Tuesday, February 15, 2011

The Weak and the Slow Get Crushed

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market"(Aucontrarian.com, 2009)

"We do not now have a problem.... Inflation made here in the U.S. is very, very low"

-Federal Reserve Chairman Ben S. Bernanke, February 10, 2011


"Inflation is a means by which the strong can more effectively exploit the weak.... [Inflation] introduces an element of deceit into our economic dealings.... [T]he increasing uncertainty in providing privately for the future pushes people who are seeking security toward the government."

-Federal Reserve Governor Henry C. Wallich, Fordham University,
Commencement Address, June 28, 1978


The topic is not whether Chairman Bernanke is strong, weak, or biodegradable. Rather, when inflation is rising, it is necessary to take matters into ones' own hands, or, get crushed. Those who remain whole during inflationary periods act early.

What follows are summaries of recent quarterly earnings reports (not necessarily a company's fiscal fourth quarter. "Fourth quarter" has been substituted when necessary to eliminate confusion.). Inflation is a major burden. Most of these companies have headquarters in the United States, although they buy and sell worldwide. (Whatever distinction Simple Ben is attempting with "inflation made here" is as trivial as the man.)

The corporate snapshots raise questions.

First, why is the stock market still going up? A possible reason is the Fed's affirmative action program that boosts undeserving failures. Another is the possibility that rising costs are temporary. Or, it may be that the mind of the market is that of the village idiot. No doubt, other propositions should be considered.

Second, is whether companies can pass rising costs to their customers. DuPont believes it can; Kimberley-Clark and Campbell's are suffering erosion. DuPont and the two retail producers sell to different markets. Their remarks support the supposition that consumers at the top are spending while the lower income groups are retreating. The comments of Whole Foods intimate its ability to raise prices, which would support the upstairs, downstairs thesis.

The point of these profiles is to show how inflation and deflation fall unevenly. It is the relative movement of prices and wages that matter. Some win and some lose. This is true of companies and for individuals. It is true of investments and for consumption. Federal Reserve Governor Henry C. Wallich went on to tell the Fordham University class of 1978 that, during inflationary periods, contracts are no longer made to "be kept in terms of constant values" but, one party understands this better than the other. He might have said (and maybe he did), if ever it is necessary to think for oneself, this is the time. Shorting Bernanke's statements and the repetitious cheerleading on Bubble TV are steps in the right direction.

What follow are from wire service synopses or corporate press releases. Questions that remain may have been addressed in quarterly earnings reports or in quarterly analyst conference calls.


DuPont & Co. - Fourth quarter sales rose 15%; net profits fell 15%. "DuPont forecast raw-material and freight costs to be some 4% to 5% higher this year than last, moderating from the 6% rise seen in 2010. [Executives] were confident they would be able to pass these on to end users. Ethane, chlorine, solvents, and pigments were seen as the key areas of cost pressure."

Procter & Gamble - Sales rose 2%; net profits fell 25.5%. "P&G, which sells everything from Tide detergent to Olay skin-care products, said its commodities bill will cost $1 billion for the fiscal year that ends in June, more than double what it had expected."

Kimberley-Clark - "Organic sales, which exclude the impact of acquisitions and currency fluctuations, rose 3% in the quarter, helped by higher prices of about 2%... but, it continues to see weakness in key categories such as diapers, paper towels, and toilet tissue.... Continued consumer frugality is now sending more consumers to private-label and low-priced products, such as Procter & Gamble's (PG) Bounty Basics line, [which] are gaining share, hurting Kimberley-Clark, which makes Huggies diapers, Scott paper towels, and Cottonelle toilet paper."

Colgate-Palmolive - "Colgate's profit fell [in the fourth quarter] 1%...squeezed by higher commodity costs and money paid to promote its products."

3M Company - Fourth quarter sales rose 10%; net profit fell 0.7%. "Margins declined under rising material costs and weakening sales in the company's health care and graphics businesses.... 3M said it intends to recover higher material expenses through price increases, which include Scotch tape, Post-It notes, furnace filters, sand paper, automotive components, and thousands of other household and industrial items."

Pepsico - [Pepsi-Cola, Frito-Lay, Quaker, Tropicana, Gatorade] - Full-year reported earnings per share increased 4 percent; fourth quarter earnings per share declined 6 percent. CEO Nooyi was pleased with the results, but acknowledged she is "mindful of three realities: (1) A weak consumer landscape given the poor macroeconomic picture, especially the high level of unemployment in key developed markets; (2) High levels of cost inflation for the coming year, driven by broad and pronounced commodity inflation; and, (3) A potentially difficult competitive pricing environment, particularly in beverages." Hugh Johnson, Pepsi's CFO, talked about cost inflation of 8% to 9.5%: "That type of inflation has a pretty strong impact."

Goodyear- [tires, blimps] Net fourth quarter sales rose 14%; with a $177 million fourth quarter loss. "Raw material prices costs are likely to rise 25% to 30% in the first quarter of 2011 and rubber prices have risen 40% since October [2010]."

Whirlpool - [Maytag, Kitchen Aid] Fourth quarter sales fell 1%; profits fell 61%. It is "seeking to offset cost increases for such items as steel, copper and plastics..."

Electrolux - [refrigerators, washers] "Operating income in North America and Europe declined as the company was hit by higher costs for raw materials and lower sales prices." "The costs for our most important raw materials continue to increase," Electrolux CEO Mr. McLoughlin, said in a statement. "In addition to increased costs for steel, we also see considerable increases in resins (used in plastics) and base metals. We have signed contracts for a significant part of this year's raw material requirements."

Whole Foods - [grocer to the Junior League] Sales for identical stores rose 9.0% in the fourth quarter; earnings rose 59%. "The Company expects higher costs in the second quarter mainly due to increases in wages and investments in other initiatives." No mention of higher food costs. Is it able to pass them on to customers?

Campbell Soup Co. - [besides soups, Pepperidge Farm, Prego, Goldfish, V8] In the quarter ending October 31, 2010: "Soup sales fell 5%.... Condensed-soup sales dropped 1%, while ready-to-serve soups slid 13%." Presumably, ready-to-serve soups cost more than condensed-soups, another indication of tighter budgets, though Campbell's did not mention consumer budgets or material costs as a reason for the poor quarter (in the Wall Street Journal summary). Its new initiative: "The challenge for us now is to create some taste adventure." Another adventure will be the 10% increase of tin over the past month - January, 2011. According to the Wall Street Journal (January 31, 2011): "Heinz, Campbell Soup and General Mills [are companies where] tin can prices can represent somewhat important input costs."

The Journal's January 31, 2011, tin report addressed the circumstances of all companies and consumers in the first sentence: "You just never know what the market is going to throw at you next."