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ECONOMIC COMMENTS

2/27/08 - Durable Goods Orders/Shipments

The Department of Commerce released monthly Durable Goods Orders/Shipments data this morning for January. The overall percent decline in Orders of 5.3 percent appears very large but this data series is known to be quite volatile. December orders were revised to being up 4.4 percent (a slight decrease from up 5.0 percent) and so the decline in January results in orders being roughly flat for the combined months of December and January.

The most volatile portion of this index are transportation equipment orders which decreased 13.4 percent in January after increasing 10.2 percent in December. New orders, ex-transportation, declined a much smaller 1.6 percent versus a 2.0 percent gain in December.

Overall, the order declines are a concerning data point as the economy is struggling between slight growth and a possible period of recession. Severe negative sentiments during the month of January may have contributed to the order declines. My own contention is that if the economy does have a recessionary period, a large factor will have been the negative sentiments felt after many months of "news" about housing price declines, foreclosures, and large losses in the trading operations of financial services companies.

As I have listened to many earnings conference calls in the recent earnings reporting season, I have heard many comments from company executives that their businesses seem to be doing fine and that they don't agree with the negative sentiments continually presented by the news media. There was one other part of the Durable Goods data release today that also might suggest that the economy might be better than most people fear. Durable Goods shipped in January increased 1.8 percent and Unfilled Orders increased 0.6 percent so it at least appears that customers are willing to receive previously ordered goods and are also not canceling previous orders at this point.

2/5/08 - Institute of Supply Management (ISM) Non-Manufacturing Survey for January

The severe deterioration in this diffusion index from December levels was definitely a shock to investors. The overall index reading of 41.9 was comparable to levels seen during the last recession and a huge drop from an "expansionary" reading of 54.4 seen in December.

Decreases in individual category indexes were also consistent across the board and other notable decreases were seen in New Orders (43.5 vs. 53.9), Imports (41.5 vs. 50.5), Employment (43.9 vs. 51.8), and Inventories (44.5 vs. 50.5). Although I was also shocked by the magnitude of such a one-month decline in this index and its dropping to levels typically seen in recessions, I also have some thoughts that may mitigate the significance of this month's index reading.

The first thought is that anomalous surprises in economic statistics, either positive or negative, are rarely sustainable and indicative of a new trend. As such, although waiting a month for the next reading in this data release may seem like a long time, I would need to see the next report before I change my outlook from one of slow growth to one of certain recession.

The second thought is that weather was not great in January. A whole bunch of pretty severe storms affected large parts of the country and would have affected many of the services oriented business represented in this survey.

The third thought is that the ISM Manufacturing survey for January was reported only three days earlier and showed both an expansionary overall reading of 55.2 (up from 48.6 in December) and had increases in nine of the indexes' 11 individual categories. Although manufacturing only represents about 20 percent of overall output versus about 60 percent for the services sector, it is also often a leading indicator. As such, as mentioned above, I would prefer to wait for more data before I also conclude that the U.S economy has entered into a recession.

There was also an interesting and noticeable increase in one category in both the Manufacturing and Non-Manufacturing survey's, however, which was in New Export Orders. This category increased from 50.0 to 52.0 in the Non-Manufacturing index and from 52.5 to 58.5 in the Manufacturing index. Although exports are only about 12 percent of GDP, increases in this category are pretty interesting relative to another "gloom-and-doom" point of view, which is that the U.S. is no longer competitive in world markets.

2/4/08 - Factory Orders/Shipments

Factory Order statistics for December released this morning by the Department of Commerce remained positive and certainly do not suggest that we have already entered a recession. Overall orders were up 2.3 percent over November and were up 1.2 percent excluding defense orders. Durable Goods were up a strong 5.0 percent and were driven by Transportation Equipment up 11.5 percent, Machinery up 7.3 percent, and Computing/Communications Equipment up 4.1 percent. Non-durable goods declined 0.4 percent (after increasing 3.0 percent in November) and was probably affected by forecasts of restrained consumer spending in an environment where the media and various pundits are continually talking about the R-word (Recession!).

Shipments statistics do provide some more support for the doom-and-gloomers, however, as overall shipments were down 0.3 percent with both durable and non-durable goods down similar amounts. There were a few highlights, however, as Machinery was up 3.3 percent and Pharmaceuticals was up 6.8 percent. Contributing to and exacerbating a large part of the shipment decline was Petroleum & Coal Products down 2.5 percent which was largely attributable to slowing oil refinery shipments. In any case, the inventory to shipment data still showed very tightly controlled inventories with an overall ratio of 1.24-to-1. If we do enter a recession, it won't be due to excess inventories as companies continue to tightly monitor and manage their sales and inventories.

The views and research presented on these pages are not intended to be a recommendation of securities to investors. These represent our current views on the industries and companies mentioned, and our opinions are subject to change at any time without notice. We encourage investors in the Polynous Growth Fund to refer to the prospectus for a more complete description on the investment process, expenses and charges associated with the fund.
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