Stocks continued to move higher yesterday. The Dow was aided by a strong performance by Home Depot# after it reported better than expected earnings.
Indeed, the theme this earnings season is the skill demonstrated by corporations in managing through a minefield created by Covid-19’s Delta variant, massive political uncertainty, supply chain disruptions, and sharply rising inflation. To be sure, not all companies navigated the rough seas successfully, but the vast majority did.
The word of the day, at least for today’s market letter, is pivot. When good managements see a road blocked ahead, they don’t just stand there and throw up their hands. They pivot. If they can’t get a particular part from a particular vendor, they pivot and look elsewhere. In some cases, they find their own sources, rent their own freighters, buy their own trucks. Last year, when hand sanitizer was short, Home Depot contracted with its paint supplier to shift a manufacturing line from paint to hand sanitizer. That solved its problem and allowed stores to stay open safely. Big names like Walmart and Costco hired their own freighters and avoided crowded ports like LA and Long Beach. Obviously, the little mom-and-pop store can’t do that. It’s the big corporate advantage, but it is only an advantage if a company takes advantage of its opportunity.
Managements pivot all the time. Daily. They do it quickly. But it isn’t just day to day things. When Satya Nadella replaced Steve Ballmer at Microsoft#, he immediately shifted the company away from Windows and PCs to enterprise solutions. In a world where Internet browsers were no longer operating system dependent, Windows’ importance was about to die. The location of every corporation’s computer was no longer a closet in the basement, but a remote data center. Soon the cloud obsoleted the data center. And guess who became one of the two major cloud providers in the world? Microsoft. Who was number one? Amazon, the Internet retailer that started selling books online.
Unfortunately, not all companies can pivot. Kodak was a photography company. But underneath the surface, it was a chemistry company coating specialty paper with a light sensitive coating. When digital photography arrived, all its advantages were gone. Not only that, it had no significant digital capability. It tried to build one from scratch but failed.
The New York Times has found a digital niche as the traditional newspaper industry crumbled. Advanced Micro Devices, a tertiary manufacturer of microprocessors, found other markets. Most often, it takes new management from outside to fully execute the pivot. Look at what’s going on at CVS# today. Not long ago, it was a traditional drug store chain. Then it decided to do more in the way of health services. It acquired Aetna, the big health insurance company. It set the table to remake itself. The process is ongoing. New leadership comes from within Aetna, not CVS. Not all pivots work, but companies in dying industries won’t survive without attempting to pivot.
IBM and Hewlett-Packard have pivoted multiple times, sometimes with more success than others, but both remain major factors in industries changing direction at lightening speed. Corning has made everything from kitchenware to Steuben glass to flat screens for TVs. It is one of the most active R&D companies in the world. It continues to evolve. Most likely, your Covid vaccine arrived in a Corning-made vial. Pivot.
The world never stands still. There are no original Dow Industrial members left. The last one to go, GE, is now in the process of reinventing itself as three companies. Pivot. Yes, there may be a few throwback stores that still appeal, but they are few and far between. One of the best 3-star restaurants in the world, 11 Madison Park in New York City, closed during the pandemic but has since reopened as a vegan restaurant. And yes, it still has 3 stars! The genes were there. It is reborn, vibrant.
No great company stands still. But not all successfully adapt. The young upstart with a better mousetrap often wins even if the resident leader recognizes the need to pivot. Bureaucracy and a stale mindset prevent fast movement. Look at Intel. Its length between cycles got longer as manufacturing became more complex. AMD and Nvidia passed it by. It has brought in new management from outside for the first time to try and catch up. Time will tell if it can or if it is too late. Verizon has hired a leader from outside. He’s trying. AT&T is trying to move forward with another insider. His deals for DirectTV and Time Warner were expensive misses. He is trying to pivot. But so far, all his moves have failed because he had no inherent advantage. In fact, in the cases of DirectTV and Warner, he started with major disadvantages. Sometimes you need to pivot more than once before succeeding.
All this takes me to Washington. President Biden has done his share of pivots over the last several weeks. At least he got the progressives to back off enough to get the long-delayed infrastructure bill passed. Speaker Pelosi is going to make yet one more attempt to get the Build Back America bill passed in the House. Depending on how the CBO scores the bill, she may get it done. But only if it scores in ways that keep down the cost and makes sure the vast list of new programs are properly paid for. We all know how games are played in Washington. No need to guess a political outcome. But if Ms. Pelosi can get House approval, the legislation will be changed significantly in the Senate. The key question is whether an ultimate Senate version can then be passed in the House. Said another way, will progressives accept half a loaf or no loaf at all?
Treasury Secretary Janet Yellen complicated things yesterday by saying that a debt ceiling extension was necessary by December 15th. That is about a month earlier than previously anticipated. Republicans are not going to vote for an extension as long as the Build Back America bill is on the table, and Democrats can only pass it alone under reconciliation. It’s hard to tell how hard the December 15th deadline is, but if it’s real, markets will take notice soon.
The last uncertainty to mention this morning is Biden’s choice to head the Federal Reserve beginning in February. The Senate must confirm the new head before the end of January. The choice is between current head Jerome Powell or Federal Reserve Board member Lael Brainard. Policywise, both are similar. I have no insight. But if Biden was going to make the safe choice, keeping Mr. Powell, logically he should have done it by now. Some suggest his choice will be announced at the end of this week or over the weekend. While both candidates have similar thoughts on monetary policy, Brainard represents change. And markets don’t like change, especially when they are content with the present. Biden continues to nominate key people in Washington who are anti-business. Brainard is a stronger advocate for more regulation on banking than Powell. Whoever the choice is, the market’s reaction won’t be major. Consensus still says Powell. But the longer we wait, the odds that it is Brainard increase, at least in my mind.
Today, Danny DeVito is 77. Martin Scorsese turns 79.
James M. Meyer, CFA 610-260-2220