Even strong manufacturing data point to crunch time around the middle of 2011

A mixed bag on manufacturing growth from the world’s economies this morning.

In China manufacturing grew at the slowest rate in six months. China’s Purchasing Managers’ Index fell to 52.2 in February from 52.9 in January, according to the China Federation of Logistics and Purchasing. The drop was the third straight monthly decline.

In the United States the Institute for Supply Management’s national factor index climbed to 61.4 in February from 60.8 in January.

In Europe manufacturing expanded at the fastest rate in 10 years.

The easy conclusion here is to connect manufacturing growth rates with inflation and interest rate policies: China is fighting inflation by raising interest rates in order to slow growth; the United States and the European Union are still letting inflation run in order to accelerate economic growth before raising interest rates later in 2011.

With the caveat that it’s always hard to interpret economic data from China in January and February, when the timing of the Lunar New Year holiday can distort comparisons of economic activity from year to year, I think that easy conclusion has a high probability of being correct. (It’s also important in trying to figure out what this data means to remember that manufacturing accounts for only about 11% of U.S. economic activity. Data on consumer spending released yesterday showed weaker growth than expected. See my post http://jubakpicks.com/2011/03/01/growth-keeps-coming-in-softer-than-expected/ )

That said, if this most recent manufacturing data gives an accurate picture, it would make the middle of 2011 the real crunch point for the year. Read more

“I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.”

I don’t have the foggiest idea if Abraham Maslow, the psychologist who authored that quote back in 1966, knew anything about investing.

But from painful personal experience I’d propose an investing version that goes like this: “When you only know one group of stock, it’s tempting to see that group as the way to succeed in every market.”

In 2011 I think it’s going to be very hard to make much money in the stock market unless you learn a new stock group, one that you’re possibly uncomfortable with, and one that’s not the commodities or technology stocks that you’re familiar with from the last two huge rallies.

You’re going to have to learn something about industrial and manufacturing stocks. That’s the stock group you’ll need in 2011—or at least in the first half of 2011.

(My Dad told me his own version of Maslow’s quote one day when he handed me a pipe wrench and said “When every problem is a nail, you should use just about anything you have as a hammer.” But I don’t know what the investing wisdom in that might be.)

In 1999, for example, anyone who knew technology stocks hammered the stock market for about a 100% gain. Or more. Shares of Cisco Systems (CSCO) climbed 131% that year.

Try that in 2007, a huge rally year like 1999 that preceded a crash, and you would have been left crying on your router. Shares of Cisco dropped that year by about 1%. Not every technology stock did that badly in 2007. IBM (IBM) was up 13%. Microsoft (MSFT) advanced 21%. Oracle (ORCL) nailed 32%. Intel (INTC) 34%.

But compare those gains to those delivered by a completely different stock group. General purpose mining stock BHP Billiton (BHP) was up 79% in 2007. And BHP Billiton would have been a lagging mining pick that year. Brazil’s iron ore giant Vale (VALE) climbed 122%. Potash of Saskatchewan (POT) soared 202%.

Yep. In 2007 it sure would have paid off to abandon what you know—technology stocks–and learn an unfamiliar group—commodity producers.

In 2011, I’d argue, that group you need to know is industrials. Read more

Update Middleby (MIDD)

Has Middleby (MIDD) finally moved off the back burner?

Middleby’s shares were up 29% from February 8 through March 5, and the relative strength on the stock has moved to 72 for the last three months from 56 over the last six months. (Relative strength measures how a stock’s price performance compares to all other stocks on the market in the period. A relative strength of 72, for example, means the stock has outperformed 72% of all stock during the period.)

The market was anticipating that orders from the commercial food service industry—everything from fast food restaurants to school lunchroom kitchens—will finally first stabilize and then turn upward in 2010.

The company’s earnings report on March 3 vindicated that anticipation. Read more