Interesting quote from Bill Siedman this morning on CNBC (slightly paraphrased) "In my memory, the widespread malaise throughout the economy is most like that experienced in the Great Depression."
I've generally found that the differential between the two indices is a pretty good indicator of near term profits. It would seem to indicate significant profit warnings ahead as costs are now flying out of control. Looks quite similar to the big widening of the two in late 1999 and early 2000 that presaged the last recession.
How many companies are there that are facing 5%+ increases in costs but have ZERO ability to pass costs on to consumers due to competitive pressures, overcapacity, and weak demand?
For a lot of companies, you just eliminated close to 100% of profit margin. And this is before higher taxes, interest rates, environmental clean-up costs, medical insurance costs, etc.
In the 3rd quarter of 2007, the U.S. economy entered a long winter for corporate earnings. Smaller companies will feel the earnings chill the worst, and it will last longer and be deeper than almost any analysts think.
The best proof that there is a PPT is the fact that Russell 2000 remains at 70+ TTM P/E ratio as this earnings winter begins to unfold. Buying small caps now is speculative insanity, equivalent to buying dot.coms in 1999.
rich writes:
How many companies are there that are facing 5%+ increases in costs but have ZERO ability to pass costs on to consumers due to competitive pressures, overcapacity, and weak demand?
Rich - there is a sea change happening & I am guessing that is what is spooking the fed more than anything.
It used to be OEMs (the original equipment guys at the end of the supply chain who ship to the big boxes) really didn't think they could raise prices - that if they did they would see demand drop and they would lose money.
This belief was reinforced because their competition wouldn't raise prices & capture that business & 'make' the money the other 'lost'.
What is happening now is they see demand is soft for everyone whether you are cheap or not. If you don't raise prices in this environment & try to build your way out you go broke even faster. So gradually these large OEs are coming around to the realization that they (1) have to raise prices even if it means losing orders and (2)they have to structure their business so they can remain profitable even at lower volume resulting from lower demand.
BTW - Their supply chain has been at this mindset for some time. I know more than a few suppliers who would hibernate before sending cash to their large OE customers.
That means we will see them all shedding a lot of fixed cost - closing more plants & cutting more office overhead. office O/H is going to take a real beating.
I've sat in on a half dozen meetings where this was the topic - what needs to be done & how to 'operationalize' it.
Oh and to those folks who say it will never happen... that lower demand will drive prices lower... maybe but I have already seen a number of companies turn down BIG orders that were priced too low instead of take those orders at a loss even if the walking away means lower revenue & lay offs.
I haven't seen that with my own eyes since the early 80s - not where OEs & suppliers couldn't come to some understanding. It is happening a lot right now - at least in my sphere.
The reason it scares the fed is this is the recipe for 'stagflation' - declining output (volume) with simultaneously increasing prices.
Will it happen? Who knows, but the recipe is there.
One other thing to look at is the geography of the Philly Region - it isn't the 'MFG Heartland' it once was. I work with two companies in the region & they tell me many of their peers have left...
I'd guess there is a lot less mfg in this region than in say North Carolina or Tennessee (not even full regions) - that was definitely NOT the case when the Fed regions were drawn up a 100 years ago or so.
Not sure how that changes the analysis but something to consider.
That means we will see them all shedding a lot of fixed cost - closing more plants & cutting more office overhead. office O/H is going to take a real beating.
dryfly | 06.19.08 - 1:24 pm | #
I wonder what it means. The firms cut all kinds of costs. But you are going to operate one way or the other. So if you reduce some air traveling, then you have to buy a blackberry for your employees. Does this sound realistic?
I wonder what it means. The firms cut all kinds of costs. But you are going to operate one way or the other. So if you reduce some air traveling, then you have to buy a blackberry for your employees. Does this sound realistic?
jin | 06.19.08 - 2:11 pm | #
It won't just be travel bans. They will fire unnecessary staff in droves - if you aren't handling the product or handling the customer or handling the money then you are expendable. In a modern organization thats something like nine out of ten employees.
A good test is if you can go on vacation for more than a week and the place doesn't shutdown. If that doesn't happen then you are expendable. Seriously.
BTW - the only way you get rid of blue collar folks now is via shutdown, divestiture or out-sourcing... the lines are so tight you pull a few folks out and it might shutdown. That's why many companies have scheduled summer shutdown - the only time direct line employees can take vacation is during shut down - then the whole plant closes for that week.
Now if these companies start laying off indirect does that mean ALL nine out of that hypothetical ten go? No - but some will, maybe a lot. It depends on how much bleeding they have to stop & how much 'mission retreat' they anticipate will be necessary. I've talked to a few folks who say their company is exiting a lot of segments they got into in the boom. They are exiting specifically so they can shed the white collar O/H associated with those sectors - and possibly close a plant or two too besides. But the real savings come from reducing 'staff'.
There are always options on what to cut once the organization bites the bullet it is exiting markets then the white collar jobs cuts come fast & furious.
OT - C says big time losses in subprime this qtr.
When we aren't manufacturing houses or cars, but just gov't data, the outlook cannot be too good.
Interesting quote from Bill Siedman this morning on CNBC (slightly paraphrased) "In my memory, the widespread malaise throughout the economy is most like that experienced in the Great Depression."
