Monday, March 05, 2012

A Macro View: ISM Regressions...22

Fair to Middling for Manufacturing, Good News for the Services Sectors
Manufacturing missed the consensus range of 54-55.5% by over 1.5 to 52.4% and well below the consensus point of 54.6%. Economists had predicted a rise in the index of 0.5 but got slack results in all the sub-indexes with new orders down 2.7, production down 0.4, employment down 1.1, supplier deliveries down 4.6, and inventories at break even. But according to Econoday, "... February's rates are respectable and not that much different than January." The most dramatic increase in the sub-indexes was prices with a rise of 6 to 61.5%. So the only good news was the exports index up 4.5 to 59.5%.

Non-Manufacturing ISM Report showed greater strength with the headline index rising 0.5 to 57.3% which was well above the consensus of 56 and on the high side of the consensus range of 54.5-58%. Econoday summary was a little more reasonable by claiming this report was "very positive". Although employment was down 1.7 to a good level of 55.7 and supplier deliveries was down 1.5 to 49.5%, business activity jumped 3.1 to 62.6% and new orders continued its strong upward trend since October 2011 (52.4%) with an increase of 1.8 to 61.2%.

Déjà vu on prices and inflation concerns
Even though the manufacturing report showed weakness across the board, the price index and numbers of commodities with rising prices did not subside last month. Below is a chart of the price indexes for both manufacturing and non-manufacturing from the Federal Reserve which shows a 5 month trend upward for both sectors.

The following two charts also shows recent upward trends from both reports for both total number of commodities rising in prices and multi-month commodities. It is not nearly as dire as during the spring of 2011. These indexes are not seasonally adjusted so we can expect this recent trend to continue up. It looks more subdued, but that could change during the spring thaws.

Stock Picks Based on Manufacturing Index with Subindexes
The regression formula I used for the following stocks picks included the headline index of the manufacturing index as well as 5 of the subindexes of the manufacturing report (employment, new export orders, new orders, and price) and all within the Fama-French 3 factor model. This creates quite a few regressors and along with raising the limits on sectors and industries, it created longer lists of potential candidates than previous runs. The list of "Lovers" (those that love a rising manufacturing index) was then weeded down to those stocks rated a Strong Buy by Sabrient Systems. (Complete list available upon request.)
Valero Energy Corporation (VLO)
Baker Hughes Incorporated (BHI)
Cummins Inc. (CMI)
Newfield Exploration Company (NFX)
Avery Dennison Corporation (AVY)
Tesoro Corporation (TSO)
WellPoint, Inc. (WLP)
EOG Resources, Inc. (EOG)
Mattel, Inc. (MAT)
Macy's, Inc. (M)
Ford Motor Company (F)
Cliffs Natural Resources Inc. (CLF)
SunTrust Banks, Inc. (STI)
Eastman Chemical Company (EMN)
MetLife, Inc. (MET)
Bank of America Corporation (BAC)
Prudential Financial, Inc. (PRU)
Wynn Resorts, Limited (WYNN)
American International Group, Inc. (AIG)
Discover Financial Services (DFS)
Goodyear Tire & Rubber Company (GT)
Principal Financial Group, Inc. (PFG)

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

Non-manufacturing: 55.5%

Calculated Risk: Existing Home Inventory declines 21% year-over-year in early March

Misc. Links:
The Tax Foundation - U.S. Corporate Income Taxes: Countdown to #1

US Banks Between a Rock and Hard Place: Dodd-Frank and Basel III Compliance | e21 - Economic Policies for the 21st Century

Environmental Economics: The Lorax: An env-econ economist's review

How Entrepreneurship Can Fix Young America. Youth unemployment is a chronic problem across the globe. Entrepreneurship is the answer. | Business |

Monetary policy: Try overshooting for once | The Economist

Sectoral rebalancing: The Fed's Reagan recovery | The Economist

Taxation: OPEC and Uncle Sam | The Economist

The Capital Spectator: Will The ISM Services Sector Index's Feb Rise Spill Over To Friday's Jobs Report?

FT Alphaville » A game of krónur

Calculated Risk: HAMP for Investors

David Smith's Service sector slips but still quite strong

CARPE DIEM: Online Job Demand Improves in February and Supply/Demand Ratio is Lowest Since Nov. 2008

How Much Do Income Taxes Affect Our Behavior? A New Study by Christina Romer and The National Bureau of Economic Research has new answers. | Business |

Vital Signs: Incomes Adjusted for Inflation - Real Time Economics - WSJ

How Much Do Income Taxes Affect Our Behavior? A New Study by Christina Romer and The National Bureau of Economic Research has new answers. | Business |

Mish's Global Economic Trend Analysis: Disingenuous Recession Explanations from ECRI Regarding Coincident Indicators; An Email Response From ECRI; Does the ECRI Even Believe Its Own Indicators?


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