Wednesday, January 11, 2012

A Macro View: ISM November/December, Haters and Lovers

The MacroView has discussed the Institute for Supply Management (ISM) reports and explored the relationships between the reports and the general health of the economy over the last two years. After first exploring the December reports, this post will explore a new area of research along with some stock suggestions related with the ISM research.

Good but is that Good Enough?
Both headline indexes increased month over month for December reports although non-manufacturing did not make up the ground it lost in November. The non-manufacturing increased .6 to 52.6% in December from a loss of .9 in November. The manufacturing index continued its rise of 1.2 to 53.9% in December after the gain of 1.9% which was on the high side of the consensus range of 52.5 to 54 with consensus point of 53.2%. The non-maufacturing was below the consensus of 53.4 but with-in the consensus range of 52 to 57.5%.

Although the economy is still apprehensive about the European debt crisis, there has been some recent good news on jobs and the unemployment rate with ADP reporting strong job growth in December and the unemployment rate dropping to 8.6%. The employment index in manufacturing continues to be the stronger of the two indexes and last month showed a strong increase of 3.3 to 55.1%, but non-manufacturing continued to be sub-50 at 49.4 even with an increase of 0.5% last month. Respondent comments are also not very encouraging on the jobs front.
Comments from respondents include: "Retirees not being replaced" and "Still in holding pattern; positions are available, but are not being filled."

Respondents' comments are mixed and vary by industry and company. Economic growth continues to be slowed by the lag in employment."

"Continued conservative hiring, with tight discretionary spending controls due to slower growth expectations for 2012, driven by Euro zone sovereign debt concerns and lack of viable U.S. legislative process through the 2012 election." (Computer & Electronic Products)

This just shows that there is still economic uncertainty and the European situation along with a divided government has not helped to increase positive expectations. A hindrance with economic growth has shown signs of finally fading away for the moment, that is prices. The converging direction of the price indexes is good on both sides. After the dramatic drop in the manufacturing price in index in October 2011 by 15 points, last month continued its upward trend with an increase of 2.5 to 47.5%. While rising prices can hinder economic growth by raising uncertainty, declining prices does not necessarily translate to stable growth either. Stable prices over time is more consistent with maximum economic growth. The non-manufacturing price index was lower by 1.3 to 61.2% last month.

Along with the price indexes in the reports, the Macro View has also been interested in the total number of commodity prices going up and commodities that have multiple months of increasing prices. Nothing unusual about the non-manufacturing numbers with 3 multiple month commodities and 9 in total, but for manufacturing there were more commodities going down in price for both categories. Multiple month higher price commodities was 3 and 7 for lower prices and total number of prices going up was 9 compared to 10 in commodities with prices going down.

"Haters" and "Lovers" of the ISM Manufacturing Index
One of the tools we use at Sabrient to development trading models is regression analysis. We find sets of stocks that through back-testing perform better than the comparable index. One set is the lovers that, like the name implies, love the independent variable(s) as it goes up and the other set is a group of stocks that perform well when the independent variable is low (haters). In other words we find stocks that perform well when the economic index is high or rising and also stocks that perform well when the index is low or declining.

With a simplistic model, the non-manufacturing group performed badly in the lovers group and the haters beat the index. But since the data only goes back to the spring of 2005 and overall the manufacturing performed better, let me use that model to provide a few stock ideas based on a regression back test over the last 11 years. Since these results are independent of our ranking system, I also filtered for Strong Buy ratings by Sabrient on the lovers side and Strong Sell along with Sell ratings on the haters side. These results take into account the latest releases by the ISM which were positive as noted above. If the upward trend of the indexes and the overall manufacturing sectors continues to perform well then the lovers group would be expected to outperform the markets.
SCSC Strong Buy
VCI Strong Buy
RHT Strong Buy
GPOR Strong Buy
GCI Strong Buy
LAD Strong Buy
LNC Strong Buy
SNX Strong Buy
HIG Strong Buy
AGCO Strong Buy
PRU Strong Buy
HCP Strong Sell
T Sell

Disclaimer: The Rock Solid Yield portfolio newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

Position None:
Full disclosure: The author does not personally hold any of the stocks mentioned in this edition of Rock Solid Yields.

ISM - Media Release: December 2011 Manufacturing ISM Report On Business®

Econoday Report: ISM Mfg Index January 3, 2012

ISM - Media Release: December 2011 Non-Manufacturing ISM Report On Business®

Econoday Report: ISM Non-Mfg Index January 5, 2012

Calculated Risk: ISM Non-Manufacturing Index indicates slightly faster expansion in December

MarketWatch December Forecast:
Manufacturing: 53.0%
Nonmanufacturing: 53.3%

Calculated Risk: Weekly Initial Unemployment Claims decline to 372,000

Calculated Risk: ADP: Private Employment increased 325,000 in December

Want a Job? Go to College, and Don't Major in Architecture -

Environmental Economics: Chronicle: Unemployment Varies by College Major

Good News On The Jobs Front?

