Dr. Pangloss Treating Goldie: Markets, Profits & Earnings
It was recently accounced that Goldilocks, who's rumored terminal illness brought world-wide panic to
her many fans, was successfully treated by the famous French therapist Prof. V. Pangloss. He was pleased to announce that rumors of her death were greatly exaggerated and in fact treatment has been so complete and successful that a whole new Goldie is in the house. Dr. Pangloss was quoted as saying, "in your modern terms think of this as Goldie 2.0....a highly successful course of sentiment and psychology obviates any risks due to fundamentals, or even technicals".
At least it seems the only reasonable course for a simple man like myself to follow - assume a miracle has occurred. If you examine the accompanying medical chart it's hard to conclude that the good Professor has achieved anything less. Six weeks ago Goldie was threated by the Wings of the Angel of Credit Death but today, she's not only recovered but doing better than ever. One can only wonder why and how ? Of course Volume's a little below average, and Relative Strength tells us Goldie is talking to herself a bit though not loudly and the momentum of MACD is just upticking now but's distorted as a weekly chart. Ignore those flashing lights on the monitor.
The answer appears to lie in that new miracle treatment of ever-rising earnings which seem to keep growing no matter wat the underlying state of the economy which grows them. Which, logically anyway but who's using logic these days, one could then ask what are earnings likely to be and how are they related to the underlying performance of the economy ?
Being greatly puzzled, even wondering myself, by this miracle it seemd a sensible thing to do to investigate a bit. It's not clear that we've resolved my/our puzzlements but perhaps a little light can be thrown on things.
The chart here looks at earnings and corporate profits since '88 (or '90 for the YoY changes) to try and find the answers. Or at least get a start on finding some. The original question is are earnings going to continue to do well ? One possible diagnosis is that, since earnings are based on profits and profits on the health of the overall economy, a positive prognosis is contra-indicated :) ! As you can see first off earnings do indeed follow profits, and quite closely indeed. Surprisingly though while they both did well until Jan02 they all really took off then. Which leads to the next question - why at the beginning of a downturn and a continued slow-growing economy did profits and earnings take a sudden jump upwards ?
One surprising answer, to be further investigated by competent analysts (not necessarily moi) is that After-tax Profits jumped, particularly as a % of total profits. Very interesting. If you look a the last sub-chart earnings and profits are clearly aligned with each other, despite being volatile & noisy. We draw that conclusion by looking at how closely the trendlines follow each other. And Profits are clearly aligned with GDP though only in a broader sense as there's clearly significant quarterly differences. So it looks like something else, and perhaps deeper, is going on.
Which we attempt with this third set of charts going back to '47 which shows the relative shares of
Wages, Profits and Capex in the GDP, with Wages on the r.h.s. of the chart. It might be worth a moment or three to took a close look. While our focus is on recent profit trends it doesn't hurt to notice, as we've been told, that profits are indeed at and moving above historical highs. It also is interesting to notice that both held up well until the mid-60s until rising energy costs led to higher investments and the shrinking of Proft and Wage shares.
Yet Capex and Profit reached level plateaus in the 80s and 90s while wage share largely continued to shrink (excepting the lagged impact of the late-90s investment boom on labor demand). But, since early in this decade (have you thought about how odd that sounds for those of us still thrashing the Telecom bust and yearning for the good old days ?) Wages have returned to a deteriorating downtrend while Capex spending has remained relatively flat. In other words, as we kinda knew from other sources, businesses aren't hiring and they aren't spending. Not only was the Boom a very different thing than previous cycles the "recovery" is a very different recovery - no jobs, no equipment, not good.
We can only conclude that with the lid screwed down on spending companies are making plenty of money, grabbing a growing share of the economy and, one guestimates, spend it on buybacks to keep the stock prices up and help out with EPS numbers. Which doesn't lead one to a great deal of confidence in organice growth of revenue, profits and earnings.
Stop and think about that for a minute - earnings may be going up but it's not because the economy or business is doing better. Somewhere under all the large pile of stock prices and reported earnings is a very large elephant. And he wouldn't appear to be a very well-groomed, well-behaved or benign one either.
We're definitely not in Kansas any more - so much for fundamentals. It's all about the finances and cash flow ? But judge for yourselves. The charts lay it out and you're as free to interpret as I and the data is readily available publicly from many sources.