lockheed Martin (NYSE: LMT), Rockwell Collins (NYSE: COL), L-3 Communications (NYSE: LLL), EMBRAER (NYSE: ERJ), FLIR Systems (Nasdaq: FLIR), BE Aerospace (Nasdaq: BEAV), TransDigm (NYSE: TDG), Spirit Aerosystems (NYSE: SPR), CAE (NYSE: CAE), Alliant Techsystems (NYSE: ATK), Hexcel (NYSE: HXL), Triumph Group (NYSE: TGI), Esterline Technologies (NYSE: ESL), Moog (NYSE: MOG-A), Heico (NYSE: HEI), Teledyne (NYSE: TDY), Curtiss-Wright (NYSE: CW), Cavco (Nasdaq: CVCO), Skyline (NYSE: SKY), Mohawk Industries (NYSE: MHK), Interface (Nasdaq: IFSIA), Albany International (NYSE: AIN), Unifi (NYSE: UFI), Illinois Tool Works (NYSE: ITW), Tyco International (NYSE: TYC), Cummins (NYSE: CMI), Kubota (NYSE: KUB), Ingersoll-Rand (NYSE: IR), Dover (NYSE: DOV), ITT Corp. (NYSE: ITT), Flowserve (NYSE: FLS), Pall (NYSE: PLL), Dresser-Rand (NYSE: DRC), SPX (NYSE: SPW), Gardner Denver (NYSE: GDI), IDEX (NYSE: IEX), Nordson (Nasdaq: NDSN), Graco (NYSE: GGG), Actuant (NYSE: ATU), Middleby (Nasdaq: MIDD), ABB (NYSE: ABB), Eaton (NYSE: ETN), Nidec (NYSE: NJ), Rockwell Automation (NYSE: ROK), Ametek (NYSE: AME), Regal Beloit (NYSE: RBC), Thomas & Betts (NYSE: TMB), Woodward Governor (Nasdaq: WGOV), Caterpillar (NYSE: CAT), Deere (NYSE: DE), CNH (NYSE: CNH), Joy Global (Nasdaq: JOYG), Bucyrus (Nasdaq: BUCY), Agco (Nasdaq: AGCO), Emerson Electric (NYSE: EMR), Parker Hannifin (NYSE: PH), Roper Industries (NYSE: ROP), Pentair (NYSE: PNR), Waste Management (NYSE: WM), Republic Services (NYSE: RSG), Fastenal (Nasdaq: FAST), Vulcan Materials (NYSE: VMC), MDU Resources (NYSE: MDU), Martin Marietta Materials (NYSE: MLM), Owens Corning (NYSE: OC), Valspar (NYSE: VAL), Precision Castparts (NYSE: PCP), United States Steel (NYSE: X), Reliance Steel (NYSE: RS), CRH (NYSE: CRH), CEMEX (NYSE: CX), Eagle Materials (NYSE: EXP), Fluor (NYSE: FLR), McDermott International (NYSE: MDR), Foster Wheeler (Nasdaq: FWLT), Empresas ICA (NYSE: ICA), Stanley Black & Decker (NYSE: SWK), Timken (NYSE: TKR), Kennametal (NYSE: KMT), Leucadia National (NYSE: LUK), Masco (NYSE: MAS), Weyerhaeuser (NYSE: WY), Quanta Services (NYSE: PWR), Chicago Bridge & Iron (NYSE: CBI), EMCOR (NYSE: EME), Snap-on (NYSE: SNA), Toro (NYSE: TTC), GM (NYSE: GM) and Ford (NYSE: F).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Choppy Seas Indicate a Changing Industrial Tide

This week’s economic data flow for the industrial sector offered a conflicting message. What I’ve learned as a fisherman is that where there are choppy seas there is change. Either the wind is blowing in the opposite direction of the tide or one current is bashing up against another. What matters is that one of the two forces will eventually win, and in this case, I believe it will be the force for change, and for the worse.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Industrial Sector Analysis

