When most investors hear the term, "six sigma," they immediately think of some secret club. That couldn't be further from the truth. Six sigma is actually a business strategy that was developed by Motorola in 1986. The actual term originated from terminology associated with the statistical modeling of manufacturing processes. The maturity of a manufacturing process can be described by a sigma rating indicating the percentage of defect-free products.
A six sigma process is one in which 99.99966% of the products manufactured are statistically expected to be free of defects. For any of you non-math majors, that would be an astounding 3.4 defects per million! Motorola set a goal of six sigma for all of its manufacturing, and this term became its rallying cry for perfection.
While I'd never say our market is perfect, I'd say it looks a lot like a six sigma market to me. My six sigmas are mergers and acquisitions, earnings, inflation, expansion, exports, and finally, my sixth sigma, imports.
Let me begin with mergers and acquisitions. Nothing gives us a better clue about business confidence than mergers and acquisitions-it trumps everything else. No business survey really matters much to me. What does matter is what businesses are doing, not what they're saying they might, or might not do. I've found in my career that any uptick in mergers and acquisitions is a sign that the business world sees a future that's brighter than the past-especially if these deals are what I'd call "blockbuster" deals. My definition of a blockbuster deal is one that's valued at more than $5 billion.
No matter where one looks, blockbuster deals are springing up everywhere. PetroChina is paying $5.4 billion for a 50 percent stake in western Canadian natural gas deposits owned by Calgary-based gas and oil producer, Encana. Meanwhile, Ensconce agreed to buy Pride International for a $7.3 billion price tag. Last, but not least among the blockbuster deals, comes Danaher, which agreed to acquire Beckmann Coulter for $5.87 billion. This deal gives Danaher a bigger footprint in the lucrative diagnostics industry.
Don't forget the ever-changing global exchanges, starting with this mega-blockbuster (more than $10 billion) deal between Deutsche Boerse and NYSE Euronext amounting to $10.2 billion. The combined organization is set to become the largest owner of equities and derivatives markets. The new company, yet to be named, will be incorporated in Amsterdam.
The deal between Deutsche Boerse and NYSE Euronext comes days after the London Stock Exchange announced its acquisition of the Toronto TMX Exchange, another blockbuster deal at $6.9 billion. Only two years earlier (in 2008), the Toronto Exchange completed its acquisition of the Montreal Exchange. And a year before that (in 2007), the London Exchange completed its acquisition of the Borsalino Italiana (Italy's Stock Exchange).
Talk about everything going full circle. Here's a brief history lesson for you. In that same year of 2007, the NYSE outbid and outmaneuvered Deutsche Boerse by acquiring Euronext (located in Europe) right under Deutsche Boerse's nose. Now, less than four years later, Deutsche Boerse is buying NYSE Euronext!
My second sigma is earnings. After all, when everything's all said and done, it's earnings that will give our market its ultimate direction. If earnings are weak, I think it'll be difficult, if not impossible, for our market to rally higher. Conversely, with strong earnings, I believe the stage might be set for a stronger market as well.
I feel like I've personally helped drive some of the earnings numbers. When my wife Cheryl and I want to grab a quick breakfast, one of our favorite places to go is Panera-they also have great coffee to go. I only mention this now because Panera's earnings soundly beat Wall Street analysts' expectations. (I feel like my wife and I played a small part in that.) Next up, while we're not big soda pop drinkers, when we do have a pop, we have a Coke Zero. I like the black can, and Cheryl likes the taste-especially when we're eating popcorn and watching a movie from NetFlix. You guessed it-Coke's fourth quarter profits soared 9%.
Finally, there was Disney. I can't take any credit for these earnings numbers, however. You better sit down before you read them, as they are, in a word, "unbelievable." Walt Disney's earnings rose 54% in its fiscal first quarter. These remarkable numbers were fueled by strong theme-park attendance and spending, as well as rebounding advertising rates and revenues. There's nothing "Mickey Mouse" about a 54% increase ;-)
Let's move on now to my third sigma: inflation. It simply amazes me how Ben Bernake and his colleagues at the Federal Reserve Board continue to worry about and discuss deflation, when inflation is all around us. It's not just these high-flying, high-profile, emerging markets like China that have inflation-it's everywhere. One has to look no further than the other side of the "pond" to jolly olde England to see exactly what I mean. In the United Kingdom, the three-month average for their Consumer Price Index is +6.5%. Matters get even worse if you look at the three-month average for the Producer Price Index in the United Kingdom, which is up close to double digits, currently standing at +9.3%. Remember, this is from old, boring England, a mature, industrialized economy, and not some high-flying, emerging-market economy.
If you'd like an emerging-market economy to look at for proof that I'm right about the issue being inflation (not deflation), one has to look no further than Vietnam. As of January, the five-month average for the Consumer Price Index in Vietnam is +24.1%.
My fourth of six sigmas is proof that our economy is moving from recovery to expansion. Talk about a perfect storm! Take a look at these three economic indicators that suggest we may be well past recovery, and on the road to economic expansion. First, exports, as measured by U.S. Nominal Goods Exports for December, stood at $116.6 billion, which puts it back close to a decade high. More importantly, it's up 41% from its lows of early 2009, when this number dipped to almost $80 billion.
Another great indicator is big-ticket, capital-goods shipments, excluding the defense industry. (The thought here is that the defense industry can sometimes be recession-proof, and including the defense industry shipments can give a misleading sense of the strength of our economy.) So instead, look at U.S. Non-Defense Capital Goods Shipments for December, which stood at $67.3 billion. That's a 15.9% improvement off its lows of under $60 billion in early 2009. The trend is clearly our friend here.
Third, and finally, are U.S. Machine Tool Orders. In December, the three-month average stood at $365 billion. Two short years ago, that number was below $150 billion. That's an almost unheard-of 191.6% increase in two years. That's what it looks like when you move from a recovery to an expansion!
My fifth sigma is something that probably will not surprise most investors: China exports. This topic is in the news almost daily, focusing on all of the "stuff" China exports. In January, China exports were $150.7 billion, which is a 37.7% increase on a year-over-year basis. You might be interested in exactly what they're exporting around the world. In January, they exported $14.7 billion worth of computers, $12.6 billion of clothing and garments, $8.3 billion of textiles and fabrics, and $3.4 billion of footwear.
You better take a seat for this one. While you'll never hear it in the popular media, China imports are soaring as well. The country actually does more than just export goods and services. In January, China imports were $144.3 billion. On a year-over-year basis, that's an almost unheard-of increase of 51.4%.
Again, I thought that you might be interested in exactly what they're importing. Actually, it's tons and tons of stuff. And I do mean tons of stuff, starting with 21,800,000 tons of crude petroleum. Not to be outdone, they imported 68,970,000 tons of iron ore and 1,734,000 tons of coal. Finally, from the Soybean front, 5,140,000 tons were imported in January alone. A few thousand tons here, a few thousand tons there, and before you know it, it all adds up to a global boom!
As I said in my opening remarks, I'd never say or imply that our market is perfect. However, I do love the six sigma issues that I've discovered regarding our market.
I'll bring this commentary to a close with one of my favorite quotes regarding perfection. It's from basketball legend, and NBA Hall of Famer, Wilt Chamberlain. Here's what he said: "They say that nobody is perfect. Then they say practice makes perfect. I wish they'd make up their minds." Me too!
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