July 26th, 2009
10:52 AM GMT
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LONDON, England – Last week when I appeared on CNN to talk about earnings, I raised the issue of the quality of the U.S earnings.

Wall Street gains sent the Dow above 9,000 points for the first time since January.
Wall Street gains sent the Dow above 9,000 points for the first time since January.

Investors have been pushing stocks higher fueled by better than expected earnings. The Dow broke through 9,000 for first time since January, while the S&P 500 has shot up 11 percent in the past two weeks. The U.S. earnings season has fueled a global rally.

But are investors getting too euphoric? If you look at the revenue side of the earnings, not all is well. Take the 143 companies in the S&P 500 who reported last week. Revenues actual fell on average 10 percent from the same period a year ago, according to Bloomberg data.

Steven Ricchiuto, chief economist at Mizuo Securities USA hit the nail on the head when he spoke about the divergence between earnings and revenues.

"We know companies are cutting costs at a record pace, and that is helping earnings. But you can't keep on shrinking your way to profitability. Eventually, you do damage to your end users. You have to get revenues up to have a sustainable upturn."

David Rosenberg, chief economist and strategist at Gluskin Sheff, echoed similar sentiments when quoted by the Financial Times.

"Earnings may be beating low-balled estimates for the majority of S&P 500 companies, but there is no questioning the fact that we are also seeing a sustained decline in revenues."

"What we are still witnessing is a trading opportunity rather than a fundamental shift in the outlook. We must take into account what the risks are going to be once the buying momentum is lost," he added.

The bottom line is that companies can't indefinitely cut costs, they need to get revenues moving higher. But every time they shed a job, that means one less consumer spending as much money in the economy, undermining the prospects for recovery, which in turn of course, hurts companies earnings prospects.

In a research note this month, the economist Nouriel Roubini sounded a note of caution.

"Expectations of corporate earnings will have to be downgraded again. Demand will be weak, most prices will be falling, and companies will therefore have little pricing power and their profit margins will remain squeezed. The expectation that in these conditions profits will rebound strongly is quite far-fetched."

Roubini is worth listening to, because he's the guy who predicted the credit mess. As I've written many times before, any sustainable recovery is still far away.

But for now, investors aren't too concerned why companies are beating earnings expectations; that they are is enough. A closer analysis might make investors a little less euphoric.

Do you agree or disagree?

soundoff (39 Responses)
  1. Mr Right

    You clearly like Mr Roubini and as for the question at the end of your 'desperate article'...I disagree with you !

    July 26, 2009 at 12:10 pm |
  2. Michael Smith

    I would say I disagree. If you are waiting to invest and have your cash sitting on the side lines keep in mind that reccessions are usually over by 6 months before the doomsayers say that maybe things are getting better but by then you have missed the opportunity. Reductions in inventories are a normal event in a downturn and do strengthen a company how this is somehow made out to be a weakness is beyond me.

    July 26, 2009 at 1:02 pm |
  3. I agree

    I agree.

    July 26, 2009 at 1:32 pm |
  4. Daniel Dyner

    I am in total agreement with your analysis of the market situation. I feel that we will be going on a roller coaster ride for a very very long time. Certain financial news,albeit positive, will have people euphoric but the basic business fundamentals will still have, unfortunately, a long ways to go before recovery.

    July 26, 2009 at 1:45 pm |
  5. Ng Yat Fai

    useful information

    July 26, 2009 at 2:42 pm |
  6. turkish

    I quite agree. Someone should cut this article and hang on the wall. Time will come up and this would be its proof.

    July 26, 2009 at 4:17 pm |
  7. BCoop

    I totally agree. The stock brokers want a bull rally so they can make more money. Sadly, the individual investors will get burned once this bear market rally crashes

    July 26, 2009 at 6:52 pm |
  8. Joseph Gold

    No question about it, Mr. Benjamin is right.

    July 26, 2009 at 7:45 pm |
  9. Elli

    I would agree with you and most people in the finance world would too... Majority of people, including large investment houses, have been short through the early part of this rally which began since early March and are now trying to catch the ride.. The fundamentals were inexistent since the rally began in early March and although the earning results have cerrtainly improved the outlook, fundamentals are still not solid. Mr Roubini as many others have predicted the subprime but we also have to make our own judgement just by feeling investors' sentiment through one another, media etc.; your article and many others alike which question the continuation of this rally validate that there's still a lot of nervousness in the market and as such volatility is likely to continue.

    July 26, 2009 at 7:48 pm |
  10. Paul

    Agreeing... but why such a focus on actual 2009 earnings v/ 2008? Instead of comparing actual 2009 earnings with what the market expected six months ago? The market will remain unsure of its future, but after the "liquidity preference" of the second half of 2008, having poured such amounts of cash in greasing the system can only have one effect: a return to the equity market...

