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 plus year 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 and is the highest since June of 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, has to 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, Edward Lazar tells us in an article in Monday's Wall Street Journal, "Productivity grows first, then jobs are created, and finally wages rise".
The best news in the ISM report was contained in the employment sector. The employment sector index surged to 53.1 from 46.2 (remember, above 50 indicates expansion, below 50 contraction). This is the highest level since early in 2006. Non farm payrolls will be reported this Friday and a number like this could well mean the consensus for a decline of -180,000 could be overly pessimistic.
Construction spending jumped +.8% in September and forecasts called for a decline of -.2%. But the apparent good news was negated by last months being revised down to -.1% after initially being reported as a gain of +.8%. So it looks like a wash for the two months. What it does mean is that third quarter GDP will not be revised due to this category.
Pending home sales (where a contract has been signed but not closed) rose for the eighth consecutive month as the index grew 6.1% in September. Most had expected no growth at all. Along with last month's gain it is the best two month stretch in eight years. This index tends to lead existing home sales by a month or two. That would imply the next existing home sales report could well be over six million. The possible expiration of the $8000 first time home buyer tax credit probably has some/a lot to do with the surge in housing activity. But low mortgage rates and favorable valuations also contribute to the mix. I can't prove it, but I don't think housing activity falls off a cliff if the credit isn't extended.
Manoj Garg, of Soleil/Health Core Research opined on Pfizer at the research meeting Monday. He has a buy rating on the stock and a $20 target. His 2010 earnings estimate is $2.24 so the stock is currently trading at roughly 7.5 times that estimate with the industry about 9.5 times 2010 consensus numbers. "At 7.5 times..we believe the stock receives no credit for its pipeline, something we should expect to hear more positively about in the coming year, especially following the Wyeth (acquisition)", he wrote recently. Manoj believes a potential catalyst will be a decision on the dividend in December. The dividend is currently $0.64 - for a 3.8% yield. Consensus calls for an increase to $0.70 -$0.72. He "continues to believe that the integration (of Wyeth) will proceed ahead of the stated goal of $4 billion in synergies, and that 2010 will see the benefit of improved operating efficiencies..announcements on share buy-backs..could also provide support to the shares".