The article I authored entitled More Manufacturing Malaise was published the same morning that the trading pit celebrated the positive surprise in the ISM Manufacturing Report. I thought, oh boy, the comments are going to be harsh today. But fear not, because just a day later, with the arrival of another data point, the market is once again in the red with the latest complaints lost to the wind. Of course, the disappointing ADP Private Employment Report contributed significantly to the darkness of the day generally, with the SPDR Dow Jones Industrial Average (NYSE: DIA) down about 0.4% through morning before taking back some ground.

Factory Orders were reported Wednesday morning for the month of March. It seems the forewarning from the prior week’s Durable Goods Orders data was forgotten. Durable orders fell 4.0% in March (revised this week from -4.2%), and even when excluding high-ticket transportation goods, durables orders still dropped 1.1%. March Factory Orders fell 1.5%, contrasting sharply to February’s revised increase of 1.1%. However, economists, with the forewarning, had forecast a decline of 1.6% at the consensus.

The Good
Let’s look at the one key conflict offering strong support for manufacturing. ISM’s Manufacturing Index was reported up to 54.8% in April, from 53.4% in March. The first thing to note is that ISM is measuring a different month (current though) than the factory orders data, but the regional indexes reported by the Federal Reserve Banks have also measured April and have offered conflicting information as well.

The market was enthused Tuesday to see New Orders and Production up, with the two component indexes important for the overall PMI rise. Employment also increased, but we note yet again that this is a lagging indicator for the economy and for segments within it. Contrary to my greatest concern, ISM reported that exports were higher in April, with its export component index up 5 points to 59.0. I expect this was an important cog for the market’s drive higher. However, I continue to foresee issue within the important European market, where 20% of America’s exports are sold into. Also, the effects of European and U.S. economic slowing weigh on the emerging world that supplies it. As the situation is yet developing (Spain only just fell into recession), I expect this measure will deteriorate in the future. Also important to note, prices are on the rise; depending on the reason, this can be a positive or a negative reflection of/for the economy. Of the many commodities measured, only two saw price decline, including natural gas and steel. Finally, qualitative comments taken from survey respondents seem to show mixed business sentiment, though 16 of 18 manufacturing industry respondents reported growth to ISM. It is important to note that the index is really a measure of sentiment, where factory orders data is a direct reflection of activity.

The Bad
Returning to the disappointing Factory Orders data, New Orders were lower by 1.5%, mainly due to durable goods orders, especially in transportation equipment. Durables orders fell 4%, while transportation equipment orders dropped 12.6%. In fact, when excluding transportation, orders were flat overall. Because of the high-ticket nature of transportation equipment, this figure varies greatly and is therefore screened out to allow for a clearer view of general economic activity. However, one could argue that transportation equipment will lead economic trends, given its long lead time to delivery. Purchasing managers in this segment would tend to act more conservatively due to intensified risk. On the positive side of things, non-durable goods orders increased 0.5% in March.

The Ugly
Not alarming, but worth keeping an eye on, inventories are up to their highest level on record. This is of course expected in a growing global marketplace. However, it also makes the monitoring of unfilled order trends that much more important. Those continued to rise, but not at an alarming rate.

Something may be developing in transportation equipment though, given the important increase in the segment inventories at the same time that new orders are declining sharply. Aircraft might be of highest concern, given its closeness to consumer spending and the fact that non-defense aircraft and parts orders declined 47.6% in March. Also, orders for ships and boats were down 8.4%. The order to delivery timeline for these products and the trend noted here might provide some concern for the manufacturers’ shares, including Boeing (NYSE: BA), Trinity Industries (NYSE: TRN), American Railcar Industries (Nasdaq: ARII), Greenbrier Cos. (NYSE: GBX), Navistar (NYSE: NAV) and PACCAR (Nasdaq: PCAR).

