Stocks Fall on a Slew of Data Released Today

ISM Report: Slowdown in the service sector, spike in prices, and an increase in the manufacturing sector.

By Chris Puplava, October 5, 2005

The Institute for Supply and Management (ISM) released its report for the September manufacturing data on Monday and for non-manufacturing (Service) today. The ISM producer's manufacturing index (PMI) rose 5.8% up to 59.4, growing for the 28th consecutive month supported by moves from new orders, production, and growing order backlogs, regaining significant momentum. (Note: A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.)

The ISM report on non-manufacturing (service) painted a completely different picture than manufacturing as can be seen in the chart below, with the ISM non-manufacturing September index falling to 53.3% business activity from 65.0% in August. The September drop marks the lowest level since April 2003, and the sharpest one-month decline on record, with the next largest decline coming after the September 11th terrorist attacks.

The drop was sharper than expected with economists polled from MarketWatch expecting the index to slip to 60.3%. The drop in activity for non-manufacturing industries was widespread, with nine out of 17 industries reporting negative growth, compared to 5 reporting negative growth in August, pointing to a slowdown in economic growth coupled with a pick-up in inflation seen by both the manufacturing and non-manufacturing price indexes rising 15.5% and 14.3% respectively from August.

"The ISM report (on non-manufacturing) did have a big impact on the markets and part of the reason is that the economy is now more of a service economy," said Paul Nolte, director of investments at Hinsdale Associates. "And services are going to be much more directly and more immediately impacted by the higher energy prices we have seen."

Hurricane Katrina: U.S. Energy�s 9/11?

According to the Minerals Management Service (MMS), 90% of Gulf oil production and 72% of Gulf natural gas production remains shut in as of yesterday, with 342, or 42%, of Gulf platforms still unmanned and 17 of 134 drilling rigs, or 13%, remain evacuated. Of the 4,000 platforms that the MMS administers, 3,050 platforms were in the path of Hurricanes Katrina and Rita. The preliminary damage assessment indicates that 108 of the older "end of life" facilities not built to MMS" upgraded design standards were destroyed, while another 53 platforms suffered significant damage.

The shutdown of the bulk of production facilities in the Gulf of Mexico are feeding worries about adequate winter heating-fuel supplies, as across-the-board declines in U.S. petroleum inventories was seen in the weekly report released today by the Energy Information Agency (EIA) regarding data for 09/30/05, marking the sixth straight weekly drop in inventories.

The EIA report indicated that crude oil stocks fell by 300,000 barrels to 605.4 million (-0.05%), while gasoline inventories fell 4.3 million barrels to 195.5 million (-2.2%), with distillate seeing a greater fall with inventories plummeting 5.6 million barrels to 128 million (-4.2%), indicating that the bottleneck is obviously in refining crude oil down to gasoline and further to distillate. Total commercial petroleum inventories plummeted by 9.9 million barrels last week, but the EIA reported that the biggest headline in the data was refining capacity, which due to Hurricane Rita fell to 69.8% from 86.7% seen in the prior week. To compound the refinery crisis here at home, production shortages are occurring overseas as well with operations at five refineries operated by France's Total (TOT) cut by 40% by port strikes.

Source: EIA Weekly Petroleum Status Report, data for week ended 09/30/05.

Consumers Taking Notice: Demand Drop Seen in Gasoline in Light of Sky-High Pump Prices, Not to Mention Truck Sales

Offsetting the refinery issues was a sizable drop in demand for petroleum products. According to the EIA, total petroleum product supplied over the last four-week period was 2.9% less than averaged over the same period last year, with gasoline demand down 2.6%, distillate fuel demand down 3.8%, and kerosene-type jet fuel demand down 0.6% over the last four weeks compared to the same four-week period last year.

"With the industrial sector still going full steam, as evidenced by yesterday's ISM release (on manufacturing), much of the demand pull-back is likely coming from residential users," said Rakesh Shankar, an economist at Economy.com.

The pullback in gasoline demand can be clearly understood by high prices alone, as the national average retail regular gasoline price increased to $2.93 per gallon on October 3, $0.125 per gallon more than last week and $0.99 per gallon over a year ago. The national average retail diesel fuel price increased to an all-time record high of $3.14 cents per gallon, $0.346 per gallon above last week and $1.09 per gallon more than a year ago.

Not only is the rise in gasoline prices slowing demand for the fuel, but it’s also slowing truck sales. Evelina Tainer, chief economist at Econoday, noted that "Not all analysts agree that $3 gasoline prices will stop people from driving - but there is no question that they have made consumers think twice about buying gas-guzzlers. While GM, Ford light truck sales fell sharply in September, Chrysler light truck sales fell modestly, while Honda, Nissan and Toyota actually saw increases in light truck sales in September. These latter makes have a better reputation with gas mileage than the traditional American brands."

This trend can be clearly seen in the graph below where gasoline prices are compared to truck sales as a percentage of total vehicle sales. Note the large spike in truck sales in July caused by the GM - employee discount plan, which saw Ford and Chrysler following suit, where incentives were focused on SUVs. As gasoline prices jumped in August, truck sales began to plummet.

Source: Evelina Tainer, Econoday Short Take - October 5, 2005

Market Summary

Index Summary
Equity Indices	Last	Change	% Change
Dow Jones 30 Industrial Average	10,317.36	-123.75	-1.19%
S&P 100 Index	552.55	-7.26	-1.30%
S&P 500 Index	1,196.39	-18.08	-1.49%
NASDAQ Composite Index	2,103.02	-36.34	-1.70%
AMEX Composite Index	1,684.05	-37.60	-2.18%
Russell 200 Index	644.98	-18.86	-2.84%

Sector Summary

Description	Last Price	Price Change		Today's % Price Change	Week To Date % Price Change	1 Month % Price Change
Basic Materials	1,188,326	-41,705		-3.4%	-5.0%	-0.9%
Capital Goods	670,379	-15,079		-2.2%	-2.9%	-1.9%
Conglomerates	760,534	-7,152		-0.9%	-2.7%	-1.7%
Consumer Cyclical	781,903		-15,762	-2.0%	-1.5%	0.6%
Consumer/Non-Cyclical	1,372,550	-10,423		-0.8%	-1.1%	0.3%
Energy	2,718,267	-94,724		-3.4%	-6.2%	-2.5%
Financial	4,559,170	-44,077		-1.0%	-2.0%	0.0%
Healthcare	2,278,863	-31,623		-1.4%	-0.9%	-1.5%
Services	4,497,789	-56,074		-1.2%	-1.7%	-2.1%
Technology	2,965,909	-45,964		-1.5%	-2.1%	-0.8%
Transportation	346,905	-5,665		-1.6%	-2.0%	1.0%
Utilities	898,501	-20,546		-2.2%	-2.8%	-0.9%

Have a pleasant weekend,

Chris Puplava

Contact Information

Christopher M. Puplava
PFS Group
PO Box 503147
San Diego, CA 92150-3147
(888) 486-3939 Toll Free
(858) 487-3939 Tel
(858) 487-3969 Fax
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