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{ 2008 03 26 }

Durable goods - the case for shorting industrials strengthens

I recently wrote a post describing what I saw as a weakness in manufacturing. That weakness, I felt, justified taking a position in the ProShares UltraShort Industrials ETF (SIJ). My timing for this trade was astonishingly bad as markets immediately staged a strong rally, driving this ultra short ETF into the ground.

What about the premise of the post mentioned above? It seems that today's February Durable Goods report from the U.S. Census Bureau bears out the original analysis. All is not well in the manufacturing sector.

My previous post talked about a string of reports showing slowing growth or outright contraction. Sources included the Federal Reserve, the Philadelphia Fed, the New York Fed and the ISM.

Today the Census Bureau weighed in and it wasn't pretty. Many headlines indicated the bad number was a surprise. To me, it seems to continue a trend.

Here is the summary statement on New Orders from the Census Bureau's web site:

"New orders for manufactured durable goods in February decreased $3.6 billion or 1.7 percent to $210.6 billion, the U.S. Census Bureau announced today. This was the second consecutive monthly decrease and followed a 4.7 percent January decrease. Excluding transportation, new orders decreased 2.6 percent. Excluding defense, new orders decreased 1.6 percent."

Here are some highlights on a few of the categories contained in the report.

The Manufacturing category showed declines in both shipments (-1.4%) and new orders (-1.6%). Machinery showed a sizable decline of 13% in new orders.

As is often the case, however, there are mixed results in the Computers and Electronic Products category. Across the board there are negative numbers for shipments in all the sub-categories. The Computers and Communications Equipment sub-categories, though showing declines in shipments, both actually saw an increase in new orders. On the other hand, Semiconductors showed a whopping 31% decrease in shipments which seems to me to be worse than a typical seasonal slowdown.

Fianlly, you know it's bad when new orders for defense goods are off 10% despite Bush's wars continuing unabated. And this is after a 15% drop in the December to January time period.

I generally focus more on the New Orders numbers as I consider them to be more forward looking and predictive in nature when trying to determine the direction of stocks. Still, shipments do provide good information on the current level of manufacturing activity. The summary statement from the Census Bureau web site is as follows: "Shipments of manufactured durable goods in February, down three of the last four months, decreased $6.0 billion or 2.8 percent to $210.5 billion. This followed a 2.3 percent January increase." To me, this is further evidence a slowdown in manufacturing is already underway.

All told, today's report does nothing to dissuade me from my original position: there is weakness in manufacturing and shorting industrials should be a profitable trade. Eventually.

Sources:
MANUFACTURERS' SHIPMENTS, INVENTORIES, AND ORDERS
http://www.census.gov/indicator/www/m3/

Disclosure: author is long SIJ
Posted by admin on Wednesday, March 26, 2008, at 4:54 pm, and filed under industrials, market commentary, trade radar. Follow any responses to this post with its comments RSS feed. Comments are closed, but you can trackback from your blog.