In this podcast, Motley Fool senior analyst Bill Mann discusses:
- Why he believes that "poor uses of capital have not been punished."
- Why anchoring to 52-week highs and lows is dangerous.
- The level of concern over rolling lockdowns in China.
Motley Fool host Alison Southwick and Motley Fool personal finance expert Robert Brokamp talk with Mark Reeth, associate investing editor at Insider, about uncommon leading economic indicators, including the Men's Underwear Index. (Yes, really.)
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on May 10, 2022.
Chris Hill: [MUSIC] We've got a closer look at China's economy as well as some uncommon leading economic indicators. Motley Fool Money starts now. [MUSIC] I'm Chris Hill joining me today Motley Fool Senior Analyst, Bill Mann. Thanks for being here.
Bill Mann: Hey Chris, how are you doing?
Chris Hill: I am doing OK.
Bill Mann: Been outside today?
Chris Hill: I've been outside. It's lovely.
Bill Mann: I think we need to focus on things like that or days like today. It is lovely outside here in the Northern Virginia part of the United States of America.
Chris Hill: Hopefully, wherever folks are listening, it is lovely where they are as well. I want to talk to you about China, but before we do that, without naming names there are a number of stocks seemingly every day now that are hitting fresh 52-week lows. Some of them falling precipitously. We've seen this in young unprofitable start-ups, and we've seen this with the biggest companies in America.
Bill Mann: Yeah.
Chris Hill: I wanted to talk to you first about the idea of buying stocks when they are falling. Because I am quite confident, particularly in the case of Upstart Holdings and Peloton. Two stocks that are not only falling today, they are trading well below where they IPO-ed.
Bill Mann: Yes.
Chris Hill: I am confident that there are investors out there looking at them and thinking, well, come on, it's below the IPO price. It is a steal at this price, and we don't have to get into those two individually I'm just using them as examples. I'm curious how you go about the process of figuring out whether something that appears to be selling at a deep discount, whether or not it actually is a deep discount, and therefore a time to buy.
Bill Mann: It is a foundational question for investing, and it's hard to tell. There's nothing magical about a company's IPO price. That is a contrived event. There's also nothing really magical about a company's all-time high. If you just pick out any company at random, anyone and look at 52-week high and 52-week low, you will see that they tend to be somewhere between 50 and 80 percent apart from each other. Not just this year, every year. Which means that at some point the stock was 50-80 percent cheaper than it was at a different point in the same year. This happens year-in and year-out.
Now, we don't tend to feel it and we don't tend to sense it because it doesn't usually happen all at once. You say the Gardners what to say, the market tends to go up, but it goes down quicker than it goes up. Goes up longer, goes down quicker. We're at a point in time when it's going down quicker all at once, and it is across the board and it's not just the US equities, its global. It is almost everything that's not energy, it's the bond market. Here we are and we have to make a good decision today. Forgetting what the all-time high was, forgetting with the IPO price was. Chris, I'm here to tell you that the market is fear- and greed-driven. Now, obviously fear is at its high, so yes, there are absolutely bargains out there and you just need to get back to first principles, figuring out what a company has the potential to earn over the long run and in some ways, what's being offered right now is fantastic.
Chris Hill: Was it you who tweeted out over the weekend something about, some of the stocks that you're seeing now are trading below their net cash?
Bill Mann: Yes. That was speaking about just in the pharmaceutical and biotech segments, but actually ran another screen. What we're looking at here is, companies that their market cap is currently below the amount of cash that they have on hand. In other words, the market is literally expecting them to destroy money, which some companies are good at doing. But right now there are 381 companies on the Nasdaq or the New York Stock Exchange that are trading below net cash, which means, Chris, not that I expect any of them to do this much less all of them. If all of those companies just said, ''Okay, we're going to stop operating and return your cash to you,'' you would profit.
Chris Hill: You're right. They're not going to do that, but it reminds me of what Jason Moser and I talked about yesterday with Uber. One of the CEO comes out and says, "Look, we had our earnings report, I was talking to investors, and to use his race, there's a seismic shift going on and we're going to cut back on marketing. We are going to treat hiring as a privilege." You would like to think that at least some of those 381 companies are going to take a page out of his playbook and say, "Look at how we're being valued right now, what if we stopped lighting money on fire?"
