WTK - Rising Inventories

[offshore44]

Why are trading folks getting a little thrill running up their legs by reports that inventories are rising? It seems counter intuitive to me.

If I am a business man, producing goods, I wouldn't want my inventories to rise beyond a small, calculable amount. I would want to produce just enough to cover my booked orders, my warranty / guarantee rate and my spoilage / reject rate. Anything else seems to be a waste of perfectly good capitol. I might keep a certain amount of inventory on hand to cover unexpected orders that happen infrequently or randomly if that actually was my business experience. Other than that I would carefully manage my inventory to carefully meet my projected sales.

Capitol is dear and should be carefully managed for contingencies and emerging opportunities. Capitol tied up in inventory that is liable to sit on the shelf is sunk until the inventory is sold. What am I missing here?

(Edited to add) If the economy is expanding, I would add to inventory in the expectation that my demand would also expand. If the economy had just started to contract, I would be adding to inventory because of supply chain inertia. If the economy had been contracting for longer than my supply chain cycle, my inventory would be dropping to meet the new projected demand. An increase in inventory in and of itself would not mean anything to an outside observer by itself. It MIGHT mean something when taken in concert with pending, booked and shipped orders if I could determine if those orders were aberrations or not. Still don't get it, though.

[gates]

They are following the CNBS company line - the consumer LIVES!!! - we'll see.

[motosapien]

Think of how the resale value of many consumer goods has plummeted.
Things like motorcycles, ATV's, Hi Fi gear etc. It does not help consumer confidence when you know the minute you walk off the sales floor you would be lucky to get fifty cents on the dollar for it if you had to sell it.

[Enquiring Minds]

offshore, one side-note I heard on this topic (from the MSM, so SACK of salt), was that "it's a sign" (*genuflect*) that "confident" retailers are stocking up early for a "big" Christmas season... uh-huh... :rolleyes:

Actually, this is probably true... in DC, and other concentrations of .gov employees... :mad:

As you trenchantly point out though, NO correlating data re book-to-bill ratios, etc... pure fluff... really, the CNBC gals should show more cleavage when they hawk this shinola.

[gates]

umm... -EM... no! on a national level... pay ATTENTION to sales tax receipts... they are declining... and have been, and IMO will continue to decline - those folks living free in their McMansions for 18 months - thats coming to an end.

[easttex]

I can tell you that from a purchasing standpoint, my lead times on standard shelf items have fallen back to where they were this time two years ago. When the bottom fell out of the economy in 2009, several of my manufacturers slowed their production schedules to cut back on surplus inventories which translated into longer than normal lead times on several common items, especially electronic parts made overseas (i.e. ice cube relays, printed circuit boards, etc.). Since the beginning of the second quarter, the manufacturers I buy from have all put on extra inventory that we've been moving. I can get it faster and in turn we've been selling it faster.

I know that rising inventories may be a concern in certain situations, but its sure as hell helped me out.

[gates]

Bro - you need to post here ALOT more! you have bleeding edge consumer behavior - it is VERY VERY valuable!

[flopshot]

my inventory level is at 02/09 and i'm bringing it down weekly.
i get more calls than ever for drop ships and special purchase deals.
i'm not looking forward to the winter.

[offshore44]

Originally posted by gates
Bro - you need to post here ALOT more! you have bleeding edge consumer behavior - it is VERY VERY valuable!

+1 on that!

Unfiltered consumer behavior from actual producers is golden for analysis.


I think it was the Rockefeller Institute's report on sales tax collections for the recent quarter (reliability?) that said state receipts are down, implying that sales are down. Sales tax receipts are a reasonable proxy for consumption, but delayed for several months and distorted by changes in individual state's tax rates.

[offshore44]

Originally posted by Enquiring Minds
offshore, one side-note I heard on this topic (from the MSM, so SACK of salt), was that "it's a sign" (*genuflect*) that "confident" retailers are stocking up early for a "big" Christmas season... uh-huh... :rolleyes:

Actually, this is probably true... in DC, and other concentrations of .gov employees... :mad:

As you trenchantly point out though, NO correlating data re book-to-bill ratios, etc... pure fluff... really, the CNBC gals should show more cleavage when they hawk this shinola.

You know, there was an economic observational theory developed awhile back that stated you could tell the state of the economy by the position of hemlines on woman's dresses. More leg exposure = better overall economy. I wonder if television cleavage is the new hemline, but in reverse? More television cleavage = poorer economy?

I don't believe in signs, only math.

[Eric Bryant]

Inventory is a really weird topic nowadays. Anyone who makes sweeping generalizations isn't really in tune with what is happening in the real world.

For example, "chip" (semiconductor integrated circuits) and certain passive components (capacitors - especially high-temp electrolytics) are extremely difficult to come by at this time. Lead times have jumped to nearly a year for some parts, and that's really uncomfortable for components dealing in a just-in-time (JIT) world. So what happens? Orders for these components go way up - this is just typically human hording behavior, albeit in a somewhat more civilized sense. So what happens when the crunch dissipates, and everyone along the supply chain ends up with excess inventory? Yeah, that'll mess with the ol' statistics.