In conclusion, one final important point needs to be repeated. New orders of non-defense capital goods excluding transportation declined 0.8% in March. While this followed a 2.8% increase in February, that gain also followed a 3.4% decline in January. This segment is what economists follow most closely for a view to business spending. Also, nondurable goods orders continued to rise. Until these segments soften, the economy should not reside in recession, though the stock market will lead not follow. Early indicators of trouble do exist in my view with regard to durable good order trends and within the transportation segment. Manufacturing continues to be supported by development of the global marketplace and the middle class overseas, but it should neither be immune to the spread of contagion from the important European market nor new issue in the critical U.S. market. The American market remains vulnerable, due to a still hobbled labor situation and the new paradigm defining capital availability in the States post the financial crisis. We’ll continue to keep close inspection of the industrial sector so as not to wind up lost in its choppy seas.

This article should interest investors in Boeing (NYSE: BA), Raytheon (NYSE: RTN), Digital Globe (NYSE: DGI), GenCorp (NYSE: GY), General Dynamics (NYSE: GD), Goodrich (NYSE: GR), Northrop Grumman (NYSE: NOC), Honeywell (NYSE: HON), Lockheed Martin (NYSE: LMT), Rockwell Collins (NYSE: COL), L-3 Communications (NYSE: LLL), EMBRAER (NYSE: ERJ), FLIR Systems (Nasdaq: FLIR), BE Aerospace (Nasdaq: BEAV), TransDigm (NYSE: TDG), Spirit Aerosystems (NYSE: SPR), CAE (NYSE: CAE), Alliant Techsystems (NYSE: ATK), Hexcel (NYSE: HXL), Triumph Group (NYSE: TGI), Esterline Technologies (NYSE: ESL), Moog (NYSE: MOG-A), Heico (NYSE: HEI), Teledyne (NYSE: TDY), Curtiss-Wright (NYSE: CW), Cavco (Nasdaq: CVCO), Skyline (NYSE: SKY), Nobility Homes (Nasdaq: NOBH), Palm Harbor Homes (Nasdaq: PHHM), Mohawk Industries (NYSE: MHK), Interface (Nasdaq: IFSIA), Albany International (NYSE: AIN), Unifi (NYSE: UFI), Illinois Tool Works (NYSE: ITW), Tyco International (NYSE: TYC), Cummins (NYSE: CMI), Kubota (NYSE: KUB), Ingersoll-Rand (NYSE: IR), Dover (NYSE: DOV), ITT Corp. (NYSE: ITT), Flowserve (NYSE: FLS), Pall (NYSE: PLL), Dresser-Rand (NYSE: DRC), SPX (NYSE: SPW), Gardner Denver (NYSE: GDI), IDEX (NYSE: IEX), Nordson (Nasdaq: NDSN), Graco (NYSE: GGG), Actuant (NYSE: ATU), Middleby (Nasdaq: MIDD), ABB (NYSE: ABB), Eaton (NYSE: ETN), Nidec (NYSE: NJ), Rockwell Automation (NYSE: ROK), Ametek (NYSE: AME), Regal Beloit (NYSE: RBC), Thomas & Betts (NYSE: TMB), Woodward Governor (Nasdaq: WGOV), Caterpillar (NYSE: CAT), Deere (NYSE: DE), CNH (NYSE: CNH), Joy Global (Nasdaq: JOYG), Bucyrus (Nasdaq: BUCY), Agco (Nasdaq: AGCO), Emerson Electric (NYSE: EMR), Parker Hannifin (NYSE: PH), Roper Industries (NYSE: ROP), Pentair (NYSE: PNR), Waste Management (NYSE: WM), Republic Services (NYSE: RSG), Fastenal (Nasdaq: FAST), Vulcan Materials (NYSE: VMC), MDU Resources (NYSE: MDU), Martin Marietta Materials (NYSE: MLM), Owens Corning (NYSE: OC), Valspar (NYSE: VAL), Precision Castparts (NYSE: PCP), United States Steel (NYSE: X), Reliance Steel (NYSE: RS), CRH (NYSE: CRH), CEMEX (NYSE: CX), Eagle Materials (NYSE: EXP), Fluor (NYSE: FLR), McDermott International (NYSE: MDR), Foster Wheeler (Nasdaq: FWLT), Empresas ICA (NYSE: ICA), Stanley Black & Decker (NYSE: SWK), Timken (NYSE: TKR), Kennametal (NYSE: KMT), Leucadia National (NYSE: LUK), Masco (NYSE: MAS), Weyerhaeuser (NYSE: WY), Quanta Services (NYSE: PWR), Chicago Bridge & Iron (NYSE: CBI), EMCOR (NYSE: EME), Snap-on (NYSE: SNA), Toro (NYSE: TTC), GM (NYSE: GM) and Ford (NYSE: F).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Manufacturing Malaise