    July 26, 2009 at 8:21 pm |
  11. Jay

    There aren't any jobs, credit has been slashed, oil is rising, and the treasury cannot stop printing money. doesn't bode well for the future.IRS Tax Problems/Help Page

    July 26, 2009 at 8:49 pm |
  12. Derek A

    Seems pretty sensible to me. We can believe a recovery is on its way when we say employment levels rising.

    July 26, 2009 at 8:56 pm |
  13. Terrence Deagle

    I'll take it one step further. I am sure we're going into a worldwide depression and this is simply a "Sucker's Market." Some people may even have the audacity to think that this recession is almost over when we're really only going into the second round. The market's are manipulated to a large degree by the mainstream media who serve Wall Street.If you think things were bad in 2009, it's going to be a lot worse in 2010.

    July 26, 2009 at 10:04 pm |
  14. John Baltz

    I agree with Mr. Benjamin. Please note, market volume is low, indicating the market is being driven by day traders, not institutions. As long as revenues are down and unemployment remains up, we are still in a recession. JB

    July 26, 2009 at 11:02 pm |
  15. Ben Lim

    I agree – this euphoria may be short lived. This situation may be the long awaited sabbatical that the economy needs.

    July 27, 2009 at 12:03 am |
  16. Neville Whiley

    I dont put a lot of faith in Mr Roubini. I beleive the market will recover at a similar rate as in previous recession/depressions and it is moving in line with that now.

    July 27, 2009 at 1:06 am |
  17. Laurent Balmelli

    IBM, Intel and Apple have shown that there is still business out there and that the industry, rather that the consumer is able to boot strap the economy. The CPI and PPI has both been growing these last quarters, showing clues for inflation. The key is job recovery.

    Unfortunately the market is largely manipulated by traders and the spikes in market values are due mostly to speculation. Most stocks are overbought (Google, American Express) and some are way over their 50-day average.

    There is however a few exceptions: Microsoft (MSFT), ETFC for example. These stocks will have an up-trend even if the S&P and NASDAC will go down a little. MS is a bargain at this moment.

    July 27, 2009 at 2:52 am |
  18. Ravi

    I agree! The economic fundamentals don't seem to support the euphoria of the stock markets. Are speculators precipitating another (and deeper) crash? If so, then the first signs will emerge by late August-mid September '09.

    July 27, 2009 at 10:18 pm |
  19. Waseem

    i totally agree

    July 28, 2009 at 8:30 am |
  20. Alexander Pavlos

    Mr. Roubini has predicted the end of the world a thousand times – well he was right once – nothing great about his perdiction – 1 out of 1000. Prices in the market are about fair now, taking into consideration how paranoid the downward spin was, it was evident to be a rebound back to fair values.

    July 29, 2009 at 8:00 am |
  21. Mike

    To the person who said

    "I totally agree. The stock brokers want a bull rally so they can make more money. "

    .... I can't believe you don't realize that brokers make just as much from bears' selling as they do from bulls' buying.

    July 30, 2009 at 8:40 am |
  22. Tim Clarke

    Everyone seems to be thinking that the economy is starting to improve, and they may even be right. What they do not mention, is the risk of a second run on the banks. Consumers still have massive debt and, despite the cut in interest rates, an increasing number will be unable to pay as the job market contracts. Add to that the debt of companies and falling demand for their products. Add to that record governement debt, rising government expenditure and declining receipts and it is easy to paint a worrying picture.
    Banks are once again bidding up the rates they offer to depositors as they cannot get all they want to borrow in the interbank market. Isn't this a perfect receipe for another crisis of confidence in the banking system and maybe this time in the lender of last resort?

    July 31, 2009 at 9:08 am |

    No question about it, Mr. Benjamin is right. Will wait until Oct'09 ( Winter Season.)

    July 31, 2009 at 9:28 am |
  24. Artur Duque

    I agree partially. That hapened with most of the companies. But as management always looks ahead for more revenues, where the proffit is, then upturn comes naturally.
    But what worries me the most is the fact that the tightening of financial discipline and regulations will definetly make recovery very very slow. We will see.

    July 31, 2009 at 10:05 am |
  25. Robert Neo

    The stock market is exactly like a casino. If most people think that a particular stock is worth US$10.00 a share, then US$10.00 it shall be. It is all about luck. If you lose money in the stock market, it is not that you are stupid, it is you are unlucky.

    August 1, 2009 at 2:01 am |
  26. Andreas, Stockholm

    I disagree but for a different reason. This question whether any individual company's top or bottom line is driving their result is a bit moot if you take a macro perspective. For an equity investor it's a different story but most of those have gone into hibernation, it is the day traders' market right now. What I mean is that it doesn't really matter how a company got a positive result this last quarter (let's say) because as long as it is staying in business it will be around when times turn around and business picks up. If companies are already now operating at peak lean efficiency it means they will need to increase capacity and workforce eventually. That may not be so quick but when it does occur (I think early spring '10) it will be the catalyst for 'proper' growth and earnings with dropping unemployment as a consequence – just what the doctor ordered.