Bill Mann: [laughs] Hear me out. [laughs]
Chris Hill: What if we got just a little bit more judicious with the way that we spend money. This might be an opportunity here.
Bill Mann: I don't actually really consider that to be great management though. Great management isn't about, hey, what's the market allowing us to do, let's do that. Great management is all about, this is a way that we're going to try and maximize returns to stakeholders. The fact that Uber came out and said, "we're not being allowed to do this anymore by the market." I didn't take that as being awesome. It's great that they recognized that as opposed to running the ship into the rocks. But at some point, I think you really want to focus on companies where the managers are good allocators of capital in whatever market. Those companies are out there and they really do give themselves away by, you're seeing returns on capital. I know this is really great podcasts topic, but that are strong year-end and year-out.
Chris Hill: Last question before we move on. Because again, some of the companies you look at the stock performance and I get everything you're saying about but don't anchor to the higher or the low necessarily. But some of the companies out there have a lot of cash on the balance sheet. Is it your expectation that a common refrain we're going to hear over the next six months is, company X is increasing their share buyback plan because all of a sudden the stock is trading 30 percent where it was at the beginning of the year, or is that just going to be on a case-by-case basis?
Bill Mann: I actually hope that it's on a case-by-case basis. Because if we think about what's great about capitalism is that, capitalism at the end of the day is the efficient use of capital. We are in a remarkable time right now, where over the last let's call it 10 years just to put a marker down is that, poor uses of capital have not been punished. They really haven't. You have been able to survive as a money-losing company for a long time at this point. What we're feeling right now is a wash-out. What I'm hopeful for, is that we will see the truly strong companies doubling down on what they're doing and pressing their advantage. That's where I think real long-term gains are going to come from. I do think you're right. I'm speaking hopeful rather than what I think will happen. But I think what you're seeing right now is the companies that are going to survive long term should be looking at this time right now and saying, our weaker rivals may not survive this, and that's a good thing for us. What is the way that we can press our advantage and make that happen quicker than possible? I know that sounds harsh, but that's the reality of what the markets are supposed to do.
Chris Hill: Absolutely. Like the old saying, when your opponent is drowning throw him an anchor.
Bill Mann: That's right. [laughs]
Chris Hill: Increasingly, people are looking at China's economy, looking at the rolling lockdowns and saying, look, the Federal Reserve can do whatever they want with interest rates, they're not really going to be able to have an impact on what's happening in China. First and foremost, based on what you're reading and seeing, how concerned are you about China's economy right now?
Bill Mann: I think you should be concerned. I mean, there are millions and millions of people who are locked into their houses. I heard anecdotally, but it was to me a pretty good source that right now in Shanghai, people are not being allowed out of their houses even to collect food, even for food to be delivered that you must remain inside. So it is severe and it harms the rest of the global economy both on the supply side and on the demand side. We've seen companies like Starbucks has just pulled their guidance and Estee Lauder, which does a huge amount of business in China, have just ratcheted the guidance way down because of the impact of the Chinese economy. I don't actually consider that to be the most dire part of the whole situation. I mean ultimately, let's be humans here. The most dire part is that there is humanitarian crisis going on in a country of 1.4 billion people. Ultimately, my hopes are that it is resolved for them as quickly as possible. But China is still the factory of the world and for people not to have the freedom to work, to go to factories, that impacts all of us.
Chris Hill: Based on that, based on companies like Starbucks cutting their guidance because they don't feel like they can predict what's going to happen in China, should every investor do the same with their own portfolio and just say, look, if American businesses with huge basis of operation in China don't have the vision to see what's coming in the next six months, maybe I should just cut my expectations to zero.
