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November 2010 QE II SAILS AND THE US DOLLAR

SINKS

Institute for Trend Research · 603-796-2500· www.itreconomics.com· ©2010 All Rights Reserved ITR® Trends Report November 2010

NOVEMBER 2010 QE II SAILS AND THE US DOLLAR

SINKS

“Insanity: doing the same thing over and over again and expecting different results.”

- Albert Einstein

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Table of Contents

Summaries .................................................................................................1 Leading Indicators .................................................................................................5 Industrial Production Forecast .................................................................................................8 Financial: Corporate Bond Prices .............................................................9 Stock Prices............................................................................10 Money Supply.........................................................................11 Short-Term Interest Rates ......................................................12 Long-Term Bond Yields..........................................................13 Construction: Housing Starts ........................................................................14 Office Buildings.......................................................................15 Commercial Buildings.............................................................16 Water & Sewer Facilities ........................................................17 Educational Buildings .............................................................18 Power Facilities ......................................................................19 Sales: Retail Sales (excl. Autos) .......................................................20 Light Vehicle Retail Sales.......................................................21

Wholesale Trade Durable Goods ...........................................22 Wholesale Trade Nondurable Goods .....................................23 Insurance Industry Revenue...................................................24 Employment............................................................................25

New Orders: Nondefense Capital Goods w/o Aircraft..................................26 Metalworking Machinery New Orders.....................................27

Industrial Machinery New Orders ...........................................28 Construction Machinery New Orders......................................29 Electrical Equipment New Orders...........................................30 Computers & Electronics New Orders ....................................31 Defense Capital Goods New Orders ......................................32

Production: US Total Industrial Production ................................................33 NA Light Vehicle Production...................................................34 Mining Production w/o Oil & Gas ............................................35 Chemicals & Products Production ..........................................36 Commercial Aircraft Equipment Production............................37

Pharmaceutical Production.....................................................38 Medical Equipment & Supplies Production.............................39 Heavy Duty Truck Production .................................................40 Paper & Products Production .................................................41

Prices: Consumer Price Index – All Items ..........................................42 Natural Gas Futures ...............................................................43

Crude Oil Futures ...................................................................44 Heavy Melt Steel ....................................................................45 Foreign: Brazil .....................................................................................46 Canada...................................................................................47 China ......................................................................................48 Europe....................................................................................49 India........................................................................................50 Japan......................................................................................51 Mexico ....................................................................................52 Russia ....................................................................................53 Southeast Asia .......................................................................54 Exchange Rates: ...............................................................................................55 Appendix: Management Objectives.........................................................58

Definitions...............................................................................61


Executive Summary: QE II SAILS AND THE US DOLLAR SINKS We have been pointing out on a regular basis that the global economy was heading toward a period of slower growth in 2011, followed by more robust ascent in 2012. Our forecast of better days ahead, particularly for late 2011 and for 2012, was initially predicated on ITR’s understanding of business cycles and more recently on leading indicator signals. However, professed concern over the viability of the recovery or the lack of economic vitality that characterizes the consumer segments of this recovery has prompted the Federal Reserve to embark on another round of quantitative easing, dubbed QE II. Quantitative easing refers to a monetary policy where a central bank has already pushed its target interest rate to zero but wants to stimulate the economy further, and does so by purchasing government and corporate bonds or other assets with newly created money. It is not all that different from normal Fed open market operations (purchasing short-term Treasuries to manipulate interest rates), except that usually longer-term securities are purchased and because interest rates are already at rock bottom, any stimulatory effect comes purely from the sheer quantity of new money injected into the banks. The first round of quantitative easing by the Fed occurred from 2009-2010 and involved the purchase of $1.75 trillion worth of long-term Treasuries and private asset-backed securities. The second round of quantitative easing has been announced and the size of the program is projected to be initially $600 billion; there is the possibility that the program could be expanded as needed. In the short term, the impact of the program critically depends on the announced size compared to investor expectations. The Fed is reported to have surveyed primary bond dealers prior to the announcement to gauge market expectations, apparently with reasonable success. Stocks rallied slightly in the wake of the announcement. For business leaders, the result of QE II is that it will not have much of an impact on boosting economic growth. Given ongoing tight credit conditions, which are not the result of a lack of bank reserves, it’s unlikely that enough of the newly injected reserves will filter through the banking system into Main Street businesses to have a demonstrable, favorable impact. On the other hand, QE II may very well lead to ongoing weakness in the dollar and inflation of commodity prices and some asset values. The most significant, near-term, positive effect on Main Street businesses will be a boost to exports as the dollar weakens, though this depends heavily on other countries refraining from or being unable to devalue their currencies as quickly or effectively as the Fed. However, a weakening US dollar also means the potential exists for higher commodity prices and higher import prices for intermediate and finished goods. Higher input prices are likely to become a reality before higher consumer prices. This suggests a coming squeeze on profits for businesses that aren’t prepared through either increasing efficiencies, the ability to push through finished goods price increases, or lowering indirect costs as we head through 2011.

1

Institute for Trend Research · 603-796-2500· www.itreconomics.com · ©2010 All Rights Reserved ITR® Trends Report November 2010

ITR Trends Report at a Glance

GREEN = Best Phase B

KEY ORANGE = Caution

Phase C RED = Down

Phase D BLUE = Advancing

Phase A

12/12 12MMT/AIndicator: Phase Data Trend Comment Page

FINANCIAL

Corporate Bond Prices C RISING Yields up 21 basis points 9

B RISING Results surpass "normal" 10

C FLAT Cyclical reversal imminent 11

B RISING Annual Starts 1.2% up year-over-year 14

A DECLINING 12/12 low in August 15

A DECLINING Redevelopment focus in 2011 16

A RISING Strong seasonal rise bodes well 17

D DECLINING 12MMT decline slowing 18

D DECLINING Nuclear future unclear 19

B RISING E-commerce up 11.2% y-o-y 20

B RISING Big three up from last October 21

Wholesale Trade Durable Goods B RISING Business conditions improving 22

Wholesale Trade Nondurable Goods B RISING Inventories rising 23

Insurance Industry Revenues A DECLINING Recovery in Life revenues developing 24

Employment A RISING Up 34,000 jobs in October 25

B RISING 10.6% annual gain in September 26

B RISING 12MMT rise above normal 27

B RISING September up 60.7% from 2009 28

B RISING 12MMT rise through 2011 29

B RISING 5.3% rise anticipated in 2011 30

B RISING Electronics retail sales in recovery 31os t e t e ds susta ab eDefense Capital Goods New Orders D DECLINING Steep decline in 2011 32

CONSTRUCTION

Educational Buildings

Commercial Buildings

Housing Starts

Office Buildings

Electrical Equipment

Computers & Electronics New Orders

Construction Machinery

Power Facilities

Stock Prices

Money Supply

SALES

Industrial Machinery New Orders

Metalworking Machinery

Retail Sales (excl Autos)

Light Vehicle Retail Sales

NEW ORDERS

Nondefense Capital Goods w/o Aircraft

Water & Sewer Facilities

2


ITR Trends Report at a Glance

BLUE = Advancing Phase A

GREEN = Best Phase B

KEY ORANGE = Caution

Phase C RED = Down

Phase D

12/12 12MMT/AIndicator: Phase Data Trend Comment Page

PRODUCTION

US Total Industrial Production B RISING Trend remains positive 33

NA Light Vehicle Production B RISING 12MMT up 37.9% from last year 34

Mining Production w/o Oil & Gas A FLAT 12MMA recovery to slow in 2011 35

Chemicals & Products Production C RISING Annual production up 4.1% 36

Civilian Aircraft Equipment Production A DECLINING Mild 12MMA rise in 2011 37

Pharmaceutical Production C FLAT 12MMA record high expected - 2011 38

Medical Equipment & Supplies Prod C FLAT Heading for recession in early 2011 39

Heavy Duty Truck Production B RISING Up 13.6% from last year 40

Paper & Products Production B RISING Cyclical reversal expected soon 41

PRICES

Short-Term Interest Rates A RISING No change in October 12

Long-Term Bond Yields C DECLINING Higher rates expected for 2011 13

Consumer Price Index - All Items B RISING Slower rise in early 2011 42

Natural Gas Prices B DECLINING $5-$6 range expected in 2011 43

Crude Oil Futures C FLAT Low $90's in 1st half of 2011 44

Heavy Melt Steel C RISING Flat to mild price decline for 2011 45

FOREIGN

Brazil B RISING Expansion dominates outlook 46

Canada A RISING 12MMA rise through 2011 47

China B RISING Hike in interest rates 48

Europe B RISING Slower growth expected for 2011 49

India C RISING Slower growth appears in August 50

Japan B RISING Second half of 2011 will be better half 51

Mexico B RISING Data trend rise continues 52

Russia B RISING Forecast lowered to 8.3% for 2010 53

Southeast Asia B RISING 3/12 portends slower growth ahead 54

3

3


ITR TRENDS 10

2006-2009 2010-2013

ForeignNew Orders

Financial

Production

Nonresidential Construction

Prices

Sales

Housing

Wholesale TradeMedical

The Summary status of the Trends 10 is positive this month, largely due to the Housing Benchmark crossing into Phase B. The economic recovery, albeit slow, is gaining ground. The Sales, Foreign, New Orders, Wholesale Trade, and Production Benchmarks are pushing into the latter portion of Phase B. Most of these benchmarks will be in Phase C by late 2010/early 2011, a clear indication that the rate of economic growth will slow in 2011. However, the fact that these benchmarks are performing well above their respective year-ago levels and that the Housing Benchmark finally entered Phase B implies that the economy will not slide into a second leg of recession next year. The Financial Benchmark is showing that the economy will likely be in Phase C in 2011. As such, the Benchmark is providing a leading indicator sign that the economic recovery will slow in 2011. Corporate financing will become marginally more expensive as corporate bond yields rise going forward.

Phase A 12/12 is rising and the data trend is either heading toward a low or is in the early stages of recovery. This is the first positive phase of the business cycle. Phase B 12/12 is rising above 0, data trend is accelerating in its ascent, and growth is occurring above year-ago levels. This is the second positive phase of the business cycle. Phase C 12/12 decline is in place, data trend is decelerating in its ascent or has stopped its rise, but it is still above last year. This is the first negative phase of the business cycle. Phase D 12/12 is below 0, data trend is in recession at levels below the year-earlier level. This is the final phase and second negative phase of the business cycle.

4

4


Housing Starts STALLING RECOVERY

The rate-of-change trends for Housing Starts improved a bit of late. This is a good sign in terms of being consistent with our macroeconomic outlook of diminished ascent in 2011 but no resumption of recession. The Housing Starts rate-of-change improvement is likely to be transient so we aren’t getting overly excited about the latest month. Take it for what it is: the economy isn’t ready to roar, but it isn’t about to slump again either. We may see Housing Starts slip a little between now and the first half of 2011; however, fortunately for the economy housing isn’t the only economic engine.

Corporate Bond Prices POTENTIAL EARLY SIGNAL FOR 2013

Corporate Bond Prices

-20

-10

0

10

20

30

'06 '07 '08 '09 '10 '11 '12-20

-10

0

10

20

30Rates-of-Change

3/1212/12

Nov '08

Aug '10

6.7

13.1

Housing Starts

-60

-45

-30

-15

0

15

30

'06 '07 '08 '09 '10 '11 '12-60

-45

-30

-15

0

15

30Rates-of-Change

3/1212/12

Feb '08

Sep '09

1.2-0.8

Housing Starts are telling about trend probabilities concerning 2011; the trend status of Corporate Bond Prices speaks to what we might see in 2013. Of note is the recent slip in the 12/12 and 3/12 rates-of-change. The trend reversals are as yet unconfirmed by a 3/12 downward passing. However, unless quantitative easing proves to be particularly effective, we are likely looking at a trend reversal in progress. So far, the recent weakening in the Corporate Bond Prices rates-of-change tells us that the overall economy will likely pass through a rate of growth peak in late 2012 or early 2013 and that we will find ourselves on the backside of the business cycle for 2013 and 2014.

5


US Leading Indicator SLOWER RECOVERY IN 2011

The Conference Board’s U.S. Leading Indicator reached a high point for the year in September (up 0.3% from August), an indication that the macroeconomic recovery is intact. These positive numbers are encouraging, but the decline in the 1/12 rate-of-change suggests that the recovery will slow in 2011. For all the hype about a double-dip recession in 2011, the U.S. Leading Indicator suggests nothing of the sort. The fact that the monthly Index continues to make gains and is 6.0% above last year implies that the economy is on a sustainable path. The strongest contributors to the rise in the September Index came from a decline in unemployment claims and the ten-year Treasury-Fed Funds interest rate spread. Modest growth in the M2 money supply and stock prices also bolstered the rise.

Purchasing Managers Index MODERATING 1/12 IS A GOOD SIGN

Purchasing Managers IndexRates-of-Change

-60

-40

-20

0

20

40

60

80

'06 '07 '08 '09 '10 '11 '12-60

-40

-20

0

20

40

60

80

1/1212/12

Dec '09

Dec '08

3.1

32.5

US Leading IndicatorRates-of-Change

-10

-5

0

5

10

15

'06 '07 '08 '09 '10 '11 '12-10

-5

0

5

10

15

1/12

12/12

Mar '10

6.0

8.2

Mar '09

The Purchasing Managers Index rose a strong 2.5 percentage points to 56.9 in October. The solid month-to-month rise also translated into a slower rate of decline in the 1/12. This is a very tentative sign that a 1/12 reversal may be in the cards for the next few months. We will have to wait and see, but if so this will provide partial empirical confirmation of our outlook for a pick-up in the rate of economic growth in late 2011. Accelerating new orders, expanding production, and growth in exports were the largest positive factors in the Index. Recovery in the manufacturing sector is outperforming the rest of the economy. This is a promising sign that the correction of some of the structural imbalances in the economy, which were revealed during the recession, is ongoing. The weakening dollar was cited by survey respondents as a cause of higher input costs that have cut into profit margins, but it is also a likely factor in the strong growth in export orders.

