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U.S. ISM Manufacturing

03/01/2012

The month of March begins with a gentle reminder for investors not to become enamored with the “need for speed” – heavily shorted names that are leading the advance in the S&P 500® Index, such as Sear’s (+116% year to date) or Netflix (+57% year to date). Both global and domestic growth are accelerating but not at a pace that suggests allocations to such high-beta assets.
 
Be invested, with a suggested focus on energy, corporate bonds, technology, consumer names and select low-beta small caps. I still expect U.S. Treasury yields (Figure 1.4) and German Treasury yields to rise and support these suggested assets.
 
This morning’s ISM Manufacturing (Figure 1.1) report is a mild disappointment in contrast to 2012’s manufacturing reports to date; the ISM headline figure of 52.4 is below both the 54.5 estimate and last month’s revised lower 54.1 reading.
 
Additionally, construction spending (Figure 1.3) was also surprisingly weak, declining -0.1% after last month’s +1.5% rise, and below expectations for a +1.0% figure this month.
 
I would expect economists to slightly revise lower their estimates for Q1 GDP, possibly below 2% by a touch.
 
Let’s take a look at the important ISM internals:
 
•  New Orders (Figure 1.2) fell from 57.6 to 54.9, suggesting inventory rebuilding is moderating
•  Prices Paid rose from 55.5 to 61.5 as rising resource input costs are now present and challenging
•  Employment Index fell from 54.3 to 53.2
•  Export orders rose to 59.5 from 55.0, a favorable condition
•  Inventories were unchanged at 49.5
  
Figure 1.1 ISM Manufacturing Index, March 31, 2011 to Present

Source: Bloomberg
 
Figure 1.2 ISM New Orders, March 31, 2011 to Present

Source: Bloomberg
 
Figure 1.3 Construction Spending, March 31, 2011 to Present

Source: Bloomberg
 
Figure 1.4 U.S. 10-Year Treasury, July 4, 2011 to Present

Source: Bloomberg


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