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Massive Corporate Profits, High Stock Prices, What’s The Problem?

21 April 2011 12 Comments

Corporate Profits Stock PricesIf you’re following the financial world the last couple weeks, you’ve undoubtedly been hearing about the major beats on earnings estimates and massive corporate profits from the S&P 500 companies.  This has helped fuel the stock market rally which has helped the Dow hit a new high (S&P still hasn’t hit a new high yet).

The bulls continue to tout corporate profits as the main reason for a recovering economy.  I’ll give them that.  Corporate profits are excellent.  But, I thought you’re bearish on the economy?  I am.  Well, what gives?

Two Economies

I’ve discussed at length that we now have two economies.  One is thriving, one continues to crumble.  On one side we have the major, large corporations of the U.S. as well as the public sector.  This economy is booming.  On the other hand, we have the world of small business (the world most Americans live in).

Let’s look at each one briefly…

The major corporations are hitting record profit numbers right now.  There’s a few reasons for this.  First, the costs of these companies are at huge lows.  The ugly recession of 2008/2009 gave these companies an opportunity to shed their excess costs that they really didn’t need much anymore due to huge gains in productivity.  What cost was this?  Jobs mainly.  As global activity picked up, revenues skyrocketed, but oh wait, they didn’t hire anyone, so their costs remained level.  This equals huge profits.

Moreover, the large corporations are more global than ever.  The huge U.S. companies, in many cases, get more of their revenues overseas that domestically.  The weaker dollar contributes to this as well (more on that later).  Profits are big.

The public sector which I also put in this economy is of course also doing great because government never shrinks.

On to the other economy… things are still tough for the guy trying to stay afloat with his small business.  I work for a small business.  While we’re doing fine, we’re not really growing.  Competition is fierce and the volume of business has picked up only minimally if at all.

Regulations and taxes don’t usually favor the small business world because well, small business guys don’t lobby the government and big business does.  In many cases, regulations which politicians claim are there to regulate the big boys often act as barriers to compete against the small guys which helps the big boys remain big.

So while the economy of big business and big government thrives, we’re not really adding many private sector jobs.  Unless of course it’s the 50,000 burger flippers than McDonald’s recently hired.  Sweet.

Weak Dollar

The big profits are helping fuel the stock rally.  This is true.  But, it’s not a coincidence that the Dow is at a three year high while the dollar is at a three year low.  The correlation is pretty consistent.

The reality is that the dollar fuels the “risk trade” which includes equities.  Should QE end and the dollar exhibit some short term strength, we’ll probably see a short term reversal in stocks.

In order to truly value the stock market, we need to price it in something other than the US dollar which is getting hammered by the Fed policies of quantitative easing.  Price it in gold, price it in silver, heck, price it in a currency of a resource-rich nation.  The chart will look quite different from the one you’re used to seeing on CNBC.

Conclusion

So what to take from this?  Well, life is good if you’re a big business.  You have government on your side, ultra low cost of capital, and a growing overseas market.

If you’re trying to start a small business or grow a small business, it’s pretty difficult.  There are ways to get ahead, but only the few will go towards them.  The rest of America I think will get left behind.

My next post will show you how to not get left behind.

12 Comments »

  • fxgeorges said:

    the flip side to this story is that with the advent of a scenario where profits start to slide there is going to be little or no room for further efficiencies without cutting into the muscle of the business plan format which can only serve to jeopardize the very core activity of that business.

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    On to the other economy… things are still tough for the guy trying to stay afloat with his small business. I work for a small business. While we’re doing fine, we’re not really growing. Competition is fierce and the volume of business has picked up only minimally if at all.
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