I've generally found that the differential between the two indices is a pretty good indicator of near term profits. It would seem to indicate significant profit warnings ahead as costs are now flying out of control. Looks quite similar to the big widening of the two in late 1999 and early 2000 that presaged the last recession.
How many companies are there that are facing 5%+ increases in costs but have ZERO ability to pass costs on to consumers due to competitive pressures, overcapacity, and weak demand?
For a lot of companies, you just eliminated close to 100% of profit margin. And this is before higher taxes, interest rates, environmental clean-up costs, medical insurance costs, etc.
In the 3rd quarter of 2007, the U.S. economy entered a long winter for corporate earnings. Smaller companies will feel the earnings chill the worst, and it will last longer and be deeper than almost any analysts think.
The best proof that there is a PPT is the fact that Russell 2000 remains at 70+ TTM P/E ratio as this earnings winter begins to unfold. Buying small caps now is speculative insanity, equivalent to buying dot.coms in 1999.
rich writes:
How many companies are there that are facing 5%+ increases in costs but have ZERO ability to pass costs on to consumers due to competitive pressures, overcapacity, and weak demand?
Rich - there is a sea change happening & I am guessing that is what is spooking the fed more than anything.
It used to be OEMs (the original equipment guys at the end of the supply chain who ship to the big boxes) really didn't think they could raise prices - that if they did they would see demand drop and they would lose money.
This belief was reinforced because their competition wouldn't raise prices & capture that business & 'make' the money the other 'lost'.
What is happening now is they see demand is soft for everyone whether you are cheap or not. If you don't raise prices in this environment & try to build your way out you go broke even faster. So gradually these large OEs are coming around to the realization that they (1) have to raise prices even if it means losing orders and (2)they have to structure their business so they can remain profitable even at lower volume resulting from lower demand.
BTW - Their supply chain has been at this mindset for some time. I know more than a few suppliers who would hibernate before sending cash to their large OE customers.
That means we will see them all shedding a lot of fixed cost - closing more plants & cutting more office overhead. office O/H is going to take a real beating.
I've sat in on a half dozen meetings where this was the topic - what needs to be done & how to 'operationalize' it.
Oh and to those folks who say it will never happen... that lower demand will drive prices lower... maybe but I have already seen a number of companies turn down BIG orders that were priced too low instead of take those orders at a loss even if the walking away means lower revenue & lay offs.
I haven't seen that with my own eyes since the early 80s - not where OEs & suppliers couldn't come to some understanding. It is happening a lot right now - at least in my sphere.
The reason it scares the fed is this is the recipe for 'stagflation' - declining output (volume) with simultaneously increasing prices.
Will it happen? Who knows, but the recipe is there.
One other thing to look at is the geography of the Philly Region - it isn't the 'MFG Heartland' it once was. I work with two companies in the region & they tell me many of their peers have left...
Map
I'd guess there is a lot less mfg in this region than in say North Carolina or Tennessee (not even full regions) - that was definitely NOT the case when the Fed regions were drawn up a 100 years ago or so.
Not sure how that changes the analysis but something to consider.
still a lot of petrochem done there along with manufacturing in the lehigh valley.
i "think" this reading was supposed to improve a bit, oh well....
That means we will see them all shedding a lot of fixed cost - closing more plants & cutting more office overhead. office O/H is going to take a real beating.
dryfly | 06.19.08 - 1:24 pm | #
I wonder what it means. The firms cut all kinds of costs. But you are going to operate one way or the other. So if you reduce some air traveling, then you have to buy a blackberry for your employees. Does this sound realistic?
I wonder what it means. The firms cut all kinds of costs. But you are going to operate one way or the other. So if you reduce some air traveling, then you have to buy a blackberry for your employees. Does this sound realistic?
jin | 06.19.08 - 2:11 pm | #
It won't just be travel bans. They will fire unnecessary staff in droves - if you aren't handling the product or handling the customer or handling the money then you are expendable. In a modern organization thats something like nine out of ten employees.
A good test is if you can go on vacation for more than a week and the place doesn't shutdown. If that doesn't happen then you are expendable. Seriously.
BTW - the only way you get rid of blue collar folks now is via shutdown, divestiture or out-sourcing... the lines are so tight you pull a few folks out and it might shutdown. That's why many companies have scheduled summer shutdown - the only time direct line employees can take vacation is during shut down - then the whole plant closes for that week.
Now if these companies start laying off indirect does that mean ALL nine out of that hypothetical ten go? No - but some will, maybe a lot. It depends on how much bleeding they have to stop & how much 'mission retreat' they anticipate will be necessary. I've talked to a few folks who say their company is exiting a lot of segments they got into in the boom. They are exiting specifically so they can shed the white collar O/H associated with those sectors - and possibly close a plant or two too besides. But the real savings come from reducing 'staff'.
There are always options on what to cut once the organization bites the bullet it is exiting markets then the white collar jobs cuts come fast & furious.
Alec writes:
still a lot of petrochem done there along with manufacturing in the lehigh valley.
Alec | 06.19.08 - 1:47 pm | #
I hear ya... plus there is a lot of component biz in the western part too - near DuBois-St. Mary & also State College - but NOTHING like 30 years ago.
I am serious when I say I bet NC & Tenn now have more 'discrete part' mfg (in $$$ & jobs) than the Philly Region.