Epiphany Investing

Searching Out the Optimal Portfolio of “Revelation” Stocks

ISM Report Continues Streak of DOA Indicators

Posted on | December 1, 2008 Time: 9:01 am |

This morning’s release of the November ISM Report is yet another economic indicator arriving DOA, reflecting the frozen state of global markets ever since mid-September.

The headline number of 36.2% (a diffusion index - read this PMI tutorial to learn more) is the lowest reading since May of 1982, and 2.7 percentage points lower than the October reading.

Drilling down further, the sub-indexes reflect escalating weakness in new orders, with only 29% of respondents reporting the same level of orders (month-over-month) and 59% reporting lower orders. The 27.9% reading is the lowest on record since January of 1980:

New
Orders		 %
Better		 %
Same		 %
Worse		 Net Index
Nov 2008 12 29 59 -47 27.9
Oct 2008 13 35 52 -39 32.2
Sep 2008 18 43 39 -21 38.8
Aug 2008 23 48 29 -6 48.3

The only good news about the 1982 comparisons is that equity markets bottomed within 3 months of the previous low reading of 35.5% in May 1982.

Prices Falling, But Time Lag for Corporate Effects

Another sliver of good news (slivers are all we get these days) is that manufacturers are finally seeing big price declines, especially in the most commoditized inputs. Given the steep declines in commodities since July, we’re finally seeing base producers unable to hold their price increases from the last few years. The rate of decline is particularly notable, with November’s 25.5% reading only a third of what we saw as recently as August:

Prices %
Higher		 %
Same		 %
Lower		 Net Index
Nov 2008 8 35 57 -49 25.5
Oct 2008 14 46 40 -26 37.0
Sep 2008 30 47 23 +7 53.5
Aug 2008 60 34 6 +54 77.0

This trend should begin to benefit industries like aluminum, steel, construction & electrical equipment, and eventually into durable goods. The only commodity that was noted to be in short supply during November was caustic soda, a large cost component for Alcoa (AA).

Parting Thoughts

As I noted a few weeks ago, we’re going to continue to see record-setting weakness in our economic indicators, whether they be leading, lagging, or coincident. As PIMCO’s Mohamed El-Erian noted this morning on CNBC, global markets went into “cardiac arrest” on September 15. Most of what we’ve seen since then amount to little more than life-support efforts on the part of the Fed and central bankers. Until we see meaningful government stimulus or public capital injections manifest themselves in the markets, we’re not going to see much in the way of encouraging data. Certainly not in 2008.

Disclosure: Author does not hold a position in Alcoa.

More on this topic (What's this?)
Market Rallies Despite Disappointing ISM (Daily US Stock Market Fundamenta..., 3/2/10)
THOUGHTS ON TODAY’S DATA (THE PRAGMATIC CAPITALIST, 2/3/10)
RAIL TRAFFIC HITS 2010 HIGH (THE PRAGMATIC CAPITALIST, 3/5/10)
Read more on ISM Manufacturing Index at Wikinvest
  • Share/Bookmark
Category: Broad Markets, Economic Indicators
Tags: > > >

Comments