Why We Ignore IBM and McDonald's Plunges
This week both IBM and McDonald's shares plunged after each company reported declining sales and earnings. Such news, all in the same week, might have caused an already shaky
stock market to quiver and slump - but it didn't. Instead, the market chooses to ignore the
rather seriously deficient results.
Both are enormous American corporations, one tech, the other fast food. (And what's more American than tech and fast food?) In each case, an explanation was provided by analysts that pointed to the particulars of each company as reasons for the poor performance. But it would be fair to ask whether the awful results, instead of reflecting specific problems at each company, might indicate a more general problem with the economy.
Before we look at that possibility, we need to acknowledge that each company may be facing the forces of "creative destruction," a concept put forth by economist Joseph Schumpeter that recognizes the reality that as an economy advances, some types of businesses or industries are left behind. Perhaps IBM, once the dominant computer/tech company in the world, is simply not keeping up with advances in technology. It's old, tired, not able to nimbly respond to new technologies and new needs and tastes. Perhaps McDonald's, the once dominant force in the mighty American fast-food industry, can't attract younger consumers who might seek fresher, less "industrial" alternatives in their quick meals. Perhaps.
Or could it be that these behemoths may be, a kind of canary in the coal mine, even if "elephant" might be more appropriate than canary given their size. Perhaps their poor results have captured a coming slowing in economic activity on both the corporate (IBM) and individual (McDonald's) level.
Whatever the explanation for two massive companies reporting poor results within days of each other, the stock market has taken both in stride and continued its recovery from recent correction, giving the bulls reason to point to such action as indication that the rise in stocks will now continue after what may have been nothing more than a minor jiggle in the rise dating back to 2009. On the other hand, the continued push up may be explained by a natural "bounce" after the initial stage of of a more severe downturn awaiting us around the corner.
For now, we wait to see what the Dow Industrials and Dow Transports do in the coming weeks. If they both exceed their mutual September highs, we're probably looking at more bull. If, however, they fail to exceed those highs, or if only one does, we've probably got our first warning of trouble ahead. In which case, the bad IBM and McDonald's earngings reports will have proved to be that canary or elephant - take your pick.
Both are enormous American corporations, one tech, the other fast food. (And what's more American than tech and fast food?) In each case, an explanation was provided by analysts that pointed to the particulars of each company as reasons for the poor performance. But it would be fair to ask whether the awful results, instead of reflecting specific problems at each company, might indicate a more general problem with the economy.
Before we look at that possibility, we need to acknowledge that each company may be facing the forces of "creative destruction," a concept put forth by economist Joseph Schumpeter that recognizes the reality that as an economy advances, some types of businesses or industries are left behind. Perhaps IBM, once the dominant computer/tech company in the world, is simply not keeping up with advances in technology. It's old, tired, not able to nimbly respond to new technologies and new needs and tastes. Perhaps McDonald's, the once dominant force in the mighty American fast-food industry, can't attract younger consumers who might seek fresher, less "industrial" alternatives in their quick meals. Perhaps.
Or could it be that these behemoths may be, a kind of canary in the coal mine, even if "elephant" might be more appropriate than canary given their size. Perhaps their poor results have captured a coming slowing in economic activity on both the corporate (IBM) and individual (McDonald's) level.
Whatever the explanation for two massive companies reporting poor results within days of each other, the stock market has taken both in stride and continued its recovery from recent correction, giving the bulls reason to point to such action as indication that the rise in stocks will now continue after what may have been nothing more than a minor jiggle in the rise dating back to 2009. On the other hand, the continued push up may be explained by a natural "bounce" after the initial stage of of a more severe downturn awaiting us around the corner.
For now, we wait to see what the Dow Industrials and Dow Transports do in the coming weeks. If they both exceed their mutual September highs, we're probably looking at more bull. If, however, they fail to exceed those highs, or if only one does, we've probably got our first warning of trouble ahead. In which case, the bad IBM and McDonald's earngings reports will have proved to be that canary or elephant - take your pick.
Comments