Bill Mann: I don't think you should. I mean, unless you view what is happening in China as something that is so unpredictable that we could see ourselves years from now with the same problem. You are talking about something that has gone on for six weeks which is again, from a human standpoint, that's an eternity and from a business standpoint, for businesses that rely on just-in-time inventory and they rely on a fully functioning supply chain, that is meaningful. But you're not talking about something where China is permanently going to be removed from the ecosystem. The other thing that's interesting to me on the supply side is because China lockdown first and earliest in 2020, there were companies like Procter & Gamble that suddenly found 80 percent of their products unavailable because of what was happening in China. We're two years down the road already of a decoupling so it is serious. Absolutely, it is serious. I would not worry about the impact of what is going to happen over the next quarter or over the next year as being deeply meaningful in terms of our investing thesis for companies that are reliant in one end or the other on China.
Chris Hill: What are you going to be watching to give you a sense of hopefully the rolling lockdowns coming to an end and China's economy opening backup again?
Bill Mann: I think that's ultimately it. Ultimately at some point, China is going to reopen. They have taken on a policy of zero COVID, which is not something that almost any other country has done. I think ultimately it's going to be better if they step back from that, I don't know how they can. What we have to see now is what we've seen in every other country on earth, a reduction of the number of cases, the intensity of the demands on the hospital system and then the country is going to open back up again.
Chris Hill: Bill Mann, always great talking to you. Thanks for being here.
Bill Mann: Thank you, Chris. [MUSIC]
Chris Hill: When it comes to economic leading indicators, you'll find no shortage of analysts willing to talk about things like consumer price index, unemployment rates, and GDP. But if you're looking for something a little off the beaten path, Robert Brokamp and Alison Southwick have got you covered. [MUSIC]
Alison Southwick: If humans were good at predicting the future, we'd all be taking our flying cars to work every day and subsist off of some nutritious sludge prepared by a robot that is very close to calmly losing its patience with us and eradicating our species. Have you thanked your Alexa today? Anyway, wouldn't it be great if we could predict what is going to happen in the economy or the stock market? I mean, think of all the money we'd make. We could buy all the nutritious sludge we could ever want. Today, we're going to talk about odd little leading indicators that supposedly predict the future health of the economy. Joining us is Mark Reeth. Long time Motley Fool podcast listeners will remember him as the host of Market Foolery and Industry Focus and he's now at Business Insider. Hello Mark, it's so good to hear your handsome face.
Mark Reeth: Hello. How can I invest in nutritious sludge? Because I'm very bullish on that.
Alison Southwick: You and me both. Let's talk after the show. The idea for this episode actually came from a member of our Motley Fool Podcast Facebook group, and he mentioned the first indicator that we're going to talk about today and that's the men's underwear index.
Mark Reeth: Yes, indeed. So the men's underwear index, Alan Greenspan came up with this in 2008. Basically, the concept is that the last thing men buy for themselves is new underwear. No one's looking and they certainly don't care speaking personally. Holes upon holes down here just mothballs and just terrible look. When guys are cutting their discretionary spending it's often new underwear, that's the first thing to go. This is an index to take a look at discretionary spending and maybe you don't bet your entire portfolio on men's underwear but it is a bit telling in that consumer discretionary stocks are not having a very good year at all in 2022, consumer discretionary spending is a worrisome prospects at this point.
Almost halfway through the year, we're seeing a lot of consumer discretionary stocks down, the Consumer Discretionary Select Sector SPDR Fund and ETF that tracks consumer discretionary stocks is down 20 percent year-to-date. A lot of these consumer discretionary stocks that are being hurt are home furnishing stocks. Like the Bed Bath and Beyond, the Kirkland's the Williams-Sonoma's that did really well during the pandemic when everyone was trapped at home and staring out their boring walls deciding what paint color to change it to. Those stocks pulled forward a lot of demand in 2021 and now we're seeing them struggle in 2022. Consumers across the board are probably not feeling as good as they once were when stimulus payments were coming in and a lot of consumer discretionary stocks saw great last two years and maybe are fading a bit this year. Overall, I'm not telling you to invest based on how new your underpants are, but consumer discretionary spending is down, it is a little worrisome as we had halfway into 2022.
Alison Southwick: When it comes to accuracy, how would the men's underwear index score on, well, we call it the breethability scale, get it?
Mark Reeth: Do we have to call it that?
Alison Southwick: Yeah, we do.
