[Marxism] How Profits, Stocks Can Rise as Economy Stumbles
giobon at comcast.net
Sun Jul 25 11:37:42 MDT 2010
How Profits, Stocks Can Rise as Economy Stumbles
“Corporate margins, or profits per sale, are hovering near 12 percent
now, by one measure -- tantalizingly close to a half-century
high. ...It's an old story, really. Companies cut workers in a
downturn, and squeeze more out of those remaining.”
By THE ASSOCIATED PRESS
July 25, 2010
Filed at 1:01 p.m. ET
NEW YORK (AP) -- With earnings season in full swing, bulls and bears
are combing through reports to arm themselves in what's become the
mother of all stock market debates: Does the recovery gain steam,
sending shares aloft? Or does it remain sluggish, or even stall, and
push them down further?
A third possibility: Maybe the economy doesn't matter so much.
Larry Hatheway, an economist at UBS, says economic growth means
companies selling more things. But he thinks that is not as important
as it used to be to generating the profits needed to send stocks
higher. That's because U.S. firms have mastered the art of pulling
more and more money from each dollar of sales.
One gauge of that success: Corporate margins, or profits per sale,
are hovering near 12 percent now, by one measure -- tantalizingly
close to a half-century high.
''As long as we don't fall into another recession, it's a good time
to make money,'' says Hatheway, who's bullish on stocks. ''We're able
to squeeze more profits out of sales than we were twenty or thirty
Though just a third of companies in the Standard & Poor's 500 have
reported quarterly earnings results so far, the picture is
impressive. Profits are booming. Eight out of ten companies have beat
earnings expectations, according to Thomson Reuters. The average jump
in profits is 33 percent.
It's an old story, really. Companies cut workers in a downturn, and
squeeze more out of those remaining. And so profitability rises
smartly -- only to fall again in the recovery as sales and payrolls
rise once more.
But Hatheway says margins will stay high for a while yet because the
forces that pushed them there aren't going away anytime soon.
He says high unemployment is likely to stick around longer than in
typical recoveries. And while that's bad for the economy, it's good
for margins. ''Firms can pick good employees and dictate
compensation,'' he says.
U.S. companies also have learned to squeeze more from their equipment
and factories, not just their workers, he says. They kept their
spending on such things low even before the recession. They feared a
repeat of the booming 1990s when they spent wildly on equipment like
telecommunications gear -- only to discover they didn't need all of it.
Hatheway says globalization has helped, too. Companies outsource much
work abroad and draw supplies from numerous sources now as trade has
boomed, which helps keep costs down. Growth abroad has boosted
exports, too. That makes the fate of U.S. profits, and margins, less
tied to U.S. growth.
The result: Though profit margins will rise and fall as they always
have done, the highs and the lows are higher, Hatheway says. He
defines margins as total U.S. corporate profit divided by the
country's gross domestic product.
''I see lows now of maybe 9 percent,'' he says, a point or two higher
than margins during most of the 70s and 80s. He adds that falling
margins are ''far in the future'' -- perhaps four years away.
Not everyone is convinced.
Legendary investor Jeremy Grantham, the Boston money manager who
called the housing bust years ago, has been telling investors for
months now that profit margins will fall from their perch, sending
stocks tumbling. Andrew Smithers of London researcher Smithers & Co.
wrote a report warning of the same. John Hussman of the Hussman Funds
wrote this month that investors buying stocks on the belief that fat
margins will last are destined to ''walk themselves over a cliff.''
''The dark side of margins is that they're going to have to come
down,'' says Claus Vistesen, an economist at the University of Hull
in England. He adds, ominously, ''And the market hasn't fully priced
Hatheway, for his part, isn't backing down.
''If you give me slow growth and high unemployment, I can give you
high earnings,'' he says. ''The stock market is not the economy.''
More information about the Marxism