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Wednesday, November 28, 2007

Does the Durable Goods report cast a shadow over tech stocks?

The Commerce Department reported on Durable Goods today while the markets were engaged in a powerful rally. For the Computers and Electronic Products category, new orders in October fell at a surprising rate, down more than 8%, from the level established in September.

Two of three sub-categories were considerably worse:
Computers and related products: -15.2%
Communications equipment: -22.6%

These declines were the largest of any sub-category in the entire report. The next closest was a 10.6% decline in Defense aircraft and parts. (The third sub-category under Computers and Electronic Products is Semiconductors. New orders data is not available for Semiconductors.)

What does this say about a recovery in tech stocks?

Moreover, given that tech as an industry has the largest over-seas sales exposure, what does that say about the concept of "decoupling"? At least some of this fall-off in orders has to be from foreign customers postponing purchases.

As noted above, the markets rallied strongly today. The Technology Select Sector SPDR ETF (XLK), which I use as a proxy for tech stocks, finished up nearly three percent. The Financial Select Sector SPDR ETF (XLF), which I use as a proxy for financial stocks, finished up nearly six percent. When the dust settled, tech ended up trailing the financials by almost three percentage points. Perhaps a few investors were cautious after all...

Sources: US Census Bureau - Manufacturer's Shipments, Inventories and Orders (M3)

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