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Friday, July 17, 2009


2q earnings so far

via clusterstock, karl denninger:

Stocks are, at their core, priced on earnings growth, with the most-common ratio used for such metrics being P/E/G, or Price-to-earnings-growth.

But earnings are not growing, they're contracting - dramatically - in percentage terms over year-ago levels. How can it be otherwise? Even with no inefficiencies due to firms having too many employees for the revenue contraction that is occurring, a 30% reduction in business done should lead to a 30% decline in profits earned.


don't know how long we have to continue to put up numbers like this before people wake up, but wake up they eventually will. When Harley Davidson ships 30% fewer motorcycles, when GE sells 17% less "stuff" (including their financial cooking) and when company after company, including Intel, IBM and others come out with revenue numbers that are down double-digit percentages on an annualized basis, there is no possible way you can justify the multiples that these firms are selling at.

When The Port of Long Beach shows container shipments down nearly 30%, when freight carloadings are down nearly 25% year over year, when sales tax receipts are down in the double digits and when income tax collections, both personal and corporate have effectively collapsed there is simply no argument that "the recession is over" or that "trend growth is around the corner."

denninger is absolutely correct, in my view -- but pragmatic capitalist has (as usual) played this very well.

At the end of the day it’s still earnings that matter most. As the expectation ratio has shown, the stock market has remained resilient primarily due to the fact that expectations for earnings have become very low and more corporations are outperforming the low hurdles. But a look under the hood has shed some light on the true strength of these earnings. We’ve seen a common trend of late. Companies are missing top line estimates and handily beating bottom line estimates. ...

Cost cuts are no recipe for organic growth. That can only be achieved through top line growth. The implications here are that we are likely to see another quarter of “better than expected” bottom line earnings as analysts have adjusted their EPS estimates very little over the prior quarter. This could further juice the stock market. The more important factor to keep in mind, however, is that this is no recipe for long-term growth. We will need to see a sharp expansion in the economy before revenue growth returns to the earnings picture. For now, the positive results are nothing more than defensive posturing by corporations. If the economy doesn’t turn up sharply heading into Q3 and Q4 it’s likely that investors will turn fearful of this false bottom line growth.

that's likely just where we're at.

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