REVENUE-LESS RECOVERY from David Rosenberg

Interesting read on Q3 earning season:

REVENUE-LESS RECOVERY
To date, an amazing 78% of the S&P 500 companies have thus far beaten consensus estimates. Then again, maybe this is less amazing than meets the eye since the consensus of street analysts have taken such a knife to their estimates that Q3 operating EPS is seen declining 25% from what were already depressed recession profits of a year ago. The WSJ ran with an article stating that because companies are being rewarded by the marketplace to such a great extent for beating their EPS estimates via relentless cost-cutting moves, executives are saying that “they are hesitant to reinvest such profits into their businesses.” This strategy is being deployed by so many firms that it is having a broad based dampening impact on private aggregate demand and hence corporate revenues — enticing firms to take even more costs out of the system.
All we know is that this process is not sustainable — either pricing power/revenues improve, and there was certainly no sign of this in the just-released National Federation of Independent Business (NFIB) survey, or the $80+ of earnings currently embedded in equity market valuation will have to be revisited, revised and reduced. It will be at that point — and the timing is next to impossible, but it is a “when”, not an “if” — that the stock market embarks on its true corrective phase.

Intel did beat its bottom AND top lines; however, what this tells us is that companies are still focusing their attention on tech-led productivity gains rather than focusing on boosting output via a boost to staffing levels. This is all a very deflationary thrust emanating from the corporate sector. For a good take on how the senior folks pretty well see it the same way we do, take a read of the article Fed Vice Chairman Sees Tamed Inflation Threat on page A2 of today’s WSJ.

The Treasury market would seem to agree that if inflation were a threat from all the monetary largesse, bond yields would most certainly be north of 5% right now. However, what doesn’t fit is gold continuing to set new highs. This isn’t about inflation, but quite possibly about sovereign default risk from all the fiscal largesse — absent a plan to balance the books, U.S. government debt is poised to exceed 100% of GDP by 2011 (see The Message of Dollar Disdain on page A23 of the WSJ — a must-read).

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