The Consumer Is Not Back, But Thanks for the Markup in Stock Price

I keep a close eye on Whirlpool (WHR) because it's one of "those" consumer discretionary names the institutions are in love with. The action in the stock Wednesday (and of late) strikes with all the things that are wrong in the stock market. It has been surging the past week... on nothing but hope.


The hope that the consumer is back. (again) Remember, reality is not reality in the stock market... perception is reality. So you could buy on perception of the upteenth "consumer is ready to rebound" rally in the past 2 years, and you banked some excellent coin. Congrats if you participated. As long as you did not stick around for reality.

Want to know something else? I see nothing different from Whirlpool's report than I saw in Eaton's (ETN) [Jul 20: Eaton Corp - Another Example of Why Betting Ahead of Earnings is Dangerous] or Caterpillar's (CAT) [Jul 21: Caterpillar Pleases the Street]. A lot of jobs, and benefits were cut, earnings expectations on the bottom line were beat, revenue stunk, guidance is stable blah blah blah. So why did those stocks rocket up and Whirpool crumble today?

*crickets chirping*

*crickets chirping*

I have no idea why. It is yet again - why the popularity of gambling on earnings report is beyond my comprehension. I scoured this report a few times and said, this is identical to Caterpillar - its better than Eaton! Those stocks were up 8-10%+ on earnings, Whirpool is down 8-10%.

What we need to ask for all these companies is, excluding government transfers of money to create "prosperity," what will you be cutting 3 quarters from now if the so-called green shoots are not blossoming? You've cut all your muscle out to "beat the numbers" - you will be left with bone.

Let's take a closer look at WHR and again, if you read my reports on CAT or ETN, you will see all the same wording. In the meantime, I'll continue to talk to this wall over here repeating like a drone how the consumer is not back, and your playbook that you've been using the past 3 decades ("don't ever bet against the US consumer") is not going to work this time around. Even allowing for government transfers of money trees from future generations (and foreign creditors) to the current generation - effectively trying to blackmail Americans to buy cars, homes, fridges, Harleys, and visit malls in great numbers spending their great grandchildren's money.

I wonder if these people would be so giddy about the handouts from government if they realized where this money comes from. Or what Ben's campaign to manipulate mortgage rate down will bring to the country on the "other side" (when rates rise). Thankfully economics classes appear to be only for "nerds" and this type of stuff is not taught in the Humanities courses - or in High School...

When the government gives us money it comes from their special money machine. No one gets hurt. Go forth and shop. Except for fridges. (just whisper softly to yourself as you read this "the consumer will be back soon - I just know it". The stock market says so and the market is never wrong. He has no job, but he has China's money via Ben and Tim and Larry. And my grandchildren's money.)

Via AP

• A significant drop in consumer demand slashed second-quarter profit 33 percent at Whirlpool Corp., the world's largest maker of home appliances.

But.... wait for it!

• The profit was better than analysts expected, and the company brightened its full-year forecast.

Yes!!! (I am saying that in Marv Albert's voice) ---->

Wait... the stock is supposed to rocket up 10%+ on this "surprise". Reboot the stock market... something is amiss today.

• But Whirlpool's revenue dropped 18 percent (much better than Eaton or Caterpillar) to $4.17 billion from $5.08 billion, missing Wall Street's average forecast of $4.2 billion (that's ok, everyone is missing revenue - you just manipulate the bottom line via tax changes, inventory changes, cutting heads, taking 1x costs that don't count on Wall Street - we all win here), and investors pushed the stock down $4.85, or 8.6 percent, to $51.49 in afternoon trading. (that's just wrong. Analysts expectations were beat, by birthright this stock should be in the $60s. Uncle Ben, push more of your paper dollars into the stock market - we have a runner here)
• Whirlpool, whose brands include Maytag and KitchenAid as well as Whirlpool, earned $78 million, or $1.04 per share, for the period ended June 30. That's down from $117 million, or $1.53 per share, a year earlier. Analysts surveyed by Thomson Reuters predicted a profit of just 51 cents per share. (they crushed analysts)

Ok for 96.9% of investors, they never get past reading anything other than the headline from Reuters screaming " beat expectations by 53 cents!!" (supported by cheering and high 5s on the CNBC set). So if you want to be like them, please stop reading here. The rest of this entry is for those who like to look under the hood and choose the red pill. If you choose the blue pill, please go visit

CNBC.com right now - Dennis Kneale's blog page is especially compelling and informative.

