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Five Things: What Companies Are Really Saying


As stress tests loom, are we approaching a bottom? Plus, how to use gold.

1. Approaching a Bottom?

"For the first time since the recession began more than a year ago, a host of major companies on Tuesday said the economy is approaching a bottom."
- Wall Street Journal, April 22, 2009, "Companies Spy an End To Declines In Earnings"

There's a dull mist hanging in the air these days, a clingy dampness that stops just short of rain even as it turns umbrellas into nothing more than hand-held cocktail stirrers. It is, after all, earnings season, that one time each quarter when Captains of Industry bring their accounting gimps up from out of the basement to beat their balance sheets senseless in front of pie-eyed analysts. It's a fun show, at least for awhile, but like anything involving gimps and senseless beatings, things have a way of turning creepy fast.

To normal and decent people, that description of how public corporations in our mighty nation conduct their business might seem... how do you say, ah yes, horrific. But think of it this way; the accountants in corporate America are the fortunate ones. Their balance sheet beatings happen only quarterly.

On Wall Street, in the banks -- our banks -- the beatings never cease. No number is good enough to be printed raw on the balance sheet of a big time Wall Street bank. Ever. "Bring out the gimp."

Which is why, despite some pockets of good news here and there from corporate America, there is so much fear over the looming "stress tests" for US banks. Who knows what hideous crimes these stress tests will uncover? But that's exactly the kind of angst a good con artist has to stir up to close the deal. Who knows? That's exactly the point.

Waiting for the results of the bank stress tests is really no different than standing around trackside in pitch-black darkness at 4:30 in the morning and asking a horse trainer - the only one with a stopwatch - how fast his horse ran. There is not an answer to that question capable of revealing anything either truthful or important.

So let's move on to what real and actual functioning companies in America are saying.

2. What Are They Really Saying? Deflation.

Funny how time flies. A little over a year ago, before the debt crisis turned everything said by company management into gibberish, there was much concern over inflation in the things companies use to produce their products, "rising input costs" as it's known in business jargon. So it was interesting today to hear McDonald's (MCD) Executive Vice President and Chief Financial Officer Peter Bensen discuss something different...

"[W]hile commodity markets remain volatile, the global recession has dampened demand for commodities worldwide creating opportunities to reduce costs," Bensen said. "In the U.S., this is beginning to work it's way through our suppliers as the quarterly increase in our grocery bill is down sequentially from 10% in the fourth quarter fast year to 6.7% in the first quarter this year."

That's still an increase, mind you, but still worth noting as a sea-change from a little over a year ago.

Meanwhile, Kimberly-Clark (KMB) reported outright deflation in their costs that exceeded their expectations by double... at least. KMB expects cost deflation to be 600 to 700 million for the year, compared to about 300 million estimated, and even that increase in deflation is based on oil and pulp prices, generally in line with current levels for the rest of 2009.

2.2. What Are They Really Saying? You're Screwed.

Although it's true that some companies are reporting at least a softening in the magnitude of the economic downturn - characterized by the Wall Street Journal's headline writers as a "an end to the declines" - there's more to and "end to the declines" than meets the eye. The elephant in the room is how the end tot he declines is being achieved.

Like many companies, Kimberly-Clark is pursuing the same needs-based strategies for their business that just about every other company is pursuing; strategies that will have the perverse effect of contributing to the "challenging economic environment" even as the company tries to fight those challenges.

According to KMB's chairman and CEO, Thomas Falk, the company is "accelerating cost reductions in driving organizational efficiencies." Let me stop here for a moment. If you are an employee of a company whose CEO says this, then, friend, it means you're screwed, because the phrase "cost reductions in driving organizational efficiencies" simply means this: worst case, you are going to be laid off; best case, you're going to see your benefits decline, your salary frozen and then be forced to assume the duties of someone else who wasn't as lucky as you and just got laid off.

Admittedly, "cost reductions in driving organizational efficiencies" sounds better than layoffs, frozen benefits and extra work for less pay.
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No positions in stocks mentioned.

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