As more and more companies release results, it appears that maybe, just maybe, things are not as bad as they seem.
In booming times, companies load up on debt, have too much middle management who may or may not manage something, and are generally carefree when it comes to costs.
In desperate times, companies start hacking and chopping away at the excess fat and trimming the workforce. When cash suddenly matters, it’s amazing how many companies are able to suddenly downside and slash expenses yet were seemingly unable to do so before.
This does, however, work both ways. I recall in a university textbook about corporate mergers the story of a chap in IT support, who found himself in the unfortunate position of being made redundant. The company – or rather the decision maker – deemed that he was surplus to requirements and so he was to be let go.
Unfortunately for the company, this then had a terrible effect on the remaining IT support team, as they were then overrun and unable to cope, which in turn affected the group. This cost saving actually turned out to be cumulative cost due to the loss of productivity elsewhere. To make matters worse, the company asked the previous employee to come back to his old job. He agreed, but only if he was to come back as an external ‘consultant’ – meaning he got paid a lot more money for doing a lot less work. Some things are best just left as they are.
It's something for the investors amongst us to think about, as companies can all too easily start cutting bone instead of fat.
But what does that mean for traders?
Well, if companies have expected much worse and taken drastic measures, then it could be that they are doing better than expected. And if they’re doing better than expected, then it is likely that the prices of stocks will continue to rise. Especially as bonds and other asset classes are so unattractive.
If we look at the last two crashes, the Great Financial Crisis of 2008 and the Coronavirus collapse in 2020, anyone could be forgiven for thinking that the stock market (overall) isn’t allowed to go down.
The banks were bailed out in 2008, and now we see an unlimited amount of money authorised to be pumped into the…