The term redpill was popularized in science fiction culture via the 1999 movie The Matrix. The movie relies on the premise that an artificial reality that is advanced enough will be indistinguishable from reality and that no test exists that can conclusively prove that reality is not a simulation. This ties in closely with the skeptical idea that the everyday world is illusory. In the movie, a Redpill is the term used to describe a human who has been freed from the Matrix, a fictional computer-generated world set in 1999. Blue pill refers to a human still connected to the Matrix.

Welcome friend... I see you've chosen the red pill. Reality is ugly, I'm sorry to say - but the truth sets you free. Rick Santelli is the only guy we have working for us on the "inside" - but let's keep that between just you and I. Let's continue shall we?

• Whirlpool has found that shoppers are still putting off some appliance purchases amid a recession complicated by tight credit and falling housing prices, both of which directly affect the market for appliances. "Consumer demand for appliances was significantly lower in the second quarter, which negatively impacted our global unit volumes," Chairman and CEO Jeff M. Fettig said in a statement.
• The sales decline was driven by lower unit volumes in both North America and Europe.

Enough about the Americans and the Europeans. We always have the Asians. They have this trick up their sleeve called... (wait for it)... saving money.

• One bright spot was Whirlpool Asia, which saw a 3 percent uptick in sales.

Stop me if you've heard that one before. Ok, that's the bad news - now the good news, expense control was fantastic as many heads were chopped, 401k contributions stopped (Main Street = Wall Street), and benefits hammered.

Via Reuters

• Cost cuts and a tax benefit helped Whirlpool Corp (WHR.N) beat analysts' second-quarter earnings estimates. JPMorgan analyst Michael Rehaut cited a better-than-expected tax benefit....
• The company has reduced its contribution to retirement plans, shuttered plants and cut capital spending to curb costs in the economic slump.

Oh yes, another company "beating" by tax treatments. It is quite beautiful that the US tax rules are so artfully managed...

Surely there must be replacement demand... right? I mean when your fridge breaks down you have to replace it. Or the washer and dryer?

• In April, it said it saw a more challenging market than it had previously expected for the rest of the year as consumers continued to delay replacement purchases, even for appliances that are beyond repair, because of the economic uncertainty.

Hmmm

- I guess even laundry is not recession proof in America... at the pace we're going maybe we too can wash our clothes in water on the streets... our dream of reaching 3rd world status is becoming more possible by the day. Thanks for the update Whirlpool!

That said, all this "negative" talk of consumers not even able to find funds to replace washers and fridges makes no sense to me ... when you are unemployed you have far more time to go shopping for appliances (and many other things). Either CNBC is wrong about the US consumer or a company that directly deals with them day after day is wrong. I can only assume a company that deals with consumers every day is wrong (what do they know anyhow?); the pundits on CNBC are always correct (as is the stock market).

**********************

Now in all fairness let me give you the new thesis on Wall Street which is of the bullish bent.... companies have cut costs so sharply that once demand surges back the profits will be flowering in ways we've never seen before. (this is course assumes as demand picks up no one new will need to be hired, 401k payment won't have to be restored, healthcare costs won't go up, etc - therefore increasing costs to the companies) For example so many heads have been chopped (and benefits lost).

Whirpool North America is minting money even with sales falling off a cliff.

• Whirlpool's North American profit rose 19% despite a 17% sales drop.

So all we need to do is get demand stoked- I mean if an $800B stimulus package (after a $200B stimulus a year ago at this time) along with generational lows in interest rates won't do it, how else can I help stoke the bottom line of our public corporations, so that CEOs can justly get their 7th house while the peons that work for them go visit the unemployment center?

Aha! Call the grandkids, time to break open their (already broken into 17 times) piggy bank! Stimulus 4.0 time. No CEO left behind! The workerless American economy (ex C- level executive, healthcare, education and federal govt jobs) is on track.

