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Tuesday, January 20, 2009

What is the ratio of inventories to sales telling us?

If you weren't sure how bad sales in the U.S. have been lately, take a look at the chart below.

Last week the Census Bureau released the Manufacturing and Trade Inventories and Sales report for November 2008. At this point, November seems like ancient history but the chart seemed dramatic enough to me that I wanted to share it with readers.


This chart tracks the ratio of inventories to sales. What we are seeing is the effect of sales falling at a much faster rate than inventories. Here are the underlying numbers:
  • Sales were down 5.1% from October to November while inventories were down 0.7%. These are the adjusted numbers. The unadjusted numbers were much worse: sales down 12.5% with inventories down only 0.5%.
  • Year-over-year, adjusted sales were down 8.9% while inventories were up 3.3%. Unadjusted sales were down 12.2% and inventories up 3.1%.
Note that we are just about at the worst level realized during the recession following the bursting of the dot-com bubble. In the years since, inventory management software has become much more sophisticated yet it has not been able to keep up with the way sales have fallen off a cliff.

What's next?

We have also recently received preliminary retail sales results for December. This number didn't include the wholesale and manufacturing sales that are part of the Census Bureau's report; nevertheless, the 2.7% drop in December implies this chart will look even worse when we get the next iteration. If this plays out as it did back in 2001 it could take an entire year for sales to pick up to the point where it allows our ratio to decline to more normal levels.

Is there a way to benefit?

It may not be too late to take advantage of falling sales by using an inverse ETF. I notice that the ProShares UltraShort Consumer Services ETF (SCC) has already gone from under $80 to around $98 in the course of the last two weeks so we have clearly missed the bottom of this ETF's recent trajectory. Still, it's most recent high was up around $145 so it may have room to run again.

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