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Kevin Grewal is the founder, editor and publisher of ETF Tutor as well as serves as the editor at www.SmartStops.net, where he focuses on mitigating risk and implementing exit strategies to preserve equity. Additionally, he is the editor at The ETF Institute, which is the only independent... More
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  • Can Manufacturing Sustain Its Levels? 0 comments
    Sep 17, 2009 1:57 PM | about stocks: IYJ, VIS
    By Kevin Grewal, Editorial Director at www.SmartStops.net
     
    Over the past two months, the activity in U.S. factories has shown a promising trend and some are taking this to indicate that a sustainable recovery for this artery of the economy  is in place, but these people are wrong.
     
    Most recently, the Federal Reserve Bank of Philadelphia's general economic index measuring manufacturing in the Philadelphia area rose to 14.1 from 4.2 in August, marking the first back-to-back monthly growth since 2007.  To add to this, the Federal Reserve Bank of New York reported a similar trend in manufacturing activity in the State of New York.  Additionally, industrial activity as a whole in the nation rose by 0.8% in August beating analyst expectations of a rise of 0.6% after seeing a rise of 1% in the previous month.
     
    Most think that this is great news because it indicates that business are loosening the grip on their wallets and starting to spend.  However, when dissecting the numbers a bit more, they can be deceiving.  The increases in manufacturing can be attributed to the following two reasons:
    Many businesses were implementing extremely lean measures at the end of 2008 and the beginning of 2009 resulting in limited supplies of inventory.  As these inventories started to deplete, businesses were forced to start purchasing and restocking to meet minimum inventory levels so overall business operations would not be affected
    The success of the "cash-for-clunkers" program.  This government program not only sparked sales in the automotive industry but also ramped up overall production of automobiles.
    As businesses replenish their inventories, they will do so only to a level to maintain business operations, and not add excess inventories.  Most businesses are still wary of the overall health of the economy.  This can be evident through employment numbers.  Granted, the number of workers filing for initial jobless claims has fallen, but the number of Americans who continue to claim file claims keeps rising.  This means that businesses are not necessarily trimming their operational expenses, but they are not ready to hire and grow.
     
    Secondly, as the "cash-for-clunkers" program has ended, there are no real incentives for consumers to purchase new vehicles.  On the tone of a broken record, people will not make large purchases, like buying a car, until they are certain about the labor markets. 
     
    To conclude, U.S. manufacturing has seen a nice trend, but it will be very difficult for these levels to be sustained unless the labor markets improve.  Some equities that have benefited from this trend are:
     
    The iShares Dow Jones US Industrial (NYSEARCA:IYJ), up 32% from a July 8 close of $39.22 to close at $51.81 on Wednesday.
    The Vanguard Industrials ETF (NYSEARCA:VIS), closing at $50.98 on Wednesday, up 33% from a July 8 close of $38.22.
     
    Keep in mind that investing in these ETFs have inherent risks and a good way to mitigate these risks is through the use of an exit strategy.  According to the latest data at www.SmartStops.net, an upward trend in these ETFs could come to an end at the following price levels: IYJ at $48.74 and VIS at $47.97.  These price levels change on a daily basis as the markets fluctuate, updated data can be found at www.SmartStops.net.
    Stocks: IYJ, VIS
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