Statistics Can Be Our Friend

Dear Fellow-Investor.

Every day the media is full of all kind of statistics and whether they are useful or not is up to each individual. When used properly, statistics can help investors make more informed decisions.

The reasons why statistics are important are as follows:

· Economic statistics keep track of the economy. They explain whether the economy is in an expansion, a recession, a sideways or cyclical motion.

· By monitoring the status of the economy, statistics provide governments with information on what sort of policies can be used to fix whatever problems the economy may be having.However, as we all know, there’s no guarantee that the state will sctually fix any problem.

· Statistics provide investors with information that can be useful to make market related investment decisions, i.e. when to buy or sell shares or other securities.

Some of the most commonly reported statistics are:

Stock Market Indices:

World-wide investors look at the Dow Jones Industrial Average as an indicator of stock market trends since this index is considered the largest and most important one. No wonder! About 60% of all financial activities in the world either take place in the United States or go via the USA.

The Dow is an index of the stock prices of the 30 largest US corporations based on their market capitalization and other factors that got them a place in the Dow. There are also Dow indices for transportation and utility companies.

On the surface, the above indices tell us whether stock prices are rising, falling or remaining unchanged.

Beneath the surface, they suggest what is happening to business profitability and the overall health of the economy. Other not less important stock market indices include the German Dax, the UK FT-100, Japans Nikkei, Hong Kong’s Hang Seng and the French Cac-40.

Standard & Poor’s 500 index:

This is an index of 500 stocks compared to the Dow’s 30. As such, it is a broader measure of overall stock market prices. This index also incorporates stocks from the Dow or the other U.S. indices like the Nasdaq or Amex, and although they are based on different group of stocks, they still have the same general interpretation.

Consumer Price Index (CPI):

This statistic measures prices in the economy. In particular the CPI is an index of prices of objects that are typically bought by consumers. It includes all sorts of items like cars, TV’s, clothing etc. but excludes commodities that the majority of consumers do not buy like airplanes, ships etc. Essentially, the government sets up a “basket of goods” which is a predetermined number of consumer goods.

The economists keep track of the prices of these goods, and a price increase over a year constitutes a rate of increase in the overall price of the “basket”. This is called inflation. For instance, if average prices have risen by 5% over a one year period, then we can say that the inflation rate is 5%.

That’s why investors are all ears when it comes to the CPI statistic because inflation is one thing they don’t like hearing.

Consumer Confidence Index:

This statistic is an index that indicates the degree of confidence that consumers have in the economy. It is compiled by asking a sample of consumers, in a scientifically valid manner, a series of questions about the economy. The answers are then indexed to indicate the proportion that is relatively confident in the economy.

This statistic can be very useful as consumer spending forms a large part of our economy. If consumers are in a depression over the economy with hardly any confidence, they will not spend and the economy stagnates.

There are a number of other statistics that measure an assortment of things relating to the economy. They include, among others, trade deficit, interest rates, money supply, savings and commodity prices.

Gross Domestic Product (GDP):

This statistic measures the production that takes place in the economy during a three month period. In particular, the GDP measures how much production takes place within the boundaries of a particular country regardless of who does the production.

Other useful measures that come out with the GDP are national income and personal income, which indicate how much income the public gets from producing the GDP.

Real Gross Domestic Product:

This measure is GDP adjusted for inflation. While the GDP is the total amount of production measured in terms of actual prices each year, real GDP uses prices from a previous year.

This indicates how much the physical production changes from one year to the next without muddeling things up with higher or lower prices.

Unemployment Rate:

Every quarter, a whole bunch of statistics is released. One such statistic is the unemployment rate which is the percentage of the official workforce that is unemployed.

Employment figures, among others, is one of many indicators of how well the economy and corporations are doing. When the economy and productions go up more people get employed due to the increased demand. So that’s a good sign.

But when no one is employed and instead, people are being retrenched, it’s an indication that corporations might not be doing too well and that they have to get rid of employees that they don’t need or can’t afford anymore. This again has an influence on the company and the economy.

But on the other hand, and this is weird, in good times, when people get fired, it can be a good sign again.

Why?

One reason is because at first demand is high and corporations need more employees to meet that demand. But, like with every economic cycle, when productions have reached their peak and the markets are saturated or even on a decline again, they gradually don’t need so many employees anymore and can start doing with less.

In a stable economic environment retrenching employees then has a positive effect on companies again because it saves them money. There are less people on company’s payrolls and when a company pays out fewer salaries it increases their earnings.

This was the case during the 1999 frenzy where stock markets reached their peak before the bursting of the Internet bubble caused the markets to go on a 3-year decline on March 20, 2000.

Employees were retrenched and on account of the financial effect it had on corporations, stocks went up. Its rather sad benefiting on the misfortune of others, but, unfortunately, that’s the dark side of capitalism.

In an environment of uncertainty and nervousness, a solid and good employment report may cause investors to fear that earnings of companies could go down due to the extra costs in salaries.

Although companies may need the extra workforce due to an increase in demand because of a slowly rising economy, but initially it’s an investment that puts a little pressure on earnings. The increase in expenses then has to be made up for by an increase in profits.

But also, on the other hand, in an environment of uncertainty and nervousness, a solid and good employment report may prove to investors that productivity is increasing which again is good for the economy and the stock markets.

So what we have here kind of resembles a double sided sword. Whether an employment report has a good or bad effect on stock markets entirely depends on the overall economic situation and on how investors, analysts and so-called experts interpret the situation.

Yours in Successful Trading

Ricky Schmidt