Posted by: Howard Silverblatt on July 21, 2010
Last week U.K. scientists determined which came first: the chicken or the egg? They claim it was the chicken. But the Wall Street version is which comes first Sales or Jobs is still open. Consumers don’t want to spend because they don’t feel comfortable about the future, specifically the economy and their job; companies won’t expand - add to plants, spend on capital expenditure, hire workers (full or part time, even extending hours) until their sales pick up. From the company’s viewpoint, why invest to produce more when you aren’t even selling everything you are making now, especially if their earnings are doing well (not to mention they have more cash on hand then at anytime in history). From the consumer’s side, even those who feel secure with their job are watching their bottom line, and money remains tight (and don’t even look at your retirement holdings or benefits). So how do you break the downward cycle of ‘I won’t spend’ therefore ‘I won’t build’? For starters there were the jump start stimulus programs. But here we are trillions later and no jobs. Maybe it would have been worse, maybe we just need more stimuli or maybe we’re just feeding a junkie. Pick a theory, stand at Broad and Wall and preach it. But whatever we’re doing, wherever we are in the process, it hasn’t worked yet, and Americans aren’t known for their patience. So if we don’t start to see some actual improvements soon the tie goes to the down side, and time is not on our side. I’m not looking for a home run, just someone on base would be nice - something to root for.
The above commentary is mine of course, and not part of my earnings review below, but the two do appear to be blending. Maybe I need to step back and look for bias in my reporting, or maybe a 38% increase in earnings isn’t the whole story.
As of last night we had 24.9% of the Q2 earnings reported. So far, the Q2 2010 earnings results are encouraging at first glance. Based on the issues that have actually reported, earnings are 14.5% ahead of estimates, with 65.8% of the issues beating their estimate. Sales, however, are a different story. While 73.4% of the issues have beaten their sales estimate, the “beat” is only slight, with the overall aggregate sales coming in 4.4% ahead of estimates - far less than the 14.5% for earnings. The earning growth over last year’s Q2 2009 is equally impressive, with earnings 38.4% ahead (excluding Citigroup which had a massive loss last year), but sales are a disappointing 6.7% ahead. Anyway you cut it - sales just aren’t cutting it.
I believe comparisons should focus on quarter-over-quarter results to determine the recovery’s progress, as well as the underlying momentum of the economy. And since I believe jobs are number one, and given that companies are generally in good financial shape with excess cash so they can ride out any short term disruption, I look to sales as a future indicator. On this basis, earnings are running ahead of Q1 2010, but sales are flat, and that’s the problem. It’s great that companies have improving earnings, but those improvements are due to high margins, which were the product of cost cuts - specifically job reductions, the very thing that we need to improve now. Until companies and consumers start to spend more, the job front will not get better, but they won’t spend more until they believe things are getting better. The stimulus programs were suppose to jump start the economy and break the downward cycle by convincing both groups that better times were here. But so far we’re not seeing the sales or the jobs; but earnings are good, at least for now.