Demystifying Industrial Production

What’s happening with American industry? [The Rude Awakening] October 17, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Demystifying Industrial Production - Yesterday’s Empire Manufacturing Index came in weak. - Today’s retail sales, industrial production, and capacity utilization numbers are due. - Let’s open the kimono to see why they’re so important. [Nvidia’s Supplier Reveals “A.I. Crown Jewel”]( A.I. investors…get ready: Because a little-known supplier just received a GIGANTIC order from Nvidia. In short: This supplier is planning to pump out 2,000,000 units of a critical piece of tech which I call… [“The A.I. Crown Jewel”]( [Click here to learn more]( A.I. investors…get ready: Because a little-known supplier just received a GIGANTIC order from Nvidia. In short: This supplier is planning to pump out 2,000,000 units of a critical piece of tech which I call… [“The A.I. Crown Jewel”]( [Click Here To Learn More]( [Sean Ring] SEAN RING Good morning from chilly Northern Italy! America is still the world’s second-largest manufacturer. But it pales in comparison to its former self. However, since the advent of “nearshoring” - bringing manufacturing back home or close to allies - there’s hope for a resurgence. Besides, with Janet Yellen telling the world that [America can certainly afford two wars]( America better get working! In today’s Rude, we’ll look at yesterday’s Empire Manufacturing Index and today’s industrial production and capacity utilization numbers. Yesterday’s Empire Manufacturing Index A Brief Review of the Empire State Manufacturing Index First, what is it? The EMSI is a monthly survey of manufacturers in New York state. The Federal Reserve Bank of New York conducts the survey. The bank sends the survey monthly to business leaders representing a wide swath of the manufacturing sector. The headline number summarizes general business conditions in New York state. The index is widely watched for insights into the state and direction of manufacturing in New York state. The index measures the health of New York manufacturers relative to a year ago and has been strongly correlated with industrial production nationally since it began in 1982. Empire is essential but not as widely trusted as the Philly Fed because the Philly Fed covers more manufacturing in the US. Second, let’s see how it’s calculated: The general business conditions index and the indexes for the other 11 indicators are calculated by adding the percentage of "increase" responses and then subtracting the percentage of "decrease" responses. If 30% of survey respondents marked "increase," 50% chose "no change," and 20% picked "decrease," then the index would show a reading of 10. Index readings are released as absolute numbers to one place after the decimal point. With that said, let’s see what happened in the September survey. [Rude] Credit: [The Federal Reserve Bank of New York]( What’s interesting is that the red line (what’s expected in six months) is perpetually better than what the actual number is month to month. It seems like New York’s manufacturing managers are smoking the hopium. From [The Federal Reserve Bank of New York]( Business activity edged lower in New York State, according to firms responding to the October 2023 Empire State Manufacturing Survey. The headline general business conditions index fell seven points to -4.6. New orders fell slightly, while shipments were little changed. Unfilled orders declined, and delivery times shortened. Inventories held steady. Labor market indicators pointed to a slight increase in both employment and the average workweek. Here’s a summary of the numbers. [Rude] For whom and why does this matter? - Investors: The ESMI serves as an early indicator of manufacturing activity and economic health, aiding investors in making informed decisions. - Policy Makers: Armed with the insights from the ESMI, policymakers can tailor fiscal and monetary policies to foster a conducive environment for economic growth. - Academics and Economists: The index provides a rich dataset for academic inquiry, helping economists model and forecast economic trends. In short, we can see where things are and where policymakers and investors would like to take them. Next, let’s look at industrial production. [Response Requested]( 1/1000th of an ounce of gold available As a Rude Awakening reader, you're being offered a 1/1000th of an ounce of gold when you upgrade your account. It will come in the form of a “Gold Back” - a new type of gold currency that’s starting to spread across America ([click here to view](. If you have not responded to this offer yet, and want to know how to claim yours… Please click the link below for details. [Click here to learn how to claim your new Gold Back Currency<]( [Click Here To Learn More]( Today’s Industrial Production Expanding on manufacturing, industrial production includes mining and utilities. The Anatomy of Industrial Production Data - Components and Coverage: - Manufacturing: The largest component, encompassing the production of goods ranging from the behemoth machines that grace our skies to the minuscule silicon chips that