Comments

[babajay:]

Enough Mike..! Youre preaching to the choir. I wonder when our "Ivy League educated" management teams will realize that the more you cut benefits at your firm, the more the other "ivy league educated manager" down the road will cut benefits at his firm. What does this all mean.. Well those workers that are getting their benefits cut will not be able to buy fridges, cars, computers, healthcare, etc. Funny how that works. But as youve rightly said, Economics class is for nerds... why not wait until CNBC tells you what the news is. We are at a frightful time in this country, Management will do everything and anything to beat expectations, get the stock up and cash in their options. Soon we will hear screaming from the ramparts when the govt decides to intervene on executive pay. This obviously cant last, but it can last long enough for the few to get paid while the many suffer.
Bottom line this past quaters earnings have been a joke in most cases. This will not end well.

Jul 23 07:28 AM

[basehitz:]

Mark, thanks for another insightful analysis. I went over your CAT analysis with someone who saw CNBC's version first. She saw first hand the blatant hype and responded "They didn't say any of that in their report. They made it sound like they're doing really well."

I explained my theory on the agenda-driven hype. Do they not have any conscience?

Jul 23 07:41 AM

[sheople:]

The only economy (that counts) left in the United States is the economy generated by government and media. The stock market belongs to them.

Jul 23 07:54 AM

[jkh307:]

I love it... read it a couple of times... sent it to friends.
I like the part about us washing clothes in the streets ...

You have a great 'feel' ... for the idiocy of the markets and
CNBC clowns.

And ... you are 100 % correct !!

As Marc Faber said recently 'the United States is following the Zimbabwe
model'. We sure are. I guess we get the 'leadership??' we deserve.

Jul 23 08:11 AM

[doubleguns:]

I have to wonder what quality measures where probably taken out at some of these places to get more profits. What will be the "consumer report" score on these products 1-2 years out.

Total garbage?

Jul 23 08:22 AM

[John Galt:]

Remember, reality is not reality in the stock market... perception is reality. So you could buy on perception of the upteenth "consumer is ready to rebound" rally in the past 2 years, and you banked some excellent coin. Congrats if you participated. As long as you did not stick around for reality.

- It's like that London face test. If they put 100 faces in the newspapers, you aren't picking the face that you think is the best looking, you are picking the face that you think the most people will think is the best looking.

I wonder if these people would be so giddy about the handouts from government if they realized where this money comes from. Or what Ben's campaign to manipulate mortgage rate down will bring to the country on the "other side" (when rates rise). Thankfully economics classes appear to be only for "nerds" and this type of stuff is not taught in the Humanities courses - or in High School...

- In college people can get degrees without taking 1 math class, without taking 1 econ class, without knowing how to balance a check book...

but oh oh oh, business majors MUST take an ethics class. We have to teach them how to be ethical.... You MUST take an anthropology class, to learn how other cultures live... you MUST take a psychology class, to learn how people behave.. Now some colleges make you take a swimming class so if you ever get stuck in a situation you won't die...

So few people have formal schooling on Economics, but everybody has an opinion on how to the scarcity and choice of distribute goods & services.

You think making me read the classics helps me as a person... yeah probably. But I also believe that making your "activist" and "humanities" groups learn economics would save a lot of headache too!

Jul 23 08:26 AM

[frosty:]

Report after report says, ". . . beat estimates" rather than "the anlaysts were wrong again". How the financial media can make lemonade out of lemon rinds is beyond me. Company after company reports sharply lower revenue, most are showing losses or at least significantly reduced earnings, the BEST they can say is that sales have hit bottom rather than sales will increase in the near future, what earnings most companies have are largely from accounting and tax benefits rather than product sales, yet Catapiller has a "blockbuster quarter"? Go figure.

Jul 23 08:34 AM

[John Galt:]

One more thing...

TraderMark, you are a Howard Roark and NOT a Peter Keating. That's what I like about you. Keep up the good work.

Jul 23 08:41 AM

[Ergo:]

Special thanks to the author for good humor in the morning --> "If you choose the blue pill, please go visit CNBC.com right now" & "economics classes appear to be only for 'nerds'"

Jul 23 09:37 AM

[WhoisJohnGalt:]

I love this satirical piece, really emphasizes how silly the recent 2Q earnings "bubble" has been, fueled by slashed revenues and softball expectations.

Wait a sec, those weren't good reasons to buy into the market...

Jul 23 09:43 AM

[robert.b.fe...:]

TraderMark: Greetings. Excellent piece. Way back in the day (No civil war jokes please) TX schools had a course called cosumer math which explained revolving credit, ballancing check books ETC... It was a required course for high school fresh men and was very informative in a basic economic sense. Why it was removed is beyond me but reinstating an updated version of it nation wide would go a long way.

