We have been watching, with no small degree of skepticism, a stream of improving Macro-economic data. Color us unconvinced. Many of the key releases have been fraught with misleading headlines obscuring much weaker data beneath, and last month was no different. From Inflation to Federal Deficit to Unemployment Rates to Industrial Output to recent GDP (and its revisions), nearly every data point comes with an asterisk.
When we look back at this period of economic home runs, we will call it the season of steroids. Like Major Leaguers, the Data is on the Juice.
Take the Leading Economic Indicators (and revisions) from the Conference Board. The changes to the LEI now register a flattening yield curve as a positive for future economic activity. Only in the alternative universe where the Conference Board lives is this considered a positive. The CB now requires the yield curve to actually invert before it bodes negatively for future economic growth.
The Board was apparently not pleased that 8 of the 10 past LEIs were negative. Hey, if you don’t like what the indicators are suggesting, than why not just change the model? And that’s exactly happened. Taking a page from the BLS handbook (Birth Death adjustment, anyone?), the Conference Board reduced the utility of LEIs for investors. Their work now falls into the category of economic cheerleading.
Kindly return your PomPoms to the gymnasium at the end of the semester.
Don’t care much for that private group? Then consider what
BLS BEA hath wrought. Their GDP revisions for 2005 Q1 border on the absurd. In order to crank GDP from its disappointing initial reading of 3.1% to the more vigorous final 3.8%, the BLS BEA had to make some sketchy adjustments. Primary amongst their changes was (I am not making this up!) an actual decrease in Home Prices for Q1. Thus, by somehow emphasizing unit sales (as opposed to price appreciation), courtesy of the Price Deflator, GDP became higher in the final read.
Torture the data long enough, and it will confess to whatever you want it to.
Despite this gamesmanship – or perhaps because of it – much of the investing public knows only half the story when they read the economic headlines. The challenge to us is to not only attempt to discern reality, but to anticipate when the great masses do so also. Its what has caused us to title research in the past with phrases such as “Fundamentals Stink: Buy Stocks.”
When the charade finally ends – probably after the last of the Bears capitulates – the finale will be ugly.
UPDATE: August 2, 2005 9:43pm
A few quick points: When GDP is calculated, one of the components is Structures (Residential). That’s the line where the new home construction supposedly dropped in price. The data comes from Census (part of BEA). Here is the relevant line from the Technical Note, under “Sources of Revisions”:
. Investment in residential structures was revised up, mainly on the basis of a downward revision to the Census price index for single-family houses. (Emphasis mine).
If prices went down, unit production went up. So not only do we have more output (units built), but since prices theoretically declined, the price deflator does its thing. Voila! GDP revised from 3.1% to 3.8%! (Hey kids, its magic)
Note also that part of GDP measures new — but not existing — home sales. The transaction of shifting title from one party to another isn’t considered production (nothing gets made), while building a new residential structure is.
Lastly, a Brain Freeze™ caused me to type BLS instead of BEA. Those responsible for this error have been sacked.
One for five.
That was my record for tech purchases during the 2004 holiday season.
My wife’s laptop arrived in perfect shape, worked great right
out of the box. That was pretty much where the streak ended — at one. The G5
iMac arrived with a thin pink stripe down the screen. A few calls to tech
support, and it was declared DOA, and shipped back to Apple. The replacement
had a white pinhole in the screen mask (that one pixel is dead for ever — and I didn’t bother to swap that one).
My wireless WiFi 802.11g Router didn’t work (hardware problem). The Bluetooth wireless keyboard had trouble connecting with the computer (but
the wireless mouse was fine). And the 40Gig iPod my wife gave me to replace my
first gen 5Gig iPod was great — but it came without the ordered inscription (Jim Cramer had the same problem).
As disappointing as the order problems were, I had (mostly) good
experiences dealing with tech support on replacing everything. Apple gave me a
choice of replacing or refunding my money on the iMac. A new wireless router
was shipped, along with a tag to send back the old one. They were less
cooperative on the iPod, however, telling me I would need to pay a 10%
restocking fee because I opened it. Perhaps someone at Apple explain to me how
else could I have found out there was no inscription before I opened the box?
These experiences intrigued me – I just had to laugh at 1
for 5 – so I started asking around. What I heard from friends, family, and
several hundred readers from Real Money and Dave Farber’s Interesting People list was that I wasn’t the only one having a
“funky” time with consumer tech orders. More than a few of you had horror
stories, which you gladly shared.
I got quite the earful from you guys. After reading hundreds of
emails (you can see them all here), I discovered a few interesting
things. For a guy with a mostly technical/quant predilection, I did a lot of
pure fundamental research.
This is an admittedly unscientific survey.
Perhaps we can glean
a few tidbits that are applicable to stocks. We might even be able to derive an
investable thesis or two. Indeed, there are a few lessons here for the
companies themselves to learn. With the 2005 holiday season only a few months
away, I wanted to revisit some of these issues that you, the reader, raised
about consumer tech companies this past holiday season.
Here’s what I discovered:
1) Some Productivity Gains Are Illusory
Since the late 90s, output per hour has improved dramatically.
But the measure of productivity is a quantitative one, a numerical reading of
total output per hour worked per employee. The problem with this measurement is
that it relies only upon easily quantifiable data; it ignores the qualitative side.
