Saturday, August 09, 2003

It's nice when the big boys repeat the General's analysis.
The root of the problem is sluggish demand. Companies have been slicing and dicing to get the most out of meager sales during the slowdown. And they've been reluctant to invest in new product development because they won't get any immediate payback.

"There's a lot of concern on the revenue side," said First Call's Hill. "It's hard to get a warm and fuzzy feeling."

In the most recent quarter, Hill said, revenue for the Standard & Poor's 500 companies rose 6.6 percent on average, which sounds good until you start to dissect the number. The weak dollar accounted for 2 full percentage points of the gain, and energy companies accounted for another 1.3 percentage points as fuel prices gained 46 percent. A refinancing boom contributed $50 billion to consumer spending, economists estimate, another one-time lift.

After the corporate accounting scandals of the past two years, investors are keenly aware of how one-time gains like asset sales and tax benefits are used to pump up profits.

But the same is true with sales, which are getting a big boost from a number of nonrecurring items -- and that's causing concern among investors. Without improved revenue, they worry, how will corporate profits continue their much-forecast rebound? Cost cuts can only go so far, and raising prices isn't a serious option. With unemployment still high, companies are reluctant to hike prices, and there is little of the pent-up demand of past recoveries since consumers have never really stopped spending.
The straight dope on the revenue gains for the S&P500 in 2003:II are especially interesting. Transnational corporations are just fine with a falling dollar, especially when they can make money in euros and trade them in for greenbacks. Domestic firms can't do this and so are at a distinct disadvantage in the stock market game, unable to show these deceptive revenue gains to shareholders.
even if consumers don't rush out to the malls, Feinman said, there are a range of factors to boost demand: Tax incentives and fiscal stimulus will help as will the end of the Iraq war.
Where to begin on this line? The "Iraq war" will not be ending anytime soon. US generals even admit that American troop levels will remain near the 150,000 mark for many months (years?) to come. Considering how GDP is now desperately dependent on continued military spending just to tread water, a near-term reduction will only wreak havoc on, not boost, general demand.

And continuing to cut taxes (even if sadly mistargeted) and boost government spending might be good in isolation for boosting demand, but these enormous deficits are sure to be felt in the bond market sooner or later, raising interest rates and depressing demand.

This "recovery" will be nip and tuck for some time to come, and pose some real spin challenges to Karl Rove next year.

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