Over recent weeks, we’ve been concerned about seepage of European contagion and American consumer constraint infecting the American manufacturing sector. The trend of the latest flow of regional manufacturing measures seems to concur. The Chicago Purchasing Managers Index (PMI) was reported down in April. The survey of business managers fell to a 29-week low reading of 56.2, down relatively sharply from March’s level of 62.2. The details show that production, new orders and inventories were lower. Employment improved but the segment is a lagging economic indicator.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Industrial Softness

Meanwhile, the Dallas Federal Reserve Bank reported its Manufacturing Survey Monday. Manufacturing activity slowed in the important state of Texas, which accounts for 9% of U.S. manufacturing production. The relative production index declined to +5.6 from +11.1 previously. Capacity utilization dropped dramatically, with a quarter of all respondents reporting decreases. New orders and shipments were both flat, reflecting the malaise seen in the Midwest measure. The regional Business Activity Index fell into negative territory in April, and surveyed managers mostly reported a deteriorated outlook.

Tuesday offers the latest Manufacturing Index Report from the Institute for Supply Management. The national measure of manufacturing was disappointing from my perspective last month. This month has economists’ expectations set low, with the Business Activity Index seen marking 53.0, which would be a decrease from March’s 53.4 reading. The range of expectations extends from 52.0 to 54.4, and the trend seems to reflect at best a flattening, stagnant environment, and at worst, the precipice of a cliff’s edge.

Other regional indices have mirrored the morose message conveyed today. Last week, the Kansas City Fed published its manufacturing index, which produced a decline to a reading of 3, down from 9 in March and 13 in February. The bank of Richmond produced an improvement in April, with its regional measure rising to 14 from 7 the month before. However, the more widely followed Philadelphia and New York measures marked declines the week before. Philadelphia’s measure fell to 8.5 from 12.5, and New York dropped to 6.6 from 20 the month before. Each of these continues to reflect economic expansion, but it is generally seen at a slower pace. Most of the indexes are benefiting from rising employment, though this is a lagging economic indicator.

Recent declines in data out of Europe and China have many questioning the support of the global environment, which has been important in times of domestic question. Stocks are down on today’s data, following a market ride set forward by Apple Inc. (Nasdaq: AAPL) and Amazon.com (Nasdaq: AMZN) last week. At the close of trading, the SPDR Dow Jones Industrial Average (NYSE: DIA), SPDR S&P 500 (NYSE: SPY) and the PowerShares QQQ (Nasdaq: QQQ) were each in the red. The Industrial Select Sector SPDR (NYSE: XLI) was off even more, down about 0.9% on the day. Given the trend developing and indicated by the regional manufacturing reports, I think the industrials are lower for good reason, and we advised against them about a month ago. The top ten holdings of the XLI were down big Monday, with General Electric (NYSE: GE) cut 1.0%, United Parcel Service (NYSE: UPS) lower by 0.4%, United Technologies (NYSE: UTX) down 0.4%, Caterpillar (NYSE: CAT) off 1.7%, 3M (NYSE: MMM) ending flat, Boeing (NYSE: BA) down 0.6%, Union Pacific (NYSE: UNP) down 1.3%, Honeywell (NYSE: HON) short 1.0%, Cummins (NYSE: CMI) dropped 2.1% and Emerson Electric (NYSE: EMR) down 0.3%.