Example: Many tech companies have outsourced tech support. They now
handle more calls per hour than they were handling previously, and at a lower
cost. That appears terrific – if you rely on the quantitative data. But if my
mail was anything to go by, this cost savings approach is hemorrhaging clients
and damaging hard won reputation. Its approaching what I’d call "anti-productivity."
Outsourcing seems to work better for coding than it does for
telephone customer service banks in the competitive consumer products markets.
I haven’t been able to quantify the exact cost of lost customers versus saved
salaries, but if RM readers complaints are anything to go by, it is quite
All this suggests that at least some of the enormous
productivity gains (quantitative) are perhaps less significant (qualitative)
than we have been led to believe.
2) Dell generates a lot of furious emails
Dell is now the best selling brand of PC. They move so many
units, one has to expect some bad experiences here and there; that’s merely the
law of large numbers. I do not have sufficient data to draw a statistically
reliable conclusion that quality control is an issue for the PC giant. I
have a sneaking suspicion that many of
the issues are Microsoft Windows problems, and not Dell issues — but that’s
another column entirely.
But I was really shocked at how many complaints I heard about
Dell, and how serious the tone was. After you hear the 3rd person tell you “I
will never buy another Dell for as long as I live” — you take notice of it.
These emails were all post holiday season, 2004. More recently,
Jeff Jarvis (of Buzz Machine) had a big problem with his Dell. What’s so
fascinating is that a blogger kvetching about a tech problem has spilled over
into the mainstream to the point where the issue has been overheard in a mall food court.
All this implies to me that Dell’s award-winning service may not
be winning that many awards in the near future.
3) Amazon delights their customers
The overwhelming consensus from shoppers is that Amazon does an
excellent job. People who are customers become repeat customers. This is
reflected in the continued 25% year over year growth of ecommerce. As Amazon’s
most recent quarter reflects, they are doing an outstanding job of attracting
and retaining customers. Ever since my college roomate gave me a gift
certificate in 1997, I’ve been a big fan. A special thanks to the reader who
gave me their public – but very well hidden – customer service number – U.S. and Canada: 1-800-201-7575 !
Also on the big box retail side, Best Buy got very high marks –
while Circuit City did not. A glance at their stock charts reveals that
customer attitudes towards a company get reflected in their share prices.
The lesson for investors is that when you hear a few customers complain
about a given store, pay attention. That doesn’t
mean run out and short the stock instantly — but do not ignore these anecdotal
warnings. At the least, pay attention to what they might be suggesting.
with Ray Dalio, Chief Investment Officer, Bridgewater Associates
WHEN YOU MANAGE NEARLY $120 billion in institutional
assets and your hedge fund provides consistent returns of about 15%, after fees,
on average, every year for nearly 16 years running, who wouldn’t want to hear
your views on the economy? Dalio, founder of Westport, Conn.-based Bridgewater
Associates, has built an organization renowned for its penetrating analysis of
world markets and its ability to seize investment opportunities among different
asset classes, particularly the credit and currency markets. Clients gain access
to Bridgewater’s latest thinking on global markets through the firm’s Daily
Observations newsletter. We thought you might like to get the scoop straight
from the horse’s mouth.
Barron’s: What’s your outlook for inflation?
Dalio: I think inflation is gradually trending higher.
It won’t emerge as a threat probably until late 2006. World economies are late
in the economic cycle, and there are not the same excesses there used to be. The
dollar will go down a lot and commodity prices will go up a lot. There is a
structural surplus of labor and there’s disinflation from labor and manufactured
goods and productivity, but commodity inflation will offset that. The rate at
which this will occur will be gradual at first, and as we get later into 2006
we’ll have run out of slack and there will be more of a depreciation in the
value of the dollar and more appreciation in commodity prices and the Fed will
lag that move. Real rates will be relatively low.
You’re not concerned the Fed tightens too much?
No, I don’t believe they will tighten too much. Rates will
continue to rise and the Fed will continue to tighten, but their moves will lag
the forces of positive economic growth, a declining dollar and rising commodity
prices. The Fed is looking at general inflation, and that will rise slowly. The
economy is growing at a moderate pace, and so any tightening will be
comparatively slow and modest. The balance- of-payments issue is a major issue,
but it is not going to be a major problem this year. This year will be the first
attempt to remedy the problem, but what is going to happen is our
balance-of-payments position is going to worsen a lot. In 2005, 2006 and 2007 we
are going to see our current-account deficit go from 5½% to 6½% to 7½% of gross
domestic product. Our need for foreign capital is going to continue to grow at
the same time that China’s desire to buy our bonds — and Japan’s to some
extent, as well — will diminish. China’s desire to have an independent monetary
policy will be a driving factor. But there is a bipolarity in the world: The
mature industrialized countries are in relative stagnation, and the big reason
the U.S. is growing faster than most of other countries is because we are being
lent capital. We are substantially dependent on foreign lending.
To put that in perspective, we import about 65% more than we
export. Then there are the emerging countries. These countries, with their
economic booms, are running current-account surpluses and are net lenders to the
developed world. This is a very, very healthy set of circumstances. Emerging
countries are using their capital to pay down their debts, and they are buying
the U.S. Treasury bonds to hold their own currencies back. There is a very
favorable structural shift in wealth to developing nations. We are very, very
bullish on emerging countries, particularly Asian emerging countries and their
currencies. Fundamentally, though, you have to ask yourself whether the ties
between us and the emerging countries that are buying our bonds will last. It
doesn’t make sense. The balance-of-payment situation reminds me very much of the
Bretton Woods breakup in 1971.