Confession: Numbers Don’t Tell All - Weekly Blog # 768

 

Mike Lipper’s Monday Morning Musings

Confession: Numbers Don’t Tell All

Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018

 

 

 

As a numbers-oriented person I must confess that numbers don’t reveal all critical information about a situation. For instance, future risks. The bearish financial press is focused on future profit margins shrinking on declining sales in the coming recession.

 

The real likely risk ahead of us is what an economic recession will mean to us personally. As Warren Buffet said, it will be revealed which swimmers are naked when the tide goes out. So too will we find out which companies are overextended when the economic pie shrinks.

 

The problem facing the management of companies, governments, non-profits, and individuals is the reduction of expenses. Rarely are expenses reduced proportionately to the actual decline in revenues, or the expected “top line”.  Expenses are cut either by judgement or happenstance. The cuts can impact the three “S” s on which future relationships are based. Products/services and future sales are based on their perceived Success in use, whereas Service is based on the ease of the relationship and the Safety of the user.

 

To an important degree the way customers feel about the product or service is dependent on the quality and quantity of known or unknown people they deal with at the firm and/or its distribution system.

 

The transaction price of most companies and practices are sold is leveraged over the resale value of its hard assets by its perceived reputation value. This is an attempt by the marketplace or ballot box to determine the sum total of the three “S” s. Thus, the impact on the absolute and relative value of its reputation is critical when it becomes necessary to cut people.

 

During the past holiday shopping season, it was easy to rank the service and inventory levels of various merchants through store visits. It was a little more difficult gauging the service levels provided by these service companies, particularly financial and health services. Much more difficult, but perhaps more important, is gauging the safety for the customer performed by service companies. Banks have announced employee cutbacks, hospitals are having difficulty finding qualified nurses and medical techs, certain military branches are understaffed in critical units, and law firms are reducing staff. These levels of safety should impact a company’s ultimate worth.

 

We don’t know what additional risks we are taking as consumers by relying on formerly reliable service providers whose staff support is shrinking. While I don’t know the risks, I do know that I am my accountant and back-office people are already spending more time reviewing the statements sent to us. I suspect the cost to me is much greater when a professional firm has an error or omission than when the wrong size of a garment is received at a store.

 

The following statistics suggest to me that I need to pay increasing attention to the details of safety than in the past:

 

Possible Warning Signs

1. The decreasing value of the US dollar relative to other currencies. This will likely raise the cost or reduce the quantity of what I buy.
2. There is a dichotomy between the level of transactions in the NYSE and the NASDAQ. Compared to a year ago, NYSE volume is down -14%, while NASDAQ volume is up +2%. Last week NYSE prices rose while NASDAQ prices fell. With many older company stocks generally flat for a year or more, the outlook for making money in these stocks looks limited. Some “growth stocks” are finding their sales more cyclical than in the past and the demographics are not promising.
3. China’s business capital returns are declining. Growth in global trade has been heavily dependent on Chinese export earnings. If they become smaller as the rest of the world slows, it is likely that export earnings will decline and result in lower imports.

 

Self-Appointed Mission

Bernard Baruch, a friend of my grandfather, labeled himself a speculator at a congressional hearing. He then explained to members of the House that the term speculator comes from the Latin term “to see far”. I use a speculative focus on the future for me and my clients. Part of looking at the future is identifying different possibilities. I take my marching orders to spot both “bull” and “bear” cases.  

 

My blogs often warn of problems, as Mr. Baruch did. However, I think the time for a new “bull” market is coming. Hopefully, we will make enough adjustments to our society/economy so that we won’t need to go through stagflation to adjust.

 

I lack the ability to see the future. Hopefully, a few subscribers to these blogs will have some thoughts they are willing to share about the next major “bull” market. (Please don’t focus on inflation and interest rates which are old news, they are attributes, not causes.) Help!!

 

 

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