Mark Reeth: [laughs] I don't know if we should call it that.
Alison Southwick: Because your last name is Reeth, we have to call it. Let's not overthink it. One out of five thoughtful nods, with five being more higher breethability scale, what would you give this?
Mark Reeth: Sure. I haven't stood in the Hanes aisle at my local target and then counted how many guys walked by with new boxers or briefs, no judgment. But signs point to lower consumer discretionary spending ahead. I'm going to give this a solid three thoughtful nods on the breethability scale. Maybe you don't predicate your portfolio on men's underpants but you should probably be aware that consumer discretionary spending is not as hot as it could be.
Robert Brokamp: First of all, it shouldn't be surprising that Alan Greenspan came up with this because many of you may know he wrote his speeches in a bathtub so the underwear was the last thing on his mind before he got into the water. It's also not surprising by the way, because I did a little research on this. So we're talking about this as men's underwear, but it turns out, according to research study cited in the Daily Mail, actually men always shop for their own underpants for 17 years of their lives. Otherwise, it's their mothers and their wives and we know that Mark is going to get married in nine days so his underwear buying behavior is probably going to change. It's not just a men's purchasing index. I'm going to give it two nods of the head. I think there's something to it for sure, I think there is certainly something to people putting off certain purchases when either prices are too high or the economy is slowing down. I just think it's difficult to follow an index that requires you to stand in the underwear section of the store.
Mark Reeth: I will note that new underpants were part of our vows before we get married. I had to promise new underwear on the horizon so you're not far off, Bro.
Robert Brokamp: We know what to get you as a wedding present so that's good.
Alison Southwick: Enough about men's underwear. Up next an economic indicator for the ladies, and that is the lipstick index.
Mark Reeth: That's right. The lipstick index was actually brought to us by a guy named Leonard Lauder of Estee Lauder fame the Chairman of the Board over at Estee Lauder.
Alison Southwick: You pronounce that like a man. [laughs]
Mark Reeth: You didn't like that? [laughs]
Alison Southwick: Go for it.
Mark Reeth: Leonard Lauder, the Chairman Emeritus of the Board of Estee Lauder, which is definitely how you pronounce it, came up with this index in 2001, basically to explain why sales of lipstick were up, even though the market was tanking post tech stock bubble and the economy was not doing so hot. His idea is that women buy these cheaper pick-me-up items like lipstick or nail polish instead of spending and splurging on the big ticket items. These smaller items can make you feel pretty and feel good about yourself and they're relatively cheap to some of the other items out there. Lipstick sales go up as the economy goes down.
That's an interesting one to pair with the men's underwear index, where men's underwear sales will go down as the economy loses strength, as opposed to women's lipstick sales going up as the economy loses strength. Either way, the lipstick index has been tweaked over the last couple of years. In fact, Estee Lauder's CEO for Fabrizio Freda, noted mid pandemic that women who were staying home, obviously cared a little bit less about their appearance as a broad generalization, but it's probably there's price onto the fact that if you were forced to wear a mask all the time, you probably don't care too much about lipstick. Lipstick sales at Estee Lauder were down throughout the pandemic but CEO Freda said that when makeup comes back, consumer sentiment will also come back. He said that back in August 2020, here we are in May of 2022 and lo and behold, makeup sales are way up louder. They just announced their earnings like two or three days ago.
Makeup sales in North America are up 12 percent year-over-year as opposed to skincare sales, which skin care, body lotion, a little bit of self-care replaced those cheaper, smaller ticket items during the pandemic. Now those skin scare sales are going back down. We see makeup sales going back up. Maybe a return to normalcy. That's little bit of stronger consumer sentiment there. I don't know if this is the most accurate indicator in the world. I don't know about you, Bro, but I stopped buying way less make up during the pandemic. I was really skimping on the foundation, saved a fortune there. I don't know if I'm ever going to go back in this hybrid remote work worlds where, maybe I care a little bit about myself and less about impressing everybody out there with this makeup. For me, in terms of breethability, because apparently we have to say that now, I will give this maybe two thoughtful nods on the scale. I don't think it's as strong of an indicator as the men's underwear index of consumer discretionary spending. Basically because the pandemic ruined this index, when you have to wear a mask all-day, who cares about lipstick? When you're stuck at home all day, who cares about makeup? Of course, makeup sales are back up. It's just a natural rebound. Two thoughtful nods from me.