This article should interest investors in Boeing (NYSE: BA), Raytheon (NYSE: RTN), Digital Globe (NYSE: DGI), GenCorp (NYSE: GY), General Dynamics (NYSE: GD), Goodrich (NYSE: GR), Northrop Grumman (NYSE: NOC), Honeywell (NYSE: HON), Lockheed Martin (NYSE: LMT), Rockwell Collins (NYSE: COL), L-3 Communications (NYSE: LLL), EMBRAER (NYSE: ERJ), FLIR Systems (Nasdaq: FLIR), BE Aerospace (Nasdaq: BEAV), TransDigm (NYSE: TDG), Spirit Aerosystems (NYSE: SPR), CAE (NYSE: CAE), Alliant Techsystems (NYSE: ATK), Hexcel (NYSE: HXL), Triumph Group (NYSE: TGI), Esterline Technologies (NYSE: ESL), Moog (NYSE: MOG-A), Heico (NYSE: HEI), Teledyne (NYSE: TDY), Curtiss-Wright (NYSE: CW), Cavco (Nasdaq: CVCO), Skyline (NYSE: SKY), Nobility Homes (Nasdaq: NOBH), Palm Harbor Homes (Nasdaq: PHHM), Mohawk Industries (NYSE: MHK), Interface (Nasdaq: IFSIA), Albany International (NYSE: AIN), Unifi (NYSE: UFI), Illinois Tool Works (NYSE: ITW), Tyco International (NYSE: TYC), Cummins (NYSE: CMI), Kubota (NYSE: KUB), Ingersoll-Rand (NYSE: IR), Dover (NYSE: DOV), ITT Corp. (NYSE: ITT), Flowserve (NYSE: FLS), Pall (NYSE: PLL), Dresser-Rand (NYSE: DRC), SPX (NYSE: SPW), Gardner Denver (NYSE: GDI), IDEX (NYSE: IEX), Nordson (Nasdaq: NDSN), Graco (NYSE: GGG), Actuant (NYSE: ATU), Middleby (Nasdaq: MIDD), ABB (NYSE: ABB), Eaton (NYSE: ETN), Nidec (NYSE: NJ), Rockwell Automation (NYSE: ROK), Ametek (NYSE: AME), Regal Beloit (NYSE: RBC), Thomas & Betts (NYSE: TMB), Woodward Governor (Nasdaq: WGOV), Caterpillar (NYSE: CAT), Deere (NYSE: DE), CNH (NYSE: CNH), Joy Global (Nasdaq: JOYG), Bucyrus (Nasdaq: BUCY), Agco (Nasdaq: AGCO), Emerson Electric (NYSE: EMR), Parker Hannifin (NYSE: PH), Roper Industries (NYSE: ROP), Pentair (NYSE: PNR), Waste Management (NYSE: WM), Republic Services (NYSE: RSG), Fastenal (Nasdaq: FAST), Vulcan Materials (NYSE: VMC), MDU Resources (NYSE: MDU), Martin Marietta Materials (NYSE: MLM), Owens Corning (NYSE: OC), Valspar (NYSE: VAL), Precision Castparts (NYSE: PCP), United States Steel (NYSE: X), Reliance Steel (NYSE: RS), CRH (NYSE: CRH), CEMEX (NYSE: CX), Eagle Materials (NYSE: EXP), Fluor (NYSE: FLR), McDermott International (NYSE: MDR), Foster Wheeler (Nasdaq: FWLT), Empresas ICA (NYSE: ICA), Stanley Black & Decker (NYSE: SWK), Timken (NYSE: TKR), Kennametal (NYSE: KMT), Leucadia National (NYSE: LUK), Masco (NYSE: MAS), Weyerhaeuser (NYSE: WY), Quanta Services (NYSE: PWR), Chicago Bridge & Iron (NYSE: CBI), EMCOR (NYSE: EME), Snap-on (NYSE: SNA), Toro (NYSE: TTC), GM (NYSE: GM) and Ford (NYSE: F).