The auto industry has been going through an inventory contraction for the better part of two years. This has resulted in "shortages" (more accurately, a lack of excess inventory) of certain models. So what have dealers been doing all summer? Ordering extra vehicles, of course. Plants have been working overtime, and more vehicles are getting to the lots - probably arriving too late to satisfy temporary demand. Now we're probably going to see a climb in auto inventories.

The economy as a whole is rather unstable right now, and as you dig into certain areas, it resembles a control system that is highly underdamped, has a lot of gain, and also has a lot of latency. Small oscillations in supply and demand are going to be exaggerated due to irrational behavior (generally of the fear/uncertainty/doubt type). So beware of anyone trying to draw any conclusions from overly-simplified concepts of "inventory", 'cause we are not in a ordinary inventory-driven boom/bust cycle.

[Bawana jim]

If you stockpile goods then what future do you see? Are you thinking better to spend now while price is low or maybe you won't be able to buy? It's about the future and how each business sees it comming.

jim

[motosapien]

Originally posted by Eric Bryant
For example, "chip" (semiconductor integrated circuits) and certain passive components (capacitors - especially high-temp electrolytics) are extremely difficult to come by at this time.

I just spent more than a few hours trying to find two 500V electrolytic capacitors for a single ended tube amp I'm building. Had to settle for an 85 Celsius on one of them instead of a 105. Kind of creeps me out, the idea that component parts may be "unobtainium" down the road. Jeez, maybe I ought to order the power and output trannies quick before they are impossible to find..........

You are right on the money there Eric.

[Eric Bryant]

It's not just little suppliers (like my employer) that are having difficulty getting components - Nissan (the 8th largest car company in the world) got shut down by ST Micro due to semiconductor unavailability:

http://eetimes.eu/en/nissan-blames-ic-vendor-for-abrupt-production-halt.html?cmp_id=7&news_id=222902815&vID=209

The semiconductor business got burned badly during the dot-com bust. When everything was going like gangbusters, component shortages occurred. The industry added capacity just in time for demand to collapse, and profitability suffered for many years. The industry collectively vowed to avoid this problem in the future, and so they were very successful in avoiding overcapacity problems - even when credit was cheap and easy.

Now, however, we're seeing a secular change in the electronics industry. I don't think demand is being driven by inventory cycles, but a fundamental shift in technology and consumer buying habits. Here we're sitting in the biggest downturn in 65 years, and yet anything with a silicon chip is flying off the shelves. Short of an all-out collapse, I don't think we'll see a significant slacking in semiconductor demand until some piece of technology replaces it.

And it takes a lot of other bits to make electronics devices work - capacitors being one of the component types that cannot effectively be integrated into a chip. Those components are seeing a huge spike in demand, and similarly, I don't see this trend reversing much in the near future. Please, please, please - someone invent a replacement for electrolytics! They just plain suck - they're expensive, they take up a lot of room, and they behave poorly at both ends of the temperature range.

The one caution I would have for anyone looking towards semiconductor demand as an overall indicator is that we're likely seeing a bit short-term boost that is driven by corporate hoarding. As that process oscillates, we'll see some short-term slackening of demand. Potential investors should be aware, and those who attempt to extrapolate a bigger story from semiconductor indexes should be very cautious.

[JohnnyV1966]

It just depends

The question one needs to ask is: What is the rate of Inventory Turnover?

Rising inventory may be related to increased sales and a projected growth in sales.

On the other hand it could be about stagnation with the very real possibility of a Double Dip!!!!

[gates]

The question is, which consumer matters... ours are fuked... can the international variety pick up the slack? I do not know.

[Eric Bryant]

Lotsa wage pressure in China - I wouldn't bet that they can become a consumer of their own goods just yet, but if indeed the rumors of their demise is proven to be greatly exaggerated, watch out!

If the Chinese become self-sufficient, then be prepared to learn the word "decoupling", and then watch the dollar collapse. I won't claim any ability to predict the likelihood or timing of this event, but it's a Black Swan that no one should be too quick to dismiss as impossible.

[K. Funk]

I work for a specialty steel producer. We are going balls to the wall with lead times at 26 weeks. We produce for aerospace, energy, defense, medical automotive and what we call commodity. It does not compute with the rest of the local economy, which seems to be in the dumps. We hired 120 folks over the past 2 months. My side business is guns. I have been selling steadily, getting good prices on collectible stuff. However, I am scared to death of getting stuck with a large inventory of guns with no customers to buy anything. That being said, I have been scared to death for the past 2 years of the same thing and have done OK. It is very difficult to get a read on what is actually going on. The plan is to conserve cash and not go into debt for the for-seeable future.

krf

[Enquiring Minds]

Originally posted by K. Funk
I work for a specialty steel producer. We are going balls to the wall with lead times at 26 weeks. We produce for aerospace, energy, defense, medical...

SO... "defense" is pure .gov spending, and the rest MIGHT be a proxy for .gov... do you know what % of your revenues are directly funded by .gov contracts? I mean, it's not like there's a lot of private sector firms erecting steel frame buildings right now.