6


Velocity of Money ECONOMY CONTINUES TO RISE

The Velocity of Money 12/12 is rising and the 1/12 is skimming along slightly above zero. The trends are indicative of an economy that is going to move upward going forward but at a pace that is slower than 2010. With employment showing some signs of improving, wages being restored to pre-recession levels in companies, and the money supply 1/12 rate-of-change rising, it is unlikely that we will see the Velocity of Money rates-of-change signify anything worse than we are already seeing. This is good news for the economy in 2011 in that it means ongoing recovery. The Velocity of Money signifies how many times each dollar in the economy changes hands in a given year. The flip side of this is that it also reflects the flow of goods being produced, exchanged, and consumed in the economy.

New Orders RIO ONGOING RECOVERY INDICATED

Velocity of MoneyRates-of-Change

-20

-15

-10

-5

0

5

10

'06 '07 '08 '09 '10 '11 '12-20

-15

-10

-5

0

5

10

1/1212/12

Mar '10

Jun '09

0.1-1.2

Ratio of Inventories to New OrdersRaw Data

0.8

0.9

1.0

1.1

'06 '07 '08 '09 '10 '11 '120.8

0.9

1.0

1.1

RIO

Nov '07

Feb '09

1.036

The RIO trend is positive. Ascent in this leading indicator means that the economy is likely to maintain a generally positive heading in 2011. The trend bodes particularly well for manufacturing. Besides ascent in the actual RIO number (currently at 1.036) the associated rates-of-change are also moving smartly higher. Both the 1/12 and the 12/12 are in Phase B with the former running above the 12/12. The trend status suggests that we should stay aggressive with our business plans for 2011 rather than caving in to concerns about the economy relapsing into recession. The trend is positive because the 12/12 rate-of-change for new orders is rising faster than the 1/12 rate-of-change for inventories. This suggests inventories are too low; more production is needed. The New Orders RIO is a ratio of the 12/12 of new orders and the 1/12 of inventories.

7

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US Total Industrial Production Federal Reserve Board, 2007 = 100, s.a. Forecast through December 2011

80

85

90

95

100

105

110

2004 2005 2006 2007 2008 2009 2010 2011 201280

85

90

95

100

105

110

Actual

12MMA

Forecast

Results through September came within forecast range. Our outlook calls for US Industrial Production in 2010 to close 4.7% higher than the 2009 level. We are anticipating the rate of recovery will slow as we approach the new year with the weakest growth appearing in the first half of 2011. The US Leading Indicator and the Purchasing Managers Index are in accordance with our outlook for only slower growth in the US economy in 2011 but not renewed recession (see page 6). The US Total Industrial Production Index 12MMA for the third quarter of 2010 averaged 91.3, toward the higher side of our forecast range. The Production 1/12 and 3/12 rates-of-change have continued to decline at a pace on par with our outlook for slower 12MMA growth for the US economy in 2011. The forecast is for 2.1% growth over the course of 2011. 2012 is expected to improve upon 2011. Forecast Annual Moving Average Period Forecast Result Jun 2010 89.5 - 90.2 89.9 Sep 2010 90.6 - 91.5 91.3 Dec 2010 91.4 - 92.4 Mar 2011 91.7 - 93.0 Jun 2011 91.7 - 93.3 Sep 2011 92.4 - 93.5 Dec 2011 93.3 - 94.4

8


Corporate Bond Prices Corporate AAA Rated Bond Yields – Inverted to Reflect Price

HIGHLIGHTS • Upward movement in long-

term interest rates • Yields up 21 basis points

SUMMARY Bond yields rose for the second straight month. The yield was up 21 basis points in October from the prior month. At 4.75 percent, it is now up 49 basis points over the last two months. The movement in yield has been enough to create a tentative trend reversal in the Corporate Bond Prices rates-of-change. Note also that the 3MMA has potentially crowned.

The trend reversal in the 12/12 rate-of-change is likely to hold; however, as yet it remains not particularly well defined with the 3/12 running above the 12/12. If the 12/12 trend reversal holds, it is an early harbinger of the economy’s likely cyclical trend beginning in late 2012 or early 2013. Specifically, it would be consistent with our forecast that the general economy, as benchmarked by US Industrial Production, is likely to experience the Phase C portion of the business cycle (decelerating rise in the data trend with the 12/12 moving downward toward zero) in 2013.

Data Trend4.2

4.5

4.8

5.1

5.4

5.7

6.0

6.3'06 '07 '08 '09 '10 '11 '12

Percent4.2

4.5

4.8

5.1

5.4

5.7

6.0

6.3

Percent

3MMA 12MMA

Nov '08

Jul '07

Data Link

Have a question for an analyst? [email protected]

MANAGEMENT NOTE

Keep an eye on this leading indicator. The latest round of quantitative easing by the Fed may stall the trend reversal, buying the economy time on the upside of the cycle in 2012.

FORECAST 2009: -2.3% 2010: -2/8%

Rate-of-Change

-20

-10

0

10

20

30

'06 '07 '08 '09 '10 '11 '120

-10

0

10

20

30

Aug '10

-23/12 12/12

Nov '08

9

http://itreconomics.com/itr-trends-report-data



HIGHLIGHTS • Solid rise in October • Results surpass “normal” • Trend indication is positive

Stock Prices S & P 500 Index, 1941-43 = 10

SUMMARY The S&P 500 turned in a stellar performance in October, rising 3.7% from the prior month and coming in just 0.3% below the high water mark for 2010. The increase easily beat our “don’t worry if” scenario mentioned last month. The improvement in the stock market must be seen as a positive leading indicator signal for the general economy. Clearly, no double-dip recession is being anticipated by the S&P 500.

Notice that the 1/12 rate-of-change improved for a second consecutive month. This is great in terms of breaking any downward momentum that may have been developing in share prices. The 12/12 is still likely to peak in the near term as a leading indicator signal to the projected early-2011 high in the US Industrial Production 12/12 rate-of-change.

It is beginning to look like 2011 is going to be characterized by rising share prices and ascending bond yields as the global economy chugs forward and inflation awaits.

Data Trend

600

800

1000

1200

1400

1600

'06 '07 '08 '09 '10 '11 '12

Index

700

850

1000

1150

1300

1450

1600Index

Actual 12MMA

Dec '07

Sep '09

FORECAST 2009: -2.3% 2010: -2/8%

Rate-of-Change

-60

-40

-20

0

20

40

60

'06 '07 '08 '09 '10 '11 '12-60

-40

-20

0

20

40

60

1/12 12/12

Sep '07

Aug '09

MANAGEMENT NOTE As we mentioned last month, we won’t be concerned if the S&P 500 loses some ground in the near term. The general thrust of the market is consistent with a slowly growing economy in 2011.

Data Link

Have a question for an analyst? [email protected] 10




HIGHLIGHTS • 12/12 reversal imminent • Federal Reserve announces

$600 billion quantitative easing

Money Supply M2 – Trillions of 1982 Dollars

SUMMARY The M2 money supply (deflated) is showing signs of an imminent 12/12 cyclical reversal. The 12MMA has risen for four successive months and the 1/12 rate-of-change has passed above the 12/12. These are positive cyclical indications.

As expected, the Federal Reserve announced a new round of quantitative easing: $600 billion to be injected through new Treasury purchases through June 2011. There has been growing recognition internationally that, regardless of the impact of quantitative easing on domestic markets, the injection of massive quantities of dollar reserves constitutes an effective devaluation of the dollar.

The boost that the resulting weakening of the dollar will give to exports may be the most significant positive effect on the US economy in 2011. However, this will only work if other countries refrain from devaluing in concert with the Fed. The prospect has added fuel to the fire of global currency war chatter.

Data Trend

3.2

3.4

3.6

3.8

4.0

4.2

'06 '07 '08 '09 '10 '11 '12

Trls 82$

3.2

3.4

3.6

3.8

4.0

4.2Trls 82$

Actual 12MMA

Dec '09

May '10

Rate-of-Change

-3

0

3

6

9

12

'06 '07 '08 '09 '10 '11 '12-3

0

3

6

9

12

1/12 12/12

Sep '08

Oct '09

MANAGEMENT NOTE Be very cautious of exchange rate volatility if you do business overseas. Ongoing disputes and currency interventions are likely to escalate.

Data Link


11




HIGHLIGHTS • No change in October • Outlook unchanged for a

broad trough into 2011

Short-Term Interest Rates Short-Term Commercial Paper, Percent

SUMMARY Short-Term Commercial Paper Rates stayed at .26 percent for October, unchanged from the previous month. We are projecting that interest rates will stay at around this level through the first quarter of 2011. A broad trough in these rates would be consistent with the deceleration in the global business cycle and the Federal Reserve’s latest round of quantitative easing.

LIBOR was unchanged in October from the previous month at .29 percent. It will be interesting to see what happens to LIBOR in 2011 relative to US interest rates given the relative austerity invoked by governments such as the UK and Germany. A likely ramification will be a generally weaker US dollar ahead.

We are projecting that these short-term interest rates will stay well below normal through the next 12 months, but note that a rising trend is forecasted to begin in 2011. The revised forecast calls for a slightly steeper ascent than previously anticipated.

Data Trend

0

1

2

3

4

5

6

'06 '07 '08 '09 '10 '11 '12

Percent

0

1

2

3

4

5

6Percent

Actual3MMAForecast

Aug '07

Apr '10

Forecast Quarterly Moving Period Forecast Dec 2010 0.22 - 0.30 Mar 2011 0.21 - 0.30 Jun 2011 0.41 - 0.48 Sep 2011 0.60 - 0.75 Dec 2011 0.80 - 1.00 Mar 2012 1.10 -1.30 (chart plots the 3MMA forecast)

FORECAST 2010: .29 12MMA 2011: .56 12MMA

MANAGEMENT NOTE It is normal to be reticent about borrowing money given the downturn we have gone through. However, these interest rates are too good not to take judicious advantage of.

Data Link


12




HIGHLIGHTS • 10 bps rise in October • Broad low in progress • Higher rates expected in 2011

US Government Long-Term Bond Yields 10 year Maturity, Percent -

SUMMARY The US Government Long-Term Bond Yields figure for October came in above the prior month. At 2.63 percent, the Yield is up 10 basis points from September but down 78 basis points from one year ago. The table reveals that we are projecting that these long-term interest rates are going through a cyclical trough and ascent will be the predominant trend in 2011.

We are not getting any strong upside signals of ascent in Yields as yet from the rates-of-change. However, exogenous inputs, such as the trend in US Industrial Production and the overall direction of the economy suggest that we should be establishing a broad low. Look for the 12MMA to reverse direction in the second quarter of 2011.

Interestingly, ascent in the 10-year bond yield also occurred in Britain, Canada, and the Euro Area as a whole (although not in Italy and not in Spain).

Data Trend

1

2

3

4

5

6

'06 '07 '08 '09 '10 '11 '12

Percent

1

2

3

4

5

6Percent

Actual12MMAForecast

Apr '10

Oct '09

Forecast Quarterly Moving Average Period Forecast Result Sep 2010 2.50 - 2.70 2.65 Dec 2010 2.38 - 2.63 Mar 2011 2.42 - 2.82 Jun 2011 2.53 - 2.93 Sep 2011 2.71 - 3.11 Dec 2011 2.96 - 3.36

FORECAST 2010: 3.03 12MMA 2011: 2.86 12MMA

Mar 2012 3.23 -3.63 MANAGEMENT NOTE

QE II has been announced by the Fed. We are holding with our forecast of ascent in the US Government Long-Term Bond Yields trend for 2011 and into 2012.

Data Link





HIGHLIGHTS • Phase B is here! • Northeast is outperforming

the rest of the country

Housing Starts Millions of Units

SUMMARY Annual Housing Starts have reached Phase B and are 1.2% above the prior year. However, the year-over-year increase is expected to be brief. Anticipate this 12/12 rising trend to peak by the end of 2010 and be back below zero by early 2011. What this means for the housing market is that we are coming to the end of a period of stability and are about to embark on another decline. The Data Trend chart shows that the decline is expected to be mild and we anticipate weak 12MMT rise to begin in the second half of 2011.

Median New Home Sale Prices were up 2.5% in the third quarter of 2010 compared to the third quarter of 2009. Meanwhile New Homes Sold were down 26.9% for the same time period.

Housing Starts in the Northeast are up 8.7% during the third quarter compared to last year. Housing Starts in the West are up 0.9%, the South is down 1.9% and the Midwest is down 5.2%.

Data Trend

0.0

0.1

0.2

0.3

0.4

0.5

0.6

'06 '07 '08 '09 '10 '11 '12

Mils Units

0.0

0.4

0.8

1.2

1.6

2.0

2.4Mils Units

3MMT12MMTForecast

Mar '06

Dec '09

Rate-of-Change

-60

-40

-20

0

20

40

'06 '07 '08 '09 '10 '11 '12-60

-40

-20

0

20

40

3/1212/12Forecast

Feb '08

Sep '09 FORECAST 2010: 4.2% 2011: -2.1%

MANAGEMENT NOTE Use remodeling and renovations to fill the funnel in an effort to keep yourself busy through the first half of 2011.

Data Link





HIGHLIGHTS • Trend in Phase A • 12/12 low in August • No reversal for the

12MMT before early 2012

Office Buildings Construction Private, Billions of Dollars

SUMMARY The Office Buildings 12/12 rate-of-change trend reversed direction in September and is in Phase A. The 3/12 is signaling that the shift is sustainable. A 12/12 rate-of-change reversal is certainly good news, but with the 12MMT 53.5% below the late 2008 high and sluggishness in the economic recovery expected through 2011, a return to rise in the 12MMT data trend is not likely in 2011.

New Office Buildings (12MMA in square footage) under construction is down 76.2% from the early 2008 high, but the decline is showing signs of stalling.

Office vacancy rates in the third quarter of 2010 edged upward to 17.6% and vacant space rose another 1.0%, signs that a lot of space is available.

