Skip to main content

Durable Goods report supports cautious stance on Communications Equipment

Goldman Sachs just came out with a call indicating they have turned cautious on the communications equipment sector.

With this sector comprising one of the buckets of data available in the U.S. Census Durable Goods report (M3 Survey), I thought I'd take a look at the government data that came out yesterday and see if it was consistent with Goldman's view.

In particular, I looked at New Orders and Shipments for the communications equipment category including both defense and non-defense manufacturing.

In yesterday's Durable Goods report, it appears that January's New Orders number was revised down slightly to $5.106 billion from the previously released $5.186 billion. This has the effect of making the January to February increase in New Orders 6% rather than 4.3%. Similarly, January's Shipments number was revised downward from $5.376 billion to $5.341 billion. This has the effect of making the January to February increase in Shipments go -0.3% rather than -0.9%.

In general, though, the numbers don't look too bad.

For example, in the last sixteen years, New Order growth in the January to February time frame has been higher only seven times. Over the last five years, the current level of growth in New Orders is right in the middle of the pack.

The chart below plots the New Orders and Shipments numbers from January 2006 through February 2008.

Chart of Communications Equipment - New Orders and Shipments
What pops out is the fact that New Orders look to have way more variability than the Shipments numbers. I have in the past assumed that New Orders would make a good predictor of future Shipments. It sure doesn't look like it.

How the numbers are generated --

At this point, I'd like to digress a bit and point out some facts on how the Durable Goods report numbers are generated:

1. The figures published are calculated by applying monthly ratios of change from the Census Bureau's reporting panel (which accounts for about 60% of the U.S total value of shipments) to the Universe levels estimated by the Annual Survey of Manufactures. This is clear as mud but serves to inform the reader that the government is applying some kind adjustment to numbers obtained by surveying a subset of manufacturers and then extrapolates the results to create the report.

2. New Orders (NO) are derived based on the value of current shipments (VS) plus current unfilled orders (UO) minus prior month unfilled orders. The formula for calculating new orders is:

NO's (current) = VS's (current) + UO's (current) - UO's (prior)

Note that for some companies that ship within the same month that orders are received, new orders are equal to shipments. In addition, there are numerous companies that are able to report unfilled orders, but are not able to report new orders.

According to this equation, it appears that the volatility in New Orders that we see on the chart is actually the result of volatility in Unfilled Orders. Unfilled orders will turn into shipments only as long as they are not canceled. New Orders may be filled out of inventory so they may not contribute to future demand; hence, Unfilled Orders are used as the better indicator.

What do the numbers tell us?

What is disconcerting is the fact that the general trend for both New Orders and Shipments seems to be slightly but clearly downward.

In looking at the values of New Orders, there has been a very visible slowdown starting in August of last year. Shipments began to decline one month later.

To deal with the volatility, I thought it might be useful to try some moving averages. Taking 6-month moving averages of New Orders and Shipments since January of 2006, it appears that New Orders are almost always higher than Shipments; however, when the New Orders moving average begins to turn down growth in Shipments becomes essentially flat or negative for one or more quarters. You can see this in the chart below.

Chart of Communications Equipment - New Orders and Shipments with Moving Averages
Given that Shipments translate directly into revenues, it certainly looks like we are in for flat performance at best over the next quarter or two. Goldman seems to have made the correct call.

Comments

Popular posts from this blog

Running TradeRadar on Windows 7 and Windows 8

Development of the original TradeRadar Stock Inspector software was begun back in the days before Windows 7 and Windows 8 were available.

As these newer versions of Windows have become more popular, we have heard from some users that they are having problems installing and running TradeRadar on their newer PCs.

The good news is that TradeRadar will work just fine on Windows 7 and Windows 8. All you have to do is adjust the Windows Compatibility Settings to ensure TradeRadar runs as intended.

It is recommended that you can apply Compatibility Settings when running the initial installation; however, it is also possible to apply Compatibility Settings after the program has been installed.

Prior to installation
After downloading the install program, go to the folder where you have stored the TradeRadarStkInsp_7_Setup.exe or TradeRadarStkInsp_7_PRO_Setup.exe executable. Right-click on the executable file and select Properties. Click the Compatibility tab. Adjust the Compatibility mode to …

Durable Goods report for Sept just so-so but Computer segment is on fire

The Durable Goods advanced report for September 2011 was released on Wednesday.

I like to dig into the Durable Goods report because it can be useful for seeing how tech in aggregate is performing and how the sector may perform in the future. I always focus on two particular measures: shipments and new orders. Let's see how it played out last month.

Shipments -- 

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 September shipments looked for the overall tech sector:


Results for the overall tech sector were a bit weak but take a look at the next chart which tracks the Computers and related products segment:


Results here were actually quite good and, to make things even better, the previous month was revised upward.

N…

Alert HQ has moved!

End of an era!

This site was started way back in 2006/2007 to showcase my blog posts and the Alert HQ buy signals and sell signals. Alert HQ grew to include other kinds of stock alerts including Swing Signals, Trend Busters, Trend Leaders, Cash Flow Kings and more.

In the meantime, I built a sister site, TradingStockAlerts.com and I started using some of the same Alert HQ content over there. As a result, I am discontinuing the Alert HQ data here at Trade-Radar.com

The good news, however, is that all the Alert HQ signals and stock screens are still completely free. In addition, the pages have been enhanced so that you can hover over a stock symbol and a small chart will pop up so you can get a quick look at the stock's recent price action. If you click on a symbol it will take you to a page with plenty of financial and technical analysis information (still free!) as well as a larger chart that you can play with in terms of adding or deleting indicators, moving averages, etc.

Click …