power our modern lives. - Mining: My friend and colleague Byron King’s specialty, this sector includes the extraction of minerals and resources essential for many industries. - Utilities: The lifeblood of modern civilization, utilities cover the generation and distribution of electricity, gas, and water. - Calculations and Indices: Industrial production is often measured using an index where a particular year is used as the base year. The base year used now is 2017. [Rude] Credit: [FRED]( - Adjustments: Seasonal adjustments are often made to account for the variations that occur regularly at the same time each year—think of the surge in candy production before Halloween or the dip in car manufacturing during the festive season. - Capacity Utilization: Alongside the raw production data, capacity utilization figures are often released. This metric shows how effectively the industrial capacities are being used and is a significant indicator of economic health. We’ll expand on capacity utilization later. The Impetus Behind Monthly Reporting The cadence of monthly reporting isn’t arbitrarily chosen. It provides a near real-time snapshot, enabling a timely response from policymakers and the market. This frequency allows for a more agile approach to assessing the economic trajectory and making informed decisions accordingly. The Echoes of Industrial Production on Broader Economies The ramifications of fluctuations in industrial production reverberate far beyond the factory gates. A rise often heralds economic growth, increased employment, and buoyant consumer sentiment. Conversely, a decline could spell economic trouble, triggering a domino effect of reduced income, lowered spending, and tightening financial conditions. The market is looking for a slight 0.1% increase in industrial production for September, down from August’s 0.4% increase. Today’s Capacity Utilization In the realm of economic indicators, Capacity Utilization - Cap Ut: pronounced YOOT as in someone from Utah or My Cousin Vinny mispronouncing “youth” - stands as a stalwart sentinel, shedding light on the operational efficiency and economic health of a nation's industrial sector. It's a metric that highlights how effectively the existing infrastructural capacities are employed in manufacturing, mining, and utilities. As such, a deeper understanding of Capacity Utilization can offer a window into a nation's economic vigor and potential future trajectory. Cap Ut is calculated simply as Actual Output / Potential Output x 100. [Rude] Actual Output represents the actual production levels achieved by the industrial facilities. Potential Output denotes the maximum possible production levels achieved should all facilities operate at full throttle. If Cap Ut numbers are too hot, that could indicate a recession. But at 79%, that’s not a worry here. The market is looking for an unchanged number this month (79.7%). Today’s Retail Sales I just wanted to mention retail sales, as that comes out today as well. Economists are looking for a flat number of around 0.2%, down from last month’s 0.6%. If it surprises to the upside, Jay Powell may reconsider his rate hiking position. Wrap Up Today’s a busy one when it comes to economic numbers. I’m not sure how much impact it’ll have on the markets. We’ll need to wait and see. Have a great day! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( In Case You Missed It… Boring Charts… Except This One. Good morning from autumnal Asti. On August 31st, I wrote “[Why We Don’t Feel Fed Hike Pain Yet]( Societe Generale (a French bank with a Wall Street and City of London presence) had found something fishy. Albert Edwards, SocGen’s famous permabear, wrote that corporate interest payments kept falling as the Fed was hiking rates. That’s odd, to say the least. His team concluded that the “S&P 150,” or the largest 150 companies in America by market capitalization (stock price x number of outstanding shares), could refinance their debt at lower rates. That is, they did the same thing savvy homeowners did during the pandemic: they traded their existing higher interest rate debt for new lower interest rate debt. The gist is that not all companies can do this, especially small businesses. (If the other 350 large-cap stocks in the S&P 500 couldn’t refinance, the smaller 2,000 companies that make up the Russell 2000 surely couldn’t.) Before we go on, here’s a handy table for you: [SJN] Edwards' research concluded we should watch the IWM (or Russell 2000 ETF) for signs of weakness. Before I show you the charts, let’s make sure you understand the Russell 2000: The Russell 2000 The Russell 2000 is a financial index that doesn't steal the limelight like its celebrity cousins, the S&P 500 or the Dow Jones Industrial Average. However, in terms of getting a natural feel for the market, especially the small-cap universe, this index is gold dust for traders and investors. Let's begin with the basics: The Russell 2000 index tracks the performance of about 2,000 small-cap companies in the United States. These firms have a market capitalization range between $300 million and $2 billion. Created by Frank Russell Company in 1984, this