Richard Russell’s Dow Theory Letters dated March 20, 1970:
“Sales and Inventories: The accompany chart from the Journal of Commerce (thanks to Humphrey Neill) shows an interesting picture, the critical sales to inventory ratio. When business is expanding, and we note on the chart that the long upward rise in the FRB production index [Industrial Production Index] signifies that it has been expanding, manufacturers tend to become increasingly bullish. Consequently, they also seek to build up their inventories in anticipation of increasing business (and as a hedge against inflation.)
“Then, as a slowdown in sales appears, it usually catches manufacturers either unaware or unable to adjust their inventories fast enough. Those who see the slowdown coming may cut back their inventory building in anticipations. This is termed to voluntary inventory cutting. But in most cases a belated recognition of a sales slowdown hits manufacturers. Then they are faced with a problem; sales are declining, and they have far too many goods coming in on order. The next step is canceling unwanted orders and cutting back on future orders. This is the process known as in voluntary inventory cutting, and it is undoubtedly happening now (page 5).” Continue reading
