Friday, April 23, 2010

Letting Go of Goldman: Here Comes Inflation


You may never have heard of Leggett & Platt, but chances are good you’ve used their products—if, say, you ever slept on a bed, or sat in a chair or drove a car.

After all, it is precisely those basic but essential products that utilize pieces of metal, foam or plastic shaped at Leggett & Platt factories around the globe, whether they are springs for beds, rollers for office chairs, or lumbar controls for car seats.

Indeed, long-time readers may recall that we here at NotMakingThisUp check in with Leggett & Platt from time to time, for two reasons. The first is for its uniquely broad view into end-market demand among businesses ranging from bedding to automobiles. The second is because the company has virtual real-time insight into to the supply-and-demand characteristics of many industrial commodities.

And judging by Leggett’s most recent earnings call—i.e. yesterday’s—it is clear that not only is the demand for what Leggett makes going up (no surprise: the stock market began signaling this last fall) but the price of those industrial commodities is going up.

Quickly and broadly.

Here’s how Karl Glassman, the company’s Chief Operating Officer put it, in response to one of Wall Street’s Finest, courtesy of the indispensible Street Events:

Joel Havard - Hilliard Lyons - Analyst
“Karl, you have made a few comments today about the inflation pressures coming your way, the price hikes are passing through.

“Is the environment changing, specifically with regard to the length of the timing curve that it takes to see these coming your way and your ability to pass them through?...”


Karl Glassman - Leggett & Platt, Incorporated - EVP, COO
“…If there is a difference today, it is the magnitude and the variety of inflation. From our finished bedding and furniture customers' standpoint not only are they getting it from steel but they are seeing it -- everything petrochemical-based.

“So they are getting foam increases, fiber increases. The leather guys are seeing huge inflation in hides. Cardboard. All the MDFs [medium-density fiberboards]. So it is a challenge.

“Historically the retailers have said to the manufacturing customers, we won't let you pass through. Our manufacturer customers are in a squeeze. They have to pass it through at retail. The magnitude and the velocity of this, retail has to move this time.”

Fun as it has been to weigh in on the Goldman situation—and unless the entire Goldman crew takes the fifth in front of Congress next week, a la Mark McGuire, we see nothing to change our dollars-to-donuts bet that the final score in that case reads “Goldman 1, SEC 0”—it seems time to get back to what makes markets move.

Like, say, “the magnitude and the variety of inflation.”




Jeff Matthews
I Am Not Making This Up


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The content contained in this blog represents only the opinions of Mr. Matthews, who also acts as an advisor: clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice, and should never be relied on in making an investment decision, ever. Also, this blog is not a solicitation of business: all inquiries will be ignored. The content herein is intended solely for the entertainment of the reader, and the author.

15 comments:

Anonymous said...

Jeff as always great color. In your opinion who are the best companies that give good insight into the direction of the economy? FDX/UPS, LEG, others?

Jeff Matthews said...

Anonymous asks about other companies that provide insight on the economy. A random list would have to include:

SLB for the oil service business as well as political and economic trends around the world.

COST for trends not only in retail trends and consumer demand, but also interesting color on healthcare costs, workers comp costs and other nitty-gritty details involved in running a low-margin business in a high-cost world.

There are many more. This topic is blog-worthy, but don't count on anything any time soon.

Too many earnings calls right now!

JM

kylemowery said...

Thanks for highlighting this Jeff.

Anonymous said...

Walmart said DEFLATION loud & clear in their last conference call... but that was 2 months ago.

Anonymous said...

Would Mr. Glassman care to note that due to the demand for his company's products rising faster than they can manufacture anything, he can simply increase the prices while blaming the high prices on the increased costs of everything else? No doubt, the prices on materials are increasing, but it is silly to believe that a large company like this won't pass on the increased costs AND THEN SOME when demand is higher than supply.

bjk said...

More cute but meaningless anecdotes about inflation . . . You've been predicting inflation for over five years, but all I see is housing and wage deflation. When is this mythical inflation supposed to arrive?

Rich said...

USG and RS echoed similar sentiments. There are price rises for certain at the wholesale level, and with diminishingly low inventories at all parts of the supply chain this should be seen in final goods prices soon.

Jeff Matthews said...

Anonymous #2 points out that WMT talked about consumer price deflation, and that is, or was, true. What Leggett is seeing is producer price inflation.

Anonymous #3 misses the point. Leggett is not raising prices for the heck of it, or merely because they can: Leggett's inputs costs are up, and quite broadly.

BJK gripes about 'more' inflation stories from us, although we haven't written one since the financial crisis took care of the last one.

Rich echoes the Leggett comments, and we thank him for the input.

JM

eeeeeekonjohn said...

But what happens now? The economy didn't handle food and gas inflation particularly well in summer 2008.

Broad inflation - wage increases = disaster

Anonymous said...

Jeff,

I'm a regular reader of your blog, I hold my ow views and appreciate your candid yet open minded approach to the info churn from mngmt, D.C. and the Fed.

Two things, first, WMT's call was a revelation- clearly the consumer is STILL deleveraging and feeling it hard in the wallet from the employment and housing data. Second, yes Legget and Platt are seeing concomitant producer price inflation from OEM's. BUT that statement by Glassman: "Our manufacturer customers are in a squeeze. They have to pass it through at retail. The magnitude and the velocity of this, retail has to move this time" is more hope than fact imho. And can you really blame him?

