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Weekly Advisory – February 6, 2012
The Economy The U.S economy picked up some momentum in December and January and it was led by an inventory build in the manufacturing sector. The Institute for Supply Management’s (ISM) manufacturing index rose to 54.1% in January from a revised 53.1% in December. This index has risen in 4 of the last 5 months. See the graph below. The new orders sub-index also rose 2.8 points in January to 57.6%. The ISM’s services index also rose to 56.8% in January from 53% in December, so both the manufacturing and services sectors rose3 in January and are well above 50%. The Purchasing Managers’ Index (PMI), which is very similar to the ISM indexes, in China was essentially flat in January and December at 50.5% for the official index and 48.8% for the private (HSBC Bank) index. Manufacturing activity in China was flat for those two months. However, the PMI index for the euro-zone rose to 48.8% in January from 46.9% in December which was a mild surprise. Auto sales in January were strong and consistent with the higher ISM manufacturing index as Nissan’s sales rose 10.4%, Volkswagen’s sales rose 47.9%, Ford’s sales rose 7% but GM’s sales fell 6.1% for the month. The Commerce Department reported that personal incomes rose 0.5% in December, but personal spending fell 0.1%. The personal consumption expenditure price index rose 2.4% for 2011, but energy costs declined significantly in the 4th quarter. The Case Shiller home price index (which averages the prior 3 months) fell 3.7% in 2011 and analysts do not think existing home prices have bottomed yet. Finally, non-farm payrolls added 243,000 jobs in January – the private sector added 257,000 jobs and federal and state government jobs declined by 14,000 for the month. The job gains were broad-based as professional and business services added 70,000, construction added 57,000, manufacturing added 50,000, leisure and hospitality added 44,000, and healthcare added 31,000 jobs in January. Additions to non-farm payrolls have averaged 183,000 per month for the past 5 months, but analysts are concerned that the unusually warm weather in January may have resulted in an overstatement of the monthly trend. Markets: The S&P 500 index rose 2.17% for the week probably as a result of the favorable January jobs report released on Friday. Corporate earnings reports for the 4th calendar quarter have been mixed and Standard & Poors is estimating that operating earnings will rise 9.6% for the 4th quarter for the companies in the S&P 500 index. QInsight notes that labor productivity in the non-farm business sector rose only 0.5% (4th quarter 2011 versus the 4th quarter 2010) in the 4th quarter, but real hourly compensation fell 1.5% in the quarter, so corporate gross margins still expanded by 2%. This is consistent with S&P’s operating earnings forecast for the 4th quarter. The best performing industry sectors are Basic Materials, Financials and Technology (up 14.42%, 11.97% and 11.31%, respectively in 2012). QInsight’s proprietary business cycle model has shifted to the EARLY REVIVAL phase. The Basic Materials, Financials and Financial Services, Industrials and Transportation and Consumer (Cyclical and Non-Cyclical) sectors have historically led the broad U.S. stock market indexes during the EARLY REVIVAL phase. Graph of the Week:
Since the QInsight Group defines the US economy to be in an EASEOFF period, investors may buy or hold stocks with the following characteristics: 1. The stocks should be in industry groups that have historically outperformed in the EASEOFF phases of the business cycle (see www.qinsight.com/current.htm for a list of these industry groups). 2. The industry groups should show rising relative strength (on a 52-week basis) as compared to the S&P 500 index. 3. The stocks should have excellent “valuation” characteristics (as measured by a price-to-earnings ratio, price-to-sales ratio or price-to-cashflow ratio well below the industry average) to avoid stocks that may have become overvalued.
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