Kodak and the Teacup Index

A couple of days ago I wrote a story about Eastman Kodak's (NYSE: EK  ) disappointing earnings, and said I had my doubts about CEO Daniel Carp's promise of new products "with a potential for growth that is far beyond that of our more mature operations." Shortly after, I received a great email from a photo shop owner who disagreed with my assessment and introduced me to the "Disneyland Teacup Index."

Mitch Goldstone is president of 30 Minute Photos Etc. in Irvine, Calif. His proximity to the Magic Kingdom, he says, gives him a great perspective on the state of the economy in general and Kodak in particular. Mitch told me that during tough economic times he develops fewer pictures of the famous Teacup ride and other Disney attractions, and more pictures when times are good. "For the first time in two years," he wrote, "I've seen a substantial increase in those and [other] vacation shots."

While not perfect, the Teacup Index can be a useful gauge not only of film and photo purchases, but also of business at Disneyland and the state of the travel and entertainment industries.

Another example of this type of in-the-trenches research can be found in Thornton O'glove's Quality of Earnings. In the early 1930s the famous short-seller Bernard Smith decided to visit a manufacturing company whose stock was defying Depression-era odds and setting new highs on a regular basis. Management would not grant "Sell 'Em Ben" an audience, however, so he walked around to the back of the plant and saw that only one of the company's five smokestacks was actually producing smoke. Taking this as a sign that production had been cut back severely, Smith shorted the stock -- and cashed in when it crumbled several weeks later.

Of course, it's hardly ever that easy in practice. Smith was lucky the plant hadn't shut down the smokestacks for cleaning instead of a lack of business, just as the Teacup Index may be moving up for a reason other than an economic recovery.

Still, these reports from the trenches must be respected, so don't neglect conducting investigations like these yourself when you're researching companies. They can be valuable tools in your investing arsenal.