November 2006

DATA - WALL STREET vs. MAIN STREET

Weak economic data in recent weeks is adding to confusion on Wall Street, which has lately been immune to the difficulties on Main Street. On Wednesday, the Institute for Supply Management's (ISM) purchasing managers' index of national manufacturing activity for October dropped more than expected to a reading of 51.2 from 52.9 in September. This rate marks the lowest growth rate over the past three years, and was sparked by reports suggesting the weakening housing market is beginning to stream into other sectors of the economy. A reading over 50 still indicates growth in the all-important manufacturing sector, but the downward trend is nearing the 50 mark rather quickly.

Of heightened concern to market participants is a persistent inverted yield curve with spreads narrowing to only 4 basis points from 2 years out to 30 years. The bond market and the stock market appear to be at odds. Historically, an inverted yield curve portends economic weakness and probable recession. This is occurring at a time when the stock market is recording all-time highs in the DJIA, and corporate balance sheets are relatively healthy on average. We believe it is more likely that the stock market will catch-up to the bond market. Worth noting, over the past few weeks we have noticed an unfavorable trend in the number of analysts' downgrades far outpacing the number of upgrades.

On Thursday, the Commerce Department reported that factory order, excluding the volatile transportation sector, fell for the second consecutive month by 2.4% in September. During September, orders for non-durable goods also fell by 4.6%. Factory orders, now declining, are a good indicator of future economic activity.

Pointing to lower inflationary risks, the prices-paid index, a closely watched gauge on inflation, fell steeply to a reading of 47 in October from a September reading of 61. The October reading is the lowest level since February of 2002.

The weakening ISM report followed last Friday's report showing third-quarter GDP coming in at a 1.6% annual pace, below the 2.2% rate the marketplace expected. A 17.4% drop in residential-housing investment, the steepest since early 1991, resulted in the 1.1% decline in the growth rate from the previous quarter.