Thursday, April 19, 2012

A MacroView: ISM March

The experts got the general directions of the ISM reports correct this last month. While there is no break-out to indicate increased overall strength of the economy or the return to the dreaded double-dips, both reports showed consistent growth which should translate into economic growth of over 3.5% in GDP annually according to Bradley Holcomb, chair of the ISM Manufacturing Business Survey Committee. The economists surveyed, predicted that the ISM manufacturing index would increase to around 53 to 53.5 and was in the consensus range by Econoday of 51.9-54.2% at the actual of 53.4%. On the non-manufacturing headline index, economists had stated the index would decline slightly to 57-56.8 from 57.3% and it declined to 56 but maintained within the consensus range by Econoday of 55.7-58%.

Respondents to the surveys were basically very upbeat about business conditions with two reservations. A respondent from Heath Care & Social Services expressed concerns that the healthcare reforms were going to drastically reduce revenue. And another from Computer & Electronic Products business was stable but they had concerns about China going forward. Naturally showing concerns about the discussions of hard or soft landing economically in China. The New Exports Orders index also showed weakness in both reports with manufacturing dropping 5.5 to 54% and non-manufacturing dropping 2 to 52.5% with both converging to low 50s.

The price index in both reports showed much needed relief downward but still maintained over 60 in both reports. The non-manufacturing price index dropped 4.5 to 63.9% and manufacturing edged lower by 0.5 to 61%. Below shows that the recent trend has reversed slightly.
(Click charts to expand)

The following two charts show recent upward trends from both reports for both total number of commodities rising in prices and multimonth commodities with price increases. It is not nearly as dire as during the spring of 2011 but something of concern if the economy starts heating up again and prices strangle economic growth. These indexes are not seasonally adjusted so we can expect this recent trend to continue up.

Stock Picks based on ISM Manufacturing Index with Lagged Indicators
Instead of using the sub-indexes of the manufacturing report as last month, this time I regressed changes in the ISM manufacturing index with additional lagged regressors. Lags refers to delayed effects of new information. In this case let us say the ISM for January affects the market not just this month but the next and the next, etc. These results produced slightly better returns with about an additional 1/2% return over the flat-weighted S&P.

Prior research had shown that at certain lags, the independent variable was significant and could add value to the adjusted R^2. In this case there were few p-values that were significant and no pattern stood out as to which lag might provide the best additional information. Which means that the model looked better without discovering any additional information about time-delayed aspects of the reports.

Below is the results from regression with repeats of last month first and then additional choices for this month.
Continuation from last re-balance:
American International Group, Inc. (AIG)
Cliffs Natural Resources Inc. (CLF)
Discover Financial Services (DFS)
Ford Motor Company (F)
Goodyear Tire & Rubber Company (GT)
Prudential Financial, Inc. (PRU)
Baker Hughes Incorporated (BHI)
Goodyear Tire & Rubber Company (GT)
Newfield Exploration Company (NFX)
Tesoro Corporation (TSO)
The Hartford Financial Services Group, Inc. (HIG)

Added to portfolio:
Huntington Bancshares Incorporated (HBAN)
Textron Inc. (TXT)
United States Steel Corporation (X)
Chevron Corporation (CVX)
Marathon Oil Corporation (MRO)

ISM - Media Release: March 2012 Manufacturing ISM Report On Business®

ISM - Media Release: March 2012 Non-Manufacturing ISM Report On Business®

Mish's Global Economic Trend Analysis: Eurozone Composite PMI® Signals Recession Says Markit; France in Renewed Decline, German Growth Weakens, Italy and Spain Contract Further

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

Symbol Rating Price* Market Cap Sabrient Scores
Composite Value Growth Momentum
AIG STRONGBUY 31.17 LargeCap 40 56 5 85
CLF STRONGBUY 70.88 LargeCap 97 94 92 48
DFS STRONGBUY 33.70 LargeCap 95 68 69 100
F STRONGBUY 12.62 LargeCap 84 82 54 64
GT STRONGBUY 11.39 MidCap 80 96 79 42
HBAN STRONGBUY 6.56 LargeCap 84 60 46 90
HIG STRONGBUY 21.95 LargeCap 64 91 16 65
PRU STRONGBUY 64.50 LargeCap 97 90 74 79
TXT STRONGBUY 28.84 LargeCap 74 56 49 96
X STRONGBUY 30.26 MidCap 54 69 66 56
BHI STRONGBUY 42.46 LargeCap 59 97 79 22
CVX STRONGBUY 108.30 LargeCap 73 72 71 37
GT STRONGBUY 11.39 MidCap 80 96 79 42
MRO STRONGBUY 32.23 LargeCap 50 80 24 32
NFX STRONGBUY 35.22 MidCap 49 99 64 14
TSO STRONGBUY 26.80 MidCap 87 70 89 68

MarketWatch estimates:
PMI: 53.5%
NMI: 56.8%

CARPE DIEM: ISM Report: Manufacturing Comeback Continues; Real GDP Growth in Q1 2012 Could Be 3.6 to 3.7%

Mish's Global Economic Trend Analysis: German Manufacturing PMI Back in Contraction, New Orders Plunge, Price Inflation Up

The Capital Spectator: Manufacturing Activity Picks Up In March

Calculated Risk: ISM Manufacturing index indicates slightly faster expansion in March
This was slightly above expectations of 53.0%.

Political Calculations: Finalized: GDP Forecast for 2012Q1

Misc. Links:
The Tax Foundation - Scott Hodge on the U.S. Having the Highest Corporate Tax Rate in the World

The Tax Foundation - Monday Map: Tax Freedom Day by State

Mish's Global Economic Trend Analysis: Eurozone Unemployment Hits 15-Year High (and About to Get Much Worse) "Official Denial" In Spain

Calculated Risk: Wells Fargo on Housing: Better Days Ahead, Prices to bottom mid-year

I Love This Video! — Economics is NOT a science like physics & astronomy « Taking Hayek Seriously

Economist's View: No Sign of an Inflation Problem

Calculated Risk: Construction Spending declines in February

Calculated Risk: Over There: Unemployment rate at new high in Euro Zone

We’re #1! U.S. Officially Has the Top Corporate Tax Rate. Or Not. | Business |

Calculated Risk: ADP: Private Employment increased 209,000 in March

Calculated Risk: CoreLogic: House Price Index falls to new post-bubble low in February, Rate of decline slows

After Best Quarter in Years, How Long Will Car Sales Keep Rolling? | Business |

The Capital Spectator: Untangling Inflation Worries

Inflation fear and privileged service sector jobs — Marginal Revolution

CARPE DIEM: North Dakota: America's "Economic Miracle State"

Economist's View: "The Trend is the Cycle"

Mish's Global Economic Trend Analysis: Spanish Economic Drama: Nearly 57% of Budget Devoted to Pensions, Unemployment Benefits, and Interest; Unemployment Rate Hits 23.6%; Spain Warns of Soaring Debt

Stumbling and Mumbling: Demand or productivity?


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