Jul 23 10:17 AM

[Wisdom vs. ...:]

economics is for nerds? when stimulus 'crackheads' like shiller (cloistered academic) and roubini (protector of his rich clients' wealth) are pushing demand side even though it has never worked while smuggly ripping everyone with a contrary view, what is economics class worth? economics is simple, if anyone tells you otherwise they are stupid ot evil. supply and demand: if laws and taxes make it more expensive for small businesses to create capital, thus jobs, then they will create less. period

Jul 23 10:34 AM

[TraderMark:]

Somehow I got JohnGalt and WhoisJohnGalt on the same thread.

My work here is done. ;)

Jul 23 01:13 PM

[TraderMark:]

One of my HUGE beefs with our education systems (among many) is the lack of this basic course. When you can graduate countless without the basic ability to balance a checkbook (I can only imagine what the "calculator in math class" generation is like) you get the problems we have.

The funny thing is "true free market" advocates (of which I'd be happy to be one) require an educated consumer balanced against a free and open competition of "sellers" of said product or service.

But in our system, due to the lack of financial acumen among populace we need over and above regulation because effectively the "sellers of services" are taking candy from babies. And when that happens, the 'responsible folks' are required to pony up. Usually the ones who were the ones who would of done ok in the free market. Ironically.

So decades of bad education, lack of math skills, thrown into a world of wolves "just sign here! yes we can give you $350K on your $31K salary, 0% APR to start!" and this is what we have.

And we will keep repeating it since nothing is changing.


On Jul 23 10:17 AM robert.b.ferguson wrote:

> TraderMark: Greetings. Excellent piece. Way back in the day (No civil
> war jokes please) TX schools had a course called cosumer math which
> explained revolving credit, ballancing check books ETC... It was
> a required course for high school fresh men and was very informative
> in a basic economic sense. Why it was removed is beyond me but reinstating
> an updated version of it nation wide would go a long way.

Jul 23 01:16 PM

[Sober Realist:]

"S&P 500 to Rally Most Since 1982, Goldman Sachs Says"
It's a liquidity driven rally, and “liquidity is seeking return.” We have the velvet-tongued used-car saleman selling us a lemon.

Jul 23 01:33 PM

[Stez:]

It is best to have no math skill. As Oscar Wilde stated education tarnishes the bloom of ignorance.

Looking at the reports most of these superior results were created on declining sales. Right now margin management is the new mantra.

Before it was the reflation trade that was linked to the stimulus trade that went before it.

You know where we are going after that back to the stimulus trade.

The daisy chain is intact.

Bottom line it's perception that masters reality as the greatest investor of all pointed out - Gordon Gekko.

He was real and he lived unlike the wonderful Caterpillar results that burst out the page.

Jul 23 02:34 PM

[Wisdom vs. ...:]

baseless speculation: GS, etc will drive this rally hard, then a terrible piece of bad news (one, usually) will cause GS, etc to demand everyone take profits, retreat, whatever. as Mark might say, "lather, rinse, repeat". we have seen this pattern all year

Jul 23 05:17 PM

[TraderMark:]

I'm more along the lines of "if you keep the sheep stupid, you can keep sheering them while they graze in lurid states of ambivalence." Then one day they realize they nude and wonder how they got that way.

Jul 23 07:03 PM

[E Nuff Sed:]

Well we are in a recession so what you expect - revenues will go down. Can we look at beyond the recession. Appliances and Cars wear down and sooner or later the consumer will be back. Companies which are lean and mean will thrive.

Take a look at Sysco SYY - it is a wide moat company selling at at 2/3rd of last year. Pristine balance sheet yielding 4.33%. Revenues are down around 3% but the company has raised a lot of cash and is primed to buy out weaker competitors.

Jul 23 08:56 PM

[TTHY:]

Laundry is still largely recession proof, but customers todays no longer limited to traditional familiar brand: Whirlpool, Maytag, GE Kenmore & Frigidaire.

Recently, I purchased a front-loading washing machine, and I choose a South Korean manufacturer over Whirlpool. Reason: Whirlpool washer does not equip with pump filter panel door. This is a must for all front-loading washer. What puzzle me is, nearly all Whirlpool & Electrolux (Frigidaire's parent company) frond-loading washers sold in Europe come with pump filter panel door. How come American consumers become second class citizen?

Jul 24 03:07 PM