Some good news for this market came from effective rents, which fell 0.1% in both the second and third quarter of 2010, the smallest drop since the fourth quarter of 2008 and a sign the market is stabilizing.

Data Trend

4

6

8

10

12

14

16

'06 '07 '08 '09 '10 '11 '12

Bils $

16

24

32

40

48

56

64Bils $

3MMT12MMTForecast

Oct '08

Rate-of-Change

-60

-45

-30

-15

0

15

30

45

'06 '07 '08 '09 '10 '11 '12-60

-45

-30

-15

0

15

30

45

3/1212/12Forecast

Apr '07

Aug '10

FORECAST 2010: -36.3% 2011: -15.5%

MANAGEMENT NOTE A faster pace in the general economic recovery, increasing employment, and a decline in the office vacancy rate are needed to move this market to a growth mode.

Data Link





HIGHLIGHTS • 12MMT decline to late

2011 • Redevelopment of existing

space major focus in 2011

Commercial Buildings Construction Private, Billions of Dollars

SUMMARY The Commercial Building 12MMT has dropped 55.0% since the April 2008 record high. The seasonal decline (3MMT) is worse than normal. Further cyclical decline is probable.

The rates-of-change are rising, but are still well below zero; their ascent is mostly an indication that the 12MMT data trend rate of descent is slowing.

Square Feet of New Retail Building (12MMT) is 74.3% below the early 2007 high, but the 12MMT inched higher in September. The rates-of-change have moved higher for several months and Building over the past three months is 2.5% above last year. Good news and an indication that activity is improving.

Vacancy rates for retail space did not change in the third quarter, holding at 10.9%. Effective rents also remained flat compared to a 0.3% decline last quarter, suggesting that the market is stabilizing.

Data Trend

5

10

15

20

25

'06 '07 '08 '09 '10 '11 '12

Bils $

20

40

60

80

100Bils $

3MMT12MMTForecast

Apr '08

Rate-of-Change

-60

-45

-30

-15

0

15

30

'06 '07 '08 '09 '10 '11 '12-60

-45

-30

-15

0

15

30

3/1212/12Forecast

Jan '08

Apr '10

FORECAST 2010: -26.5% 2011: -4.7%

MANAGEMENT NOTE With a substantial amount of retail space vacant, the major focus for the near term is likely to be redevelopment and repositioning of existing space.

Data Link


16




HIGHLIGHTS • Annual Construction close to year-

ago level • Strong seasonal rise • Cyclical rise for 2011

Water & Sewer Facilities Construction Public, Billions of Dollars

SUMMARY Water & Sewer Facilities Construction continues to rebound off its recessionary low. Construction is now just 0.8% below the year-ago level (12MMT basis). The near vertical rise in the 3/12 rate-of-change portends further 12MMT rise in 2011.

The 3MMT has increased 43.1% from the March 2010 seasonal low and has surpassed the previous November 2008 record high by 1.4%. The seasonal rise is slightly stronger than normal and is expected to last for another month.

Water Facility Construction had a lagging relationship to Housing Starts until the housing debacle occurred in 2008. Further setbacks arose and were compounded by the recession that strapped local and state governments of funds, pushing this market even lower. Expect few contributions from the housing sector before 2012, but the general economic recovery should begin to positively affect this market by mid 2011.

Data Trend

5

7

9

11

13

'06 '07 '08 '09 '10 '11 '12

Bils $

20

28

36

44

52Bils $

3MMT12MMTForecast

Jan '09

Apr '10

Rate-of-Change

-20

-10

0

10

20

30

'06 '07 '08 '09 '10 '11 '12-20

-10

0

10

20

30

3/1212/12Forecast

Apr '06

Apr '10

FORECAST 2010: 2.0% 2011: 7.8%

MANAGEMENT NOTE Look for additional vendors now to grab good deals and avoid future bottlenecks before activity picks up even more in 2011.

Data Link





HIGHLIGHTS • 12MMT stabilizing • School bonds approved on

Election Day

Public Educational Buildings Construction Billions of Dollars

SUMMARY This market is not growing, but the freefall in annual Construction is stabilizing. However, it may not feel that way given downside seasonal pressure through the first quarter of 2011. Construction will pick up in 2011.

A business cycle low is imminent as evidenced by the 3/12 upward passing the 12/12 (positive ITR Checking Point).

School construction bonds were passed all over the nation on Election Day last Tuesday. School districts can sell bonds, usually funded through higher property taxes, in order to fund public school construction projects. Bonds were approved in California, Texas, Arizona, Virginia and elsewhere. This is a positive sign that Construction may pick up in 2011.

Private Educational Buildings Construction is 20.5% below the year-ago level, but internal trends suggest that the decline will begin to mitigate in the near term.

Data Trend

10

15

20

25

30

'06 '07 '08 '09 '10 '11 '12

Bils $

40

60

80

100

120Bils $

3MMT12MMTForecast

Jul '09

Rate-of-Change

-30

-20

-10

0

10

20

'06 '07 '08 '09 '10 '11 '12-30

-20

-10

0

10

20

3/1212/12Forecast

Mar '07

Mar '08

FORECAST 2010: -11.2% 2011: 10.6%

MANAGEMENT NOTE Locate the districts and municipalities that have recently passed school bonds. Opportunities will be limited outside this type of construction financing in the immediate future.

Data Link





HIGHLIGHTS • Construction down 8.1% • Rising demand will spur

trend reversal in 2011 • Nuclear future is unclear

Power Facilities Construction Billions of Dollars

SUMMARY Power Facilities Construction, at $81.7 billion, is coming in on the low side of our forecast range. The 3/12 rate-of-change rise tapered off this past month, a sign of deteriorating market conditions. Look for the trend to stay weak into early 2011.

Electric Power Generation Production is up 2.8% over the past year but is still below peak 2007 levels. We think rising electricity demand will keep the current decline in Construction short lived and improving market conditions will return by 2Q11 (12MMT basis).

Despite billions in federal loan guarantees available for nuclear power, no new nuclear plants are currently under construction in the US. Regulatory roadblocks and inexpensive competing energy sources such as natural gas are keeping a nuclear renaissance at bay.

Our forecast calls for more near-term recession but 8.1% growth in 2011.

Data Trend

5

10

15

20

25

30

'06 '07 '08 '09 '10 '11 '12

Bils $

20

40

60

80

100

120Bils $

3MMT12MMTForecast

Dec '09

Rate-of-Change

-20

0

20

40

60

80

'06 '07 '08 '09 '10 '11 '12-20

0

20

40

60

80

3/1212/12Forecast

Jul '06

Feb '08

FORECAST 2010: -10.0% 2011: 8.1%

MANAGEMENT NOTE Remember this is normally a growth industry and we expect improving conditions in 2011. Market and prepare your company to take advantage of the upswing next year.

Data Link





HIGHLIGHTS • Annual Sales for

E-commerce up 11.2% • Consumers holding onto

cash ($724 billion)

Retail Sales (excluding automobiles) Trillions of 1982-84 Dollars

SUMMARY Americans are spending. Look for annual Sales to end the year 2.8% above 2009 (adjusted for inflation) and for growth to continue through 2012. Note that revenues through 2011 are expected to move a bit more horizontally (12MMT, upper chart) before renewed rise takes hold in 2012.

The healthy gap between the 3/12 and 12/12 rates-of-change bodes well for the upcoming holiday season.

Sales from furniture to jewelry, dining to general merchandise stores, are above year-ago levels. E-commerce is up 11.2% over the year earlier. Still below year-ago levels but gaining, are: Radio, TV/ Electronics (-2.5%), Auto Parts/Tires (-0.5%) and Building Material and Supply (-3.6%) stores (12MMT basis).

Absorption rates for new retail construction rose in the third quarter for the first rise since 2007, a small indication of improving activity in the retail sector. The good news is that consumers are holding onto a pile of cash, about $724 billion (12MMA).

Data Trend

0.42

0.46

0.50

0.54

0.58

0.62

'06 '07 '08 '09 '10 '11 '12

Trils 84$

1.68

1.84

2.00

2.16

2.32

2.48Trils 84$

3MMT12MMTForecast

Feb '08

Jan '10

Rate-of-Change

-9

-6

-3

0

3

6

9

'06 '07 '08 '09 '10 '11 '12-9

-6

-3

0

3

6

9

3/1212/12Forecast

May '06

Jul '09

FORECAST 2010: 2.8% 2011: 1.6%

MANAGEMENT NOTE Plan for growth, but avoid linear projections from this holiday season forward through 2011. Note that our forecast anticipates a soft spot for two to three quarters in 2011.

Data Link





HIGHLIGHTS • Big Three & Honda rise in

October from one year ago • More Toyota recall issues

Light Vehicle Retail Sales Millions of Units

SUMMARY Retail Sales declined slightly in October from the prior month but were up 13.4% from one year ago. Although the recovery in this market is losing momentum, we expect annual Retail Sales to expand through 2011.

The 3/12 rate-of-change dipped below zero two months ago, a typical sign that a market is headed for recession. However, fears of a double-dip recession in this market have dissipated as the 3/12 reversed course and is back above zero (consistent with our forecast).

Of the five largest auto makers in the US, Toyota was the only company to report lower sales in October from the year-ago level. It is likely that the 4.4% decline was partially due to further recall issues that have embattled the company’s image for the past year. The company is recalling roughly 1.5 million vehicles because of a brake fluid problem.

General Motors (4.2%), Ford (19.2%), Chrysler (37.0%), and Honda (15.6%) saw gains in October from the same month last year.

Data Trend

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

'06 '07 '08 '09 '10 '11 '12

Mils Units

6

8

10

12

14

16

18

20Mils Units

3MMT12MMTForecast

Oct '09

Nov '06

Rate-of-Change

-45

-30

-15

0

15

30

'06 '07 '08 '09 '10 '11 '12-45

-30

-15

0

15

30

3/1212/12Forecast

Jul '07

Jul '09

FORECAST 2010: 7.2% 2011: 7.8%

MANAGEMENT NOTE Since the rate of growth in Retail Sales has slowed, missionary efforts into new markets are required to maintain your company’s 2009 rate of recovery.

Data Link


21




HIGHLIGHTS • Growth continues to accelerate • Business conditions improving • 12.2% gain in Motor Vehicles

Wholesale Trade Durable Goods Trillions of Dollars

SUMMARY The pace of growth for Wholesale Trade of Durable Goods growth accelerated in September. Quarterly Sales are up 15.4% from the same quarter in 2009, while annual sales are 6.0% above the same period last year. Sales of Durable Goods are growing faster than inventory levels. Sales increased 4.9% from July to August while inventory levels increased only 0.2%. This is a positive sign that business conditions are continuing to improve. Wholesale Trade of Motor Vehicles and Parts continues its ascent in Phase B. Annual Sales are 12.2% above the 2009 level. However, the 3/12 rate-of-change has seen three consecutive months of decline, suggesting we will see a more tepid pace of growth in 2011.

Anticipate Wholesale Trade of Durable Goods to continue to grow at an increased pace through the remainder of 2010 before a modest deceleration trend takes hold in 2011. Note that the absolute level of activity continues to rise.

Data Trend

0.3

0.4

0.5

0.6

'06 '07 '08 '09 '10 '11 '12

Trls $

1.2

1.6

2.0

2.4Trls $

3MMT12MMTForecast

Sep '08

Nov '09

Rate-of-Change

-30

-20

-10

0

10

20

30

'06 '07 '08 '09 '10 '11 '12-30

-20

-10

0

10

20

30

3/1212/12Forecast

Nov '06

Oct '09 FORECAST 2010: 12.3% 2011: 7.9%

MANAGEMENT NOTE To offset the slower growth that is expected in 2011, attempt to penetrate selected new accounts.

Data Link





HIGHLIGHTS • 3MMT up 10.6% from the

year-ago level • Inventories rising

Wholesale Trade Nondurable Goods Trillions of Dollars

SUMMARY Wholesale Trade of Nondurable Goods continues to expand. Wholesale Trade for the last three months is 10.6% above the same three months last year, while Trade over the past 12 months is 7.2% higher than the year-ago level. Look for continued gains through 2011.

Every subsector of the Wholesale Trade of Nondurable Goods market is currently in Phase B, Growth, except for Paper and Paper Products which is in Phase A, Recovery.

There are promising opportunities in Wholesale Trade of Farm Products and Raw Materials (+10.5%) and Chemicals & Allied Products (+15.3%) as they saw strong quarterly gains from the year-ago level. Internal trends also suggest that Wholesale Trade Apparel, Piece Goods and Notions and Petroleum & Petroleum Products are on an upward trajectory.

Wholesale Inventories of Nondurable Goods on a quarterly basis is 6.3% above one year ago, which is below the activity level for Wholesale Trade.

Data Trend

0.3

0.4

0.5

0.6

0.7

'06 '07 '08 '09 '10 '11 '12

Trls $

1.2

1.6

2.0

2.4

2.8Trls $

3MMT12MMTForecast

Oct '08

Oct '09

Rate-of-Change

-30

-20

-10

0

10

20

30

'06 '07 '08 '09 '10 '11 '12-30

-20

-10

0

10

20

30

3/1212/12Forecast

Sep '08

Oct '09FORECAST 2010: 11.5% 2011: 6.5%

MANAGEMENT NOTE Consider lead time and turnover rate as you build your inventories because you will be busier in 2011.

Data Link


2121 23




HIGHLIGHTS • Recovery developing • Strong seasonal rise in ‘10 • Increases for 2011

Insurance Industry Revenues Life, Billions of Dollars (includes health and accident premiums for life insurers)

SUMMARY As of June 2010, annual Life Insurance Revenues are down 18.6 % year over year. Indications are that the trend will improve in 2011.

Monthly revenues have seen some recovery since the 4Q09 low but at $500 billion annual revenues are still well below the 2008 high of $647.5 billion. This is no surprise as unemployment is high and about one quarter of life policies are group insurance purchased though an employer.

