Volume I   Issue 2
February 28, 2005

“Does Your Market Analysis Dig Beneath the Surface
to Get the Real Story?”

I remember reading an article about paper markets that began: "Shipments were down 3% in September..."

Hold it right there. This is trouble already.

How often have you read an article that began like that? This sort of thing raises more questions than it

Down 3% from what? From last month? From last year?

Even then, there are more questions.

If shipments were down 3% from the prior month, it might mean nothing - after all, there are 3% fewer days in
September than August. Or it might mean a lot - after all, business is often slower in the summer, but normally
picks up in the fall.

If shipments were down 3% from last year, the situation is no better. Do you know if last September was typical,
or was it unusually weak or strong?

So, what does that 3% decline really mean?

But it gets worse.

The article, written by a much respected analyst, (I don't remember who, but if I did, I wouldn't tell) continued:
"Shipments were down 3% in September, indicating that markets are beginning to soften."

Now that is just plain wrong. He was talking about paper mills, and paper mills normally run 24 hours a day, 7
days a week,  close to 365 days per year. When markets are strong, and the mills are running full, they have to
manage demand by means of allocations, and in September of 2004, mills were on allocation and running full

Then why were shipments down in September? Simple: poor production. Production in a complex facility like a
paper mill is not a constant. Tiger Woods is capable of shooting a round of 61 on any given day, but he doesn't
do it every day. Even Tiger Woods has some variability in his performance; so does any manufacturing process.

In the case of paper mills in September of 2004 the poor production was due to more than just normal
variability, however. You might recall the unusually severe hurricane season we had.  

Of course, paper markets did soften in the autumn of 2004, and in the end, our errant analyst appeared to be
correct. But what really happened is this: there was a slight uptick in real consumption (VERY slight), coupled
with a decline in imports due to the weak US dollar. This put pressure on supplies, and so consumers (printers,
publishers, office superstores) tried to build inventory, increasing the pressure on supplies, which in turn
created more demand for inventory, and so on and so on.

By September, this cycle was just about running out of steam due to the seasonal slump which occurs every
summer. The production shortfall in September didn't signal the downturn; in fact it delayed it by keeping supply
in check.

Sloppy analysis, or sloppy writing? In any case, make sure you have insightful analysis and clear business

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