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FreeMarkets (40.41)

Big Cuts = Big Profits = Big Problems



July 16, 2010 – Comments (4) | RELATED TICKERS: GE , AA , SPY

Top line profits from GE, Alcoa and other are looking rosier than rose bush, but there are thorns in that there bush!  In past recessions, the business cycle was pretty straight forward.  Businesses cut expenses (employees, product lines, wasteful production), they got lean and profitable, then started hiring new employees with those fat balance sheets.

The question - will this time be different.  The answer is "YES" (and that's not a good thing).

A little history here is quite important.  From 2002-2007 employment growth in the U.S. was very limited as compared with GDP growth.  What's caused that phenomenon was cheap foreign labor.  In the past factory labor had to compete with cheaper labor around the world, today technology is giving corporations the ability to export service sector jobs (call centers, claim processing, computer programming, etc) and when you couple the cheaper labor with zero business regulations, it's hard to fault the CEO's for shipping jobs overseas.

In reality, the above can SLOW growth, not eliminate it.  Today there is something more sinister at play - the enormous U.S. Debt albatross and new regulations.  Where is America going to get the revenue to pay back its debt?  No one is getting elected by promising to tax the people, so corporations are looking like the easy target and they know it.   They are hording cash.

The continuing regulatory hurdles being created by the Obama administration (and previously be Bush) are making business EASIER for large corporations.  They can hire unproductive employees to filter through the thousands of pages of nonsense (I'm sorry, consumer protections), because they have the cash to do so.  It's the small businesses (the men/women creating 70% of all new jobs) that find themselves unable to compete with their limited resources.

And this is the crux of the profit problems.  CNBC and other financial outlets LOVE to tell you about GE's profits, but you never hear about a little company like SEECO who employes 60 people or EBS who employs 12 people.  Yet it's these little company's whose profits are the key to 70% of our job growth.  Increasing regulations will make it easier for the bigger company's to compete with smaller company's and decrease job growth in this country.

To right America's economic ship, we need to seriously cut regulations and end deficit spending.  I'm betting against either of these from happening and that's why I'm bearish on the market (bearish the Wilshire 5000, not the DOW)

4 Comments – Post Your Own

#1) On July 16, 2010 at 11:02 AM, menefer (< 20) wrote:

Wrong again.

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#2) On July 16, 2010 at 11:36 AM, davejh23 (< 20) wrote:

menefer (inappropriate username) - Please elaborate on what's "wrong again".  Are you saying FreeMarkets is wrong, or are you saying gov't is taking the wrong steps again?

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#3) On July 16, 2010 at 11:43 AM, outoffocus (22.80) wrote:

I agree the current Big Corp/Gov alliance is killing small business.  You say that the gov will raise taxes or corps. I disagree. If you look at the tax increases coming over they next few years, they will hit small business first and much harder than large corporations. Further hindering job growth.  The only bone I've seen the gov throw at small business is more small business loans.  Because thats what struggling small businesses need, more debt (sarcasm intended).

If the gov were really interested in real job growth, they would cut taxes across the board on small businesses. The "bailouts" would have gone to small businesses.  But thats just too much like right. It seems that all major legislation passed in the last 3 years is set up to benefit big businesses in favored industries at the expense of small business.  This cannot last.

It is also why I remain bearish in the near term.  You cannot kill the goose that lays golden eggs and continue to expect golden eggs.

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#4) On July 16, 2010 at 2:14 PM, Jbay76 (< 20) wrote:

rec +1

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