The Capital Spectator: ADP: Job Creation Surged In December

CARPE DIEM: Jobless Claims End 2011 at 3.5 Year Low; And ADP Reports 325K Private Job Gain in December

Strong ADP Jobs Gain Needs Grain of Salt - Real Time Economics - WSJ

David Smith's Good news from UK manufacturing

Calculated Risk: ISM Manufacturing index indicates faster expansion in December

Calculated Risk: ISM Non-Manufacturing Index indicates slightly faster expansion in December

Vital Signs: Port Traffic Muted - Real Time Economics - WSJ

Vital Signs: More Hotel Rooms Filled - Real Time Economics - WSJ

Vital Signs: More Homes Going Into Contract - Real Time Economics - WSJ

Outside the Bubble, Public Investment Is Disappearing « Multiplier Effect

Personal finance: A layaway to save | The Economist

CARPE DIEM: ND Oil Boom Fuels Real Estate Sales in Arizona

Stumbling and Mumbling: Entitlements & ratchets

Kahneman, Greed and Success, Bryan Caplan | EconLog | Library of Economics and Liberty

The President’s Suspect Statistics We have too little upward mobility, but it has not declined.

Worthwhile Canadian Initiative: The concrete impacts of taxes

Leading Indicators Index Gets Overhaul - Real Time Economics - WSJ

Still in the Woods

ISM - Media Release: November 2011 Manufacturing ISM Report On Business®

Econoday Report: ISM Mfg Index December 1, 2011

ISM - Media Release: November 2011 Non-Manufacturing ISM Report On Business®

Econoday Report: ISM Non-Mfg Index December 5, 2011

World-Wide Factory Activity, by Country - Real Time Economics - WSJ

MarketWatch November:
ISM: 52
Non-Manufacturing: 53.9%
U.S. manufacturing lightly accelerates: ISM

The Capital Spectator: Will Manufacturing's November Revival Last?

Calculated Risk: ISM Manufacturing index indicates slightly faster expansion in November

Calculated Risk: Construction Spending increased in October

Misc Links:
Calculated Risk: Employment Summary, Part Time Workers, and Unemployed over 26 Weeks

Calculated Risk: Seasonal Retail Hiring, Duration of Unemployment, Unemployment by Education and Diffusion Indexes

The U.S. Unemployment Rate Falls to 8.6%: Has America Avoided a Double-Dip Recession? - The Curious Capitalist -

Mish's Global Economic Trend Analysis: Charts of the Day: Labor Force and Unemployment Rate Adjusted for Population Growth Since 1948 Show Falling Unemployment Rate is "Statistical Mirage"

The Tax Foundation - Overreaching: Time to Reconsider FATCA

What Does The Decline in Labor Force Participation Tell Us « Modeled Behavior

Mankiw: We Need Fiscal Hawks, Monetary Doves, Arnold Kling | EconLog | Library of Economics and Liberty

In Praise of Dirty Energy: There Are Worse Things Than Pollution and We Have Them « Modeled Behavior

Are These Recessions All the Same?, Arnold Kling | EconLog | Library of Economics and Liberty

CARPE DIEM: We Should Thank China for Its Currency Policy

Quotation of the Day…

Judith Scott-Clayton: Student Loan Debt: Who Are the 1%? -

If there is a recipe for growing too fast forever, I have yet to see it « Modeled Behavior

New evidence that being underwater on your house limits labor mobility — Marginal Revolution

Economist's View: "The Facts about Small Businesses and the Millionaire Surcharge"

Judith Scott-Clayton: Student Loan Debt: Who Are the 1%? -

Macro Musings That Drive Me Nuts « Modeled Behavior

Soros: World Financial System on Brink of Collapse - Real Time Economics - WSJ

CARPE DIEM: One-Year ARMs Fall to Historical Low

CARPE DIEM: How Terrible: Walmart Plans to "Dump" Six Stores, 1,600 Jobs and $21 Million in Charity on Wash. D.C.

Stumbling and Mumbling: Why stagnation matters

TaxVox » Blog Archive » Top Income Tax Rates and Revenue: A Historical Perspective

Vital Signs: Strong Private Hiring - Real Time Economics - WSJ

Time to Demand Transparency and Accountability at the Fed « Multiplier Effect

Calculated Risk: LPS: Mortgages In Foreclosure Process at an All-Time High

Thinking About CEO Pay, Arnold Kling | EconLog | Library of Economics and Liberty

Top Marginal tax rate of 70% ? | Angry Bear - Financial and Economic Commentary

Who’s Dropping Out of the Labor Force « Modeled Behavior

Mish's Global Economic Trend Analysis: Daily Show on "Free Money"

Calculated Risk: ISM Non-Manufacturing Index indicates slower expansion in November

David Smith's Service sector growing

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