index serves as a benchmark for small-cap stocks in the United States, akin to how the S&P 500 represents large-cap stocks. Here's the kicker: While most people tune their financial antennas exclusively to the ups and downs of blue-chip giants like Apple, Microsoft, or Google, focusing on the Russell 2000 provides an alternative and more nuanced picture of market conditions. You see, small-cap companies are typically more susceptible to economic shifts, both good and bad because they don't have the financial buffers or diversified revenue streams that large-cap companies do. When the economy's revving up, these small players can experience explosive growth, which is reflected in a booming Russell 2000. Conversely, economic downturns often hit them first and hardest, making the Russell 2000 a canary in the coal mine for market troubles ahead. Now, let's talk about numbers. Unlike the Dow, which is price-weighted, the Russell 2000 is market-capitalization-weighted, like the S&P 500. This means that companies with a higher market cap influence the index's value more. Still, given that we're dealing with small-cap stocks, the largest company in the Russell 2000 is a minnow compared to the blue whales in the S&P 500. The Russell 2000 also has diversified sectors. While the S&P 500 leans heavily on technology stocks, the Russell 2000 offers a smorgasbord of industries from healthcare to financials, from industrials to consumer discretionary. This diversity makes it an excellent vehicle for investors seeking exposure to the broad U.S. small-cap market without picking individual stocks. Many do this through ETFs like the iShares Russell 2000 ETF (IWM). We’ll talk about the ETF in a moment. This index epitomizes the dynamism and entrepreneurial spirit of the American economy. It highlights businesses that aren’t entrenched behemoths but agile and innovative enterprises, often responsive to local or specialized markets. [Urgent Notice From Paradigm CIO Zach Scheidt!]( [James Altucher]( Hi, Zach Scheidt here… I’m the Chief Income Officer at Paradigm Press. With inflation raging (and showing no signs of coming to an end any time soon), almost everyone in America is feeling the pain in a big way. Which is why, several months ago, I set out on a big mission… my goal was to create a [complete, step-by-step plan to surviving and beating inflation]( one that anyone could take advantage of. Today, after hundreds of hours of research, I’m revealing all of my findings. [Simply click here now to see how to survive America’s deadly inflation crisis](. [Click Here To Learn More]( The Charts That Keep Me Awake The IWM Chart First, the IWM (Russell 2000 ETF) chart: [Rude] That blue line, at the $161 level, indicates a resistance level (until late 2020) that turned into a support level afterward. Technical analysts call this a “change of polarity.” We bounced off that level twice in 2022. We’ve not tested it, as yet, in 2023. On the contrary, those higher highs are cause for optimism. However, if we break down hard and go below $161, that spells big trouble for small caps and the underlying economy. Some charts are already looking at $149 as the first target. Again, we’re not there yet. The IWC Chart What’s scarier is what’s happening in the microcaps. The IWC, the iShares Microcap ETF, has definitively broken down. [Rude] Those two blue lines, at 103.75 and 97.75, represent the top and second peak, respectively, before Covid. They created more of a “zone” than a definitive “line” of resistance/support. From here, the next target is $77. However, this represents something much more important: it may be the first domino to fall. Since the IWC has broken down, the IWM may be next. Then the Nasdaq, and finally, the S&P 500. What To Do The Rude is a free daily; its mission is not to give you stock picks. However, there are things to look at. If you’re aggressive, you can look at puts on the IWC that’s already broken down and still has considerable downside. Unfortunately, I could see no open interest (liquidity) in that option. You could look at IWM puts as well. Or, if you’re feeling brave, you can buy the RWM (inverse IWM ETF). But I must warn you that you mustn’t hold this for long. Inverse ETFs are meant for short-term plays. The longer you keep it, the less your return will look like it should. The safe thing to do is to use these ETFs to monitor the NDX and SPX, so you know when to sell if it comes to that. I’ve been bullish lately, so these charts leaped out at me. But the dominos have stopped falling if the IWM doesn’t fall through its support level. Wrap Up Let’s keep our heads about us. If we continue to monitor the things that matter, we’ll know when to bail out of positions. Right now, it’s time to take a deep breath, watch with keen eyes, and act when it’s time to act. [Rude] Have a wonderful week! [Rude] And thank you for staying. Have a wonderful weekend! All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your Rude Awakening e-mail subscription and associated external offers sent from Rude Awakening, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. 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