The rates-of-change suggest that this market is poised to recover and grow. We have additional evidence of this in the quarterly results, which have been improving since October 2009.

The magnitude of the 3MMT seasonal rise is the best in 10 years and points to improving revenues.

We expect a year-over-year gain of up to 6.6% for 2011. About 30% of US households do not currently carry life insurance so there is opportunity for growth in 2011.

Data Trend

60

75

90

105

120

135

150

165

'06 '07 '08 '09 '10 '11 '12

Bils $

240

300

360

420

480

540

600

660Bils $

3MMT12MMTForecast

Sep '08

Rate-of-Change

-60

-45

-30

-15

0

15

30

'06 '07 '08 '09 '10 '11 '12-60

-45

-30

-15

0

15

30

3/1212/12Forecast

Dec '06

Mar '10

FORECAST 2010: 13.9% 2011: 6.6%

MANAGEMENT NOTE There is a big pool of the uninsured in the US. Be poised to garner market share as the recovery takes hold.

Data Link;


24




HIGHLIGHTS • Employment up 34,000 jobs

in October • Mining Employment is up

11.9% from last year

Employment Millions

SUMMARY Employment in October rose by 34,000 jobs from September. Employment for the past 12 months is 1.3% below the previous year but is expected to finish 2010 virtually even with 2009. Mild improvement is anticipated in 2011. Plan on employment for the year as a whole being 1.2% above 2010.

Manufacturing Employment rose by nearly a million jobs in October, bringing the most recent quarter to 0.3% above the same three months last year. Additional improvement is likely in 2011.

Mining Employment is up 11.9% for the recent quarter when compared to last year. Oil and Gas Extraction Employment is up 4.7% for the same time period. Expect to see further rise in employment for both sectors as the global recovery progresses, further increasing the demands on these resources.

The number of people unemployed in October was 4.4% below October 2009.

Data Trend

130

135

140

145

150

'06 '07 '08 '09 '10 '11 '12

Mils Units

130

135

140

145

150Mils Units

3MMA12MMAForecast

May '08

Aug '10

Rate-of-Change

-6

-4

-2

0

2

4

'06 '07 '08 '09 '10 '11 '12-6

-4

-2

0

2

4

3/1212/12Forecast

Mar '06

Dec '09 FORECAST 2010: -0.3% 2011: 1.2%

MANAGEMENT NOTE Good sales people are hard to come by right now. If you find a candidate that you think is right for the job, don’t be afraid to snatch them up before someone else does.

Data Link





HIGHLIGHTS • 10.6% annual gain in September • Slower more sustainable growth

across different sectors in 2011

Nondefense Capital Goods New Orders w/o Aircraft, Billions of Dollars, N.S.A.

SUMMARY Nondefense Capital Goods New Orders continues its upward ascent. Annual New Orders currently stand 12.6% above the November 2009 cyclical low and 10.6% above the same period last year. However, the 3/12 rate-of-change has moved downward over the last four months; an early sign and reminder that business-to-business activity will slow in 2011.

Similar trends are being seen across various sectors of the economy. Electrical Equipment, Appliances, and Components New Orders and Construction Machinery New Orders continue their upward ascents in Phase B. Annual New Orders are up 8.7% and 57.0% above the same time last year, respectively. The 3/12 has turned downward for both of these New Orders series, suggesting a slower, but more sustainable pace of growth for next year.

The year as whole will likely come in around 17.5% above 2009. A 6.6% gain is projected for 2011.

Data Trend

140

160

180

200

220

'06 '07 '08 '09 '10 '11 '12

Bils $

560

640

720

800

880Bils $

3MMT12MMTForecast

Jul '08

Nov '09

Rate-of-Change

-30

-20

-10

0

10

20

30

'06 '07 '08 '09 '10 '11 '12-30

-20

-10

0

10

20

30

3/12Forecast12/12 Oct '09 FORECAST

2010: 17.5% 2011: 6.6%

MANAGEMENT NOTE Ensure that you maintain and pursue quality as a way to give your company a huge competitive advantage.

Data Link





HIGHLIGHTS • Rates-of-change rising • 12MMT rise above normal • Slower growth in 2011

likely

Metalworking Machinery New Orders Billions of Dollars, N.S.A.

SUMMARY The 12MMT for Metalworking Machinery New Orders is 8.6% above last year and rising at a better-than-normal pace that is akin to the 1972 and 1983 recovery years. The forecast calls for the 12MMT to move higher through 2011 (green dots on upper chart).

Earlier weakness in the 3/12 rate-of-change has disappeared. There are currently no empirical trends in this market’s data indicating that growth will slow. However, the general leading indicators, such as the US Leading Indicator and Purchasing Managers Index, are pointing to a slower pace of growth in 2011. Their deceleration will likely presage subdued growth in this market.

The markets that use the bulk of Metalworking Machinery are experiencing strong growth, but a few of their rates-of-change are signaling slower growth in 2011. We are projecting slower growth in automobile and appliance production as well as some sub groups such as fabricated metal production.

Data Trend

4

5

6

7

8

9

'06 '07 '08 '09 '10 '11 '12

Bils $

16

20

24

28

32

36Bils $

3MMT12MMTForecast Nov '09

Jul '08

Rate-of-Change

-45

-30

-15

0

15

30

'06 '07 '08 '09 '10 '11 '12-45

-30

-15

0

15

30

3/1212/12Forecast

Jul '08

Oct '09 FORECAST 2010: 16.2% 2011: 4.7%

MANAGEMENT NOTE Improve machinery delivery and lead times. A quicker response time will stabilize your backlog and avoid cancelled sales as orders become less robust in 2011.

Data Link





HIGHLIGHTS • 60.7% rise for September

from the year-ago level • Trend flattens out for 2011

Industrial Machinery New Orders Billions of Dollars, N. S. A.

SUMMARY Industrial Machinery New Orders grew a resounding 60.7% from the same month last year, an indication that although the general economic recovery is beginning to slow, the shift in momentum is not yet apparent in these New Orders. We are projecting that this market will reflect the state of the general economic recovery in 2011.

New Orders for the past 12 months are up 45.0% from the previous year. Although the rise has been significant, annual New Orders remain 24.8% below the pre-recession high.

As opportunites decline in 2011 in the United States, start looking toward emerging international markets such as Brazil. The robust 11.2% rise in annual Brazil Industrial Production indicates that this country is a land of opportunity, and our outlook calls for 6.5% growth in Brazil through 2011. Look for increasing opportunities in this South American country and from other countries in the region.

Data Trend

4

6

8

10

12

14

'06 '07 '08 '09 '10 '11 '12

Bils $

16

24

32

40

48

56Bils $

3MMT12MMTForecast

Jan '08

Oct '09

Rate-of-Change

-60

-30

0

30

60

90

120

'06 '07 '08 '09 '10 '11 '12-60

-30

0

30

60

90

120

3/1212/12Forecast Sep '09

Oct '06

FORECAST 2010: 45.7% 2011: 1.2%

MANAGEMENT NOTE Communicate competitive advantages domestically, but also seek opportunities in global markets.

Data Link





HIGHLIGHTS • Strong demand from Latin

America and Asia • 12MMT rise through 2011 • Slower growth in 2011

Construction Machinery New Orders Billions of Dollars, N.S.A.

SUMMARY The 12MMT for Construction Machinery New Orders is 57.0% above last year, a 68.5% increase since the November low. Evidence that New Orders will rise through 2011 is coming from the 3MMT (upper red line), which began an unusually strong seasonal rise in September. The September rise over August was the strongest on record.

Construction Machinery Retail Sales in the third quarter showed strong double-digit increases. Especially strong are sales in Latin American and Asia where infrastructure building and mine expansion created strong demand.

The strong increase in Sales will keep New Orders rising through 2011.

In spite of the strong rise in Orders, US Construction Machinery Production (12MMA) in September came in about even with last year. Offshore Production is rising at a faster pace than in the US. Facilities in both South Korea and Brazil have been expanded to supply the increased demand.

Data Trend

3

5

7

9

11

13

'06 '07 '08 '09 '10 '11 '12

Bils $

12

20

28

36

44

52Bils $

3MMT12MMTForecast

Nov '09

May '08

Rate-of-Change

-120

-80

-40

0

40

80

120

160

'06 '07 '08 '09 '10 '11 '12-120

-80

-40

0

40

80

120

160

3/12Forecast12/12

Aug '07

Oct '09

FORECAST 2010: 86.3% 2011: 25.9%

MANAGEMENT NOTE The 12MMT will continue to rise (upper green dots) through 2011. Growth will be less robust but will still put a lot of upside cyclical pressure on resource utilization.

Data Link





HIGHLIGHTS • New Orders trend positive

but forecast lowered for 2011

• 2011 to be up 5.3%

Electrical Equipment New OrdersBillions of Dollars, N. S. A.

SUMMARY September was a rough month for Electrical Equipment New Orders. New Orders in September dropped to $3.187 billion, making it the third weakest month for New Orders thus far in 2010. The 3/12 rate-of-change also declined this month. Traditionally, one month of decline is not cause for concern, but it does fit in with our outlook for a milder 2011. Expect the August 2010 peak in the 3/12 to be a precursor to the anticipated December 2010 peak in the 12/12 rate-of-change.

The less robust than expected September has caused us to revise our outlook. We anticipate 2010 to finish the year 24.9% ahead of 2009. Plan on 12MMT data trend rise continuing throughout 2011 but at a milder pace than previously projected. Watch for New Orders in 2011 as a whole to be 5.3% above 2010. New Orders on an annual basis are not expected to return to their pre-recession peak until sometime post 2012.

Data Trend

6

8

10

12

14

'06 '07 '08 '09 '10 '11 '12

Bils $

24

32

40

48

56Bils $

3MMT12MMTForecast

Jul '08

Dec '09

Rate-of-Change

-45

-30

-15

0

15

30

'06 '07 '08 '09 '10 '11 '12-45

-30

-15

0

15

30

3/1212/12Forecast

Feb '08

Oct '09FORECAST 2010: 24.9% 2011: 5.3%

MANAGEMENT NOTE Develop a plan for lower activity in traditional and mature markets.

Data Link




Institute for Trend Research · 603-796-2500· www.itrelectronics.com · ©2010 All Rights Reserved ITR® Trends Report November 2010

HIGHLIGHTS • Strong rising trend, but flat

2011 ahead • Electronics sales in

recovery

Computers & Electronics New Orders Billions of Dollars, N.S.A.

SUMMARY Computers & Electronics New Orders is in a strong rising trend with a 12MMT of $321.3 billion, up 8.9% from one year ago. We expect continued growth through the end of the year followed by a flat 2011.

The rising trend in the New Orders 12MMT is more robust that the last cycle, but is expected to lose some steam and fail to break the pre-recession level within the next 18 months.

Computer & Electronics Production is 10.7% above the year-ago level (12MMA basis). Retail Sales at Radio, TV, and Electronics Stores remains below one year ago, but it is in recovery and much electronics retailing takes place online rather than in stores.

The 3/12 rate-of-change has reversed direction, suggesting that a 12/12 trend reversal is nearing. This is consistent with our forecast for 2011.

Data Trend

60

70

80

90

100

'06 '07 '08 '09 '10 '11 '12

Bils $

240

280

320

360

400Bils $

3MMT12MMTForecast

Nov '09

Oct '07

Rate-of-Change

-20

-10

0

10

20

30

'06 '07 '08 '09 '10 '11 '12-20

-10

0

10

20

30

3/1212/12Forecast Jun '09

Feb '07

FORECAST 2010: 10.3% 2011: 0.2%

MANAGEMENT NOTE Labor costs will be an issue going forward. Those looking to expand into the recovery will find investment in productivity enhancing capital relatively more rewarding than expanding their labor force. This bodes well for business electronics.

Data Link


31




HIGHLIGHTS • Budget tensions mounting

in wake of elections • Steepening decline in 2011

Defense Capital Goods New Orders

Billions of Dollars

SUMMARY Annual Defense Capital Goods New Orders continue to decline, dropping to $119.1 billion, 1.5% below one year ago. Capital spending on defense goods is increasingly viewed as a target for spending cuts as federal deficit pressures rise.

Some pivotal events for defense spending are in motion this month. The changing balance of power in Congress in the wake of the election season could yield escalating controversy as budget hawks collide with defense hawks. The Bipartisan Policy Center's Debt Reduction Task Force is due to release its deficit cutting proposals on November 17th. In this environment, cuts to Defense Capital Goods New Orders are increasingly likely.

The forecast calls for a short-term boost to spending levels that will bring New Orders for 2010 in 5.1% above 2009. 2011 will be a year of steep decline as annual New Orders fall by 15.4%.

Data Trend

15

20

25

30

35

40

'06 '07 '08 '09 '10 '11 '12

Bils $

60

80

100

120

140

160Bils $

3MMT12MMTForecast

Dec '09

May '09

Rate-of-Change

-30

-15

0

15

30

45

60

'06 '07 '08 '09 '10 '11 '12-30

-15

0

15

30

45

60

3/1212/12Forecast

Dec '07

Jul '06

FORECAST 2010: 5.1% 2011: -15.4%

MANAGEMENT NOTE:

Look to export markets for opportunities going forward as domestic demand falls and the weaker dollar makes US products more competitive on price.

Data Link





HIGHLIGHTS • Slight monthly decline but

overall trend still positive • 1/12 pointing toward

slower 2011

US Total Industrial Production Index, 2007 = 100 S.A.

SUMMARY The US Industrial Production rising trend stalled in September, the first month-to-month decline since February (red line, upper chart). Periodic lapses in the overall rising trend are going to become more frequent in the coming months as the recovery trend loses steam. The one-month decline from August to September is not of any special concern as the Index fell just 0.2%, well within the normal historical range.

Monthly Production is 5.1% above its 2009 equivalent. However, the 1/12 rate-of-change declined for the third consecutive month in September, further solidifying our expectations of slower 12MMA growth ahead in 2011.

