Hey, its earnings season! Let’s look at the overall profits recovery, and see if we can figure out where all this earnings goodness is coming from together.

As the Chart of the Day (below) shows, S&P500 earnings have recovered from their harrowing 92% plunge back up to to near record levels. We are higher than the Dot Com earnings peak, and coming up on the Credit Bubble earnings highs.

I guess the economy must really be healthy, and this is nothing but a positive sign for the future. After all, what else could be the source of such magnificent profit gains . . . ?

>


Courtesy of Chart of the Day

Category: Bailouts, Earnings

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

39 Responses to “What is the Source of Record Earnings?”

  1. mathman says:

    (as Tonto once said) “What do you mean ‘we’, Paleface?”

    As if everyone is “sharing the wealth”. The ownership class is decimating the population.
    i saw the first $4 gas signs this week, so how about that? While the vaunted stock market grows and grows the majority of the population suffers on at the hands of the money hoarders.

    If people are pushed to the limit of survival through the shenanigans of “the marketplace” (oh, you know, the eternal chase for profit leading to “genius” decisions like LET’S OUTSOURCE ALL THE GOOD JOBS TO CHINA), we’ll have chaos and lawlessness to deal with as a reaction. When people make enough to live on, their disposable income is generally SPENT, while the few who have WAY TOO MUCH continue to hoard it (since they already have all the toys).

    When are the people at the top going to learn to share so that everyone can at least live? (So much for all that “Christian” nation crap the “religious right” keeps spewing).

    No response is necessary, since it won’t matter any way. Humanity is most definitely on its way out.

    Which “black swan” (or combination of the flock sweeping our way) causes the breakdown of civilization is up for grabs – more and more environmental catastrophes (including those due to climate change – like the extinction of bees or plagues caused by mosquitoes or other airborne sources), the currency being debased past the point of no return (the Zimbabwe scenario), resources becoming scarce to the point of not being available to the masses, the erosion and abandonment of infrastructure (like the electrical grid and water treatment plants for example) due to lack of local government money, DEBT (causing default by governments, leading to war), or another from a list too numerous to mention.

    Okay, rant over – go back to counting shekels.

  2. Petey Wheatstraw says:

    Mark to fantasy GAAPs? QE? Direct participation in the markets by OMOs? Solid fundamentals? The invisible hand of the free markets? There never was a reason for the decline, in the first place? We’re No. 1?

    Nothing to worry about, here — the stock market never goes down. Buy in now, or be priced out forever. Everybody is doing it.

    Remember back when we weren’t bat-shit insane?

  3. Bill Wilson says:

    What are the threats to those earnings? A return to “mark to market,” higher input costs, lower government spending, lower home prices, consumer de-leveraging, China slowdown?

    A good bullish argument is that companies are lean and mean right now. Also, consumers may be re-leveraging, and employment is improving.

  4. machinehead says:

    Dumping of excess labor during the recession lowered breakeven points. Even with a weak overall bounceback in sales, plus an inflationary boost, profits can approach their pre-recession levels. Big Finance, as a ward of the government, is a special case, with both direct aid and mark-to-smoky mirrors accounting.

    Yet … this scenario leaves millions as long-term unemployed, and social benefits ranging from Soc Sec, Medicare, Medicaid and food stamps with a permanently lowered negative net worth.

    So, robust corporate profits have been achieved by socializing more risk onto the insolvent public sector, basically writing down its negative equity to a deeper abyss. I’m not focusing blame here; it’s a ‘public-private partnership,’ you know!

  5. MayorQuimby says:

    Everyone should buy equities! Get your grandma to buy some if you can. Buy some NFLX after HELOCing your underwater home!

  6. b_thunder says:

    The picture without heavily-subsidized financials would look significantly different.

  7. MayorQuimby says:

    I’d like Barry to post a poll:

    “Do you believe the Fed can successfully print itself out of a credit collapse?”

    Yes or No

  8. Orange14 says:

    Pretty simple explanation, companies with solid balance sheets continue to do well. Even with 10% unemployment, a significant % of the rest of us are still consuming. Look at the retail numbers from yesterday, mid to high-end showed markedly improved sales figures. One just needs to be selective about which equities to be long in (duh!!!!).

