High trust enables creative risk. Only when we trust each other can we risk the quantum leap into the next generation of activity. Regardless of service or products, to move beyond the status quo takes a special talent—and that talent is best tapped into through partnerships. Some of the best breakthough examples come from the American effort to conquer space. The partnerships developed between NASA and private industry are too numerous to list— but they have yielded a lot more than the beverage Tang. From microwave ovens to insulated clothing, our lives have changed dramatically thanks to these partnerships. The creative risk taking was there. And those who formed partnerships with NASA stood to benefit like no other.

• Long-term changes of growth patterns
• Changes in the customer base (demographics)
• Changes in production costs
• Product innovation
• Changes to production processes
• Structural changes of supplementary industries
• Changes of government policy
• Exits and new competitors.

Industry trends have to be monitored and projections about future trends have to be made because they will influence the profitability of an industry. Some major industry characteristics are:

• Pricing and cost structures (evolution over time)
• Domestic and international competition
• Technological change (pace and adaptability)
• Asset values
• Upcoming financing needs
• Potential liabilities
• Political and regulatory environment
• Government support
• Current state of regulation/deregulation.

This is a basis for a sector rotation strategy but the profit cycle is not the only selection criterion. Banks show a profit rebound in the early phase of a recovery because the countercyclical Fed policy that is often observed in this economic environment results in low interest rates. A steep yield curve helps banks to increase their interest margins.

Automobile manufacturers usually realize a profit rebound at the early stages of an economic rebound because consumer confidence improves and induces a higher demand for discretionary products. In this phase favorable financing is also available and especially car manufacturers can substantially increase their sales through financing initiatives like zero-percent financing and large discounts for new car sales. Cyclical industries like automobiles have a high operating leverage which means that they will benefit at the early stages of economic recovery because they experience a rise in sales. Also industries with high financial leverage benefit from rising sales volume. Fixed financial costs like interest expenses determine financial leverage.

The business cycle sets the parameters for the sector rotation strategy. Sectors with a high cyclical component will outperform at the early stages of an economic expansion while noncyclical sectors will tend to underperform during an expansion phase relative to the market. The cyclicality of a sector allows predictions about the development of earnings across business cycles. For example, the business of IT hardware companies depends on the capital expenditure (CAPEX) plans of other companies. In an economic slowdown when CAPEX is scaled back or postponed, IT hardware companies run a higher risk of being downgraded due to a deterioration of their credit protection measures. The most recent examples are the telecommunications equipment companies Alcatel and Ericsson. Both suffered from the lack of demand by telecommunications companies in 2002.