Greetings everyone to another new installment in the Manufacturing series. Now this was intended to be released yesterday, but some emergency family issues came up that needed to be resolved (this seems to be happening a lot to me on these days lately!). So, please accept my apologies on the delay. Saying that, though there is a silver lining, I'm going to go ahead and basically give you a more "fresher" version of what was planned for yesterday (I normally write these up on Saturday and Sunday). So without further adieu....
Yesterday we got the latest ISM Manufacturing Survey Index figures for the month of January. The patient is recovering, but is still in critical condition!
For the record, the January number came in at 35.6, above December's 32.6. Consensus was for between 30 and 36. Any number in the main index above 50 means that there was expansion in the manufacturing sector, and well, the opposite for any figure below 50. The Survey is conducted with 300 firms across the country.
Now besides the main index, there are several sub-indexes that are part of the main, but one of the most watched of these are the Prices Paid Index. The Prices Paid is an index reflects the conditions in prices manufacturers have to deal with. Like it's parent index, anything below 50 indicates that prices are contracting prices for materials and components. Now this may seem like a good thing, as a contraction means lower costs, yet this could also mean a general malaise in demand for the final product. The latest figure was also an "improvement" over the previous month's, coming in at a cool 29, versus the breakthrough low of 18 made in December. Still, the gang at Haver Analytics put it well:
· The separate index of prices paid also improved moderately to 29.0. That, however, was not much above the lowest level since 1949. During the last twenty years there has been a 79% correlation between the price index and the three-month change in the PPI for intermediate goods.
The latest increase in the composite index recouped only a bit of the declines during the prior five months. That suggests the recent 10% rate of decline in industrial output will continue.
· The new orders index during January improved slightly as 15% of survey participants reported higher orders but 52% reported that orders fell. The export order index improved, but only at the margin as economic weakness outside of the U.S. continued. It was still near the lowest level in this index's short twenty year history. During the last ten years there has been a 53% correlation between the index and the q/q change in real exports of goods in the GDP accounts.
Rockwell Automation may just be the canary in the coal mine!
A long time ago one of my trading mentors, one of the earliest options traders going back to the 1970s, told me that if you want to know where the economic indicators will be like, pay attention to what companies say. That advice has served me for a long time, and I have to say he's right. From inflation to productivity, listening to what a company says in it's conference calls to their reports will give you a heads up. When they compile, for example, auto sales figures like those recently released, where do you think the bulk of the information comes from? You want to know about inflation? See if companies are complaining about rising costs hurting earnings. Most of the time, one single company won't give you the complete picture, there could be specifics for that company that would disqualify it. But you have certain companies that do give you a damn good idea, when you find one of these, you cherish it because it's almost like getting a good tip (not on buying the stock per say though). I try and compile a list (that changes) of over 300 companies (that may sound like a lot, but trust me it isn't) that I keep tabs on.
One of these companies that I follow is Rockwell Automation. Now full disclosure, I don't own any shares nor am I recommending the stock. So why make a big deal about Rockwell Automation? Because it's one of those companies that makes things that you never see, products that without them your life wouldn't be the same. In Rockwell's case, they make things like control systems to various assembly systems, everything you could conceivably think of that would go into a factory. You name it, if you use it, they probably had a hand in putting it together.
So when the CEO, Keith Nosbusch says that things are looking bad, I listen and listen very carefully. Nosbusch says he expects earnings to come in between $1.55 to $2.25 per share, which is significantly below the $3.14 a share folks were expecting. The company highlighted cancellation of new orders. This means, for manufacturing watchers, that reinvestment in factory equipment is either dropping or completely stalled. Considering that the Milwaukee, Wisconsin-based company sells it's wares and services from here to China, this cutback in capital investment is not just in our neck of the woods!
"This is the first time since World War II we have seen a synchronized global recession,” Nosbusch said on the conference call. “It is now clear that we need to aggressively reduce our costs and restructure our businesses. The company may consolidate factories,"
Nosbusch told The Street that he expected 2009 to be worse. Given the recent layoffs in companies like Caterpillar, one wonders how far will the pull back in operations be? The above ISM index still shows a contraction in manufacturing activity (see how all this ties together?). With no real jump in orders, one could easily speculate that more factories will be shut down. The automakers, America's other industrial "giants" are already going gangbusters on trying to make themselves look viable before Congress's deadline in two months. That means more layoffs and production cutting.
“We expect the market environment in 2009 to be extremely difficult. The global recession has grown deeper and wider than we originally anticipated. Key economic indicators and projections continue to weaken and we are seeing a significant deceleration in customer demand. Given the abrupt fall off in sales volume and increasing uncertainty, we are preparing for a revenue decline between 12 and 17 percent in fiscal 2009,
Cardinal Fasteners to Congress: Pass that stimulus!
On Tuesday, the President of Ohio-based Cardinal Fasteners, Jeff Grabner went on CNBC to push for Obama's stimulus plan. Now in case you don't watch CNBC, they were covering the stimulus plan. They had on folks previously talking mainly about the tax issue. Then on to projects, they had on Mr. Grabner, who went on to promote the green manufacturing aspect of bill in question. Now if his name or Cardinal Fasteners sound familiar to you, it is because it is that same company that President Barack Obama visited recently in Ohio. Anyways, below is Grabner's bit on CNBC. I apologize for the video and sound quality, but I'm not exactly the AV maestro, I have yet to find a way to get the thing off my DISH PVR correctly. I literally had to use a hand held digital camera. Also, I've been told for legal reasons, I must state right now that below is a copyright of CNBC. Well that out of the way please take a look.
Now the segment that came after his was Steve Forbes basically bashing the plan. For people like him, the only solution was to cut his taxes further. Grabner had to lay some people off, and Robert Oak of Economic Populist did bring up a good question, could Grabner instead of laying off simply retrain these folks? Grabner sorta danced around that issue when he was asked.
Moving a head towards green manufacturing, we need to not forget those who have been on the assembly line. Sometimes I think executives think the old adage "You can't teach an old dog new tricks" applies to blue collar workers. But I think that's a bunch of bunk, a person on the line whose been in that company for decades has worth and can be retrained. And, as has been said by many, we should have safeguards so American workers aren't fighting with foreign H1-B visa (or whatever visa) holders for those jobs.
Saying that, if the reader doesn't mind, I'd like to go now onto the Stimulus bill. As the video shows, to much of the Republicans dismay, that this bill has a very good potential to create jobs! Here we have a company that proof positive that there can be employment gains through the bill. Of course, we manufacturing fans are also hoping that this is the first of MANY legislation (and executive orders) that helps stir up a rebirth in manufacturing in America.
Green manufacturing is one leg in a multi-legged stool that is the American economy. So the question begs...more money for Steve Forbes' tax cut, or for investment in new industries in America? Now I know what some are going to say, "well gee Venom, taxing the rich won't allow them to put their money into these new companies." I think we all know that the wealthy, if they're clever in spotting a money maker, will regardless of taxes invest in this growth industry. The government, though, needs to start acting like a venture capitalist and help foster these new industry and subsequent jobs. If they call you a Socialist or something, just say look at our Asian or European trading partners. While we're all trying not to get spooked by being labeled a "commie", our trading partners are willing to say "das Kapital" laughing all the way to the bank!