Bob Dylan's wrong. At least when it comes to our business. You do need a weather man to know which way the wind blows.
The old canard first expressed by Dylan in the seminal Subterranean Homesick Blues, doesn't hold up when it comes to stocks because stocks are buffeted by headwinds and tail winds and you need help discerning which is which. It's even more complicated, tail and head winds can be cyclical or secular, the former being ephemeral and the latter being permanent.
Every day we get a new weather forecast and if you dismiss it you can end up in a monsoon without a poncho.
Take today. This morning PepsiCo (PEP) the drink and snack food company, reported and the quarter was widely panned because the company guided down numbers by a nickel. But if you summon the weatherman you will find out that there was a headwind, the strong dollar, which is a big deal for an international company. When PepsiCo made its forecast it didn't include the dollar getting as strong as it did against so many currencies. It was a huge headwind that caused the nickel number shade.
When I spoke with Hugh Johnston, the CFO, he assured me that it was the dollar, a purely cyclical headwind - meaning right now we are in a strong dollar cycle. It was not what many investors are worried about: a secular headwind related to health worries, a thesis, for example, about millennials wanting to avoid sugary drinks and salty snacks because their bodies are their temples.
When I pressed Johnston about what else might be keeping the numbers from positively surprising, he said that aluminum costs have gone up for cans and transportation costs have risen because of labor costs, related to drivers and enforcement of safety rules that cut down the number of hours drivers can stay on the road.
He cautioned that before I reach a conclusion that these two costs must be weighing negatively on the numbers he said that the company is able to raise prices for its goods - especially carbonated given that Coca-Cola raised prices this summer - and I should not be concerned with these cyclical headwinds.
Now we know that the aluminum costs have been elevated by fiat: the president chose to put tariffs on something that we don't even make much of, so that made little sense, but Hugh told me not to worry because they can shift to plastic. He also said that transport costs are cyclical, that the rewards for being a truck driver today have never been greater and, while the average truck driver is 49, he expects more workers to be drawn to the profession.
I came back and questioned whether that's a secular headwind because younger prospects fear that once they learn how to be truck drivers autonomous driving will take over. He admitted that could be a true negative that can't be undone. I did not get to ask him whether a switch from aluminum might be something that won't be embraced. Why? There is a secular headwind against plastic: millennials don't want to add to the island of bottles the size of Antarctica nor to the landfills that are pacted with the stuff.
I came away thinking that PepsiCo did lack real tailwinds but that retiring CEO Indra Nooyi had correctly combated the headwinds with ingenuity, grit and perseverance.
General Electric (GE) , on the other hand, has both headwinds and tailwinds. Earlier I wrote about why John Flannery was fired after just 13 months on the job, but GE uniquely chose headwinds over tailwinds. It put big money into fossil fuels, namely natural gas turbines and oil and gas related equipment. In fact it doubled down on these even as management failed to read the weather correctly and didn't understand how the next generation, the one younger than management, simply has turned against fossil fuels in a way that they might as be cigarettes. On the other hand the company virtually stopped investing in two of its businesses that have fabulous tailwinds: health care equipment and aerospace. There's endless demand for healthcare equipment that can save lives and save the system money: that's what GE has going for it. Aerospace? The tailwinds are so strong that Boeing's (BA) stock hit an all-time high today even as one in four Boeing planes is destined for China. We have no trade deal with China but the demand for anything having to do with aerospace is one of the great secular tailwinds of our time as more and more people around the world take their first plane rides as part of the great middle-classification migration continues unabated by any policy change.
The healthcare device tailwind is why companies like Abbott Labs (ABT) , Illumina (ILMN) , Intuitive Surgical (ISRG) and Medtronic (MDT) and dozens of others are so in favor. United Technologies (UTX) and Honeywell (HON) have been gigantic beneficiaries of the aerospace tailwinds.
Right now we have almost full employment in the United States with no sign of any slowing. The Federal Reserve does not mind full employment but it doesn't want runaway wage growth. It's been raising rates because it believes that it can head off a cyclical tailwind of higher salaries. But today Amazon (AMZN) raised wages to $15 dollars an hour, which is much higher than many brick and mortar outfits pay their employees. Immediately the stocks of many of the retailers that pay less than Amazon got hammered. Does this mean the Fed has to tighten even more than it has? We will find out on Friday when we get the Labor Department's non-farm payroll report. For as long as we can remember aggregate wage growth has been pretty anemic because of automation and immigration. The former is a classic secular tailwind for the economy but the former is a man-made headwind, as President Trump has made it a mandate to stop illegal immigration and cut back legal immigration. Let's see if aggressive automation, including that by Amazon which has put a fortune into making warehouses less human dependent, can trump the immigration headwind.
Right now it seems that headwinds are more visible than tailwinds and are often more entrenched or secular. So what makes it so we keep getting new high after new high after new high?
We have two tailwinds, one cyclical and one secular that are not visible to many people but I think are responsible for a lot of the levitation. First tailwind? The cyclical boom in hiring and wages. When jobs get created you have people who put money away, they save and they save, in part by investing in the stock market. As long as we get growth in employment we are going to see this process play out and it is hugely positive for stocks.
The other? A secular tailwind that has been the most significant of the entire investing era: a stock shortage having to do with endless merger and acquisition activity and a torrent of buybacks that was voracious before the tax cuts but has become a tidal wave now that the government has returned the capital to business.
Now just like the weather, the stock market is subject to change. Any one of these cyclical tailwinds can become secular headwinds as was the case, say, with coal. The advent of the web has made internet advertising one of the great secular tailwinds but has been a vicious headwind to every other form of advertising. But that might not mean a thing say, to Facebook (FB) , which has squandered so much goodwill with its endless scandals.
So you certainly need more than a weatherman to pick stocks, but it sure helps to know which way the wind blows before you pull the trigger.