  9. lenw says:

    When the market has discounted the price of a company’s stock as a result of some event which management can’t control, every opportunity is taken to write off expenditures or “bring forward” charges thereby worsening the income or loss position. A good portion of these charges may result in credits to reserves on the balance sheet which can be brought back into income at a later date.
    Given the extreme depletion of earnings across the board, I suspect this occurred on a broad basis after the crash. Then companies went on extreme cost control initiatives to cope with the depletion of revenue.
    A combination of these 2 significant issues now bump up against a recovery in earnings resulting in an abnormally high and DISTORTED earnings picture. I believe the manipulation of write offs and creation of reserves when the market plunged was excessive, hence such a significant dip in earnings at that time.
    DShort in his chart yesterday suggests the average of the past 5 years trailing earnings of $6o is likely where earnings will settle, and I suspect he is close.

  10. Potomac says:

    Plain and simple. Management has taken advantage of the crisis to trim underperformers and hack away at cost centers. Everything has been done to the nth degree and most of those jobs simply ain’t coming back. Margins however, will look juicier than ever.

  11. Mike S says:

    I know the reason for strong corporate profits, but I am not sharing it with you. I’ve got a cool chart that shows it too. One variable, R2 of 63% against corporate profits 1 year later.

  12. Mike S says:

    I will tell you to expect very high corporate profits for the next 2 quarters at least.

  13. Chief Tomahawk says:

    The Fed has channeled Monty Python’s “Bring out yer dead!” line, and corporate America has applied it to refinancing.

    What next after all debt has been rolled over at cheap rates? That would seem to be a one-trick pony.

    P.S. The real estate market around me, particularly condos, is a disaster now. More and more listings are taking 20+% price cuts (noted on http://www.condo.com and select the “price drop newest to oldest” option.)

  14. MayorQuimby says:

    I wish RE were booming as THAT would put everything on a firm SELL.

    But honestly – Ben is wasting his and our time. All that has happened is that – the richest people got richer.

    Great.

    Now they can spend their money on houses and boats and cars and when the free loot gets nixed, the value of all of those items will collapse in a hurry.

    Unless Ben is prepared to do MANY iterations of QE (ie full debt monetization and hyperinflation) – things are going parabolic right now and the end is drawing near.

    If we DID go hyper – we’ll all lose and it will be more painful than any here can imagine.

    Short version: Despite Ben’s best attempts – we will all lose and regret having wasted so much time chasing after that which has no value to it whatsoever (and never did) – MONEY. It’s what BACKS the money (labor – past and future) that made it so. When money is backed by ink – it isn’t worth owning.

    How sad.

  15. wally says:

    It would depend on what industry you are looking at… the aggregate number is no guide.

  16. ashpelham2 says:

    I agree with the poster that said unemployment rate is higher, which explains better profits in companies that probably had too many employees to begin with. Companies that simply cannot afford to lay off anyone else, or need more essential employees than the industry can withstand, explain why some organizations are continuing to fail. This “recovery” is going on. I don’t doubt that. But it’s a recovery in a very different economy than we had 5-10 years ago. I just changed jobs myself about a month ago, and the entire focus during my courtship and even now, that I’m on the job, is cost cutting. They even went as far as to tell me that they wanted to hire me as cheaply as they could. I asked them why they are a publicly traded company if they wish to operate as a charity? I passed on their first offer. I took the second offer. And while they promised great potential for bonus compensation, I’ve already learned that the structure of how that bonus is compensated is being tightened up.

    Never fails. It’s all about retaining profits at the top. Don’t like the way it’s being done? Get out and do it yourself. This is Amerika after all…

  17. dad29 says:

    Any IDIOT can build inventory for a year, lay off the entire factory, and sell the inventory.

  18. ancientone says:

    With a national government that no longer recognizes corporate leaders as ever being criminally liable for whatever their company does (just pay a fine as part of the cost of doing business, no one need go to jail), how long can this crooked system continue? Perhaps until the public wakes up and demands some kind of accountability………I wouldn’t hold my breath waiting.

  19. Bob is still unemployed   says:

    Two main ways to increase earnings are cutting expenses and increasing revenues. The current earnings boom is due to the former. Strong companies are due to the latter.

  20. Francois says:

    Here’s an anecdotal source of free earnings: System analyst works in a mission critical facility for one of the Fortune Top 10 Applied Research division. He’s on call 24/7 on a predictable and rotating schedule. He’s been dong that for 14 years, good performer, stellar reviews, the works. (pun intended)

    All those on call were earning extra pay (Duh!) until a month ago. One Monday morning, management told them the extra pay was gone…boom! pffffuit! Hasta la vista, Baby!

