03 Oct 2003 “But No One Indicates”
Not too long ago I listened to an Australian gentleman who was interviewed on a radio talk show. When asked about his experiences inAmerica, he seemed very impressed with our culture, infrastructure, opportunities, etc. But he concluded his complimentary remarks with a rather telling observation that “no one in this country indicates.” That’s Australian-speak for ‘uses one’s turn signal.’
For quite a while I have been acutely aware of and annoyed by this growing phenomenon. It might be easy to blame the trend on the narcissistic youth, but empirical evidence suggests that the problem is age, sex, and race indifferent. Very few drivers seem to give a hoot about telling the rest of us what they plan to do with their one-and-a-half-ton menaces around us. But that’s a problem for sociologists, anthropologists, and hopefully, law enforcement.
Today’s investors face a larger problem than unpredictable automobile maneuvers. Since the ‘Bubble,’ 9/11, corporate malfeasance, war withIraq, and a host of other world-class shocks to the system, many traditional economic indicators are proving themselves less reliable. In some cases they are downright misleading. For instance, consumer confidence surveys have indicated on several occasions during the past three years that the consumer was ready to quit spending, but it did not happen. Since the war ended in Iraq, the stocks of companies representing the S&P Consumer Discretionary index are up over 36%. If you believed the confidence indicators and avoided consumer companies, you missed a great return.
On the corporate front another set of powerful indicators has been muffled. In the past, most corporate managers, in their presentation of their companies’ actual financial results would spend time laying out their goals and expectations for future results. These snippets of information were very useful to analysts and investors as they provided a framework within which to build expectations for the company’s future earnings.
In response to the corporate malfeasance of last year, the Congress acted politically and, in the view of many, unfortunately, to the problem with the Sarbanes-Oxley Act of 2002. Among many things, the act states that “the SEC shall issue rules providing that pro forma financial information must be presented so as not to ‘contain an untrue statement’ or omit to state a material fact necessary in order to make the pro forma financial information not misleading.” While that sounds well and good, the effect has been to almost completely muffle management’s comments about their future earnings prospects.
When there is a void of comments or responses from management, hedge funds and short sellers are better able to drive down stock prices with their own negative comments and innuendo. In fact they have been more effective in destroying stock value and investor trust than I have witnessed in my twenty-two-year career. Don’t get me wrong, hedge funds add liquidity to markets and they provide balance to excessive investor enthusiasm, but shouldn’t their actions be regulated just as are those of long investors, analysts, and corporate managers?
The government was busy this week getting out its economic indicators. Remember that most of them are reports of what has already happened rather than indications of what is likely to happen. Today, we got another bit of good news on jobs. For the first time in 8 months the economy created jobs in the non-manufacturing area. The gain was not sufficient to reduce the unemployment rate which held steady at 6.1%, but at least the country’s unemployment rate didn’t rise as many economists expected. Note too that the government revised by half its earlier reported number of jobs lost in the service sector. In the troubled manufacturing arena, the rate of job losses showed a welcome decline.
Confidence may be rising among business managers that this recovery is sustainable. Business leaders must have high confidence that profits will be sustainable in order to invest their precious cash flow toward the hire additional workers. Business investment in jobs and equipment usually follows improving profits and stock prices. These are the best two indicators for investors and we have seen the improvement in both for a couple of quarters now.
Company profits are reports of their actual performance while stock prices represent investors’ expectations of future results. Due to the confusing indicators caused by events discussed earlier, investors have not been willing to project profit expectations very far into the future, and relatively small events can easily change their views. But if indications like today’s payroll number continue to gain momentum, their confidence in sustainability will improve and they will be willing to project profit growth further into the future. That means rising stock prices.