A good friend called me on Monday, practically in tears. She wasn't worried about the stocks in her portfolio. Monday's lament focused on a stock she didn't buy.

Her husband is an avid motorcycle rider. She started riding with him these past couple of years and has met a number of other riders. The fellow bikers stopping at café's (a local hangout in Portland, Oregon is Starbucks), diners and parks are not stereotypical Hell's Angels types, but doctors, lawyers and bankers. My friend, who follows the "Peter Lynch Principle" of investing in what she knows, is always on the lookout for investment opportunities. Seeing more and more bikers on the road, it occurred to her that buying stock in a motorcycle company was perhaps a good idea. Her first thought was to invest in Honda motorcycles. After all, her husband owned two Honda Gold Wings and an ST1100. There was one drawback, however. Honda produces cars, lawn mowers, snow blowers as well as sport bikes. She really wasn't comfortable with the rest of the Honda market. She was simply interested in the motorcycle segment.

My friend did notice that while there were a lot of Hondas on the road, there were also a lot of other brands including BMW, Ducati and the American favorite, Harley Davidson. While Harley wasn't her husband's favorite make, there sure were a lot of Harleys on the road - and this was a company whose sole product was motorcycles. She put the company stock on her watch list.

My friend looked at the corporate fundamentals. She thought they were pretty good, although when doing a comparison with its peers, she noticed that the P/E ratio was a bit high for a company in this industry. She came up with a price target with which she was comfortable for making the purchase. But she never got around to place a buy-limit order with her broker. The stock took off in 2001 without her. When the stock market collapsed after September 11, she was a bit nervous about buying on the dip. She finally talked herself into it, but once again she let her price target get away from her.

This summer's stock market collapse brought Harley once again within her reach. But all the negative market psychology made my friend nervous; she put off evidence of consumer strength, all her friends who were buying big-ticket items -- furniture, cars and of course motorcycles. In the midst of a declining stock market, she saw the Harley price either hold stable or rise. Monday was the final straw when Harley closed at $52.15 up $2.00 from the Friday close - a full $7 dollars from her buy target. Eating dust again!

My friend was feeling a bit foolish. After all, she had been following the stock price for some time and she saw that the value of the stock was still outperforming the market (measured by the S&P 500 in the chart above). She had done her homework, including research on the financials. My friend asked me if there were other tools she could use in the future that would guide her in her purchase decisions.

Using economic indicators to help decision-making
The motorcycle phenomenon seems to be related to an aging population. (The Wild One for our parents, Easy Rider for us!) Stories abound about aging Baby Boomers, now finished putting their kids through school, purchasing their first motorcycle. The chart below shows the population growth of men in the 40-to-59 bracket. We should also look at the female population growth trend, since many women are no longer satisfied hanging on in the back seat. The chart shows that annual growth for this segment is pretty healthy even if it peaked a few years ago. Thus, demographic factors are playing a major role in demand for recreational vehicles such as motorcycles.

Income and Spending
Motorcycles are basically adult toys. What induces these types of discretionary purchases? Certainly, income growth plays a major role in their demand. The chart below shows the yearly pace of real (inflation-adjusted) income and consumption growth compared to annual gains in growth for recreational vehicles. (These are not limited to motorcycles, but include the entire recreational vehicle market.) Notice that income and consumption typically move in the same direction, although there were periods in the 1990s when consumer spending outpaced income. Typically, this occurred during strong expansionary periods when the stock market was also accelerating rapidly. The yearly growth in spending on recreational vehicles did not always jive with total consumption expenditures. During some periods, spending on recreational vehicles moderated more sharply than spending overall; at other times, these purchases accelerated more rapidly than total consumption - such as in much of the past year. What other factors are important in purchasing large ticket items?

The chart below compares spending on recreational vehicles to interest rates. We use the yield on the 2-year Treasury note as a proxy for interest rate levels. Notice that high interest rate periods are not good for spending on recreational vehicles while declining rates tend to spur this type of expenditure. Demand for recreational vehicles has been particularly strong over the past 18 months when interest rates have come down significantly.

BOTTOM LINE
My friend liked the charts. She understands that demographic movements are slow. She believes that the positive trend stemming from aging Baby Boomers buying motorcycles will continue to hold for a while. She will continue to monitor the direction of interest rates as well as income growth. She realizes that she needs to make her own assessment of where the economy is headed over the next year. All in all, she likes painting a picture that combines her analysis of corporate fundamentals together with economic factors that play a role in a company's profitability.

Did she finally buy the Harley Davidson stock? I don't know. But when she does make a decision, maybe she'll place a market order this time!

Evelina M. Tainer, Chief Economist, Econoday