What we have here is nascent inflation in ppi and ancedotal evidence of deflation in cpi, which has been accurately borne out in the GDP deflator data over the last 9 quarters. Not a good situation to be in by a long shot. I am a longtime market operator and so I like to look at the big daddy, the ten year yield. What was/has been rather unsettling is that 10yr yld is now approaching 4% and rallied this week EVEN in face of Greece, Euro and crappy home sales. The market is bigger than the Fed, Mr. Glassman is talking his book, because its not US based end demand that is picking up- no way, China's GDP growth was north of 8.5% las quarter! Without end sales there firms like L&P are in between a rock and very very hard place. Margins will be/are being squeezed, see QCOM call, AA, IBM and yes even the mighty GOOG. Sans end sales in China most firms will be left with nothing more but hope ala Mr. Glassman as the US consumer is officially broke this cycle turn.

CB

Jeff Matthews said...

CB has imparted a more detailed explication of the sudden blip in input costs seen by Leggett, and he or she may well be right.

However, the fact is, the notion that "it is not US-based end demand that is picking up, no way" is wrong--as is the line about "lousy US home sales."

Restaurant chains, retailers, car companies are all reporting very healthy demand. And, for the record, home sales are actually quite strong.

When the trends start to change for the worse, we'll report them here. But the conference calls I'm listening to aren't seeing it.

JM

Anonymous #3 said...

Jeff, you missed the point in Anonymous #3 post. No one is denying that the costs are up. But with rising demand, it has become easier to pass the costs to the customer AND add extra margin for own benefit. It would be stupid not to and it's smart to blame the rising costs while not mentioning this whole supply/demand equation that can be used to ones own benefit.

christopher said...

JM,

Per your reply to my comments, please see this:

http://www.calculatedriskblog.com/2010/04/first-american-corelogic-house-prices.html

And then, because I know you were listening, please quote for us today's CAT conf call and detail for us where their "growth" (demand) came from.


As to restaurant chains- please watch PBS excellent Food Inc.
See here:
http://video.pbs.org/video/1402965302/
I am surprised that someone as tuned in as you are would fall for "restaurant chain" revs as a signal to end demand. Their revs as purely a supply demand equation skew that WE are subsidizing and HAVE been subsidizing via the Farm Bill for the last 20 years.

Car companies??? Come on JM, go read WHR's latest Q results and yes! Virginia SUBSIDIZED goods will be bought on the margin- see GM, F and hell even Chrysler.

And finally to retailers, your last example. JM, where is WMTs, SHLD, TGTs and JCP's revs q over q not y o y?

JM you are a bright guy, we, your blogging audience expect a lot of you, unfairly, maybe too much.

No need to listen "for trends to change for the worst"

As the "trends" really haven't "changed".

All my best and do keep up the good fight.

CB

Jeff Matthews said...

CB: Well, you're right about that--I was on the CAT call. As for "where their demand came from," I'm not sure if that's a trick question, but here goes...from StreetEvents:

"Capital markets are in much better shape than last year, demand for our products is rising, and we are seeing it in most geographic regions, although it's much more robust in the developing countries of Asia, Latin America, Africa/Middle East, and the CIS.

"We are also seeing a significant pickup in mining globally. In fact, we have already filled our available 2010 production slots for some of our large truck models and are taking orders for 2011. Demand for aftermarket service parts in our Machinery and Engine businesses is very strong and gained steam as we moved through the quarter. This is usually a good indicator of how much work is getting done in the field and the strength we have seen is encouraging.

"We are working with our suppliers and within our own factories to ramp up production and in some cases to accelerate planned capacity additions....

"I think the contrast between last year and this year can be summed up by saying last year we were rapidly ramping down and faced a very negative economic climate. This year we are rapidly ramping up and are seeing much better prospects for the world economy.

"Sales and revenues in the first quarter were $8.2 billion, and that was down about $1 billion from the first quarter of last year.

"Now given my positive comments about the economic environment, you may be asking why are sales and revenues lower than the first quarter last year when demand is improving and we are ramping up production. Well, there are two main reasons.

"First, we ended 2008 with a strong order book for mining products and large engines. And while we saw cancellations and very few new orders, we did continue to produce and ship mining products, large engines, and turbines at relatively good levels throughout the first quarter of 2009.

"The second reason is that it does take some time to ramp up and not just in our factories. Our suppliers are seeing, in many cases, dramatically higher demand from us. We have increased production schedules throughout the quarter and March was our best month for sales and revenues since the end of 2008.

"One other point about sales and that is throughout 2009 we talked a lot about the impact of dealer inventory changes and the very negative impact that had on our full-year of 2009 sales as dealers shut inventory. This year we are expecting relatively flat dealer inventory and for the most part that is what happened in the first quarter. Overall, dealers held new machine inventories about flat, but took engine inventories down about [200] million....

"As you know the recovery in machines sales, particularly in the United States, Europe, and Japan, the traditional OECD countries, is pretty anemic at this point. So we have very robust growth occurring across the Asia-Pacific theater, Latin America, and selected parts of Europe, Africa, Middle East, but very anemic growth in the OECD world, which is a substantial percentage of the total industry globally....

"Capital goods are notoriously difficult to forecast. Three to six months ago, most of you, all of our dealers, and many of our customers were very pessimistic about the global economy and I don't think they saw the V-shaped recovery, particularly in a lot of commodity sectors and emerging markets, that was unfolding even at that time."
###


Sounded fairly positive to me. "V-shaped recovery" and all.

JM

Stealthmouse said...

You're right, there will be rampant inflation. After the deflation. Rising input prices do not automatically translate to rising prices at the final consumer purchase point. For that, you need end demand. Consumer confidence is still below where it was in the depths of the early 1980s recession, retail sales are punk when compared to where we were in 2007-2008, NOT compared to last year, and housing is still a far cry from normal volume. U6 unemployment is still over 17% and even if you just look at U7, those who have jobs are still scared. What the talking heads say on TV and what analysts say is happening, is not consistent with what the average American sees and feels. The disconnect is tremendous. WMT has it right.