Robert Brokamp: I'm going to agree with you on that. I'm going to give it two thoughtful nods as well. There is definitely evidence that during tough economic times, people do spend a little bit more on small indulgences, whiskey sales go up, chocolate sales go up, things like that. But you do have to question whether something fundamentally changed in society or the economy to undermine an index. I think that might be the case here as more people are working from home, probably looks like all kinds of things, professional wardrobes, office space sales, things like that. I will be curious to know whether five years from now, this whole work-from-home thing will be rethought. But in the meantime, I'm not going to spend too much time on the lipstick index.
Alison Southwick: Not hanging out in the cosmetics isle too much. That's probably for the best. [laughs] Let's move on to our next leading indicator, which feels like we're entering self-fulfilling prophecy territory here. That's with the recession index and we're going to try not to say that R-word too many times to avoid triggering it here. Right, Mark?
Mark Reeth: That's right. I prefer the R-word anyway, because it sounds like an index of piracy, the R-word. Porch piracy perhaps actually. No, the R-word, the recession index is this old-school index created by the economist a couple of years back, where the idea is that the more frequently the word recession appears in print in The New York Times and in The Washington Post, the more likely it is that a recession actually happened. You said it very well there, Southwick.
The fact that people are seeing the R-word more frequently can become this self-fulfilling prophecy, you have to ask, are people reading and writing it down the R-word more frequently because it's more likely to happen, or are people are reading about the R-word and thinking that it's going to happen and starting to become a little bit more fearful, maybe pulling their money out of the market and maybe actually causing a recession to occur? That's a question for the author of The Psychology of Money to answer but for me personally, I don't fully believe that the R-word index is as strong of an indicator as it could be, simply because of this self-fulfilling prophetic nature of the R-word. There is a lot of fear in markets right now and it is warranted given, GDP just fell short of expectations two-quarters of bad GDP or low GDP growth means a recession.
We have a war in Ukraine, we have rising interest rates, we have sky-high inflation, we have supply chain issues, we have COVID 0 in China not going as well as it could be. There's a lot to be afraid of right now and there's a lot of indicators out there that are making people more and more fearful. I feel like it's really those indicators that are making people talk about recession more frequently and making the likelihood of a recession occurring actually a little bit higher. For me, I'm going to give the R-word index maybe three thoughtful nods. Again, I feel like the index itself isn't the strongest indicator of whether or not a recession will occur but I do think it is a lagging indicator of sentiment in the market and how fearful people are feeling right now.
Robert Brokamp: I'm actually going to give it five thoughtful nods.
Alison Southwick: Wow, OK, all right. Here we go.
Robert Brokamp: I did not find the economists actually tracking this even though they are the folks who came up with it. Instead I turned to Google Trends, which Google's only there around since 2004 so we have limited data, but you can say definitely the search on the term recession has spiked. They've only been a few times when it's been higher. So far in the last, whatever that is, 17, 18 years and the other times are either right before recession, we've had two, or during it. I would say that it's somewhat maybe leading or maybe more coincident. But the reason I'm giving it five thoughtful nods is whenever you have an indicator, you have this, what I'm I going to do with this information? I think any time there is more talk about a recession, there's probably a good reason, and that's a good reason for you to look at your personal finances and say, you know what? Maybe I need to make sure I'm on solid ground and maybe get a little more defensive. Spend a little less, save a little more. Maybe checking in on your employer, is your business is going well? What's the likelihood that there will be job cuts or pay cuts in the future? What can you do to enhance your human capital to make sure that that doesn't happen to you? I think it's a good indication when this happens, it's just time to do a little reset and say, "Okay, let's make sure my finances are solid." [MUSIC]
Alison Southwick: Well, Mark, that's all the time we have for today, but you actually have more indicators that you want to talk about. You know what? Let's do this all over again in the future. What do you say?
Mark Reeth: Sounds like a plan.
Chris Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow.