Monday, October 30, 2006

Investing as the Winds change

In addition to this post on the economy, some other economic details have been bothering me. The housing industry has just projected the first decline in overall construction spending since 1991. The construction industry is a solid 10% of the economy, and the reduction impacts other areas too as people need fewer new appliances, less furniture, and consume fewer raw materials. Call it 15% of the economy no longer growing.

Meanwhile AutoNation, the worlds largest chain of car retailers, has announced an intention to order 30% less cars from Detroit in the upcoming quarter. They also took the unusual step of publicly stating that they felt the American automakers were misstating the inventory of cars they have sitting on lots.

Exxon and Shell have both experienced reduced earnings due to reduced demand, adding oil & gas to the list of industries looking to cut back before they get caught in an inventory overhang.

We are looking at the classic lead-in to a stock decline: industries facing inventory overages and beginning to take steps to mitigate that. Earnings may be strong for previous quarters but as the end users reign in spending we will probably see reduced earnings growth over the next six months.

I'm changing directions a bit on my economic analysis. I had been reviewing Terex Corp. as a probable investment (if you're interested). Now I think I am more likely to look for something a bit more likely to benefit in a recession, like a good utility or perhaps a beat down financial stock (they have been getting very cheap due to the challenging interest rate environment).

I will also be keeping more assets in cash, and possibly issuing some sell recommendations in the upcoming weeks.

Stay tuned.
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