EARNINGS: A STORY OF TWO ECONOMIES
Earnings are coming in far better than expected this quarter. Thus far, 83% of companies have topped analyst’s expectations. That’s an astounding figure compared to the historical average of 62%. But as I mentioned the other day with Apple’s earnings release it’s more important to look under the hood than it is to take these figures at face value. After all, “better than expected” could simply reflect the low level of the underlying estimates and not the strength of the actual data.
(Image Source: CNN)
The best way to gauge the organic growth in corporate earnings is to look at the top line growth. Revenues per share have climbed 10.9% from the trough in December 2009 and remain 12.75% from their peak – a recovery, but a recovery with a lot of work to do before we can say that corporate America has fully recovered. This quarter’s 7% year over year growth is a bit stronger than last quarter’s 6% year on year figure. This is a positive trend. But a closer look at the revenues tells a story of two very different economies.
In my intense focus on the domestic balance sheet recession I have not focused enough on the strength abroad – particularly in Asia. There is no doubt that revenues have rebounded across corporate America, but the domestic recovery in revenues is hardly robust at this point. This has been apparent in all earnings thus far where we have have seen consistent reports of strong international revenues and weaker domestic revenues. Yesterday’s average daily package volume from UPS highlighted this. While they showed 3.5% year over year growth domestically, their international growth was 13.7%. This is very important. While we see deflationary trends in the developed world we continue to see inflationary trends in the emerging world.
This early glimpse at earnings shows that results are coming in substantially better than expected and revenues are surprising to the upside nicely. Although most of the revenue recovery is occurring abroad it’s a positive sign for corporate profits any way you cut it. If this trend is to continue it could be positive for the labor market, however, because cost cuts have contributed so substantially to the bottom line (33% year on year EPS growth thus far this quarter) there is no great urgency for firms to hire. Companies can sit on their fat margins and churn out nice profits until they are certain that revenues have stabilized and there is a need for labor expansion.
This is going to be crucial when considering the future strength of the economy in the USA. This margin expansion has created flexibility that is good for corporations and bad for the millions who remain unemployed as it likely means the climb out of the job’s trench will be a long road. This situation was beautifully summarized by Caterpillar yesterday in their earnings release:
“I am pleased that we have put so many people back to work this year, and with continued global economic growth, we will add people in 2011 but remain keenly focused on cost control. While we are expecting positive economic growth in the United States, the recovery is weaker than we’ve seen historically, particularly given the depth of the 2009 recession. “
In other words, they’re cautiously looking to hire, but have no great urgency as they remain concerned about the outlook for the domestic economy and margins remain the number one priority. All of this points to signs of a continuing weak domestic economy and earnings growth that is being supported by Asian growth and margin expansion.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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27 Comments
TPC would you know the % of earnings of the S&P 500 now derived abroad? How much would be explicitly ‘emerging economies’?
And one more thing…this trend is likely to continue as the fall of the USD this quarter is going to be very beneficial for the next quarter reporting at the very least
@BK
I’m not TPC, but foreign revenues on the S&P can be very difficult to find, plus with all the tax gaming people aren’t always on the up and up where “revenue” comes from.
Here’s a couple links that estimate from 40 to 50% of revenues, and nearly all of the growth until very recently. XOM for example has 70% of oversees revenues. Hussman takes a shot at it in the first link, but downplays its importance.
http://www.hussmanfunds.com/rsi/intlsales.htm
and this is more recent
http://www.outlook.standardandpoors.com/NASApp/NetAdvantage/mkt/OutlookMarketInsight.do?subtype=OWMO&pc=NET&tracking=NET&context=Company&docId=15783735
overseas/oversees… that’s terrific spelling
This is one of the better looks you can get for free. Hope it helps.
http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DSP_500_2009_Global_Sales_2010_Aug.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243740073026&blobheadervalue3=UTF-8
Now you start to listen to me, good for you. US shouldn’t be the focus now, it’s China, it’s Asia. U.S. economy will muddle through, but the stock market is cheap. The size of the global pie is important, not the US portion of the pie. You are starting to understand the situation now.
I admittedly have a domestic focus, but I’m well aware of the fact that China is the engine of global growth here (something I’ve discussed quite a bit).
I wonder how much of this is just profits being pushed into this year in anticipation of taxes rising next year?
Karl Denninger’s post for today is about the upcoming squeeze on margins.
Listen to this guy at your own peril, he has some psychological illness I think.
NEF, I agree with you that we might be at the very beginning of an insane bull market due to the EMs growth. But the structure of our economy will destroy us within the next few years. The only way I believe you can take advantage of that is to put money in EMs and commodities and short the markets here and in Europe. I really don’t see any other investment strategy that I have confidence will make money over the next 5 years.
What’s an EM?
non_economist_fortunately — I am assuming you mean Karl Denninger. I certainly have come to trust TPCs view of macro economics more than Denninger’s and also appreciate TPCs willingness to change his views as he takes in more information and his keeping politics from influencing his understanding of economics.
Yeah, I meant Karl Denninger, I would avoid to be influenced by folks like him, Mish (this guy has no clue), zerohedge, etc., those folks have an inherent negative view of the world.