    Now, to add two insults to injury: First, this corporation is raking in a tsunami of cash, has no debts and pay very good dividends TYVM. So, it’s not as if times were tough. Second, the lame ass excuse and Orwellian newspeak used by management to “justify” this decision: “Of course, you guys are still on call, same conditions. But, since you are bound to do those on-calls anyway due to the nature of your work, we don’t have to pay you for that!

    Gee! By the same logic, since they’re bound to do the work, why do they even bother to pay their workers at all? (Ooops! I forgot that slavery was abolished around here…even if it took a long time to get rid of it.)

    How’s that for insulting the intelligence of your people? Why don’t just say: “Listen assholes! You are nothing! You’ve got mortgages,most likely underwater, colleges tuition to pay, so it’s not as if you’re free to go find something elsewhere, huh? Plus, we been consolidating the industry, our shareholders want more, We, the Management DESERVE much more (of course!) Hence, since we can, we’re doing that to you. And by the way, be grateful you still have a job…bitchez!

    Stories like that are not uncommon. Just multiply them across the board and there you have it.

    That is what you get when the whole legal and political system systematically favor the corporations over the individual. BTW, fucking easy to become “successful” when you can cheat your workers like that with almost total impunity.

  21. A) your kids
    B) your kids kids
    C) your kids kids kids
    D) all of the above

  22. Competition is what has raised profits.

    Competition to be hired.
    Competition to sell 1% loans
    and competition to lease CRE

    Competition built America don’t ya know?

  23. nofoulsontheplayground says:

    BR, drop interest rates to zero, reflate the credit bubble, re-finance debt at much lower rates, and suspend mark to market.

    That’s your recipe for record corporate profits.

    Of course, applying losses from the previous year to the current year’s income reduces the current year tax liability, which also helped.

  24. VennData says:

    It’s the way businesspeople feel about our blessed Commander-in-Chief and his people.

    That smile, that twinkle in his eye, Barrack Obama just makes me feel good about our country. It’s Morning in America.

    God bless, Barrack Obama.

  25. cognos says:

    MayorQuimby SAYS:

    “Buy some NFLX after HELOCing your underwater home!”

    Would he have said the same thing last year? Bet he would!

    I did that… NFLX went up 300%… and now Im rich, bitch. HELOC loan paid, millions made. Its called speculation. Stuff goes way down and then way, way up.

    Seriously, the tragedy (besides the stupid perma-bears here and everywhere)… is the chart shown in this post. Real earnings #s never dipped below $55/shr on a trailing basis… maybe not even $60. What is driving this stupid chart is the inclusion of AIGs $150B+ loss in a single quarter. But this CANNOT effect the value of the other 98% of companies… so you have to adjust for that. Or… you can stare at this chart and get stupider.

  26. barniebrains says:

    Agree with “Bob is still unemployed”. I think companies made deep cuts, probably too deep to sustain current revenues. As a result, we’re seeing a nice bump in earnings.

    Would be worth seeing S&P 500 revenues and expenses to see underlying trends causing this rise in earnings. Are revenues still on a downward trajectory or have they bottomed?

  27. cognos says:

    Uh, Im pretty sure revenues are at record highs.

    At least they are for non-financial and non-energy companies. (Despite the whining energy is still down alot from 2008 prices).

  28. cognos says:

    Companies that had RECORD REVENUE in 2008 (most of them by a large margin, some by 50% or more above 2007-08 levels):

    MCD, IBM, MSFT, INTC, CSCO, RIMM, AAPL, PFE, WMT, KO, MMM, VZ, GOOG

    Very few large non-fin, non-energy companies didnt have record revs:

    CAT, DE – down 10% ish versus great year in 07/08… PG (flat), T (flat)

  29. budhak0n says:

    People who think that this is all a result of the Fed trying to print themselves out of a credit collapse are missing the point.

    I’m not saying the Fed hasnt’ backstopped a lot of mickeyed nonsense, they have. But this is not all some slight of hand accounting.

    We’re slowly approaching what should have been about the fair valuation of the market prior to the craziness.

    Then we’ll see where this all goes but the earnings are real.

    What happened was a lot of the “credit issuers” got spooked thinking that in the end the end user was going to leave them holding the bag on billions of unsecured and secured “credit” so they sought some form of insurance from Uncle sam.

