What they said
Fedex issued a small press release on Friday, saying that the company’s August quarter earnings came in at $.58 a share, much higher than its guidance to analysts of $.30-$.45. The November quarter looks strong as well. Why? …a rebound in international business and cost-cutting in the US. The first fits with the recent comments of a number of foreign governments that their countries are exiting recession sooner than expected.
A striking number of IT hardware companies have been saying that their business is better than anticipated. The reason?…a continuing rebound in unit volume (and revenue) growth. This contrasts with the reports of retailers worldwide, who are turning in relatively strong results, but all based on cost-cutting in a declining revenue environment.
To my mind, the most interesting announcement comes from ASML, the Netherlands-based manufacturer of wafer steppers, a type of semiconductor production equipment. The company, which had been losing money earlier in the year, announced in a (very) short press release that is it seeing a strong pickup in orders, both from logic and memory chip makers. It will report results on October 17th.
What makes this important is that ASML’s offerings are expensive pieces of capital equipment used for capacity expansion (the average price of a new machine shipped in the June quarter, for example, was about $46 million). Industrial companies, and semiconductor makers in particular, almost never borrow to pay for capital equipment; the money virtually always comes from cash flow. So this announcement means ASML’s customers are feeling a lot richer than they were six months ago and their customers are pressing them to expand.
Implications for stocks
First of all, IT hardware is stronger than most people thought. And foreign economies seem to be perking up faster than the US.
In addition, there may be a wider pattern here, although it’s too soon to tell. It’s something to think about, though.
One of the peculiarities of the US economy during all the years I’ve been observing it is that economic recovery usually starts with the consumer. Long before unemployment stops rising, the American consumer is back in the stores shopping. This sends a signal to the makers of consumer goods to increase production, and causes both retail and factories to start hiring again. The newly employed reinforce the consumer wave. Ultimately, the industrial sector starts to recover, as new retail space and factory capacity is called for.
In the rest of the world, the process is just the opposite–and more in line with traditional textbook economic models. Lower interest rates stimulate new industrial and construction projects. This leads to more hiring and finally, as a result, to increased consumer spending.
Why the difference? Economists have posited a “wealth effect,” the idea that Americans feel more well off when lower interest rates cause house prices and stock portfolios to rise. This is enough to make us feel comfortable going out to the mall, despite the fact that recovery has not yet arrived. To be honest, I’ve never much believed in the wealth effect. But it may be that a “no wealth effect” will be in play in this business cycle. Because of that, the US may well follow the foreign pattern.
This would mean that the consumer will be the caboose of the recovery train, not the locomotive…and that consumer stocks will end up having disappointing earnings early in this business cycle, before showing positive surprises later on. I don’t see much evidence that the market is thinking this way, so that would be a big surprise. The upcoming holiday season will likely tell. If I’m right, we’ll have to choose the consumer stocks we want to hold very carefully, and not just buy across the board.
This is a refreshing and contrarian point of view since the rest of the financial commentarian class out there seems to have missed this perspective entirely.