US Total Industrial Production is expanding at a 3.1% annual rate (12MMA basis). The Phase B growth trend is expected to continue through the end of 2010 and internal trends to date are only pointing to slower growth in 2011, not a double-dip recession.

Data Trend

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85

90

95

100

105

'06 '07 '08 '09 '10 '11 '12

Index

80

85

90

95

100

105Index

Actual12MMAForecast

Mar '08

Dec '09

Rate-of-Change

-15

-10

-5

0

5

10

'06 '07 '08 '09 '10 '11 '12-15

-10

-5

0

5

10

1/1212/12Forecast

Aug '07

Aug '09 FORECAST 2010: 4.7% 2011: 2.1%

MANAGEMENT NOTE Take advantage of the uncertainty out there. What some fear as a double dip in 2011 will actually be 2.1% growth in the overall US economy.

Data Link





HIGHLIGHTS • 12MMT up 37.9% from

last year • Strong demand for

midsized cars & crossovers

NA Light Vehicle Production Millions of Units

SUMMARY The recovery in NA Light Vehicle Production is slowing, as evidenced by the declining 3/12 rate-of-change. Even though the rate of growth has slowed, gains are expected to persist through the first half of 2011 before leveling off in the second half of the year.

Annual Production is 37.9% above the year-ago level and currently stands at 11.7 million units. The gains in annual Production have been strong but they are still 22.9% below the pre-recession high of November 2007.

Demand for small cars is beginning to wane as retail sales for these cars for the past 12 months have declined 1.3% from the year-ago level. Nonetheless, there is still a strong governmental push for U.S. auto makers to produce small, fuel efficient cars.

The most sold types of vehicles are midsized cars and crossovers. Expect demand to slow for all vehicles in 2011 along with the macroeconomy.

Data Trend

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

'06 '07 '08 '09 '10 '11 '12

Mils Units

4

6

8

10

12

14

16

18Mils Units

3MMT12MMTForecast

Nov '07

Oct '09

Rate-of-Change

-60

-40

-20

0

20

40

60

80

'06 '07 '08 '09 '10 '11 '12-60

-40

-20

0

20

40

60

80

3/1212/12Forecast Sep '09

Feb '08

FORECAST 2010: 41.7% 2011: 8.8%

MANAGEMENT NOTE With the rising trend slowing during 2011, be careful not to let overhead and inventory costs rise.

Data Link





HIGHLIGHTS • Election results could aid

mining industry • 12MMA recovery will

slow in 2011

Mining Production (excluding oil & gas) Index, 2007 = 100 N.S.A.

SUMMARY US Mining Production is marching higher from the recessionary trough. Seasonal rise from February through September was stronger than historically normal, though within expectations coming off of recessionary lows. A peaking 3/12 rate-of-change is giving the first signals of the slower 12MMA growth we are anticipating in 2011.

The mining industry is hoping to benefit from the results of the mid-term elections. The future of US coal mining is heavily tied to the regulatory burden and pending carbon legislation; donations from the industry were heavily sided toward Republican candidates. However, even with a more balanced Congress, the future of US mining will not be one of robust growth as labor costs alone put the US at a disadvantage in the global market.

Our forecast remains unchanged. Expect increases from today’s level of activity but the coming Phase B will be short lived. Growth will slow in 2011, particularly in the second half of the year.

Data Trend

70

80

90

100

110

120

'06 '07 '08 '09 '10 '11 '12

Index

70

80

90

100

110

120Index

3MMA12MMAForecast

Dec '06

Mar '10

Rate-of-Change

-15

-10

-5

0

5

10

'06 '07 '08 '09 '10 '11 '12-15

-10

-5

0

5

10

3/1212/12Forecast

Oct '08

Jan '10 FORECAST 2010: 2.3% 2011: 1.8%

MANAGEMENT NOTE We expect industry growth under 3.0% both this year and next. Keep a modest projected valuation on capital returns.

Data Link





HIGHLIGHTS • Annual Production up 4.1% • Capacity utilization gearing down • Diminished ascent for 2011

Chemicals & Products Production Index, 2007 = 100 N.S.A.

SUMMARY The Chemical Production Index (12MMA) is up 4.1% from the year-ago level, but the 12/12 inched lower in September and the 3/12 is below the 12/12. These are indications that the August 12/12 high will hold and that the outlook for slower growth through 2011 is on target.

The Chemical Industry Capacity Utilization Rate for September is 73.6%, a 1.4 percentage point increase from this month last year, but 1.4 percentage points below the January high. The drop in capacity utilization is coinciding with slower 12MMA rise in 2011.

The 2010 forecast has been adjusted downward by 0.5 percentage points to account for a potentially steeper-than-expected decline in late 2010. The overall trajectory has not changed. Anticipate 2010 to end the year 3.0% above 2009 as a whole. The pace of growth will continue to fall through 2011 and bring next year in 1.5% above 2010. This will bring the Production level back to that last seen around late 2008.

Data Trend

80

85

90

95

100

105

'06 '07 '08 '09 '10 '11 '12

Index

80

85

90

95

100

105Index

3MMA12MMAForecast

Jan '08

Aug '09

Rate-of-Change

-15

-10

-5

0

5

10

'06 '07 '08 '09 '10 '11 '12-15

-10

-5

0

5

10

3/1212/12Forecast

Aug '10

Jun '09

FORECAST 2010: 3.0% 2011: 1.5%

MANAGEMENT NOTE Begin to identify and overcome any competitive disadvantages as production slows through 2011 to avoid losing customers. Pricing pressures are likely to intensify.

Data Link





HIGHLIGHTS • Mild 12MMA rise in 2011 • 12/12 above 0 in early 2011 • Ascent in 2011 will be mild

Civilian Aircraft Equipment Production Index, 2007 = 100 N.S.A.

SUMMARY The Commercial Aircraft Production 12MMA is 9.6% below the year-earlier level and still on target with the forecast for a near-term low. However, September Production fell more than normal and the 3/12 rate-of-change inched lower instead of higher, suggesting that the 12MMA low may be pushed forward a month or two.

On an encouraging note, Aircraft New Orders surged upward in September with the month coming in 219.8% higher than last September. New Orders (12MMT) are 48.2% ahead of last year.

Passenger Revenue as reported by the Air Transport Association increased for the ninth consecutive month in September, coming in 19.0% above September 2009. Passenger miles flown increased approximately 7.0%. Cargo traffic for August rose 14.0% year-over-year, down 1.0 percentage points from July.

US Carrier Available Seat Miles is in a positive trend, running 1.8% higher than a year ago for the last three months.

Data Trend

60

70

80

90

100

110

'06 '07 '08 '09 '10 '11 '12

Index

60

70

80

90

100

110Index

3MMA12MMAForecast

Nov '07

Rate-of-Change

-30

-15

0

15

30

45

'06 '07 '08 '09 '10 '11 '12-30

-15

0

15

30

45

3/1212/12Forecast

Mar '07

Mar '10

FORECAST 2010: -4.8% 2011: 7.8%

MANAGEMENT NOTE Carriers are reporting the largest profits in years and more people are flying. This should push this industry into recovery in the near term.

Data Link





HIGHLIGHTS • Emerging markets offer

better near-term growth opportunities, but will become more competitive.

Pharmaceutical Production Index, 2007 = 100 N.S.A.

SUMMARY Pharmaceutical Production will remain essentially flat for the next quarter before taking off with renewed momentum in 2011. Production will reach a record high level (12MMA basis) next year with a year-over-year gain of 5.2%.

US pharmaceutical producers have typically dominated foreign pharmaceutical markets. According to one source, US pharmaceutical companies control approximately 64% of the Chinese market. With high rates of economic expansion, China, along with other emerging markets, has provided a huge revenue stream for US producers.

As emerging markets become more prosperous, domestic investment in pharmaceutical research and development continues to rise as well. India has already become the world’s largest producer of generic drugs. As foreign markets become more competitive in the coming years, it will become more difficult for US producers to maintain their dominant position.

Data Trend

90

95

100

105

110

115

120

125

'06 '07 '08 '09 '10 '11 '12

Index

90

95

100

105

110

115

120

125Index

3MMA12MMAForecast

May '10

Feb '09

Rate-of-Change

-8

-4

0

4

8

12

'06 '07 '08 '09 '10 '11 '12-8

-4

0

4

8

12

3/1212/12Forecast

May '10

May '08

FORECAST 2010: 1.0% 2011: 5.2%

MANAGEMENT NOTE The demand is sufficient to support this market for the foreseeable future; however, it is important to stay competitive in both pricing and innovation.

Data Link





HIGHLIGHTS • New Medicare contracts

could change business environment in some areas

• Recession in first half of ‘11

Medical Equipment & Supplies Production Index, 2007 = 100 N.S.A.

SUMMARY Medical Equipment & Supplies Production is up 1.8% from last year but this market is heading into recession. Prepare for declining Production over the next three quarters, but don’t lose sight of the big picture. We expect a high rate of growth to return to this market in 2012.

The Centers for Medicare & Medicaid Services (CMS) recently awarded 1,217 contracts to 356 medical equipment suppliers through a competitive bidding process. The program will be implemented in nine areas across the country in an attempt to drive down costs for both Medicare recipients and tax payers.

At this time, this is a pilot program. The plan has the potential to disrupt both recipients and suppliers, but at a relatively small scale for now. Recipients will have fewer choices regarding supplies. Small suppliers who were not awarded contracts could be bumped out of the market if they depend on Medicare for a large portion of business. If the program were to be implemented nationally, it could disrupt the entire industry.

Data Trend

95

100

105

110

115

'06 '07 '08 '09 '10 '11 '12

Index

95

100

105

110

115Index

3MMA12MMAForecast

Jul '10

Rate-of-Change

-10

-5

0

5

10

15

'06 '07 '08 '09 '10 '11 '12-10

-5

0

5

10

15

3/1212/12Forecast

Jul '10

Dec '09

FORECAST 2010: 0.6% 2011: 0.2%

MANAGEMENT NOTE If you are a supplier who was not awarded a contract by the CMS, look to contract with firms that won bids. There is a good chance that with fewer suppliers, demand may exceed their current capacity.

Data Link





HIGHLIGHTS • Production will exceed

150,00 units by year-end • ATA Index projects slowing

activity in 2011

Heavy Duty Truck Production Thousands of Units

SUMMARY Heavy Truck Production is at 148,141 units, 13.6% ahead of last year. Increasing unit production is projected through 2011 (upper green dots), but the probability of a slowing economy in 2011 and deterioration in the ATA Truck Tonnage Index suggest a slower pace of rise in 2011.

The ATA Truck Tonnage Index (not seasonally adjusted) in September was 4.2% better than last year, but 0.9% below August. The Index 3/12 rate-of-change is moving generally lower, a signal of slowing growth ahead.

Retail Sales of Heavy Duty Trucks are having a good year. Sales in the third quarter of 2010 are 24.0% above the same period last year and are likely to move higher in the fourth quarter. September Truck Stocks are down 14.3% from last year.

A slowing economy is likely to slow Retail Sales of Heavy Duty Trucks in 2011.

Data Trend

15

30

45

60

75

90

105

'06 '07 '08 '09 '10 '11 '12

Mils Units

60

120

180

240

300

360

420Mils Units

3MMT12MMTForecast

Dec '08

Jan '10

Rate-of-Change

-60

-40

-20

0

20

40

60

'06 '07 '08 '09 '10 '11 '12-60

-40

-20

0

20

40

603/1212/12Forecast

Mar '09

Dec '09FORECAST 2010: 28.0% 2011: 6.5%

MANAGEMENT NOTE Unit Production will increase through 2011, but the rise will be less noticeable than this year. Don’t cut inventories because of slower growth; activity will be steadily increasing.

Data Link





HIGHLIGHTS • 12/12 decline to near 0 in 1st

half of 2011 • 12MMA basically flat in 1st

half of 2011

Paper & Products Production Index, 2007 = 100 N.S.A.

SUMMARY The Paper Production market 12MMA has gained 3.9% since the October 2009 low and is 3.4% ahead of the year-ago level. Seasonal rise through August was the best since 2002. Seasonal decline began in September.

The rates-of-change are above zero, but the 3/12 (lower red line) experienced a fourth month of decline, a sign that a 12/12 high is probable in the near term and that the pace of growth will slow in 2011. The deterioration in the 3/12 indicates that our forecast for slower growth in 2011 is on target.

The Paper Industry Utilization Rate of 78.5% is up 5.8 percentage points from last year and is at its highest level since September 2008.

Significant gains have occurred across the different segments of this market.

Paper Bag and Treated Paper 5.4% Pulp Production 7.1% Paperboard Mills 3.9% Paper Mills 2.6%

Data Trend

75

80

85

90

95

100

105

'06 '07 '08 '09 '10 '11 '12

Index

75

80

85

90

95

100

105Index

3MMA12MMAForecast

Aug '07

Oct '09

Rate-of-Change

-20

-15

-10

-5

0

5

10

'06 '07 '08 '09 '10 '11 '12-20

-15

-10

-5

0

5

10

3/1212/12Forecast

Jan '08

Sep '09

FORECAST 2010: 3.8% 2011: 1.2%

MANAGEMENT NOTE The 10-year historical growth pattern in this market is negative. The flat to mild rise forecasted for 2011 should be considered in the context of this long-term reality.

Data Link





HIGHLIGHTS • Slower rise through mid

2011 • Quantitative easing boosts

inflation expectations

Consumer Price Index – All Items Index, 1982-84 = 100 N.S.A.

SUMMARY A cyclical reversal in the Consumer Price Index is imminent. The 12MMA stands 1.7% above the year-ago level and we expect growth to continue at a slower pace until mid 2011. The monthly Index for September came in a mild 1.1% above September 2009.

Producer prices are rising more rapidly and at an accelerating pace. The PPI is in Phase B, with the monthly Index 4.0% above one year ago. The differential rates of increase between inputs and output is squeezing profit margins.

