Thursday, June 14, 2012

Stockpiles are Good?

Recently, the stock market rebounded. The analysts claim that it's partially due to data that shows inventories are increasing. I'm wondering what logical argument tells smart people that building inventory is a sign that business is rebounding, worth bumping up prices in anticipation of greater earnings.

I know accounting systems make it look like there's earnings. But think it through.

Inventories grow when sales are weak. Either procurement or production has been greater than demand in order to have more stuff sitting around. If sales are weak, then it's not a good sign for future earnings. Having cash tied up in inventory narrows the options for future investments that could grow the business. Inventory limits the option to one: sell what you got because you can't invest to sell other things.

If someone has a clue why the stock market think increasing inventories is a good thing, let me know. I'd like to learn something today.

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