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Great Retailers. Great Defensive Plays

Mar. 06, 2021 6:35 AM ETAZO, DG, ROST, ULTA2 Comments
George Dagnino profile picture
George Dagnino


  • The business cycle drives asset prices.
  • In a strong economy, buy cyclicals.
  • These retailers are very sensitive to business cycle developments.

The business cycle is the outcome of business decisions. Politicians try to bias these decisions, but managers rarely change their focus. Business managers' concern is sales - sales do not happen unless goods are on the shelves.

The management of inventory levels to match changes in demand is what drives the business cycle. All my articles deal with this critical decision process and how it impacts many asset classes from gold, to metals, to bonds, to energy and energy stocks.

Source: Author

The essence of the inventory cycle is to adjust inventory levels through the production process. At the end of Phase 1 (see above chart), managers recognize inventories were reduced to excessively low levels compared to the underlying demand. They decide, therefore, inventories need to be replenished. This decision results in a series of other decisions such as buying raw materials needed to produce the goods, hiring people and paying them to manufacture the goods, and borrowing money to improve capacity and paying short-term cash needs.

Because of these decisions, commodities, employment, and interest rates stop declining. As income and demand increase, production also needs to expand to build-up inventories. Growth becomes self-sustaining.

In Phase 2 - this is where we are now - manufacturing is very strong. Commodities rise, interest rates rise, and income also increases. Eventually inflation rises toward the end of Phase 2 as productive capacity is stretched to meet demand.

Demand slows down as consumer spending power declines when adjusted for inflation. Business decides to reduce inventories. The slowdown is taking hold in Phases 3 and 4 and the process is exactly the opposite of what was happening in Phases 1 and 2. The outcome is reduction of purchases of raw materials, reduction of employment and wages, reduction of borrowing. These decisions place downward pressure on commodities, inflation, and interest rates.

This article was written by

George Dagnino profile picture
George Dagnino. Economist -- Investment strategist -- Portfolio manager – Author - Editor of THE PETERDAG PORTFOLIO STRATEGY AND MANAGEMENT on www.peterdag.com. Complimentary subscription is available.Nationally recognized speaker on business cycles George Dagnino, Ph.D. is the former Chief Economist and Risk Manager for a major corporation where he managed $4 billion of interest rates and currency hedge portfolios. The Economist Intelligence Unit (London) wrote an article about his unique and successful approach to managing risk (interest rates and currencies) using derivatives. Dr. Dagnino is 1989 market timer of the year (Source: Timer Digest) He is also the author of three books: *** "PROFITING IN BULL OR BEAR MARKETS," published by McGraw-Hill, available in Asia in several editions from McGraw-Hill Education. *** EASY WAYS TO BEAT THE MARKET WITH ETFs *** INVESTING WISELY, IT EASIER THAN YOU THINK He taught MBA courses business and portfolio management. He has a Ph.D. from Case Western Reserve, Cleveland, Ohio. He is also an internationally recognized speaker and lecturer to many AAII investment groups, hedge funds, Europe, and China.

Analyst’s Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (2)

ROST is a great stock, greatly overvalued imo. Forward PE is about 25 and average PE is about 18. I don't buy those kinds of stocks that have gotten way ahead of themselves, no matter how good they are. Price matters.
George Dagnino profile picture
@Ruble Noon Agree. However, between now and then it may very well become much cheaper as COST. Follow the business cycle.
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