In this article I will examine the correlation between five economic indicators and five freely traded securities. The five economic indicators examined in this article are CB consumer confidence, ISM non-manufacturing PMI, ISM manufacturing PMI, E.U. manufacturing PMI and E.U. services PMI. The five securities we will take a look at are Oracle (ORCL), the S&P 500 (SPY), Apple (AAPL), International Business Machines (IBM), and Altria (MO). A correlation reading above +/-0.25 is considered strong.
| Oracle | SPY | Apple | IBM | Altria | |
| CB Consumer Confidence | -0.13 | +0.13 | +0.06 | +0.19 | +0.33 |
| ISM Non-Manufacturing PMI | +0.30 | +0.29 | +0.38 | +0.26 | +0.04 |
| ISM Manufacturing PMI | +0.14 | +0.32 | +0.37 | +0.08 | +0.37 |
| E.U. Manufacturing PMI | +0.22 | +0.39 | +0.42 | +0.05 | +0.18 |
| E.U. Services PMI | +0.01 | +0.21 | -0.03 | -0.16 | +0.09 |
Jan 2011 - June 2012
CB Consumer Confidence
Altria is strongly correlated with CB consumer confidence. CB consumer confidence crossed below the 3-month and 6-month simple moving averages, a sign that the trend is down. Throughout this article, a down trend will be defined as the economic indicator being below the moving averages. Based on the statistical relationship and the current down trend in CB consumer confidence, investors should sell shares of Altria.
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ISM Non-Manufacturing PMI
Oracle, the S&P 500, Apple and IBM are strongly correlated with the ISM non-manufacturing PMI. The non-manufacturing PMI gauges the economic growth of the service sector. The index is saying that the pace of growth is slowing. A continued decline in the ISM non-manufacturing PMI should lead to a continued decline in share prices of the aforementioned securities. Based on the statistical relationship and the current down trend in ISM non-manufacturing PMI, investors should sell shares of Oracle, the S&P 500, Apple and IBM.
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ISM Manufacturing PMI
The S&P 500, Altria and Apple are strongly correlated with the ISM manufacturing PMI. Given the statistical relationship, a continued decline in the ISM manufacturing PMI should lead to a continued decline in share prices. Currently, the ISM manufacturing PMI is trending down and suggesting that investors sell shares of the S&P 500, Altria, and Apple.
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EU Manufacturing PMI
The S&P 500 and Apple are strongly correlated with E.U. manufacturing PMI. Further, firms included in the S&P 500 face counter-party risks stemming from the European sovereign debt crisis. A declining EU manufacturing PMI should weigh on the S&P 500. The down trend in the manufacturing PMI suggests selling Apple and the S&P 500.
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Company Fundamentals
Currently, the fundamentals of the companies mentioned are strong. That said, the point of this paper is to examine the macro-economic environment which I believe will weigh on the company fundamentals going forward. We'll take a brief look at fundamentals of each company.
IBM
The firm is trading at 13.65 times earnings and 1.97 times sales. Earnings per share grew 13.37 percent this year and is expected to grow 10.52 percent next year. The firm has a profit margin of 15 percent. Currently, IBM is trading below the declining 50-day simple moving average.
Oracle
The firm is trading at 14.70 times earnings and 3.79 times sales. Earnings per share grew 17.53 percent this year and is expected to grow 9.77 percent next year. The firm has a profit margin of 26.9 percent. Currently, Oracle is trading above the declining 50-day simple moving average.
Apple
The firm is trading at 14.60 times earnings and 3.93 times sales. Earnings per share grew 82.63 percent this year and is expected to grow 15.73 percent next year. The firm has a profit margin of 27.13 percent. Currently, Apple is trading above the flattening 50-day simple moving average.
Altria
The firm is trading at 21.03 times earnings and 3 times sales. Earnings per share decreased 12.56 percent this year and is expected to grow 7.27 percent next year. The firm has a profit margin of 14.4 percent. Currently, Altria is trading above the rising 50-day simple moving average.
Conclusion
Sell Oracle, the S&P 500, Apple, Altria and International Business Machines because the analysis suggests shares should trade at lower prices. CB consumer confidence, ISM non-manufacturing PMI, ISM manufacturing PMI and EU manufacturing PMI are trending down and shares prices should also trend lower. At the least, investors should buy insurance in the form of buying put or selling call options.
