Where Have All The Bellwethers Gone?
The term “bellwether” is derived from Middle English and the practice of placing a bell on a castrated ram (wether) as he led his flock from place to place. That way, no matter the weather or topography, a shepherd would have a good idea where the flock was located and where they were going by listening for the sound of the bell on the wether.
Of course in these more modern times, the term is used in investments for certain companies that serve as rough proxies for industries or even the economy as a whole. To know where that company is going is to get a good idea of the economy’s direction. Thus, the analysis of these representative businesses should confirm as anecdotes the “empirical” data we use to make more direct economic comparisons. Most recently, I alluded to IBM and General Electric as bellwether proxies for business’ propensity to make productive investment – capex. It wasn’t a picture of health.
Earlier this week, McDonald’s announced that its same store sales in the US fell 3.3% in January, blaming, of course, “bad weather” for some of the decline. Part of the miss was also laid at the feet of an “overly complex” menu that made some kitchens inefficient. However, total global sales rose 1.2% in January, so it is less clear about menus. USA Today helpfully noted that McDonald’s just opened its first store in Vietnam, as the company, along with most of its competitors, are, “looking to grow overseas to offset weaker growth at home.”
That actually flips the script for most bellwethers that have been consistently producing meager results. The blame, apart from weather (not wether), has been shifted to overseas markets. It provides a convenient excuse given the amount of attention being paid to emerging markets in turmoil. But that rarely provides a comprehensive view of the geography of the revenue problems.
That was certainly the case with IBM, as it has been more than rough overseas for the firm, particularly EM. But that only masked the deficiency closer to home, where North American revenue is shrinking too, just not to the same degree.
We see much the same with Cisco’s disaster of a quarter. It has been spun as an overseas problem, and that is certainly true to some extent. But the biggest geographical segment, the Americas, saw a monstrous 9.5% contraction in revenue for the latest quarter. The company does not provide a breakdown with just the US or North America isolated, but with almost $6.5 billion in sales in the quarter for this geographical segment, 58% of overall revenue, it is clear that the decline is not all due to Brazil and Argentina. Like IBM and GE, there is more than a fair amount of US weakness in that mix.
And so it goes, with bellwether after bellwether showing not only contraction or very low growth in revenue, with that pattern due to both overseas turmoil and weakness at home.
What are we to make of the economy when its most visible producers are so visibly stumbling? I can only think of two possibilities – that they are no longer bellwethers, having been replaced by some newer and rising competitors; or that the US economy is as they suggest. As to the former, that would be terrific for the macro economy, but it would be hard pressed to describe current conditions as such since a widespread takeover by newer competition would provide a huge burst and boost (an unambiguous growth phase). For the latter, it just simply fits with all the other data.
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