Five Things You Need to Know: An Inside Look at Our Asymmetric Recovery

By Kevin Depew  JUN 24, 2011 12:30 PM

A ground level view from corporate executives suggests an economic recovery will take longer than we'd like.


1. An Inside Look at Our Asymmetric Recovery

The overall economy is weak, housing remains a drag, unemployment high, consumer spending uneven, but some companies are reporting improved conditions. FedEx (FDX) executives during the company's fourth quarter earnings call this week maintained the company is seeing signs of an "improved economy" and "strong customer demand." Make no mistake, this wasn't a tentative, hopeful assertion of economic improvement. FedEx Chairman Federick Smith's comments were definitive and bold: "We believe that the near-term softness in the economy will be temporary," Smith said. "Going forward, we see stronger economic growth," he added. "We believe the industrial sector will lead growth in the United States and overseas in the next two years."

Fair enough. But rather than taking Smith's word at face value and leaving it at that, we decided to survey a handful of other companies that reporting during the week to see if they too are seeing the same industrial-led recovery as FedEx. Below are some comments pulled from those earnings calls.

As Smith noted, companies in the industrials sector are seeing improved economic performance. Here are a few comments:

Flow International
(FLOW) designs and manufactures ultrahigh-pressure waterjet cutting and cleansing systems, including robotics systems and food safety applications used in aerospace, automotive, food and paper industries:

President and CEO Charlie Brown: "[W]e feel that our spare parts business is a good indicator of industrial capacity utilization and overall economic activity. Often times even a leading indicator of sorts. Well, in Q4, this piece of our business set an all-time quarterly revenue record at $18.8 million, growing 8% sequentially and 17% year-over-year. Our previous record quarter was in Q2, but Q4 beat that record by over 4%."

Steelcase Inc. (SCS) designs and manufactures high performance work environments including office furniture, and office furniture systems.

President and CEO Jim Hackett: "[M]y biggest takeaway from [the NeoCon annual industry trade show in Chicago] was the upbeat mood of the customers, designers and dealers who came to visit. It wasn't just the quantity of visitors to the showroom which was very healthy, because the spaces seemed full throughout the show; it was the quality of those visitors. They're very serious about projects, serious about our topics more than just buying new furniture. We're seeing project business, as a result, come back to life in large companies."

Robbins & Myers (RBN) manufactures fluids management products and systems used by pharmaceuticals, the oil and gas production industry, wasterwater treatment and pulp and paper industries, among others:

CEO Peter Wallace: "Earlier this year we reported that our fiscal year started out strong and during the second quarter we continued to see strength and improving demand in many of our primary end markets. I am pleased to report that the momentum carried into the third quarter, with T-3 exceeding our preliminary expectations, and our other businesses also enjoying strong organic growth. With the orders coming in at a very healthy rate, we were able to see a nice ramp in our sales, and with the higher sales we were able to drop a respectable amount to the bottom line. Margins came in higher than our initial forecast, and cash flow from operations was extremely strong."

Not bad. But here's an interesting one:

Apogee Enterprises
(APOG) designs and develops glass products, services and systems, mostly architectural glass serving the commercial construction market, but with a smaller component of the business providing glass coatings for the electronics markets. The two-year product segmentation growth is -22.82% for architectural related products, as one would likely expect given the commercial construction industry, while optics-related growth is +2.8%.

CEO Russ Heffer: "Our businesses are beginning to see signs of improvement from the bottom of the commercial construction cycle. Among the first quarter signals pointing to architectural segment improvement were the sequential backlog growth as well as the revenue growth in our domestic architectural businesses.... I believe we are finally seeing the beginning of an upturn for our architectural segment, even though a stronger economy and more jobs are needed to bring ongoing steady growth to our commercial construction markets. For fiscal 2012, our outlook has improved slightly as we've become more confident that architectural glass price increases should flow as the year progresses and stronger volume is anticipated for our architectural glass and storefront businesses with both market improvement and share gain."

Of course, the main issue is that while things are improving on the industrial side, those economic improvements are not translating to Main Street. A survey of consumer-related businesses shows that the pass-through of costs to consumers for the narrow, yet important, area of the economy reflecting price inflation is continuing to have an impact not only on the availability of discretionary spending, but on consumer confidence as well. From some earlier conference calls this month:

Smithfield Foods
“No one wants to push through price increases because it hurts everyone’s business, but it’s the reality of life. If corn’s going to be $6 and $7, we’re going to have higher priced meat in the grocery store. That’s the reality. And I’ve made the statement publicly if we could see corn come back and these ethanol subsidies reversed, I think you’d see the price of meat come back down. So it’s a direct correlation here and I think retailers understand that and consumers are accepting it. I don’t know that they’re at all pleased but they’re accepting it just like they’re accepting $4 gasoline the second time around."

Lennar (LEN)
CEO Stuart Miller: "[S]tabilization and recovery will continue to be a slow and rocky process as traffic and desire have not yet translated into strong actual sales. These are, though, the first signs that repair of the market is upon us."

Kroger (KR)
“As you know, the weak economy continues to present significant challenges for most households. The promising signs of the  improvement we saw earlier this year seems to have stagnated. Unemployment remains high in most of our markets. And food
stamp and other government program use continues at high levels.” 2. Is This the Down Move You Were Looking For?

One thing we know is that the economy is not the stock market, so a reader asked about what lies ahead for the remainder of the summer and into fall.

