(By Ron Rutherford) Overall, the ISM reports brought in good but not great news; however they were overshadowed by the poor jobs report of last week. Even though Tuesday was a light calendar day, the non-manufacturing sector's good news only translated into a slight improvement in market sentiment. More specifically, the good news was that the new orders index of both reports rose 2 points or nearly 2 points to 55.5 and 60.1 for non-manufacturing and manufacturing, respectively. Also, pricing pressures have continued to subside, as discussed below.
The headlines indexes were fair to middling, even with the strong headwinds of the Euro crisis and questions about China's continuing growth. Manufacturing PMI, at 53.5, was below the market consensus of 54, but at the top-end of the consensus range of 51.0-54.5 by Econoday. The non-manufacturing index was above the consensus of 53.5 by Econoday and MarketWatch, with an index of 53.7.
Even with new orders coming in strong, employment was not better. Non-manufacturing dropped the most, with a decline of 3.4 to 50.8 and manufacturing dipping 0.4 to a respectable mid-50s range of 56.9. Thus, the services sector, being the bulk of the economy, slowed its growth of hiring last month. One respondent in the report said there was a "Reduction of excess FTE (full-time equivalent) capacity and organizational consolidation" — which corroborates what the jobs reports stated as increased reliance on part-time staff.
Below is a graph of the non-manufacturing employment index since December 2009 with a so-called trend line. Since January, the index has trended downward, and if it continues, it will drop below the 50-mark indicating contraction in hiring.
Click to enlarge
The price index for both reports dropped below 50 since July 2009 at 49.8 and December 2011 at 47.5 for non-manufacturing and manufacturing, respectively. The drop was most dramatic for the manufacturing sector, with a decline in the index by 13.5 and net (those responding higher prices vs. those reporting lower prices) dropped from positive 22 to negative 5.
Also, commodities rising in prices were surpassed by commodities down in prices for the manufacturing sector, which is a rare event in view of the past three years. All these facts point to dreaded signs of deflation. While slow, steady increasing prices are best, falling prices are not good for the economy overall. If the Fed is looking at this data, QE3 might be more attractive or necessary moving forward.
Stock picks based on the ISM Manufacturing Index with lagged indicators
The regressions used this time were a continuation of the formulas used from the last report in April, but some data issues with the data base have been corrected. The results were much better than the last back-test results, with about a 5% higher annualized rate of return than the flat-weighted S&P index and a nearly 12.5% annualized return.
The results showed no overlapping stocks with the last pick selections, but on the other hand, the turnover rate during this back-test was 7.5% or lower per quarter. Which means that even though turnover was low, it did not correlate with the last stock picks. The list below has also been filtered by Sabrient's rating system of Strong Buys only. These choices should outperform the market and do especially well if the manufacturing sectors perform well over the next 6 months.
- Cascade Corporation (CASC)
- Deluxe Corporation (DLX)
- Helix Energy Solutions Group, Inc. (HLX)
- MarineMax, Inc. (HZO)
- Masco Corporation (MAS)
- Protective Life Corporation (PL)
- SYNNEX Corporation (SNX)
- Tyson Foods, Inc. (TSN)
- Wyndham Worldwide Corporation (WYN)
New orders gaining momentum should propel the overall index higher for the near future, as well as the stock picks above. The strength in new orders may have been mostly from domestic sources, as new export orders dropped significantly, with a decline of 5 for non-manufacturing and 5.5 for manufacturing. Both export indexes stayed above the 50-mark, with manufacturing at 53.5 and non-manufacturing at 53–which shows growing export orders, but at slower pace. Respondents comments were mostly favorable; Anthony Nieves stated in the non-manufacturing report, "The majority of the respondents' comments are positive and optimistic about business conditions and the direction of the economy."
Full disclosure: The author holds or will hold the stocks mentioned in this edition of the Macro View.
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.
Disclosure: I am long DLX.