Three Part Harmony?
This is one of those discussions where I’m going to let the pictures do most of the talking….well, maybe. To the issue at hand, over the years I’ve consistently checked in on hopefully what we can term the views of corporate insiders. I’ve found them helpful in the past from a fundamental analysis standpoint, although in this brave new world of unlimited money printing and perceptions management, often times fundamental reality can take a back seat, at least for a while. Neither good nor bad, but simply the facts of life as we know them at present. Deal with it.
Specifically, I’m referring to the CEO Business Roundtable Survey, the Duke/Fuqua University CFO Survey and the Conference Board CEO optimism survey. So why look at all of these right now? In a word, consistency. They all seem to be giving us a very similar message. Again, will these messages be “heard”, or for that matter will they even be meaningful set against the “will” of the Fed and fellow global central planners to reflate? After all, reflation efforts of the last 12 years have worked so well for both the financial markets and real global economies.
The key issue is this. In literally every current survey response you see below, response levels rest at or near the lows of the entire current economic recovery cycle. In all sincerity, I’ll be extremely interested to see what next quarter brings as the only time in the last say six or seven years we have seen responses below the levels seen in the current surveys was in the second and third quarters of 2008. You know what happened next.
I was perhaps most surprised by the current CEO Roundtable numbers. Historically the Roundtable numbers have lagged directional change in the CFO and Conference Board CEO optimism numbers, to say nothing of the real economy and financial markets. Not this time. We’re looking at three-part harmony, if you will, in the collective surveys below.
Is the CEO Roundtable crowd a bit on the razors edge at the moment? Sure looks that way.
Really more important to me personally is what corporate head honcho’s see in terms of sales, cap spending, hiring and ultimately earnings. Below lie more of the razors edge theme from the Roundtable. Anything below current levels and we need to take serious fundamental notice.
It’s just my own sense of historical perspective, but the CFO survey has always been important. As the old saying goes, “The CFO always knows.” To be sure, this is not about doom and gloom nor death and destruction by a long shot. It’s a picture of understandable concern. It’s a picture of heightened risk awareness. As is clear, we’ve seen the CFO folks flip flop back and forth a bit in the current cycle between positive and negative responses much more so than has been the case in prior cycles. Let’s face it, the current cycle is not just confusing for investors, but for the folks who actually run and manage businesses!
But again in the charts below that attempt to assess CFO thinking on forward earnings and cap spending expectations, we’re looking at the visual razors edge one more time. Any response levels below the current were last seen into the 2008 descent. Forward surveys will be important watch points.
Finally, the recent CEO optimism survey results lay below, this time with a good shot of historical retrospective. Important in that the historical track record of the Conference Board CEO survey has been excellent. Given that the Conference Board survey is a diffusion index, anything below 50 connotes a preponderance of cautious comments, and that’s where we stand now. But the important issue is what may or may not lie ahead in next quarter’s numbers. Over the entire data series shown, anything below the current response level has always been associated with recession. One more time, the razors edge formation, if you will.
There you have it. I thought it useful to look at all of these in a series as they are “singing” in three-part harmony. There are no definitive conclusions of the moment, but if next quarter’s survey responses deteriorate in harmony from here, I’d take very serious note.
As a final hopefully important comment, one reason I “hope” watching these types of insider surveys ahead is important is the changed nature of the financial markets in the current cycle, specifically the credit markets. In prior cycles the credit markets provided very valuable information about risk and ultimately about economic risk to those choosing to listen. Information about changing credit quality, information in spreads relative to historical context, etc. Although it’s just my point of view, those very valuable pieces of market information/signals are at best distorted and at worst completely absent from the financial market landscape given global central banker intervention of a magnitude unprecedented. They are no longer there to provide important anecdotal information. So can corporate insiders help us with this all-important task? We’ll see, but I think in the current cycle we better be more attentive.
About Brian Pretti CFA
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