    Then when everybody deleveraged they were faced with the odd quandary of sitting on piles of cash that they had never expected to be repaid. Have to put the money somewhere.

    If you personally took the credit bubble as a personal invitation to buy 400 bottles of dom and put a japanese hoopdie on your Amex, then all the power to you Mr Unsecured .. I don’t have to actually pay for anything with real money…. you’re our hero.

    Now move along junior. Your baggy pants and stupid haircut are botherin me. Oh that’s right, you recently found the suit racks.

    Ever onward. Have a great weekend all.

  30. seneca says:

    Source(s) of record earnings:

    1. Low input labor costs thanks to high immigration and 9% unemployment.

    2. Corporations have pricing power, resulting in record profit margins.

    3. Excess industrial capacity, so no need for new plants and equipment since final unit sales are growing slowly.

  31. brianinla says:

    It’s called running $500B annual deficits pre-2008 and moving to $1.5T deficits now. The majority of the freshly diluted currency is going to the top 5%. The current path of currency dilution (of multiple countries) is not the signature of a healthy economy. The people who holler the most for more currency dilution (deficit spending) are the most unproductive of the classes – both the top and bottom segments of society.

  32. Guillermo says:

    Ummm welll maybe losses were overstated (esp. financials.. writedowns and such) and then reversals are starting to show up ? I wouldn’t be surprised if that was a nice little bump to profits. I don’t have a negative view, I just think that maybe the excess write-downs are now making the recovery seem steeper

    at the end of the day, just remember that it’s the integral, not the derivative, of the profit curve that matters

  33. Guillermo says:

    What cognos said!

  34. socaljoe says:

    I wonder how much earnings really dipped ex banks.

    If you invest in individual securities or sectors, this chart really doesn’t have any relevance. If I’m invested in ABT, what do I care what the earnings of AIG were or will be? I fail to see what possible use grouping them together has… unless you invest in the broad market in its entirety… and I can’t figure out why anyone would want to do that.

  35. MayorQuimby says:

    Cognos-

    Long are going to get obliterated.

  36. snapwizard says:

    I have to agree with Cognos. I worked in the technology industry and profit drops during the last recession were very modest. The semis, network equipment were affected much more but consumer internet, enterprise software barely dipped.

  37. Marc P says:

    @Cognos:

    “What is driving this stupid chart is the inclusion of AIGs $150B+ loss in a single
    quarter. But this CANNOT effect the value of the other 98% of companies… so
    you have to adjust for that.”

    I’ve never thought about that point before. Great observation. I checked to find the total S&P earnings.

    “The expectations for the full year are very healthy, with total net income for 2010 rising to $791.5 billion in 2010, up from $545.1 billion in 2009. In 2011, the total net income for the S&P 500 should be $907.5 billion, or increases of 44.7% and 13.8%, respectively. The expectation is for 2012 to have total net income passing the $1 Trillion mark to $1.0308 Trillion.”

    From here (just the figures, not the commentary) http://www.zacks.com/commentary/17335/It%26%2339%3Bs+Still+About+Earnings

    It does appear that AIG and bank losses in 4Q 2008 account for a lot of the downturn in S&P EPS in the chart. How much of it? This merits far more analysis than I have time for over lunch. Plus the other factors: companies seized the opportunity to downsize; corps cookie-jared revenues and profits so they could show a recovery; etc.

  38. Winston Munn says:

    What are profits? Profits result from Productivity (supply) – Demand (wages) + Investment (capital improvements).

    When productivity grows, demand must grow to accomodate the consumption of the increased production. The only way this can be done is to increase both wages (demand) and expand investment to meet the increased demand.

    This is what healthy ecomonies do. The balance between supply and demand is kept in equalibrium by sharing the increased productivity with workers.

    What happens when debt replaces the increase in wages?

    Here is how it works. For example purposes, let’s say an economy is producing $8 worth goods and is paying $4 for labor costs and $2 in capital improvements. Then an upswing in technology increases productivity to $12 worth of goods, but instead of raising wages debt is used to consume the excess goods.

    Here is what happens: in the first example, the profits are $2 from this formula: Profits = $8-(4+2)=$2. If this same relationship is held with the increase in productivity, we have $12-(6-3)=$3. But now, with the increased productivity and debt used in lieu of wages increases, the profits are $12-(4+3)=$5.

    This is the mystery as to why profits are up. Debt as proxy for wages.