The Federal Reserve’s announcement of renewed quantitative easing has boosted inflation expectations. Treasury inflation protected securities are drawing record low yields, reflecting heightened demand for inflation shelters. Commodity prices have risen as the dollar continues to weaken. We expect these trends to contribute to accelerating inflation, on an annual basis, in the second half of 2011.

Data Trend

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190

200

210

220

230

'06 '07 '08 '09 '10 '11 '12

Index

180

190

200

210

220

230Index

Actual12MMAForecast

Feb '09

Oct '09

Rate-of-Change

-2

0

2

4

6

8

'06 '07 '08 '09 '10 '11 '12-2

0

2

4

6

8

1/1212/12Forecast

Oct '08

Oct '09 FORECAST 2010: 1.6% 2011: 2.3%

MANAGEMENT NOTE Rising commodity prices as the dollar weakens will put pressure on profit margins going forward. Raise prices where you can and maximize efficient use of costly inputs.

Data Link





HIGHLIGHTS • Suppliers beginning to feel

the pain of these low prices • $5-$6 range expected in

2011

Natural Gas Futures Prices $ per MMBtu

SUMMARY Natural Gas Prices rose for the second consecutive month in October to $4.04 per MMBtu. Albeit only a mild 17 cent improvement over last month, the general trend of price rise into the $4-$5 per MMBtu range is in accordance with our forecast for the fourth quarter of 2010. We are anticipating additional flat-to-mild upward movement in prices in the coming months.

Many futures contracts that have yielded above-market prices for producers are set to expire over the coming year. The likely result will be falling production until prices rise from their current levels. This move toward higher prices will take time though, and we are only anticipating less than a dollar in price rise over the course of 2011 for Natural Gas Futures.

Our forecast calls for prices to spend more time above $4.00 per MMBtu in the near term and average around $5.00 per MMBtu in the coming two quarters.

Data Trend

0

3

6

9

12

15

'06 '07 '08 '09 '10 '11 '12

$/MMBtu

0

3

6

9

12

15$/MMBtu

3MMA12MMAForecast

Dec '09

Aug '10

Rate-of-Change

-90

-60

-30

0

30

60

90

'06 '07 '08 '09 '10 '11 '12-90

-60

-30

0

30

60

90

3/1212/12Forecast

Sep '08

Nov '09FORECAST 2010: 12.1% 2011: 14.4%

MANAGEMENT NOTE Seasonal factors have the potential to drive natural gas prices higher from today’s low levels in a hurry. Act on these low prices and hedge against potential spikes.

Data Link





HIGHLIGHTS • Dollar is overlying factor

behind price rise • Forecast revised • Low $90’s in 1H11

Crude Oil Futures Dollars per Barrel

SUMMARY Oil Futures broke above $80 per barrel in October, rising as fast as the dollar has been falling. A recent announcement by the Fed to continue quantitative easing has sent Oil to near two-year highs. Demand is still not overtly strong for Oil in the US and inventories are at their highest levels of the year; a falling dollar is a clear driving factor in Oil Futures right now.

With our exchange rate outlook for broad dollar decline to continue through the first half of 2011, our forecast for Oil has been upward revised, and we no longer anticipate a dip in prices over the winter months. Although dollar decline is expected to reverse in the second half of 2011, rising global demand for Oil will be a strong enough factor to keep a mild price rise going.

Our forecast calls for more near-term price rise with average prices in the $80 - $92 per barrel range to close out 2010. 2011 will be typical Phase C conditions for Oil, price rise but slower than normal. Year-end 2011 prices will be just below $100 per barrel.

Data Trend

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50

75

100

125

150

'06 '07 '08 '09 '10 '11 '12

$/bl

25

50

75

100

125

150$/bl

Actual12MMAForecast

Sep '09

Sep '08

Rate-of-Change

-75

-50

-25

0

25

50

75

100

'06 '07 '08 '09 '10 '11 '12-75

-50

-25

0

25

50

75

100

1/1212/12Forecast

Sep '10

Sep '09FORECAST 2010: 24.5% 2011: 16.4%

MANAGEMENT NOTE With the Fed manipulating the value of the dollar, this is a particularly uncertain time for Oil Futures trading. Caution is advised during this Phase C trend.

Data Link





HIGHLIGHTS • Prices to moderate through

early 2011 • Slower demand keeping

metals prices contained

Steel Scrap Prices Pitt Iron #1 Scrap, Dollars per Gross Ton

SUMMARY Steel Scrap Prices transitioned into Phase C, though the data trends are expected to continue higher through year-end. The average Price over the last three months rose to $332.50 per gross ton, up 31.7% from one year ago. We have revised and extended our outlook. Prices will moderate through early next year, but we now expect to see accelerating price rise set in by the end of 2011.

Iron and Steel Products Production has risen strongly this year, but is also showing signs of an imminent shift into Phase C. The slowdown in the general economy will mean slower demand growth for steel, putting downward pressure on prices and production through the next several quarters.

Other industrial metals prices are also showing signs of slower price rise. Copper (+57.4%), nickel (+54.3%), and zinc (+47.6%) have all transitioned into Phase C.

Data Trend

100

200

300

400

500

600

'06 '07 '08 '09 '10 '11 '12

Index

100

200

300

400

500

600Index

3MMA12MMAForecast

Sep '08

Sep '09

Rate-of-Change

-75

-50

-25

0

25

50

75

100

125

'06 '07 '08 '09 '10 '11 '12-75

-50

-25

0

25

50

75

100

125

3/1212/12Forecast

Sep '10

Sep '09 FORECAST 2010: 54.6% 2011: 1.7%

MANAGEMENT NOTE Avoid long-term purchase commitments until prices hit the low end of the cycle in the first half of 2011.

Data Link





HIGHLIGHTS • Economic expansion

dominates outlook • Trade surplus down from last

year

Brazil Industrial Production Index, 2002 = 100 N.S.A.

SUMMARY Industrial Production for the past 12 months is up 11.2% from last year. Growth may slow next year, but the trajectory clearly calls for economic expansion through 2012.

The Brazilian yield curve has steepened sharply on heightened inflation expectations. The incoming President is expected to replace the central bank head and push for lower interest rates, sparking concerns that government debt monetization may be the tool used in an attempt to restore fiscal balance.

Brazil’s trade surplus totaled $429 million in the first week of November. Brazil’s 2010 trade surplus to date is $15.0 billion, down from $22.4 billion during the same period last year. The trade surplus is likely to be lower this year due to a significant rise in imports with the robust economic recovery.

The October Purchasing Manager’s Index showed a contraction in manufacturing, falling to 49.5 from 50.4 last month.

Data Trend

90

100

110

120

130

140

'06 '07 '08 '09 '10 '11 '12

Index

90

100

110

120

130

140Index

3MMA12MMAForecast

Oct '08

Oct '09

Rate-of-Change

-20

-10

0

10

20

'06 '07 '08 '09 '10 '11 '12-20

-10

0

10

20

3/1212/12Forecast

Apr '08

Oct '09

FORECAST 2010: 11.6% 2011: 6.5%

MANAGEMENT NOTE Brazil is importing a wide array of products, from consumer goods to capital goods. Producers can use this market to offset slower growth in the U.S. macro economy next year.

Data Link

Have a question for an analyst? 46 [email protected]




HIGHLIGHTS • 12MMA rise through 2011 • Retail Sales are up but so is

the Consumer Price Index • Phase B is almost here

Canada Industrial Production Index, 2000 = 100 S.A.

SUMMARY As you can see from the chart to the left, Canada Industrial Production (12MMA basis) is steadily climbing upward. The green dots illustrate that we expect the recovery to progress smoothly through 2011.

Thus far, Industrial Production is 13.3% below the July 2006 12MMA peak, indicating that the economy still has a lot of ground to make up. We are not anticipating Production to return to its pre-recession level until after 2012.

Retail Sales are up 4.2% above last year on an annual basis. However, the Consumer Price Index is also on the rise. The CPI rise is milder than the increase in Retail Sales, suggesting that the boost in Retail Sales is partially due to a rise in prices but is mostly the result of an increase in consumer spending. The increase in Retail Sales is evident throughout the country. The increase in Sales in Alberta is the weakest in the country at 1.8% above the previous year, while New Brunswick and British Columbia are both 6.2% ahead of last year.

Data Trend

85

90

95

100

105

110

'06 '07 '08 '09 '10 '11 '12

Index

85

90

95

100

105

110Index

3MMA12MMAForecast

Jul '06

Feb '10

Rate-of-Change

-15

-10

-5

0

5

10

'06 '07 '08 '09 '10 '11 '12-15

-10

-5

0

5

10

3/1212/12Forecast

Jan '08

Dec '09

FORECAST 2010: 4.8% 2011: 4.1%

MANAGEMENT NOTE Phase B is coming but it is likely to be brief. Brush up on your Phase B Management Objectives so that you can make the most of it before Phase C occurs in the second half of 2011.

Data Link





HIGHLIGHTS • GDP slows to 9.6% in 3Q10 • Hike in interest rates • Consumer spending still lags

China Industrial Production Index, 2000 = 100 S.A.

SUMMARY Growth is slowing, reflected by the 3/12 falling below the 12/12. Industrial Production is 16.6% above last year (12MMA). GDP in the third quarter slipped to 9.6% from 10.0%.

Inflation is around 3.6%. Property has appreciated 14.9% this year.

China will import $15 billion in corn, pork, wheat, cotton and soybeans this year in one of the best (export) years for US farmers in 30 years.

To encourage savings and reduce liquidity, China raised its reserve rate for the six largest banks 50 basis points to 17.5%, hiked interest rates 25 basis points (5.56%), and increased saving deposit returns from 2.25% to 2.5%.

In 2009 consumption was 35.1% of GDP, compared to S. Korea at 50% and the US at around 67%. Despite sizable growth, China’s per capita gross national income is 120th in the world by purchasing power according to the World Bank.

Data Trend

170

220

270

320

370

420

'06 '07 '08 '09 '10 '11 '12

Index

170

220

270

320

370

420Index

3MMA12MMAForecast

Rate-of-Change

0

5

10

15

20

25

'06 '07 '08 '09 '10 '11 '120

5

10

15

20

25

3/1212/12Forecast

Mar '08

Aug '09

FORECAST 2010: 16.0% 2011: 13.7%

MANAGEMENT NOTE Stay realistic; beware of linear projections in the face of anticipated sluggish global growth in 2011.

Data Link





HIGHLIGHTS • 12/12 above 0, economy in

Phase B • 12MMA rise through 2011 • Slower growth in 2011

Europe Industrial Production Index, 2005 = 100 S.A.

SUMMARY The ascent in the Europe Industrial Production 12MMA is stronger than normal (4.2% so far versus a median of 2.4%). More gains are coming.

The 12/12 rate-of-change broke above zero in August for the first time in 21 months, but the 3/12 rate-of-change inched lower for the second straight month (lower red line). The mild decline in the 3/12 indicates that the economy in Europe will likely experience a period of slower growth 2011.

The October manufacturing Euro Zone Markit Flash PMI came in slightly above September (54.6 versus 53.7), the first rise in eight months. Europe’s manufacturing will expand through 2011, but as the PMI and other indicators suggest, probably at a lesser rate of growth.

The economy in Europe is increasingly dependent on manufacturing (exports) for growth, with most of the activity coming from Germany and France. The growth trend outside of those two nations deteriorated for the seventh consecutive month.

Data Trend

85

90

95

100

105

110

115

'06 '07 '08 '09 '10 '11 '12

Index

85

90

95

100

105

110

115Index

3MMA12MMAForecast

Apr '08

Dec '09

Rate-of-Change

-20

-15

-10

-5

0

5

10

'06 '07 '08 '09 '10 '11 '12-20

-15

-10

-5

0

5

10

3/1212/12Forecast

Apr '07

Oct '09

FORECAST 2010: 6.0% 2011: 2.1%

MANAGEMENT NOTE The 12MMA will continue to move higher through 2012, but the pace of growth in 2011 will be slower than 2010. Focus your efforts on Germany and France since the majority of the growth will be there.

Data Link





HIGHLIGHTS • Slower rate of growth • Inflation holding at 8.6% • Cars + housing should support

output

India Industrial Production Index, 2000 = 100 N.S.A.

SUMMARY India’s Industrial Production growth rate, while being volatile over the last five months, slowed in August. The 1/12 rate-of-change sagged to a 15-month low of 5.6%. Quarterly and annual production slipped to 8.8% and 12.3% above their respective periods last year.

The falling rates-of-change are not only indicative of a slower pace of growth as production moves into 2011; they are also signifying that inflation and five interest rate increases this year may be prompting companies to curb their output.

India’s central bank is aiming to rein in inflation to 6.0% from the current 8.6% by the end of March 2011. India will continue to weigh the risk to industrial production output against their goal of lowering inflation.

Expect the forecasted 11.7% growth rate this year to be supported by demand for cars and new housing.

Data Trend

130

150

170

190

210

230

'06 '07 '08 '09 '10 '11 '12

Index

130

150

170

190

210

230Index

3MMA12MMAForecast

Rate-of-Change

-5

0

5

10

15

20

'06 '07 '08 '09 '10 '11 '12-5

0

5

10

15

20

3/1212/12Forecast

Jul '10

May '09

FORECAST 2010: 11.7% 2011: 6.9%

MANAGEMENT NOTE Continue to tap into and target markets that will be bolstered by local demand in India through 2011 such as the auto and housing markets.

Data Link





HIGHLIGHTS • Second half of 2011 will be

better than first half • General Machinery is up

44.7% for the recent quarter

Japan Industrial Production Index, 2005 = 100 S.A.

SUMMARY The 12MMA rise has been going on for 10 months now and has thus far returned Production to its April 2009 level. We anticipate the Industrial Production 12MMA to increase at an accelerating pace through the remainder of the year. Expect a slower pace of growth to set in through next year. The 3MMA rising trend has stalled. Expect to see activity pick back up in the second half of 2011.

