A little more than two years ago I wrote a column here (in Hebrew) called "Things you see from the driver's seat." It dealt with remarks by William Zollars, the chairman and CEO of a transportation company called YRC Worldwide. That was at the beginning of the credit crisis, long before the economic crash of late 2008. 

All of the captains of the U.S. economy at the time, including Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and President George W. Bush, as well as the vast majority of Wall Street analysts were saying that perhaps a slowdown of the U.S. economy could be expected, but there wouldn't be a deep recession. Stock market investors apparently agreed with them, since the indexes were close to their all-time highs.  
 

But in an interview with the CNBC financial television network Zollars said he didn't care what all the Wall Street analysts and the Washington economists were saying. He argued that the experts were staring at computer screens too much to see what was happening right in front of their faces. After decades in the transportation industry, Zollars said, he knew a recession when he saw one. He told the interviewer, Maria Bartiromo, who stared at him in apparent disbelief, that already now, in October 2007, the country was clearly in a recession and it would only get worse.

The message was that investors needed to try to find sources of information on the ground and not count on official government figures. Zollars said what the people behind the desks would only see a few months later, but which cashiers and drivers and waiters were already seeing. He admitted that the people on the ground were only seeing a small piece of the big picture, but they were seeing it in real time and could directly and immediately compare what was happening with what had gone on before.

Zollars said he wouldn't advocate replacing government statistics with a stroll through markets or restaurants or by eavesdropping on truckers' conversations, which could be misleading. But he said his sense of what was happening on the ground was also a reminder that relying exclusively on the steady and systematic collection of data can also be misleading. Zollars also recounted a joke making the rounds among doctors to the effect that pathologists can explain everything, but only when it's too late.

A little more than two years have passed since that interview, and 2008 proved that Zollar turned out to be a much more reliable bellwether than the experts with all of their analyses. The sense on the ground trumped the data-reliant models used by the economic leaders and the folks on Wall Street.

If that were not enough, the joke about the pathologists has become rather ironic, since Zollar's own company, YRC Worldwide, is currently in a profound crisis. To stave off bankruptcy the company is proposing a debt-for-equity swap in an effort to stave off bankruptcy. The company's share price today is just a dollar, compared to $15 two years ago, which shows that sometimes even the ability to understand what is happening on the ground can't help you when things get really bad.

Let's skip ahead though. The consensus in the United States is that the worst of the recession is behind us. It is true that unemployment there has risen to 10%, but it is expected to decline and on the whole there are clear signs of economic recovery. U.S. Treasury Secretary Timothy Geithner, for example, said in an interview a few days ago that the employment market is expected to begin to show improvement in the spring, meaning within 4 or 5 months.

Geithner's name is certainly familiar to many of our readers, but that of William Gale probably is not. Nor is the company of which he is chief financial officer, Cintas. To tell the truth, until a few days ago I had never heard of it, but it is not a small business by any means. It was the company's financial reports for the quarter ending in November that caught my attention, when it turned out that the analysts' revenue and profit forecasts for the firm were too optimistic. Same-quarter revenues dropped by about 10% and profits plummeted by close to 25%. True, company management is not providing projections on future performance, but company managers have argued that the analysts' forecasts for the coming year are optimistic. This resulted, of course, in a drop in the company's share price.

Cintas supplies uniforms and professional wear to businesses. Its clients include hospitals and other medical organizations, fast-food companies such as McDonald's and Starbucks as well as casinos, hotels and factories. Cintas operates throughout the United States and has 31,000 employees. Its annual turnover is about $4 billion and it has $2.5 billion in shareholder equity. The company is on both the S&P 500 and the Nasdaq 100 indexes.

Cintas also sells first aid kits and firefighting equipment, but uniforms are its core business. Its business model is based on supplying uniforms as an outsourcing service. In practice, the company rents the uniforms to its customers, collecting, laundering and delivering the cleaned items. It's a complicated and logistically intensive business.

When I read the transcript of the Cintas quarterly earnings results conference call, held exactly one week ago and moderated by CFO Gale, I was reminded of Bill Zollar's candor two years earlier. Gale simply spelled out the situation, without embellishing matters, which, it should be noted, it pretty rare when it comes to these kinds of conference calls. Here is an excerpt of Gale's remarks: "So we're not seeing growth [in the manufacturing sector] because the manufacturing base isn't really growing. Retail continues to be very sluggish and retail has been a target of ours over the last few years."

Gale expanded on this during the call, saying that the company's managers still don't see any sign of recovery in the job market. He said that major customers - large employers in their own respective industries - were not talking to Cintas about plans to expand their workforces in the coming months and many are even talking about continued cuts, albeit at a slower pace. Gale said the situation appears to be more stable than nine months or a year ago, but the company still does not see any sign of recovery.

So who are we, as investors, to rely on more: the treasury secretary, who sees an improvement in the employment picture in the offing, or an executive at a company that provides uniforms to workers and who sees at best a leveling off of unemployment rates but definitely not employment growth? As in the case of YRC Worldwide and William Zollars two years ago, it's difficult to learn from one example, even if it involves a large company in an industry that appears to be not such a bad barometer of the employment market and of the general economic situation.

Nonetheless, from what happened just two years ago many commentators and economists proved that they are incapable of identify a dramatic downturn in the economy even when it is staring them in the face, while one transportation company CEO with his feet on the ground and not underneath a computer screen saw things clearly.

Therefore, one shouldn't be at all surprised if in another year or two it turns out that the finance chief of a uniform supply company has a much better understanding of the economic situation in general and the job market in particular than the wizards of Wall Street and Washington.

Source: Haaretz.com, December 28, 2009