Hi Kevin

Just thought I would ping you and see if I have interpreted your commentary over the last few months correctly. From what I understand you are very long term bullish, but were expecting we were going to have this weakness we are experiencing now. Your plan was to build a list of stocks to accumulate during these rocky summer months as it would be a great long term buying opportunity. My question is if you have been deploying or are deploying into this period, despite the window of weakness having just begun (the 2 count on a full 13 expected). I'm sure there are numerous ways to approach this, if one sees 50% upside then the 10% down is palatable (although often not comfortable!) . Anyway, if you have a moment would love to know if my interpretation is correct or how you are approaching all this.

Minyan T

MT -

Yes, that is correct. We knew back in the late winter and spring that the probabilities favored a MONTHLY DeMark TD Sell Setup in May, producing a window of 4-16 weeks of weakness, and supported by lower time frames with both the WEEKLY and DAILY eventually aligning. Currently we are only on bar 2 down of what I believe will be a full TD Sequential 13 buy signal on the DAILY chart, but in the meantime at risk are both the disqualified TDST levels on WEEKLY and MONTHLY. TDST levels inform us of the present trend. Disqualified levels act as support until qualified. Those levels are 1219.50 on the WEEKLY and 1049.33 on the MONTHLY.

At any rate, because I believe we are nearer the end of the process of bottoming in individual stocks than the beginning, I have been buying some stocks in a variety of sectors (tech, consumer, multi-family apartment REITs and the water sectors) continuing the process of reallocating longer-term accounts to equities from bonds and metals. This process is not focused on indices, but individual stocks. Right now there is market risk, but I believe in many stocks no longer any individual security risk.

It is important in the selection process to monitor Relative Strength now (not momentum, mind you, because the two are very different). During the heart of bear markets, RS does not really work because all securities correlations converge and everything moves together. In more normalized markets (and for those who were not involved in markets prior to 1999, bear markets are not the norm) RS shows which securities are more likely to survive market risk and lead the way higher once the market risk is reconciled.

3. Best Buy to Downsize

Amid weak sales and growing online competition, Best Buy (BBY) plans to sublease space at its stores to smaller retailers, according to the LA Times. This is part of the much broader Socionomic trend we predicted would shrink everything from houses to retail stores to online communities.

"Big-box has already seen its heyday," Brad Thomas, a retail analyst with Keyblanc Capital Markets, told the LA Times. "Retailers just don't need as much space as they once did. Across the retail industry there is an effort to reduce the size of your stores as retail and purchases increasingly occur online rather than through brick-and-mortar stores."

Williams-Sonoma (WSM) has also been deliberately closing stores looking to recapture consumers through direct sales channels, catalog and Internet. At the Goldman Sachs (GS) dotCommerce Day conference earlier this week Willams-Sonoma Sharon McCollan observed that their data captures show customers were already shopping more than one company store, particularly in highly dense multi-store markets. Interestingly, the company's data capture was able to allow them to deliberate cut costs and close redundant stores without eating into sales, a strategy that a decade ago would have been both unthinkable and improbable without access to the data.

4. No, the Game is Actually Only Just Beginning

This is an interesting piece by Chris Hedges observing the decline of America and informing us that the revolution must start in America, not Egypt or Tunisia. This is the conclusion, but it won't spoil the piece for you to read it now.

"The game is over. We lost. The corporate state will continue its inexorable advance until two-thirds of the nation and the planet is locked into a desperate, permanent underclass. Most of us will struggle to make a living while the Blankfeins and our political elites wallow in the decadence and greed of the Forbidden City and Versailles. These elites do not have a vision. They know only one word: more.  They will continue to exploit the nation, the global economy and the ecosystem. And they will use their money to hide in gated compounds when it all implodes. Do not expect them to take care of us when it starts to unravel. We will have to take care of ourselves. We will have to rapidly create small, monastic communities where we can sustain and feed ourselves. It will be up to us to keep alive the intellectual, moral and cultural values the corporate state has attempted to snuff out."

Game over. We lost. How's that for some Socionomics-related sentiment? But buried here in the rhetoric are our familiar Socionomics-based themes of fracturing into small, self-sustaining communities to help foster, or "keep alive," our "moral and cultural values." The author does not recognize that this is already happening, and the fact that it is happening necessarily means that the bull market for our elites has already peaked and is, in fact, over. It's not that I disagree factually with anything Hedges writes in his piece, only that, as I read it, he confuses the cyclical for the secular -- a mistake always made at the bottoms and tops of cycles. The assumption is that the trend is going to continue forever; i.e. the new economy, the Chinese century, even "permanent war." We've been here before. And we'll one day, many years from now, return once again.

5. Dire Warning About Human-Induced Climate Change

Speaking of having been here before, check out this dire warning from a U.S. congressman about the impact of human-induced climate change.

"Man cannot at his pleasure command the rain and the sunshine, the wind and frost and snow, yet it is certain that climate itself has in many instances been gradually changed and ameliorated or deteriorated by human action. The draining of swamps and the clearing of forests perceptibly effect the evaporation from the earth, and of course the mean quantity of moisture suspended in the air. The same causes modify the electrical condition of the atmosphere and the power of the surface to reflect, absorb and radiate the rays of the sun, and consequently influence the distribution of light and heat, and the force and direction of the winds. Within narrow limits too, domestic fires and artificial structures create and diffuse increased warmth, to an extent that may effect vegetation. The mean temperature of London is a degree or two higher than that of the surrounding country."

That is an excerpt from a speech delivered by Congressman George Perkins Marsh... in 1874.

(Via the Guardian's Environment Blog)

No positions in stocks mentioned.

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