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Manufacturing Sector has No Business Rallying

Over the course of the last week, we’ve received several manufacturing sector reports, which offer an opportunity now for a timely review of the sector. The slew of reports culminated in Monday’s reporting of the ISM Manufacturing data, and also include last week’s data from the Federal Reserve branches of Dallas, Richmond and Kansas City, plus the latest Durable Goods Orders data and Chicago Purchasing Managers Index. Tuesday brings a fresh update on Factory Orders as well.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Relative tickers: NYSE: BA, NYSE: RTN, NYSE: DGI, NYSE: GY, NYSE: GD, NYSE: GR, NYSE: NOC, NYSE: HON, NYSE: LMT, NYSE: COL, NYSE: LLL, NYSE: ERJ, Nasdaq: FLIR, Nasdaq: BEAV, NYSE: TDG, NYSE: SPR, NYSE: CAE, NYSE: ATK, NYSE: HXL, NYSE: TGI, NYSE: ESL, NYSE: MOG-A, NYSE: HEI, NYSE: TDY, NYSE: CW, Nasdaq: CVCO, NYSE: SKY, Nasdaq: NOBH, Nasdaq: PHHM, NYSE: MHK, Nasdaq: IFSIA, NYSE: AIN, NYSE: UFI, NYSE: ITW, NYSE: TYC, NYSE: CMI, NYSE: KUB, NYSE: IR, NYSE: DOV, NYSE: ITT, NYSE: FLS, NYSE: PLL, NYSE: DRC, NYSE: SPW, NYSE: GDI, NYSE: IEX, Nasdaq: NDSN, NYSE: GGG, NYSE: ATU, Nasdaq: MIDD, NYSE: ABB, NYSE: ETN, NYSE: NJ, NYSE: ROK, NYSE: AME, NYSE: RBC, NYSE: TMB, Nasdaq: WGOV, NYSE: CAT, NYSE: DE, NYSE: CNH, Nasdaq: JOYG, Nasdaq: BUCY, Nasdaq: AGCO, NYSE: EMR, NYSE: PH, NYSE: ROP, NYSE: PNR, NYSE: WM, NYSE: RSG, Nasdaq: FAST, NYSE: VMC, NYSE: MDU, NYSE: MLM, NYSE: OC, NYSE: VAL, NYSE: PCP, NYSE: X, NYSE: RS, NYSE: CRH, NYSE: CX, NYSE: EXP, NYSE: FLR, NYSE: MDR, Nasdaq: FWLT, NYSE: ICA, NYSE: SWK, NYSE: TKR, NYSE: KMT, NYSE: LUK, NYSE: MAS, NYSE: WY, NYSE: PWR, NYSE: CBI, NYSE: EME, NYSE: SNA, NYSE: TTC, NYSE: GM, NYSE: F.

Manufacturing Sector Review

The latest ISM Manufacturing Report showed the Purchasing Managers’ Index (PMI) inched higher to a mark of 53.4% in March, up from February’s 52.4% read. Economists surveyed by Bloomberg forecast a less robust gain to a consensus forecast of 53%. A close inspection of the data shows the pace of New Order growth slowed, export growth dropped sharply, prices ran high and customer inventories were too low. In other words, the details reveal something less appealing than the headline seen in the popular press, as usual. Given that this index has flirted with the threshold to sector contraction since last summer, there seems little reason to draw much comfort from it today. This index is particularly important these days as it flirts with the breakpoint between economic expansion and contraction. Historic data indicate that a reading above a mark of 50 generally reflects expansion in the manufacturing sector, where readings below 50 indicate sector recession. Read more on this specific report here.

