Wednesday, July 18, 2007

Global Exposure

"Devaluation...would be a lunatic self-destroying operation."

Harold Wilson in 1963; in 1967 he devalued the British pound.


The above chart of the S&P 500 Index compares the prices in the upper pane with the percentage of stocks trading above their 40 day moving average. Since the end of April the number of stocks above their 40day moving average has been in a decline, yet the rally has held and gone higher. This signifies that the market is being carried higher by fewer stocks, and the ones doing the lifting are larger capitalization stocks.

One way to see the true power of these stocks is to create a custom basket of selected stocks and in essence make our own index. Since most of these stocks we already know to be larger-cap stocks, the weighting of this custom index will be based on price alone. To avoid one or two stocks skewing the data, we will include in our index 16 multinational companies that are well known and trade with large volume.

The index will be made up of 16 stocks:

UTX - United Technologies Corporation
BA - The Boeing Company
CAT - Caterpillar Inc.
GE - General Electric Company
PCP - Precision Castparts Corp
PH - Parker-Hannifin Corporation
MO - Altria Group, Inc
JCI - Johnson Controls, Inc.
EMR - Emerson Electric Co.
ROP - Roper Industries, Inc.
SWK - The Stanley Works
TKR - The Timken Company
KMT - Kennametal Inc.
ITT - ITT Corporation
CMI - Cummins Inc.
MMM - 3M Company

Below is a weekly chart of the S&P 500 compared to the created multinational large-cap index. Since the spring 2003 it has doubled the performance of the S&P 500 Index.

Why have these companies performed so much better than the overall market? Well it can be assumed that they are well run companies and have great products and/or services. Importantly, they have two common traits that have both aided greatly to their success. One is they sell globally which takes advantage of strong global economic growth. Two, the weakening U.S. Dollar makes their goods and services more appealing in foreign markets.

The two charts below compare our custom created index to the U.S. Dollar Index and then to an ETF that tracks global markets. Both pictures help show that these companies, and there are others, have been thriving in a global economic expansion along with the weakening dollar.

As long as this group of stocks holds strong, it is going to be hard for the over-all market to really crack and take a hard fall. Creating custom indexes like this can be a helpful tool in assessing the internal strength of the market. If this group of stocks starts to weaken, then it sets up a different situation, and money coming out of this group will soon start to look for a new home of out-performance. The next post will deal with another custom index that might hold a key to where money might find a home in the future.


Description of companies used in this post's created index.

UTX - United Technologies Corporation (UTC) provides high-technology products and services to the building systems and aerospace industries. It has six segments: Otis, Carrier, UTC Fire & Security (UTC F&S), Pratt & Whitney, Hamilton Sundstrand and Sikorsky. Otis includes elevators, escalators, moving walkways and services. Carrier includes heating, ventilating, air conditioning and refrigeration systems and equipment, and food service equipment. UTC F&S offers electronic security, fire detection and suppression, monitoring and response systems and services, and security personnel services. Pratt & Whitney includes military aircraft engines, parts and services, industrial gas turbines and space propulsion. Hamilton Sundstrand includes aerospace products and aftermarket services. Sikorsky offers military and commercial helicopters, aftermarket helicopter, and aircraft parts and services. In March 2007, Sikorsky Aircraft acquired aircraft maker, PZL Mielec, from the Polish Government.

BA - The Boeing Company is involved in the design, development, manufacturing, sale and support of commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services. The Company operates in five principal segments: Commercial Airplanes, Precision Engagement and Mobility Systems (PE&MS), Network and Space Systems (N&SS), Support Systems and Boeing Capital Corporation (BCC). PE&MS, N&SS and Support Systems comprise the Company’s Integrated Defense Systems (IDS) business.

CAT - Caterpillar Inc. operates in three principal lines of business: Machinery, Engines and Financial Products. Machinery deals with the design, manufacture, marketing and sales of construction, mining and forestry machinery. Engines business deals with the design, manufacture, marketing and sales of engines. Financial Products, consists primarily of Caterpillar Financial Services Corporation, Caterpillar Insurance Holdings, Inc., Caterpillar Power Ventures Corporation and their respective subsidiaries.

GE - General Electric Company (GE) is a diversified industrial corporation. It is engaged in developing, manufacturing and marketing a variety of products for the generation, transmission, distribution, control and utilization of electricity. During the year ended December 31, 2006, GE completed the sales of its Advanced Materials business by Industrial and GE Life, its United Kingdm-based life insurance business. During 2006, GE acquired IDX Systems Corporation, ZENON Environmental Inc. and Biacore International AB. In November 2006, GE Fanuc Embedded Systems acquired Radstone Technology PLC. In December 2006, Energy Metals Corporation's subsidiary, Golden Predator Mines Inc., acquired Springer Mining Company from GE. On March 15, 2007, GeoEye Inc. acquired M.J. Harden Associates, Inc., from GE. In May 2007, Smiths Group PLC sold its aerospace businesses to GE. In May 2007, STV Partners Corporation, the Japanese unit of GE, acquired a 97.15% interest in SANYO ELECTRIC CREDIT CO., LTD.

