Capital Goods / Industrial

This broad sector has underperformed the stock market since the spring of 2011. From
then, the momentum of the growth of industrial production and business sales has slowed
markedly, with the now rather important book of export sales curbed by slower economic
growth offshore US and a stronger dollar. Industrial output in the US has flattened out in
2012, and factory operating rates have fallen. Business has responded very quickly, with
new orders for capital goods (excluding aircraft & defense) having tumbled this year until
just recently. New Order

The chart shows data through 9/12, but there was another and significant increase in orders
for Oct. Note as well that the chart shows excessively rapid growth of new orders from the
1992 - 2000 period, driven by the broad tech sector, the internet and "dot.com" booms and the
very large build out of wireless telecom. With execess capacity on hand since 2000, capital
goods orders have been range bound, and it is quite something to see how fast orders tanked
this year as operating rates softened.

This recent improvement in orders reflects the positive reaction of business to the early
expectation / follow through of the Fed's QE 3 program. The capital goods / heavy industry
 sectors are interesting long term because with so little growth of capacity since 2000, plant
and equipment is aging and is due for substantial overhaul. The sector could well experience
better economic and stock market performance over the year ahead if the resolution of the
fiscal cliff issues in the near term is not onerous.

S&P XLI Spyder price and Relative Strength Chart