02/17/10 Gaithersburg, Maryland – We are in the midst of one of the best quarterly earnings seasons on record.
More than four out of five companies are topping consensus estimates on profits. The S&P 500, that big index of America’s largest companies, is set to break a run of nine consecutive quarterly declines in profits.
This doesn’t mean stocks are a buy. The big rally stocks enjoyed in 2009 baked in much of that recovery. However, unlike prior quarters, it’s not just cost cutting that’s driving those profits. Sales are starting to tick up again. Nearly two out of three companies are beating sales forecasts.
What happened? The good recession happened (at least where government bailout money did not get there first). The bitter winter of recession thinned the herd. It’s an ongoing process. For instance, a recent Wall Street Journal headline reads ‘Radical Shifts Take Hold in U.S. Manufacturing.’ It pointed out that Dow Chemical would shed $2 billion worth of basic chemical factories to shift into more profitable specialty chemicals. Whirlpool is cutting 1/10th of its capacity. Yet Intel is investing billions in its US plants to meet new demand.
In a big-picture sense, what we are seeing is a squeezing of the economic sponge. The market process forces people to liquidate the bad businesses and purge mistakes. The excess capital is then free to go elsewhere and find better returns. And the capital that remains in a business earns a better return for its owners. Or put another way, capital flows out of the Whirlpools and toward the Intels. Thus, we plant the seeds of recovery.
Chris Mayer
Chris Mayer is managing editor of the Capital and Crisis and Mayer’s Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012 Chris will release his newest book World Right Side Up: Investing Across Six Continents.
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Thank you, Mr. Mayer. It’s what I’ve been saying to readers of the Daily Reckoning for months. I really can’t understand why people think this market is going down from here.
We’re seeing some pretty impressive earnings now on top and bottom lines. Not to mention, we’re also seeing upward revisions to prior guidance.
The seeds have been planted and we are witnessing wonderful growth. Yet for some reason, most readers here don’t want to admit it. Their loss, I guess.
Keep smoking Harry…lol…you are too funny.
Yes, we have had growth but most of it has come in govt. at the cost of the taxpayer.