Last week, we received a slew of key data that should prove useful to measure the health of the manufacturing sector. It seems most appropriate to begin this retro-discussion with the important Durable Goods Orders data for February. After a difficult result in January, Durable Goods Orders came up short again in February. New Orders for Durables increased 2.2%, missing the consensus of economists’ views, which had been set at +2.9% for the month, based on Bloomberg’s survey. The data point was partially impacted by an upward revision to January, which was hiked to -3.6% from -4.0% at its initial reporting. Still, the month missed the mark even when accounting for the revision. Excluding transportation, thus eliminating the influence of the high ticket items that tend to skew the overall data wildly month-to-month, orders rose 1.6%. This data point, while fighting the tide of an upward revision to January’s result, still exceeded the economists’ consensus for a 1.5% increase.

Breaking out manufacturing from the Durables Report, we see that the sector experienced a 2.8% increase in new orders. That was certainly good news and a positive sign for the sector. The month’s increased orders marked a nice change from January’s 5.1% decline. Still, February’s ordering activity remained 2.5% below December’s activity. Furthermore, Manufacturing Shipments were down 0.5% in February, following a 0.7% drop in January.

Last week’s regional Federal Reserve branch manufacturing reports offer a different message than ISM’s headline did Monday. Across Dallas, Richmond, Kansas City and Chicago, the message was the same, slower growth which surprised economists on the short side. The Dallas Fed reported its Business Activity Index fell to 10.8 in March, from 17.8 in February. The monthly reading missed the economists’ consensus forecast for 15.5, and was deeply short of the lowest forecast for a reading of 15.0, as measured by Bloomberg. The Richmond Fed Manufacturing Index dropped sharply to a mark of 7, from 20 in February. This index reading, like Dallas, again deeply missed the economists’ consensus forecast for 18 and fell under the lowest forecast for 15. The Kansas City Fed Manufacturing Index slipped to 9 in March, from 13 in February. Finally, the Chicago Purchasing Managers Index (PMI) retreated to 62.2, from 64.0 in February. It was likewise short of economists’ views for 63.0 in March.

The message seems clear. Manufacturing expansion is slowing in March at a pace faster than expected by economists. It’s unclear at this point, based on the data, whether the manufacturing sector might contract after nearly 3 years of expansion or not. However, anecdotal reports I receive about the Greek economy and my view of the situation seem to say Greece and Europe will deteriorate worse than the talking heads atop the troika are reporting. With 20% of our exports selling into Europe, we cannot escape impact. It’s also my view that China will pay the price for its exaggerated economic expansion effort, and find a hard landing of its own before long. Finally, I fear the Iranian trigger could so disrupt global trade that a global recession will ensue with costly results for overextended central banks and currencies. My forecasts have tended to lead popular understanding, due to my independent, unbiased position and my willingness to make forecasts contrary to the popular view.

Thus, I reiterate my view that the day’s market rally on manufacturing data was misplaced, with the SPDR S&P 500 (NYSE: SPY) closing up 0.7% on the day. The Industrial Select Sector SPDR (NYSE: XLI) was up more than the broader indices before giving way toward the close (+0.65%). Within the industrials group, sector players Cummins (NYSE: CMI), Emerson Electric (NYSE: EMI) and Caterpillar posted gains of roughly 1% or so, while Honeywell (NYSE: HON), General Electric (NYSE: GE), UPS (NYSE: UPS) and United Technologies (NYSE: UTX) were about unchanged or fractionally lower. I expect any gains made on nascent data will evaporate.

See also this article for more on the ISM Manufacturing Report.

