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TheStreet Open House

The End of the Mac & Cheese Trade

Stocks in this article: WMTMJWN

Scott Rothbort will be a guest on Fox Business News' "Happy Hour" at 5 p.m. EST tonight. Check your cable guide for channels and rebroadcast times.

MILLBURN, N.J. ( TheStreet) -- This week is a big one for retail companies, with the bulk of the earnings reports coming from big-box retailers. A smattering of specialty retailers will be reporting this week as well. In a compressed period of time, we'll be inundated with all sorts of financial data, separating the winners from the losers and inevitably resulting in dramatic responses from traders and investors.

As the bulk of the investment community focuses in on individual companies, I'm busy spotting trends in consumerism. Trends begin with subtle signs, but if you can recognize certain patterns and take appropriate action, you'll be rewarded.

First, I feel obligated as The Finance Professor to review some theory.

Economists classify products into two categories: normal goods and inferior goods. Rather than being classified by product quality, normal goods are products for which an increase in income causes an increase in demand. Inferior goods are those that increase in demand as incomes fall.

Investors have created a third product class: luxury goods. Luxury goods are normal goods for which an increase in income causes an even greater increase in demand. To put it in context: An inferior good is the equivalent of macaroni and cheese, a normal good is chicken, and a luxury good is steak.

When economies shrink, luxury goods demand shifts to normal goods, and normal goods demand shifts to inferior goods. As incomes stabilize and the recession abates, demand for inferior goods peaks. As incomes then begin to rise, demand shifts back from inferior goods to normal goods and from normal goods to luxury goods. Keep in mind that this does not happen overnight but rather over a period of time.

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