General Machinery Production has shot into Phase B and is up 15.7% compared to the previous year. Over the past three months Production has risen 44.7% above the same time last year. Given our outlook for the general economy in 2011, a slower rate of growth in 2011 is likely.

Chemicals Production is up 5.7% on an annual basis compared to last year. However, the 3/12 rate-of-change has been declining for six months; expect the recovery to slow in 2011.

Data Trend

60

70

80

90

100

110

120

'06 '07 '08 '09 '10 '11 '12

Index

60

70

80

90

100

110

120Index

3MMA12MMAForecast

Jun '08

Nov '09

Rate-of-Change

-45

-30

-15

0

15

30

'06 '07 '08 '09 '10 '11 '12-45

-30

-15

0

15

30

3/1212/12Forecast

Mar '07

Oct '09

FORECAST 2010: 17.6% 2011: 4.1%

MANAGEMENT NOTE Beware of linear budgeting. The first half of 2011 is not expected to be as robust as 2010 has been.

Data Link





HIGHLIGHTS • Production returns to pre-

recession level in 2012 • Light Vehicle Production is

up 44.6%

Mexico Industrial Production Index, 2003 = 100 N.S.A.

SUMMARY Mexico Industrial Production on an annual basis is 3.3% above the previous year. The 12MMA data trend has been consistently rising throughout the year and has returned to a level reminiscent of April 2009. Thus far the recovery has brought the 12MMA to just 4.4% below the April 2008 record-breaking peak. Plan on the data trend rise to continue and the 12MMA to surpass its pre-recession level in 2012.

Light Vehicle Production in Mexico for the past 12 months is 44.6% above last year. Production on an annual basis has returned to its pre-recession level and is likely to see additional growth in the year ahead.

Paper Production for the most recent quarter is 6.6% above the same time last year and up 4.6% for the year. Expect to see Paper Production continue to grow in 2011. However, the rate of growth is likely to slow in 2011 along with the general economy.

Data Trend

100

105

110

115

120

'06 '07 '08 '09 '10 '11 '12

Index

100

105

110

115

120Index

3MMA12MMAForecast

Apr '08

Nov '09

Rate-of-Change

-15

-10

-5

0

5

10

'06 '07 '08 '09 '10 '11 '12-15

-10

-5

0

5

10

3/1212/12Forecast

Oct '06

Oct '09

FORECAST 2010: 5.6% 2011: 2.3%

MANAGEMENT NOTE Consider outside manufacturing sources if internal pressures become tight.

Data Link





HIGHLIGHTS • Forecast lowered • Budget pressures driving

privatization

Russia Industrial Production Index, 2005 = 100 S.A.

SUMMARY Russia Industrial Production on an annual basis remains in a growth trend, but we expect the rate of rise to slow markedly through 2011.

Disappointing economic growth and increasing bond issuance have pushed the government’s borrowing costs up, exacerbating budget problems. This is on top of the recent announcement that corruption consumes an estimated 10% of the annual state budget.

The Russian government is moving toward a new round of privatization, reversing the trend of recent years, in order to correct fiscal imbalances. The proposed $59 billion deal would see greater shares of equity in banks, railroads, and energy producers in private hands.

The HSBC Russia Manufacturing PMI rose to 51.8; a positive number but suggestive of sluggish growth amid rising inflation.

We have revised our outlook for Russia. Growth will peak by year-end, with steady deceleration through 2011.

Data Trend

90

100

110

120

130

140

'06 '07 '08 '09 '10 '11 '12

Index

90

100

110

120

130

140Index

3MMA12MMAForecast

Oct '08

Oct '09

Rate-of-Change

-20

-15

-10

-5

0

5

10

15

'06 '07 '08 '09 '10 '11 '12-20

-15

-10

-5

0

5

10

15

3/1212/12Forecast

Jul '07

Oct '09

FORECAST 2010: 8.3% 2011: 2.5%

MANAGEMENT NOTE Rising interest rates mean more attractive returns on financial capital but political risk remains high in Russia.

Data Link





HIGHLIGHTS • Slower growth in 2011 • 2011 global slowdown will

hurt demand for goods by Asian manufactures

Southeast Asia Index, 2000 = 100 N.S.A.

SUMMARY Industrial Production in Southeast Asia has fully recovered from the 2009 recession and has set new record highs in each of the past five months (lower blue line). The Index 12MMA exceeds the previous September 2008 record high by 5.0%. However, the 3/12 rate-of-change has moved generally lower over the past six months and has fallen below the 12/12 rate-of-change. This is a signal that our forecast for slowing growth in 2011 is on target. Singapore Industrial Production grew by the fastest pace for the three months ending in September. Manufacturing, which accounts for roughly a quarter of the Singaporean economy, will likely stall in 2011 as the overseas demand for goods by Asian manufacturers cools due to the slowdown in the global economic recovery. Specifically, Singapore will likely see its growth rate ease as a more tepid world growth rate will likely hurt the demand for both electronics and pharmaceuticals.

Data Trend

110

120

130

140

150

160

170

'06 '07 '08 '09 '10 '11 '12

Index

110

120

130

140

150

160

170Index

3MMA12MMAForecast

Sep '08

Aug '09

Rate-of-Change

-20

-10

0

10

20

30

'06 '07 '08 '09 '10 '11 '12-20

-10

0

10

20

30

3/1212/12Forecast

Jun '08

Sep '09

FORECAST 2010: 17.6% 2011: 2.6%

MANAGEMENT NOTE While some markets may be affected by the global slowdown in 2011, Southeast Asia as a whole will still offer a plethora of economic opportunities.

Data Link





HIGHLIGHTS • USD down steeply • Trend deteriorating sooner

than previously anticipated • First-quarter-2011 low

Euro Euro per US Dollar

SUMMARY The US dollar is down 12.1% versus the Euro over the last four months. October closed at .718 euros to the dollar. This is equivalent to 1.392 $/euro. It is the weakest the dollar has been in ten months and further decline is expected.

The onset of decline is sooner than we had anticipated based on normal trend probabilities. A combination of some austerity moves within Europe vs. significant deficit spending in the US, in conjunction with the increasing perceived likelihood of QE II as we moved through October could account for the shift in trend.

The magnitude of the decline is reminiscent of the 1991-92 fall in the dollar. That particular precedent as well as the 2008-09 steep decline suggest that the weakness in the dollar will extend into the second quarter of 2011. Doing so would make this a shorter-than-average declining trend, but the brevity is made up for by the steepness of the decline.

Data Trend

0.5

0.6

0.7

0.8

0.9

'06 '07 '08 '09 '10 '11 '12

€/$

0.5

0.6

0.7

0.8

0.9€/$

Actual12MMAForecast

Apr '10

Aug '09

Rate-of-Change

-30

-20

-10

0

10

20

'06 '07 '08 '09 '10 '11 '12-30

-20

-10

0

10

20

3/1212/12Forecast

Sep '09

Apr '10

FORECAST 2010: 4.2% 2011: -6.6%

MANAGEMENT NOTE We are projecting that the US dollar will decline to a first-quarter-2011 low of about .674. This would amount to another 6% to 7% decline in the dollar.

Data Link


55




HIGHLIGHTS • USD sets record low • Further near-term weakness • USD up & Yen down in

2H11

Yen Japan Yen per US Dollar

SUMMARY The US dollar declined further against the yen in September and October. The exchange rate at the end of October was 80.45 yen per dollar. This is a record low. Decline in the dollar was expected, but the magnitude of the drop over the last two months (4.2% since August) is more severe than we had projected. We have revised our outlook for the exchange rate; we now think the dollar will maintain a weakening trend into the second quarter of 2011. Our prior outlook called for a low around the end of this year.

The dollar is now down 34.6% from its 2007 high vis-à-vis the yen. The decline is on par with the magnitude of decline in the 1990s and it is milder than the decline from 1985-88 (both prior trends lasted at least another five months). Our forecast calls for the dollar to decline by approximately eight percent to a 3MMA low in the second quarter of 2011 of around 75.6.

USD recovery is projected for the second half of 2011.

Data Trend

70

80

90

100

110

120

130

'06 '07 '08 '09 '10 '11 '12

¥/$

70

80

90

100

110

120

130¥/$

Actual12MMAForecast

Jul '07

Rate-of-Change

-30

-20

-10

0

10

20

'06 '07 '08 '09 '10 '11 '12-30

-20

-10

0

10

20

1/1212/12Forecast

Feb '09

Sep '06

FORECAST 2010: -7.4% 2011: -8.8%

MANAGEMENT NOTE The ongoing decline in the US dollar may be helpful to the US economy, but it is anathema to the well-being of Japan.

Data Link





HIGHLIGHTS • 1/12 running above the 12/12 • USD gains expected • Ascent mild and short-lived

Australia Dollar Australian Dollar per US Dollar

SUMMARY The US dollar has reversed direction and is falling vis-à-vis the Australia dollar through October. We had projected that the pre-September stability/mild rise in the USD would continue; instead the USD fell to near parity against the Australia dollar. The USD is now at its lowest level in over 27 years. Further near-term decline is probable.

There is greater near-term inflation pressure in Australia versus the US as evidenced by PPI and CPI trends. However, the price index trends in Australia are being countered by relatively stringent money supply growth, suggesting that the USD decline will continue.

We are forecasting that the USD will be weak against the Australia dollar through approximately March 2011. The projected 3MMA low is only 4.1% lower than the October 2010 monthly data. We are looking for a 6.0% 12-month rise in the USD following the 2011 low.

Data Trend

0.90

1.10

1.30

1.50

1.70

'06 '07 '08 '09 '10 '11 '12

A$/US$

0.90

1.10

1.30

1.50

1.70A$/US$

Actual12MMAForecast

Aug '08

Aug '09

Rate-of-Change

-40

-20

0

20

40

60

'06 '07 '08 '09 '10 '11 '12-40

-20

0

20

40

60

1/1212/12Forecast

Sep '10

Aug '09

FORECAST 2010: -14.4% 2011: -7.9%

MANAGEMENT NOTE The outlook calls for the USD to start to show some sustained, but mild, gains against the Australia dollar about the time interest rates start to rise in the US.

Data Link





ITR – Four Phases of a Business Cycle

12/12 Rate-of-Change Rising Phase A: * Data trend is slowing in its rate of decline. * Data trend usually reaches a low and begins to rise before the end of this phase. Phase B: * Data trend is experiencing the strongest part of the business cycle rise.

12/12 Rate-of-Change Declining Phase C: * Data trend becomes progressively milder in the business cycle rise. * Data trend usually reaches a peak and begins to decline before the end of this phase. Phase D: * Data trend is experiencing the steepest part of the business cycle decline. Phase Management Objectives™ Phase Late A - Recovery: 1. Positive leadership modeling (culture turns to behavior) 2. Establish goals: tactical goals which lead to strategic achievement 3. Develop a system for measurement and accountability re:#2 4. Align compensation plans with #2 and #3 5. Be keenly aware of the BE (Break Even) point and check it regularly 6. Judiciously expand credit 7. Check distributions systems for readiness to accommodate increased activity 8. Review and uncover competitive advantages 9. Invest in customer market research (know what they value) 10. Improve efficiencies with investment in technology and software 11. Start to phase out marginal opportunities 12. Add sales staff 13. Build inventories (consider lead time and turn rate) 14. Introduce new product lines 15. Determine capital equipment needs and place orders 16. Begin advertising and sales promotions 17. Hire "top" people 18. Implement plans for facilities expansion 19. Implement training programs Phase Early B - Growth: 1. Accelerate training 2. Check the process flow for possible future bottlenecks 3. Continue to build inventory 4. Increase prices 5. Consider outside manufacturing sources if internal pressures becoming tight

58


6. Find the answer to “What next?” 7. Open distribution centers 8. Use improved cash flow to improve corporate governance 53 9. Use cash to create new competitive advantages 10. Watch your debt-to-equity ratio and ROI 11. Maintain/pursue quality: don’t let complacency set in Phase Late B Early C - Prosperity: 1. Stay in stock on A items, be careful with C items 2. Consider selling the business in a climate of maximum “goodwill” 3. Penetrate new selected accounts 4. Develop plan for lower activity in traditional, mature markets 5. Freeze all expansion plans (unless related to “what is next”) 6. Spin off undesirable operations 7. Consider taking on subcontract work if the backside of the cycle looks recessionary 8. Stay realistic – beware of linear budgets 9. Begin missionary efforts into new markets 10. Communicate competitive advantages to maintain margins Phase Late C - Warning: 1. Begin work force reductions 2. Set budget reduction goals by department 3. Avoid long-term purchase commitments late in the price cycle 4. Concentrate on cash and balance sheet 5. Reduce advertising & inventories 6. De-emphasize commodity/services in anticipation of diminishing margins 7. Weed out inferior products (lose the losers) 8. Encourage distributors to decrease inventory 9. Identify and overcome any competitive disadvantages 10. Make sure you and the management team are not in denial 11. Cross train key people 12. Watch Accounts Receivable aging 13. Increase the requirements for justification of capital expenditures 14. Evaluate vendors for strength (don’t get caught honoring their warranties with no one

to accept returned goods) 15. Manage the backlog through pricing and delivery, try to fill the funnel Phase Early D - Recession: 1. Continue force reduction 2. Reduce advertising – be very selective 3. Continue to avoid long-term purchase commitments 4. Review all lease agreements 5. Increase the requirements for justification of capital equipment 6. Eliminate all overtime 7. Reduce overhead labor 8. Combine departments with like capabilities and reduce management 9. Select targets of opportunity where price will get the business 10. Tighten credit policies – increase scrutiny

59


53

11. Look for opportunistic purchases 12. Grab market share as your competitor dies Phase Late D - Recession / Early A - Early Recovery 1. Prepare training programs 2. Negotiate union contracts if possible 3. Develop advertising & marketing programs 4. Enter or renegotiate long-term leases 5. Look for additional vendors 6. Capital expenditures & acquisitions considered in light of market-by-market potential 7. Make acquisitions – use pessimism to your advantage 8. People will be scared – lead with optimism and “can do” attitude Checking Points of Cyclical Progress: As the rate-of-change cycle moves from the beginning low point through the peak and down to the final low, it passes through several Checking Points. The progress of the rate-of-change through each checking point during the cycle helps to establish whether a cyclical trend is just beginning, is about to reverse, or is in the steepest part of the trend. A 1/12 may be substituted for a 3/12.

