Economic Signs Point Green: What Durable Numbers Mean

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Signs that the economy may soon turn around are everywhere. Investors have a renewed sense of optimism, consumers again have the confidence to make large purchases, and the market is finally seeing some positive action in the US automobile business.

Hard Data Sells

Hard data is what really drives the market – numbers that we can see, practically feel, and can accept as factual.  The hard data this week suggested that business inventories were still dropping.  Generally, this would be a disappointing sign; however, the data also showed that inventories would soon be too small and factories would have to start gearing up production levels to meet demand.  The next major step in the growth cycle would be for businesses to begin again to expand their inventories.

Expanding Inventories Follow a Flat Bottom

The growth in inventories will have to arrive after a long bottoming pattern for the change to be healthy.  A v-shaped bottom in a business cycle shows manipulation – not improvement in the markets.   Ideally, the bottom would be nearly flat, with a small increase in product beginning a few months after the bottom.  In this capitalistic society, it is important that consumers have time to collect capital to buy the products they need.  Much of society has been living on a credit card for far too long, and the credit crisis might not have been a crisis at all; perhaps foreign investors were simply wise enough to stop cutting the checks to America.

Wait for Durable Goods Orders

Durable goods stay true to their name; they last for a long time, and because they carry so much utility, they also carry higher prices.  As such, many durable goods orders are financed, or they are paid in installment payments.  The purchase of a durable good shows you have confidence your job will be able to meet the monthly payments of your durable product.  Durable goods numbers also show that the marketplace is buying products for utility rather than consumption.  Each washing machine sold is thousands fewer quarters that get put in vending machines and hundreds of more dollars that get put into more productive areas of the economy.

There are Two Markets to Trade

Right now, traders have access to two markets: the economic market and the stock market.  Since the early March rally, stocks have enjoyed a near universal boost in share prices, and as such, are starting to show they may be selling to a premium – or at least trading at prices that are reflecting the future, but not today.  This is normal with any economic recovery; traders sell late and buy early.  On the rebound, stocks are an excellent barometer; however on the fall, they're usually far off the appropriate mark.

Ride the Economic Tide

There are plenty of seasonal trades that will lend a hand to the assumed economic recovery.  Spending is likely to increase in the summer, especially if consumer confidence holds.  Investors should consider minute investments in both the automotive and financial industry, along with some exposure to real estate.  All of those investments are on pure government intervention into the marketplace.  The automotive sector is finally showing that it might make it out of the recession in a decent situation.  Ford looks promising, as it has been out of the negative news feeds lately.  Financials are showing profits, and the overwhelming majority now has enough cash to operate safely.  Real estate is doing very well in some areas; many localities are reporting that prices are finally stabilizing and some are moving up in price.  The $8000 tax credit to first time home buyers gives those who didn't buy a home during the bubble initiative to pick up a dream home even cheaper.

Dividends Are the Deal Breaker

If you buy shares right now, stocks look like corporate bonds.  Chances are they're not going to plunge much lower, and the good news is many companies have kept their dividends at pre-crash levels.  If you're buying and holding, the dividends are simply begging to be purchased right now, especially when you can lock in the yield and enjoy the capital gains.

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