The ISM Factory Index was released yesterday in the US and it showed a surprise improvement. This is what MarketWatch had to say:
WASHINGTON (MarketWatch) – The nation’s manufacturers continued to cut back production in May, but not as rapidly as during the worst of the downturn, the Institute for Supply Management reported Monday. The ISM index rose to 42.8% in May from 40.1% in April. The rise was stronger than expected and the strongest since September. The consensus forecast of estimates collected by Marketwatch was for the index to rise to 42.0%. Readings below 50 indicate contraction. The index has been below 50% for 16 straight months. The ISM index has been improving slowly since hitting a low of 32.9 in December. A key sub-index, new orders, rose to 51.1% in May.
We would like to point out that it is not the level of the index that is of vital importance rather it is the trend and whether or not the index is beating expectations. The trend is now clearly up and furthermore it is taking economists/analysts by surprise – this is a very bullish sign because it indicates the market is still in a “state of disbelief” about the improving fundamental outlook.
Should the improvement in the ISM Index really come as a surprise? We think not. At the heart of manufacturing activity is the demand for commodities. Rising commodity prices suggest that there is a pick-up in industrial/manufacturing/economic activity (call it what you will).
The behavior of the ETF DBC and the Baltic Dry Index over the last few months makes no secret of a pick-up in activity……..but the crowd were led (and perhaps still are) to believe that it was only the Chinese who were stockpiling commodities that drove prices higher. Now the ISM Index suggests that Chinese demand accounts for perhaps only a small part of the advance in commodities. We remain positioned for additional upside in commodities (and aggressively so via deep out of the money LEAP call options).