This article should interest investors in Boeing (NYSE: BA), Raytheon (NYSE: RTN), Digital Globe (NYSE: DGI), GenCorp (NYSE: GY), General Dynamics (NYSE: GD), Goodrich (NYSE: GR), Northrop Grumman (NYSE: NOC), Honeywell (NYSE: HON), Lockheed Martin (NYSE: LMT), Rockwell Collins (NYSE: COL), L-3 Communications (NYSE: LLL), EMBRAER (NYSE: ERJ), FLIR Systems (Nasdaq: FLIR), BE Aerospace (Nasdaq: BEAV), TransDigm (NYSE: TDG), Spirit Aerosystems (NYSE: SPR), CAE (NYSE: CAE), Alliant Techsystems (NYSE: ATK), Hexcel (NYSE: HXL), Triumph Group (NYSE: TGI), Esterline Technologies (NYSE: ESL), Moog (NYSE: MOG-A), Heico (NYSE: HEI), Teledyne (NYSE: TDY), Curtiss-Wright (NYSE: CW), Cavco (Nasdaq: CVCO), Skyline (NYSE: SKY), Nobility Homes (Nasdaq: NOBH), Palm Harbor Homes (Nasdaq: PHHM), Mohawk Industries (NYSE: MHK), Interface (Nasdaq: IFSIA), Albany International (NYSE: AIN), Unifi (NYSE: UFI), Illinois Tool Works (NYSE: ITW), Tyco International (NYSE: TYC), Cummins (NYSE: CMI), Kubota (NYSE: KUB), Ingersoll-Rand (NYSE: IR), Dover (NYSE: DOV), ITT Corp. (NYSE: ITT), Flowserve (NYSE: FLS), Pall (NYSE: PLL), Dresser-Rand (NYSE: DRC), SPX (NYSE: SPW), Gardner Denver (NYSE: GDI), IDEX (NYSE: IEX), Nordson (Nasdaq: NDSN), Graco (NYSE: GGG), Actuant (NYSE: ATU), Middleby (Nasdaq: MIDD), ABB (NYSE: ABB), Eaton (NYSE: ETN), Nidec (NYSE: NJ), Rockwell Automation (NYSE: ROK), Ametek (NYSE: AME), Regal Beloit (NYSE: RBC), Thomas & Betts (NYSE: TMB), Woodward Governor (Nasdaq: WGOV), Caterpillar (NYSE: CAT), Deere (NYSE: DE), CNH (NYSE: CNH), Joy Global (Nasdaq: JOYG), Bucyrus (Nasdaq: BUCY), Agco (Nasdaq: AGCO), Emerson Electric (NYSE: EMR), Parker Hannifin (NYSE: PH), Roper Industries (NYSE: ROP), Pentair (NYSE: PNR), Waste Management (NYSE: WM), Republic Services (NYSE: RSG), Fastenal (Nasdaq: FAST), Vulcan Materials (NYSE: VMC), MDU Resources (NYSE: MDU), Martin Marietta Materials (NYSE: MLM), Owens Corning (NYSE: OC), Valspar (NYSE: VAL), Precision Castparts (NYSE: PCP), United States Steel (NYSE: X), Reliance Steel (NYSE: RS), CEMEX (NYSE: CX), Eagle Materials (NYSE: EXP), Fluor (NYSE: FLR), McDermott International (NYSE: MDR), Foster Wheeler (Nasdaq: FWLT), Empresas ICA (NYSE: ICA), Stanley Black & Decker (NYSE: SWK), Timken (NYSE: TKR), Kennametal (NYSE: KMT), Leucadia National (NYSE: LUK), Masco (NYSE: MAS), Weyerhaeuser (NYSE: WY), Quanta Services (NYSE: PWR), Chicago Bridge & Iron (NYSE: CBI), EMCOR (NYSE: EME), Snap-on (NYSE: SNA), Toro (NYSE: TTC), GM (NYSE: GM) and Ford (NYSE: F).

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