Last Thursday and Friday played with investors minds by looking at the same news two different ways. The economic data that came out on Monday went some distance to calm the worst of the fears created last week. The overriding worry over the weekend was that the GDP report of a positive 3.5% for the third quarter would be a flash in the pan. The absence of a "Cash for Clunkers" program and the expiration (maybe) of the tax credit for first-time homebuyers would, it was feared, topple the economic recovery.
Monday's Institute of Supply Management (ISM) number caught the market by surprise. The reading of 55.7 set a three-year-plus high. Within the report, new orders did slip to 58.5 from 60.8, but the rest of the components would make a healthy fourth-quarter GDP forecast more likely. Production jumped to 63.3 from 55.7, and inventories improved to 46.9 from 42.5. Rising production and a slower rate of inventory depletion will contribute positively to GDP in the fourth quarter. This would confirm the Chicago Purchasing Managers Report of last week. The Chicago PMI reported a rise to 54.2. That number was a positive surprise, but the new orders and production sub-sectors were the really good news. New orders rose to 61.4 from 46.3, which is the highest number since June 2007. Production jumped in the Chicago area to 63.9. Inventories fell to 32.2 from 38.9. What this means is that orders are rising faster than inventories can meet the demand. Production, therefore, must continue to rise. Since worker productivity is already so high -- productivity for the third quarter will be reported this Thursday and could be as high as 7% with the long term average less than 2% -- workers needed to be added. In a recovery, as Edward Lazar tells us in an article in Monday's Wall Street Journal, "Productivity grows first, then jobs are created, and finally wages rise."
Market Commentary Asking the Wrong Question 11/2/2009 11:00 AM EST Rather than pondering why Friday's market was so bad, ask yourself why Thursday's market was so good.
At the time of publication, Farrell had no positions in the stocks mentioned.
Vincent Farrell Jr. is chief investment officer for Soleil Securities Group and a regular guest on CNBC and other national print and broadcast media.
Prior to joining Soleil in August 2008, Farrell was a principal of Scotsman Capital Management. Before that, he was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships.
Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.
Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.
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