PCP - Precision Castparts Corp. (PCC) manufactures complex metal components and products, investment castings, forgings and fasteners/fastener systems for aerospace and industrial gas turbine (IGT) applications. The Company also provides investment castings and forgings for general industrial, automotive, armament, medical and other applications; specialty alloys, waxes and metal processing solutions for the investment casting industry; metal-injection-molded and ThixoFormed parts for automotive and other markets; sewer systems, and metalworking tools for the fastener market and other applications.

PH - Parker-Hannifin Corporation is a full-line diversified manufacturer of motion control products, including fluid power systems, electromechanical controls and related components. It has three business segments. The Industrial Segment produces motion-control and fluid systems and components used in manufacturing, packaging, processing, transportation, mobile construction, agricultural and military machinery and equipment. The Aerospace Segment designs and manufactures products and provides aftermarket support for commercial, military and general aviation aircraft, missile and spacecraft markets. The Climate & Industrial Controls Segment manufactures motion-control systems and components for use in the refrigeration and air conditioning and transportation industries.

MO - Altria Group, Inc. (ALG) is primarily a holding company. The Company, through its wholly owned subsidiaries, Philip Morris USA Inc. (PM USA) and Philip Morris International Inc. (PMI) are engaged in the manufacture and sale of cigarettes and other tobacco products. ALG’s 89% owned subsidiary Kraft Foods Inc. (Kraft) is engaged in the manufacture and sale of packaged foods and beverages. Philip Morris Capital Corporation (PMCC), another wholly owned subsidiary, maintains a portfolio of leveraged and direct finance leases.

JCI - Johnson Controls, Inc. (Johnson Controls) is engaged in the building efficiency business. It is a global supplier of heating, ventilation, and air-conditioning (HVAC) mechanical equipment and services. The Company operates in three primary businesses: building efficiency, automotive experience, and power solutions.

EMR - Emerson Electric Co. is engaged in designing and supplying product technology and delivering engineering services in a range of industrial, commercial and consumer markets.

ROP - Roper Industries, Inc. (Roper) is a diversified growth company that designs, manufactures and distributes energy systems and controls, scientific and industrial imaging products and software, industrial technology products, instrumentation products and services, and radio frequency products and services. Roper operated in four segments: Industrial Technology, Energy Systems and Controls, Scientific and Industrial Imaging, and RF Technology. The Company markets its products and services to selected segments of a range of markets, including RF applications, water, energy, research and medical, and general industry.

SWK - The Stanley Works (Stanley) is a worldwide producer of tools for professional, industrial and consumer use and security products. The Company’s operations are classified into three business segments: Consumer Products, Industrial Tools and Security Solutions.

TKR - The Timken Company (Timken) is a global manufacturer of engineered bearings, alloy and specialty steel and related components. The Company is a manufacturer of tapered roller bearings and alloy seamless mechanical steel tubing and a North America-based bearings manufacturer. Timken had facilities in 27 countries on six continents as of December 31, 2006.

KMT - Kennametal Inc. (Kennametal) is a global supplier of tooling, engineered components and advanced materials consumed in production processes. It provides metal cutting tools and tooling systems. Kennametal specializes in developing and manufacturing metalworking tools and wear-resistant parts using a specialized type of powder metallurgy. It also manufactures and markets a line of tool holders, tool holding systems and rotary cutting tools by machining and fabricating steel bars and other metal alloys.

ITT - ITT Corporation (ITT), formerly ITT Industries, Inc. is a global multi-industry company engaged, directly and through its subsidiaries, in the design and manufacture of a range of engineered products and related services. It operates in three business segments: Fluid Technology, Defense Electronics & Services, and Motion & Flow Control.

CMI - Cummins Inc. (Cummins) designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration and emissions solutions, fuel systems, controls and air handling systems. The Company operates in four segments: Engine, Power Generation, Components and Distribution.

MMM - 3M Company (3M) is a diversified technology company with a global presence in various businesses, including industrial and transportation, healthcare, display and graphics, consumer and office, safety, security and protection services, and electro and communications. The Company manages its operations in six operating business segments: Industrial and Transportation; Health Care; Display and Graphics; Consumer and Office; Safety, Security and Protection Services, and Electro and Communications.

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