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Economic Reports and How They Affect Your Trading

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Economic Reports and Expiration Notices

July 23rd, 2008 — Issue #438

Special Commentary Series: Economic Reports and How They Affect Your Trading — Part One

Market Fundamentals are a key part in understanding Technical trading.

The two key forces that move market prices are fundamentals and technicals. These two very different philosophies of trading and price discovery can be reliant on the other. As a position trader or day trader it is important to understand each of these components because they are dependent upon one another. You must understand the fundamental aspects of the market to see why the technicals are trading and acting the way they are and vice versa. We must first understand basic market fundamentals and where we can start understanding this is through the news. A good place to begin is with the economic reports that are sent every month at regularly scheduled time. As traders once we have solid understanding of what these reports mean we can then start applying them to the market and seeing how the market prices can react to the information. Over the next few newsletters we will discuss key economic reports, starting with the ones below:

Consumer Price Index: is a measure of the average price level of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation. The consumer price index is the most widely followed indicator of inflation in the United States. Just knowing what inflation is and how it influences the markets can put an investor ahead of the game. Inflation is a general increase in the price of goods and services. The relationship between INFLATION and INTEREST RATES is the key to understanding how data like the CPI influence the markets. Higher energy prices, manufacturing cost increases, medical costs, imbalances in global supply and demand of raw materials and food products all weigh on this report. For example the price of gasoline we pay at the pumps.

If gas prices escalate to the point where it cost one 30 dollars per week to fill up a car or even to 50 or 60 dollars, you will have less spending money on other items. It may not affect you immediately but a longer duration will hit your pocketbook. Even weather can be a factor on short term changes on food. What would the cost of tomatoes at the grocery store after a damaging freeze in California or down south in Georgia be, 3.00 or 4.00 per pound? It has occurred, right. Think of the restaurants that serve salads that lose revenue let alone the farmer whose crop is destroyed. This all plays a part in the CPI number. The core rate is the inflation number that excludes the volatile Food and Energy components. Economists track and watch these numbers, you should too.

Durable Goods Orders: reflect new orders placed with domestic manufacturers for immediate and future delivery of factory made products. Orders for durable goods show how busy factories will be in the months to come, as manufacturers work to fill those orders. The data not only provides insight to demand for things like washers, dryers and cars. It also takes the temperature of the strength of the economy going forward.

Gross Domestic Product: (GDP) is the broadest measure of aggregate economic activity and accounts for almost every sector of the economy. GDP is the broadest measure of economic activity. Analysts use this figure to track the economy's performance because it usually indicates how strong or weak the economy is and that helps predict the potential profit margin for companies. It also helps analysts gauge to see if the economy is accelerating or slowing down. The stock market likes to see strong economic growth because that translates to higher corporate profits.

Housing Starts: measures the number of residential units which construction is about to start on. The backbone of the American Economy is based on construction. Think about this when one purchases a new home, durable good items like refrigerators, washers and dryers, furniture, and lawn care products may be purchased, right? This is known as a ripple effect throughout the economy. Think of all the jobs produced from construction to factory and transportation and even communication and technology that goes into the building and financing and furnishing a new home. The economic commerce is substantial. Especially when there are a hundred thousand or more homes built in a month around the country. At the very least the data from housing starts can help project the price direction for the sector of stocks in homebuilders, mortgage banks, and appliance companies. It used to be that lumber and copper futures prices were dramatically affected by the Housing Starts figure. However, since the development of pre-fab and new construction materials especially fiber optics and plastics (PVC is used for plumbing rather than copper) these products are now less sensitive to the building industries trends.

Industrial Production and Capacity Utilization Rate is a measure of the physical output of the nation's factories, mines and utilities. The capacity utilization rate reflects the usage of available resources. Industrial production shows how much factories, mines and utilities are producing. Since the manufacturing sector is estimated to account for onequarter of the economy, this report can sometimes have a big impact on the stock and financial markets movement.

The capacity utilization rate provides an estimate of how much factory capacity is in use. If the utilization rate gets too high (above 85%) it can lead to inflationary pressures.

International Trade: measures the difference between imports and exports of both goods and services. Changes in the level of imports and exports are an important tool that is used to gauge of economic trends both here and overseas. This report can have a profound effect on the value of the dollar. That in turn can help or hurt multi national corporations whose profits overseas can diminish when they convert their funds back to the US especially if the US dollar is overvalued.

Another valuable aspect of this report is that imports can help indicate demand for foreign goods here in the U.S. and Exports may show the demand for U.S. goods in overseas countries.

Next Week we will go over additional reports and their significance to your trading.

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Economic Reports and Expiration Notices

Source: Moore Research Center, Inc.

* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.

** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.

*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!