The advanced report for Durable Goods for July was released
Wednesday and it was pretty dismal.
The fact that the market managed to advance in the face of this
report almost makes me think that a rally is in the offing. This is
the second instance of bad news leading to gains in stocks. The
first was the homebuilders stocks rallying after the horrific
existing home sales report on Tuesday. And today we have the
overall market gaining even though this report clearly shows one of
the green shoots of the economy showing signs of wilting.
In any case, here are some of the highlights of this latest
- New orders for manufactured durable goods in July increased
$0.6 billion or 0.3 percent to $193.0 billion. Excluding
transportation (primarily aircraft) new orders decreased 3.8
percent. (Yikes!) Excluding defense, new orders increased 0.3
- Shipments, up four of the last five months, increased $4.4
billion or 2.2 percent to $200.6 billion. Transportation
equipment, had the largest increase, $3.4 billion or 6.9 percent
to $52.7 billion.
- Unfilled orders, down following three consecutive monthly
increases, decreased $1.1 billion or 0.1 percent to $802.8
billion. Computers and electronic products, down following four
consecutive monthly increases, had the largest decrease, $0.5
billion or 0.4 percent to $121.1 billion.
- Inventories, up seven consecutive months, increased $1.8
billion or 0.6 percent to $311.2 billion. This followed a 1.3
percent June increase.
- Capital Goods. Nondefense new orders for capital goods in
July decreased 2.8 percent to $64.1 billion. Shipments increased
1.4 percent to $64.7 billion. Unfilled orders decreased 0.1
percent to $487.2 billion. Inventories increased 0.8 percent to
$129.8 billion. Defense new orders for capital goods in July
decreased 2.2 percent to $9.5 billion. Shipments decreased 2.4
percent to $9.5 billion. Unfilled orders decreased slightly to
$139.7 billion. Inventories increased slightly or 0.1 percent to
- Revised June Data -- all categories of June data were revised
As always, I'll take a closer look at the tech sector. I wish I
had better news to report.
I generally give less importance to Shipments since this is a
backward looking measure reflecting orders that have been
confirmed, manufactured and shipped. It's similar to earnings
reports -- it's good to know but the data is in the past and we're
more interested in the future. The following chart shows how July
shipments look for the overall tech sector:
Despite all the bad press on the headline numbers, you can see
that the overall Tech sector managed a pretty strong July with
shipments hitting a post-recession high (just barely).
Looking a little deeper, we can see that signs of weakness are
beginning to appear. Here is the chart for the Computers and
Related Products sub-sector:
You can see that shipments have stagnated for the last few
months and the latest data point has dropped to the 6-month moving
average. Not exactly a sign of doom, but still worrisome.
Here is where the bad news is lurking. Here's the chart of new
orders for the entire tech sector:
This the second month in a row where new orders have decreased
and now this month they slid under the 6-month moving average.
Where things get really dicey is in the Computers and Related
Whereas the decrease in new orders is only 2.4% for the tech
sector as a whole, we have a sickening 12.7% drop in the Computers
sub-sector. Interestingly, it has been exactly two years since this
category endured a drop of this magnitude. What kind of impact
might this have on Dell (
) or H-P (
) or even Intel (
We find a bit of good news at the bottom of the barrel. There is a
little uptick in the chart of new orders for Communications
Nevertheless, the uptick doesn't manage to rise above the
6-month moving average which, incidentally, is still heading
downward. No wonder Cisco Systems (
) was cautious in their most recent earnings conference call.
The headline numbers surprised economists, coming in significantly
weaker than expected. Last month, I looked at the numbers for the
tech sector and said that after two months of decreases in
shipments, it would be important for July to show a gain. It's a
relief that the gain did indeed materialize but, as noted above,
the sharp drop in new orders is raising a serious alarm.
If you're a pessimist, you can look at these charts and say tech is
dead on arrival. With new orders breaking down so badly, tech is
running into that most over-used of words: headwinds.
If you're an optimist, you can look at these charts and say that
the data bounces around on both sides of the 6-month moving
averages. Tech certainly seems to be taking a breather but it is
not a done deal that the sector has thrown in the towel. This is
especially true since the summer months tend to be somewhat of a
weak seasonal period for tech. So, though the caution flags are
certainly waving, full-on bearishness is not yet warranted here.
Still, as I look for a good entry point in a semiconductor ETF (why
semis? read the post
Analysts can't agree on outlook for semiconductors
- what's an investor to do?
), this durable goods report gives me pause. Tech remains at a
tipping point, perhaps tipping a little further toward weakness
than I had expected. Once again, we await next months' numbers.
Will it be game over or recovery back on track?
Small position in ROM, the ProShares Ultra Technology ETF, no
positions in other companies mentioned in this post
Cramer's Mad Money - The Greatest Retail Stock of
All Time (9/14/10)