-- Posted Thursday, 9 October 2008 | Digg This Article | Source: GoldSeek.com

By Joseph Brusuelas (Chief Economist)

While, the service sector does account for well over 80% of overall economic activity, industrial production often provides a very timely indicator implying the end of the business cycle and the onset of a recession. The pro-cyclical nature of the report provides a well-timed and sensitive indicator of the current rate of growth in overall output. We expect that the September industrial production report based on our forecast of a -1.4% print will confirm other grim data that the market has observed in the manufacturing sector and looks to provide a strong signal that the business cycle has reached its end and the American economy has entered a recession.

As always, the devil is in the details. On first glance, industrial activity picked up in the early summer due to the increase in production caused by the settlement of the strike at American Axel, a key supplier of parts to the domestic automotive industry. However, during the second quarter of 2008 total industrial production on a year over year basis, contracted at a rate of -3.2%. Moreover, with domestic light auto and truck sales in an advanced state of collapse, this implies that auto assembly going forward will see another round of retrenchment.

Looking at the September employment report total hours and overtime hours worked in the manufacturing declined for the third straight month with noticeable declines in the primary metals and fabricated metals sectors. Hours worked in natural resources and mining declined 1.0% on a monthly basis.

Perhaps more troubling is the decline in the September ISM report that saw the overall manufacturing index decline to 43.5 and production collapse to 40.8 even in light of a sharp fall in the prices paid category and still relatively decent demand from the external sector that saw growth during the month. The combined evolution of the data does strongly suggest that the economy has moved into territory consistent with overall contraction.

Thus, we do not anticipate that on a national basis that the manufacturing sector will see any growth during the final two quarters of the year. Our provisional forecast is that industrial production will contract at a rate of -0.7% in Q3'08 and -1.0% in Q4. The risk to that forecast is to the downside due to an expected decline in demand from the external sector going forward and the likely impact caused by a stronger dollar in the coming months.

Joseph Brusuelas
Chief Economist
Merk Investments

Merk Investments LLC is the manager of Merk Mutual Funds, including the Merk Asian Currency Fund and the Merk Hard Currency Fund. The Merk Asian Currency Fund invests in a basket of Asian currencies. Asian currencies the Fund may invest in include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund invests in a basket of hard currencies. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Funds may be appropriate for you if you are pursuing a long-term goal with a hard or Asian currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit www.merkfund.com.

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at www.merkfund.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invest in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds own and the price of the Funds' shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Funds are subject to interest rate risk which is the risk that debt securities in the Funds' portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advise nor a solicitation or an offer to buy or sell any products or services. Foreside Fund Services, LLC, distributor.

-- Posted Thursday, 9 October 2008 | Digg This Article

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