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 a 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 multi-month 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 result from regression with repeats of last month first and then additional choices for this month. All are rated Strong Buy by Sabrient Systems.
Continuation from the 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
Newfield Exploration Company (NFX)
Tesoro Corporation (TSO)
The Hartford Financial Services Group, Inc. (HIG)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: This article 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.