The world as a whole is moving forward, US will be sluggish for some time, but with a stronger emerging market, US will be carried forward too over time. It takes time, but we’re moving in the right direction, just be patient. Based on my judgment, we are in the midst of a bull market, there will be corrections, but we’re in a bull market.
I still get research from my old shop from analysts covering a bunch of different industries…
Over the past 2 days two companies have blown earnings expectations (both auto suppliers, GNTX and SRI) because of supply constraints / cost increases for electronics and electronic components…
Very interesting trend.
Also – check out BUCY today – the epicenter of the global EM boom yet they blew estimates and talked down future expectations on the conference call suggesting globally, mines are shifting away from ramping up new capacity now to E&P instead.
This jives very well with a steel production chart I’ve seen floating around…we’ve been declining on steel production for months now and it has started to accelerate.
Also, did anybody see this at Market ticker the other day? It nearly perfectly tracks the ebbs and flows of the economy and it’s dropping off dramatically as of October.
http://market-ticker.org/akcs-www?get_gallerynr=475
Nef, china is putting 10T more loan in than normal year, how it can not generate miracle? Normal loan a year is 3_4T. The loan last year is 9.5T, this year will be 8.5T. How can that be sustainable?
Their stradegy is very simple, a strong loan to pop up economy, hope a quick recovery in EU and usa to digest the over expanded capacity later. But the problem is their capacity is already over 06 07 level. The demand here is no way to match that. Their own consumption is so depressed by high house price (it,s different from west. They can,t use house as atm). We should expect major correction in china rather than continual growth. It will depend on inflation rate. Btw, chineses joke their official cpi, times 10 will be closer.
Well, it depends on how these loans are used. Most of the loans are for infrastructure build-out, which is the basis for the sustainability of the economy in the long run. Those infrastructure is badly needed for under-developed inner China, and it will integrate the poorer isolated area of the country into the economic system, make people more affluent all across the country. Believe me, I know more about China than folks like Chanos, Hugh Hendry etc.. China has problems, no doubt, but who doesn’t.
Consumption is growing much faster than economy, it is happening, not there yet, but it’s moving in the right direction.
There is no overcapacity in infrastructure in China by the way.
Non Economist Fortunately – google “Ordos” for one of the most egregious examples of overcapacity i have ever seen! Hugh Hendry has also filmed a video demonstrating the vast quantity of commercial property lying dormant in Inner China.
Jim Chanos produced a very quotable statistic that current CP pipeline would indicate that there are currently plans for a 5 by 5 square office cubicle for every man, woman and child in the PRC!
Is ordos a bubble? Well, it depends on how you define bubble. The apartments were bought with cash, no/little leverage is involved. The better way to call it is probably “waste”, not bubble. There are a portion of Chinese have too much money, but also a large portion have little, the thing needed to address that is political reform. The 12th 5 year plan is targeting to address the wealth distribution issue, and I think it’s going to change over time.
Don’t listen to Hugh Hendry and Chanos, those guys have no clue about what they are talking about. There are issues in China, but not the way they characterize them.
Even with the emerging economies, revenue growth will be anemic. Without expanding margins (and possibly higher input costs thanks to QE2), profit growth will be anemic.
Don’t expect much in terms of PE multiple expansion under those circumstances. Thus, the market is likely to see intermediate returns on average near the growth in profits ~ 5% at best.
Billy Mitchell, over at billy blog.com, had an article the other day titled, “Why Budget Deficits Drive Public Profits.” I believe that it explains why the corporations are reporting higher earnings and I suggest everyone read it. Some of the increased earning may be due to overseas operations, but I suspect that most of the increases are due to the stimulus. Since the stimulus is over I don’t expect a repeat.
Cullen,
An excellent video on QE and how it injects liquidity into the market…
http://www.youtube.com/watch?v=lm-z3TgIB4Y&feature=player_embedded
http://ciovaccocapital.com/wordpress/
bull market huh……..spare me
When you have someone talking about permanent excessive and 12th 5 year plan(guess american will need to try hard to learn, very funny), it is exactly when you need to find where the back door is.
I am still bullish on EM ( No BRIC, but nations like Chile, Indonesia, Turkey and Egypt) and commodity on intermediate term. But the trade of life is going to set up nicely, I am going to short china and make a fortune after inflation/deflation pendulum has its full swing.
There is no miracle and everything regress to mean over long term.
Shorting CHina might be a suicide idea. Better Idea would be to short commodities when the market gets into the bubble stage. Gold/SIlver stocks will be like tech stocks in 2000. The problem is most americans don’t invest in gold stocks as the TSX has most of the world gold stocks. I live in Canada and have already seen 200%-500% growth in alot of the best precious metal stocks. SOon all the Precious metal stocks will be up 700% -1000%. Don’t be stupid by these stocks
There are some truths which we all must acknowledge,the short comings which America is now faced with can be reversed through a series of major about face decisions which involve drastic military cutbacks by more than half and closing 95% of its bases outside of the US jurisdiction as well as to totally shut down the FED and ban all Derivatives and charge a Tobin tax on all financial institutional forex transactions, this would literally and affectingly turn the US economy around provided that competent people are in office. However politicians as a whole are unwilling to make basic intelligent decisions like this…..