Positive Checking Points 1. 3/12 low The rate-of-change is making the transition from the 2. 3/12 passes above the

12/12 previous cycle's decline to rise in the current business cycle. Checking points #1 and #2 reflect this activity.

3. 12/12 reaches a low The onset of business cycle rise is observed. 4. 3/12 crosses above 0% The entry of the cycle into its steepest part of the 5. 12/12 crosses above 0% rising trend is observed

Negative Checking Points 6. 3/12 reaches a high Checking points #6 and #7 indicate that the 7. 3/12 downward passes

the 12/12 business cycle is making the transition from rise to decline.

8. 12/12 reaches a high Business cycle decline begins with checking point #8. 9. 3/12 crosses below 0% The entry of the cycle into its steepest part of the

10. 12/12 value crosses below0%

decline is with checking points #9 and #10.

60


56

Definitions of the Series Included in ITR Trends Report All data is not seasonally adjusted (NSA) unless otherwise noted (SA)

Corporate Bond Prices: Corporate AAA Rated Bond Yields, inverted to reflect prices. Corporate Bond Prices act as a

leading indicator to general economic change. Stock Prices: Standard and Poor 500 Industrials, 1941-43 = 10. Money Supply: M2, comprised of currency, travelers’ checks, demand deposits, savings, MMDAs, CDs, and retail money

market mutual funds. Deflated by the CPI to eliminate the effects of inflation, NSA. Short-term Interest Rates: Dealer commercial paper, average 30 & 90 days. US Government Long-Term Bond Yields: 10-year maturity, percent yield. Housing Starts: Total number of housing units started, including farms, private and public, NSA. Office Buildings Construction Spending: Private construction of all sizes of office buildings. Spending measured in

billions of dollars, NSA. Commercial Buildings Construction Spending: Private construction of commercial buildings, shopping centers, and

warehouses. Spending measured in billions of dollars, NSA. Water & Sewer Facilities Construction: Public construction spending measured in billions of dollars, NSA. Educational Buildings Construction Spending: Public construction of buildings for educational purposes. Spending

measured in billions of dollars, NSA. Power Facilities Construction Spending: Total construction of power facilities including distribution systems. Spending

measured in billions of dollars, NSA. Retail Sales: Excluding automobiles and parts, trillions of 1982-84 (constant) dollars, NSA. US Light Vehicle Retail Sales: Retail sales of new passenger cars & light duty trucks, includes transplants, in units. Wholesale Trade Durable Goods: Merchant wholesalers to retailers, contractors, or other types of businesses of goods with

an estimated useful life of three years and greater, measured in trillions of dollars, NSA. Wholesale Trade Nondurable Goods: Merchant wholesalers to retailers, contractors, or other types of businesses of goods

with an estimated useful life of less than three years, measured in trillions of dollars, NSA. Insurance Industry Revenue: Property & Casualty, total US net written premiums measured in billions of dollars. Life,

total US net written premiums (includes health and accident premiums for life insurers, measured in billions of dollars. Health, total US health and HMO net written premiums in billions of dollars.

Employment: Civilian labor force, measured in millions, NSA. Nondefense Capital Goods New Orders w/o Aircraft: Capital Goods New Orders exclusive of defense orders and aircraft

and parts, measured in billions of dollars, NSA. Metalworking Machinery New Orders: NAICS Code 3335. Metal forming and metal cutting tools; patterns; dies, tools,

jigs, fixtures; rolling mill machinery; welding apparatus, measured in billions of dollars, NSA. Industrial Machinery New Orders: NAICS Code 3332. Machinery used for saw mills and woodworking, plastics and

rubber, paper, textiles, printing, food, and semiconductor industries, measured in billions of dollars. NSA. 61


56

Construction Machinery New Orders: NAICS Code 33312. Construction machinery and equipment; elevators; conveyors; moving stairways; hoists; cranes; industrial trucks. Billions of dollars, NSA.

Electrical Equipment New Orders: NAICS Code 33531. Power, distribution, and specialty transformers; electric

motors, generators; switchgear; relays, and controls, in billions of dollars, NSA. 56 Computers & Electronics New Orders: NAICS 3341. Mainframes, personal computers, workstations, laptops,

computer servers, and computer peripheral equipment. Measured in billions of dollars, NSA. Defense Capital Goods New Orders: Goods New Orders contracted by the Department of Defense or by foreign

governments through the DOD Foreign Military Assistance Program, billions of dollars, NSA. US Total Industrial Production: Manufacturing, mining, and utility output, measured in physical units and/or inferred

from data on input to the production. Index, 2007 = 100, SA. NA Light Vehicle Production: Passenger car and light duty truck production (classes 1-4), including transplants. US,

Canada and Mexico. Measured in millions of units. Mining Production (w/o oil & gas): NAICS 212. Includes; Metal Mining, Coal Mining, and Nonmetallic Minerals

Mining. Index, 2007 = 100, NSA. Chemicals & Products Production: NAICS 325. Basic chemicals, resins. Synthetic rubber & fibers, pharmaceuticals

and paint. Index, 2007 = 100, NSA. Commercial Aircraft: NAICS 336412,3. Civilian Aircraft Equipment Production. Index, 2007=100, NSA. Pharmaceutical Production: NAICS 3245. Manufacturing drugs, medicines and related products for human and

animal use. Index, 2007=100, NSA. Medical Equipment and Supplies Production: NAICS 3391. Manufacturing laboratory apparatus and furniture,

surgical and medical instruments, appliances and supplies, dental equipment and supplies, eyeglasses and protective wear. Index, 2007 = 100, NSA.

Heavy Duty Truck Production: Class 8 trucks, US, Canada and Mexico. Measured in thousands of units. Paper & Products Production: NAICS 322. Manufacturers of pulp, paper and converted paper products. Index,

2007=100, NSA. Consumer Price Index – All items: Urban population sample. Index 1982-84 = 100, NSA. Natural Gas Futures Prices: Dollars per MMBtu. NYMEX, following month delivery. Crude Oil Futures Prices: Light, sweet. Dollars per barrel. NYMEX, following month delivery. Steel Scrap Prices: #1 Heavy Melting Mill, Pittsburgh, dollars per gross ton, FOB delivered, quoted last business day of

each month. Foreign Economies: Measures of industrial production, indexes with varying years equaling 100. Some are NSA. Exchange Rates: Measures of foreign currency expressed in terms of the currency per US $.

59 62


Definition of Terms Moving Totals Moving totals are used to smooth out the volatility inherent to monthly data, particularly at the product or company level. An annual moving total goes one step further in that it also removes seasonal change from the data series under consideration. This is desirable when the objective is to discern and forecast the underlying cyclical trend for the subject data series. A moving total is simply the total of the monthly data for the stated number of months. For example, the 3 month moving total (3MMT) for November 2009 would be the total of the September 2009, October 2009, and November 2009 monthly data. When December 2009 data becomes available, you simply drop September from the calculation and add December. The December 2009 3MMT is thus comprised of the activity recorded in October, November, and December 2009. 3MMTs are used to illustrate the seasonal changes inherent to the data series. They are also used when forecasting specific product activity on a quarterly basis. Example: Housing Starts 3MMT September 2009 .133 October 2009 .140 November 2009 .121 3MMT = .394 A 12 month moving total (12MMT) is derived by adding 12 consecutive months of activity together. The 12MMT for November 2009 is the total derived when adding the Housing Starts (or bookings or sales) figures for December 2008 through November 2009. To ease the calculation process, as each new month of data becomes available, add the newest figure and drop the previous oldest figure. In our example, the November 2009 12MMT can be quickly derived by adding the November 2009 monthly figure to the October 2009 12MMT, and then subtracting the November 2008 number from the subtotal. 12MMTs are used to define the business cycle trend inherent to the subject time series. When ITR refers to a data trend, it is referring to the 12MMT trend. Example: Housing Starts 12MMT November 2008 .117 December 2008 .101 January 2009 .106 February 2009 .108 March 2009 .133 3MMT = .347 April 2009 .151 May 2009 .154 June 2009 .155 3MMT = .460 July 2009 .155 August 2009 .141 September 2009 .133 3MMT = .429 12MMT = 1.595 October 2009 .140 3MMT = .414 12MMT = 1.594 November 2009 .121 3MMT = .394 12MMT = 1.598

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There are times when it is desirable to calculate a 12 month moving average (12MMA). A 12MMA is calculated in the same way as the 12MMT, with the additional step of the sum of the 12 months of activity will be divided by 12 to reflect the monthly average level of activity over the preceding year. A 12MMA will look exactly like a 12MMT when plotted on a chart. 12MMAs are used instead of 12MMTs when one of the following is being observed: an index; percentages (for interest rates or inflation); inventories. Rate-of-Change Rate-of-change comparisons are utilized for various purposes, all of which relate to the data trend. A 12/12 rate-of-change (discussed below) is more sensitive to changes in cyclical trends and can be used to anticipate trend reversals, often before the data trend even begins to show signs of weakening. An understanding of the timing relationship between a 12/12 rate-of-change and the particular data trend allows for the development of dependable timing estimates for data trend highs and lows. The rate of rise or decline in the rate-of-change is often indicative of the recovery or recession expected in the data series. In general, the rate-of-change provides a reflection of change in a data trend before the change becomes apparent in either the 3MMT or 12MMT. Calculating Rate-of-Change: A rate-of-change figure is simply the ratio of a number in a data series to a preceding number in that data series. The time interval between the numbers is fixed. One rate-of-change figure can tell you instantly whether activity is running below or above this time last year, and by how much. Consecutive rates-of-change will reveal whether activity levels are getting progressively better or worse compared to last year. It is the rate-of-change of a data series which is used to illustrate and measure cyclical change and identify trends. The most common rate-of-change is the 12/12. As is the case for all rates-of-change, the numerator denotes the data aggregation involved; the denominator indicates the time intervals. The 12 in the numerator of the 12/12 designation specifies that a 12MMT comparison is being made. The 12 in the denominator signifies that the time interval is 12 months (for all of our work represented by this text, the time interval will be fixed at 12 months). The 12/12 rate-of-change for July 2009, expressed as a percent, would be calculated as follows:

12/122009%7.1100100618.1122008591.1122009 July

MMTJulyMMTJuly

−=−⎥⎦

⎤⎢⎣

⎡×⎟⎟

⎠

⎞⎜⎜⎝

⎛

The July 2009 12MMT was 1.7% below the July 2008 12MMT. What we would next want to see is if this figure were trending upward or downward. By doing so, we could begin to give definition to change specifically relating to the business cycle. Of course it is possible that when a 12/12 calculation is made the result will be positive.

12/122009%1.1100100582.1122008599.1122009 November

MMTNovemberMMTNovember

+=−⎥⎦

⎤⎢⎣

⎡×⎟⎟

⎠

⎞⎜⎜⎝

⎛

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The 1.1% rate-of-change figure reflects the fact that activity for the 12 months ending November 2009 was 1.1% above the level of activity posted for the 12 months ending November 2008. The 12/12 is providing a snapshot of a given month. It shows where business stands today in relation to the annual total of one year ago. What becomes paramount to anticipating future change is whether this figure is moving upward (i.e. 3.0%) or downward (i.e. -1.7%). The 12/12 is used to define business cycle change for the subject data series. ITR research has shown that business cycle change for any given data series is going to be most measurable and forecastable when using the rate-of-change for the series as opposed to the actual data. Repetitive trend characteristics (timing and dynamics) can more easily be observed, measured, and utilized for anticipating change when using the 12/12 rate-of-change. Another rate-of-change frequently used in measuring cyclical change is the 3/12. As the numerator indicates, the figures being compared are 3MMTs. The time interval is fixed at 12 months. The 3MMT is not used to define the business cycle of the data series per se, but rather is utilized as a tool to better enable us to anticipate shifts in the business cycle trend (changes in the cyclical momentum). The 3MMT is calculated as follows:

12/32009%1.6100100345.32008324.32009 January

MMTJanuaryMMTJanuary

−=−⎥⎦

⎤⎢⎣

⎡×⎟⎟

⎠

⎞⎜⎜⎝

⎛

Sales for the 3 months ending January 2009 were down 6.1% from the year before. Monitor to see if this figure is improving (approaching 0.0%) or decreasing (falling further below -6.1%) to gauge what the business cycle momentum is for the subject data series. The 3/12 and the 12/12 are the two most frequently used rates-of-change when analyzing company or market data. There are times when a 1/12 rate-of-change will be employed. Dividing the most recent monthly figure by the monthly figure of one year ago derives the 1/12. The 1/12 is frequently too volatile for use at the company level. It is used primarily for aggregate, macroeconomic data series, which are not prone to significant swings from one month to the next. The 1/12 is calculated as follows:

12/12009%0.10100100120.2008108.2009 February

datamonthlyFebruarydatamonthlyFebruary

−=−⎥⎦

⎤⎢⎣

⎡×⎟⎟

⎠

⎞⎜⎜⎝

⎛

Business is down 10.0% from this same time one year ago. What we need to know next is whether this figure is part of an upward trend or downward trend. We can also observe if the February 2009 1/12 rate-of-change is higher or lower than the February 2009 3/12. If it were higher and part of a sustainable trend, then we would have empirical evidence that the 3/12 trend is approaching a cyclical low. If the 3/12 is approaching a low, the 12/12 trend is also moving closer and closer to the low. In other words, we would have our first empirical indication of impending business cycle rise. All this refers to a system of Checking Points developed by ITR, which provides for the orderly observation and anticipation of relatively near-term reversals in predominant business cycle trends.

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