Companion Advisor: Techniques
"Pssst, hey buddy," whispers the man in the battered trench coat and fedora, "Wanna tip on a hot stock?"
Sources of investment information
This is how people in the movies used to gather investment information.
Now, we may hear from a friend or broker, see a news item on television,
or read an article in the newspaper. How can we analyze investment information,
and how can we make sure our sources are credible?
Your best source of information is your financial adviser. If you have developed an investment plan based on your financial situation, your capacity for risk, and your investment objectives, your advisor is the best person to help you execute your plan. But, to get the right answers, you have to ask the right questions, and that requires attention to several economic indicators.
Indicators of economic developments are usually reported by The Financial Post and The Globe & Mail. All major brokerage houses publish economic forecasts at least annually, and business publications produce economic reports. Mutual fund companies publish newsletters, quarterly and annual reports, and sometimes monthly reports from fund managers. Television programs include Public Television's Nightly Business Report and Wall Street Week. As well, radio programs such as Everett Banning's Moneyworks can be helpful.
Economic information is only as reliable as the raw data collected and the credibility of its interpretation. Pay attention to the time period upon which the data are based. After collection, sorting, analyzing, and reporting, some data are weeks or months old. Also, take special note of any corrections to reports previously issued. Coverage is usually greatest when data are first reported, accurate or not, and later corrections are often much closer to the true story.
Gross National Product (GNP) deserves watching. It is the total market value of all goods and services purchased for direct use, and which won't require any further production, distribution or processing. An increasing GNP indicates an increase in economic activity, usually more jobs, more energy required, and more factories in need of upgrading. If GNP has been low or negative for a time, an increase may precede a rise in consumer spending on small appliances or clothing. If the GNP continue to rise, more expensive items such as cars, large appliances, or houses may be in demand, as well as raw materials like steel and lumber to make them. But remember, GNP only signals a rise in activity, not that things are actually getting better. When someone is diagnosed with cancer and requires treatment, GNP goes up. When a major source of pollution has to be cleaned up, GNP rises.
The Consumer Price Index (CPI) gives an indication of the rate of inflation. It is based on a basket of goods and services that the average consumer might purchase. If the CPI rises quickly, investors may move to hedges against inflation such as natural resource stocks and precious metals. If the CPI is stagnant or decreasing, it may signal a reduction in interest rates which is good for fixed-income investments such as bonds.
Unemployment Rates measure the number of people registered as unemployed, but they don't cover those who have given up looking for work. We all have a sense of the level of unemployment from the news, so the trend is usually more important than the actual level. If unemployment is increasing, there is more worry about job security, and consumers tend to spend less. Government deficits may increase as money is used for job creation or unemployment insurance payments. If unemployment is decreasing, worries about inflation may surface and it's sensible to watch the CPI.
Housing Starts and Car Sales are both related to consumer confidence and are fairly accurate because of the ease of collecting data. However, because building a house takes time, housing starts reported today reflect consumer confidence six to 12 months ago. Housing starts bode well for the construction industry, furnishings, large appliances, and plumbing as well as their suppliers and the raw materials to make the products. However, once the figures are published, the growth has already begun and smart investors will have bought their stock six to 12 months ago.
Money Supply and Interest Rates are usually related. Money supply is the amount of money in circulation, controlled by the Bank of Canada. Increasing the money supply lowers interest rates, supports economic expansion, and increases the possibility of employment and inflation. Decreasing the money supply does the opposite.
There are many other economic indicators that investors can watch but you can have too much information, too. The best strategy is to discuss changes in economic trends with your investment adviser in order to structure the investment portfolio that is best for you.
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