Dow Chemical’s Q4 Results Make Me Wonder if the U.S. Was In Recession Last Quarter

Dow Chemical (DOW) reported its Q4 earnings today and helpfully provided supplementary, detailed information on how much of its sales came from volume changes vs. price changes.  Since Dow is so large and diversified, it is a sort of proxy for the economy.  Here are some highlights.

North American volume was down 4% year on year.  Sales were up only because of 6% price increases.  This 4% drop in volume was similar to the 5% volume drop in its Europe, Middle East and Africa segment.  Asia was only up 3% yoy in volume; and I saw a comment from an analyst in a Bloomberg article that Dow’s China business was weak last quarter.

On a twelve month’s comparison, Dow’s North American volume was down 2%.  Given that Q4 was down 4%, then the first three quarters were only down closer to 1% on a yoy comparison.  This sounds as if Dow saw an economy that was decelerating, perhaps sharply, last quarter.   

Within segments, the “electronic and functional materials” segment had 3% lower volume in Q4 vs 2010.  Coatings and infrastructure solutions were down 5% and performance plastics were down 8%.

If we remember that the Bloomberg Consumer Comfort Index hit worse sustained levels last fall than even in 2008-9, and think back to final Q2 and (near-final) Q3 GDP data, I think that in view of Dow’s 6% price increases, the U.S. may have been in a recession last year including in Q4 (accepting that the Great Recession ended in 2009).  The Gross Domestic Income data for Q3 were recessionary , at least after per capita adjustments, and that was using the government’s inflation numbers, not the price increases that most of us observe.  (GDI should match GDP; it’s a different way of trying to measure the same thing.)

In any case, past is past and does not predict the future.  There’s a reason why the DJIA broke through its 200 day moving average well before the Russell 2000, which has half the dividend yield of the Dow.  Investors are, or at least were, hungry for yield.  How often do rallies in the Dow correspond with price rallies in the municipal bond market?

I mentioned perhaps in December that periods of prolonged correlations between asset classes, as was the case for months on end, generally give way to periods in which the assets move on their own merits.  For stocks, in that case a “stock market” becomes a market of stocks that move on their own corporate strengths and weaknesses.

Some of the dividend-paying micro-cap stocks I own because they were just too cheap even for me to object to have shown real strength lately.  A 5% yielding micro-cap bank stock has gone, with no news, to a 4% yielder in less than two weeks.  Now, this is a stock that trades “by appointment”; many days it does not trade at all, but it is a NASDAQ National Market-listed stock nonetheless.  A small seller could push the stock back down as fast as it moved up, so my point is that whether it’s a company with declining earnings estimates with a high dividend yield such as Eli Lilly or a micro-cap with a similar yield as Lilly, investors are hankering for fiat dollars.  They are acting is if first and foremost they want security of principal with a secure yield, and will accept a lower yield if they see growth.  In AAPL’s special case, they see massive potential for cash to be returned to shareholders even though it pays no dividend.  Note the mention of all the stocks above is exemplary only, and not a positive or negative commentary on their investment merits; also note I am long AAPL.

To be sure, speculators are always going to have fun in times of fiscal deficits and an “accommodative” central bank with the “growthier” stocks, which always outperform the income vehicles during periods of economic acceleration, even if such periods are brief.  So I’m making no trading calls for the near future, rather I’m reiterating a well-trodden path that, to be sure, has gotten a bit well-traveled finally.  But with Facebook around a $100 B valuation and said to be 5 times pricier than GOOG, and with Amazon stock so “resilient” despite one quarterly earnings “miss” after another- always investing for future growth, the company says- I don’t accept as likely that the trend back to the Old Normal that emphasizes safety of principal with some return over growth at almost any price – dividends be damned while insiders sell, sell, sell- has ended.

Time, as always, will tell its tale. Who knows what tomorrow may bring?