Bad Times, Good Companies: Who's Swimming Naked
My what a funny market - clearly the worst is over...again. All the writeoffs have been taken, banks
are repairing their balance sheets and the "recession" isn't really here. Or so one would believe from the last few days of market action. The sudden uptick - which we plan on discussing in more depth this coming weekend - has been driven by surges in Finance and Consumer Discretionary, including huge jumps in GM and F. Of all people. Just to wrap a little perspective on it check out the graphic which is a 10-day snapshot of the SP500 major sectors. Who's read and who's green - all the folks who've done well are now reddish to glaring crimson while the converse is true of the ones who've been taking it in the kister. We won't wax on too much about whether or not this all makes sense per se.
But you likely recognize the Buffett quote about finding out who's been swimming naked when things get tough and the rising tide starts receding. As you no doubt know by now we think the tide is really just starting to ebb and there are going to be a lot of stranded players. Many of whom have been swimming more naked than they've admitted and, sadly, than they may know themselves. Interestingly despite the "good" earnings news from financials and others in fact this is more a case of severely lowered expectations being satisfied. Not the delivery of good news. From ORCL's poor outlook a couple of weeks ago to Apple and MSFT's not-so-good outlook we come to today's news where, for example, Costco's poor but honest outlook has tanked the stock. Now we ask you if one of the better run retailers in the world is getting nailed by rising costs, falling demand and tighter spending who else is going to catch it ? The markets have shrugged off AmEx's warnings and increased negative outlook as well but it's even more of a harbinger. Which leads us to the topic and readings we do want to get to.
Finding a Wet Suit
Just as refresher we've found that five major factors determine whether one is naked, wearing a swimsuit or is even better equipped. IOHO there are two things you should be thinking about right now. First, while this bounce may run for a while it's certainly been wishy-washy and seems to be largely on the back of the demand drops for oil. Not a positive sign. That would say this is more an opportunity to sell into the market rise and build up some dry powder. Second you ought to be looking for those companies that will be worthy of that powder...at some point in the future. And they may already be telling you who they are.
Virtuous Circle of Enterprise Performance
After the break you'll find another readings excerpt collection that walks nicely thru the five factors and then some. The immediately adjacent graphic is another way of thinking about things btw....no one factor by itself will make sure a company has a deluxe wetsuit. It takes all of them working together in a synergistic feedback loop. But those that've got it are going to really hammer those that don't. The readings include some good and bad stories... including those companies still squandering scarce capital on buybacks. In a time which we believe couldn't be worse, except for what's to come. A perfect contrast of strategies is the unraveling of Cold Stone Creamery's not-so-sound business model as compared to some very strong outfits that are using this downturn to turn up the pressure on their competitors - the usual suspects, e.g. HPQ, LUV, FDX. All of whom are companies with operational capabilities as excellent as it gets in their respective industries. Yet who's example is sadly neglected as the stories on Manufacturing and Logistics neglect illustrate. Just as a sidebar we've been talking about the need for manufacturing excellence since the Japanese started kicking our butts almost three decades ago - after having learned the howto from an American. Makes you wonder.
Largely it's a question of leadership, management and discipline. JNJ's discussion of how they run themselves is superb and contrasts with the bad stories from Dow and American Axle. It's also a story of good, strategic human resource development - in other words of making work worth an extra effort. And finally it's a story of tying it all together with the right kinds of measurements and controls - an integrated management system. Highlighted here by another discussion of the Moneyball approach to doing it right.
These are the folks you want to be hunting down - the experts at BizzBall ! Who aren't swimming naked but are going to stake out those who have on the beech for the crabs.
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