    August 1, 2009 at 5:32 am |
  27. Quiet vacation

    I was on vacation in U.S.A this month. Experienced empty hotels, restaurants and shopping malls. Seems you guys have it bad.

    August 1, 2009 at 9:58 am |
  28. JUST ME FROM ie

    I agree we are setting up for another big leg down. I keep hearing about an increase in disposable incomes and an increased savings rate ? Really didn't we just get a record low avg work week aren't tons of companies not only sheding job's but also cutting hours, suspending bonuses, and slashing salaries is anyone getting overtime recently? So where would all this extra money be coming from? Not to mention a whole lot of debt is getting paid down and you really can't call paying off debt "Saving" and don't forget about those underemployed meaning way underpaid ! I am sure we are about to start seeing drops in continueing claims as benefits are running out , and this will be touted as the Bama's doing but thats just a bigger % of the poulation not being counted . Everybody please keep buying stocks i'm up 800% from march and don't want to go to cash just yet.

    August 1, 2009 at 10:46 pm |
  29. William

    Agree,I foresee another leg down in the economy shortly after labor day. Although, the market will problem continue to rise till after the holiday due to spin and short covering etc. The only thing going up in 2010 is taxes, unemployment, and gold. This artificial stimulus thing is a temporary band aid for economy infected with gangrene not green shoots and will just delay the inevitable cleansing that is needed to clear the decks. Sorry for doom and gloom outlook but with our massive debt burden reality can only be stalled not denied.

    August 2, 2009 at 2:28 am |
  30. Mike Chase

    Dear Toddybear,

    First of all welcome back. It is good to know you are still around and that you can think well.

    What is not mentioned is the huge pile of toxic assets that remain on the books of credit organization including mortagages that reset in 2010 and the vast amount of credit card debt that is of questionable quality among other things.

    The second element that is not mentioned is that the US savings rate that is now up to about 7% just about offsets the stimulus cash infusions that have taken place so far.

    The third element is that consumption driven economies are vulnerable and the US economy has only been supported for years by credit expansion as the proportion of the GDP created by manufacturing has steadily dropped.

    Until the global economy rebuilds itself and is driven not by consumption but by production it will be unlikely that a permanent "fix" for our global economic problems can be developed. What is required is new economic thinking to create a new economic era. You understand this–Go Toddybear!!


    August 2, 2009 at 7:57 am |
  31. Bradman

    I agree. It is sad though that the very companies and banks that got us into this mess seem to be profiting first while the little guys suffer.

    August 2, 2009 at 3:00 pm |
  32. Sam K.

    This rally looks like an apparent application of the "buy the rumor – sell the fact" rule. Yes I agree with u, but that's just the way markets work!

    August 2, 2009 at 7:51 pm |
  33. Telly Chong

    We have seen a yo yo market in the last 8-10 months . The market always open up for opportunity and risk. I agrees with your analysis and also recommend investing on stocks over the board. Analyst may comment negative news and yet go on buying before the boom are too far to catch. They say at the end of a rainbow there are gold. Challange is where is the end of the rainbow.

    August 3, 2009 at 10:18 am |
  34. Myrna Bangoy

    Maybe we are not in the posiion to call it a take off, considering that companies have closed, debts are still unsettled. However, it is a very good indications that people are really hopeful, and management have devised strategies for more profits, and maybe there will be an upturn for our economy if we just believe it to happen and do our best to contribute in the upliftment of our present status.

    August 3, 2009 at 2:41 pm |


    August 3, 2009 at 3:30 pm |
  36. AVE2000

    Although the reasoning is sound, the conclusion that the gain in stock-prices is getting ahead of ourselves is not correct.

    The stocks are rising because the earnings indicate that the decline in stockprices since august 2008 was to strong.

    The markets have a remarkable resemblance with a chicken, its either euforia or sheer panic.

    August 8, 2009 at 3:24 pm |
  37. oscar perez

    Benjamin ,

    I agree with your analysis,.

    The euphoria is part of the maniac expression of the gamblers and speulators . There is no basis for such euphoria.

    No solutions were found nor given for the crisis and nothing excep money printing and cost cutting has changed.

    This time is an illusion.

    by the way, where are you Benjamin?

    August 8, 2009 at 4:22 pm |
  38. chris

    there couldn't be a more beautiful picture to illustrate this article ! shame on you editorialists!

    August 21, 2009 at 6:51 am |
  39. Azli Yahya

    Dear Todd
    I am pretty much in aggreement with you.I think, we are almost there in term of recovery.or maybe another 2-3 years then world economy will be okay .

    September 27, 2009 at 10:30 am |

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