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FreeMarkets (92.06)

When The Facts Are In

Recs

11

July 28, 2010 – Comments (10)

The U.S. stock market has been on a run of late.  Corporate earning reports are over shadowing poor macro reports.  The argument for higher stock prices is simple, the macro data is a lagging indicator, but the corporations are raising future profit forecasts.  The end of the recession isn't just near, they say, but the V shaped recovery is in the works!

But when the facts are in, reality is going to bite.  First and foremost, nearly every DOW component that has beaten expectations have done so with strong foreign sales.  And even though U.S. sales are disappointing, profit margins are improving.  How is the second point possible?  Easy, they're raising their prices, something you and I would call inflation.

There's little doubt that with the weakening dollar over the last two weeks, the EU's new found austerity and the latest corporate earnings are a harbinger of higher inflation.  I can't predict the exact amount, but 3% inflation is a thing of the past and will be missed by many Americans as their incomes will continue to fall well behind prices over the coming years.

10 Comments – Post Your Own

#1) On July 28, 2010 at 10:20 AM, drgroup (69.26) wrote:

I truly believe that these corporations are shuffling their books around to move profits into this quarter in order to take advantage of the lower tax rights. obama is on a mission to repeal the bush cuts when they expire in '11 and further cripple this struggling economy. Be suspect of all earnings reports until after '11.

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#2) On July 28, 2010 at 12:16 PM, SockMarket (41.39) wrote:

that assumes that Bush's tax cuts actually helped. Considering that they were one of the chief reasons for our massive deficits under him I think that seeing them expire is a good thing. 

I don't see how those cuts can help considering that:

1) the money only helps spur growth when it is invested, as oppose to sitting in cash.

When corporations are sitting in cash it actually hurts because the government would spend it, albeit probably not as effectivly. If they spend the money over and above the deficit we are getting that much more money in the system, if they spend it instead of borrowed dough we are seeing less of a crowding out effect. Either way it helps.

(And if you believe Keynesian economics the cuts will hurt regardless of investment, since the multiplier will be lower since the money is being spent fewer times)

2) A corporation will only invest when they are fairly certain that the investment will pay off in the long run. Few are certain of that during a bad economy.

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#3) On July 28, 2010 at 12:26 PM, Turfscape (41.29) wrote:

Freemarkets wrote:
"Easy, they're raising their prices, something you and I would call inflation."

That's a big assumption. An example to the contrary: Harley-Davidson recently reported an increase in margin while in a period of holding MSRP, and in fact lowering MSRP on several models. Like many, MANY corporations have done over the past year to two years, HOG went through a very thorough analysis of operations and has become much more lean. Raising prices is not the only way to increase profitability. In fact, it's a downright poor way to increase profitability in a time of economic struggles, as you will more than likely lose sales to the frugal-minded.

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#4) On July 28, 2010 at 12:28 PM, Turfscape (41.29) wrote:

drgroup wrote:
"Be suspect of all earnings reports until after '11."

Because corporate earnings reports were so thoroughly honest previously?

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#5) On July 28, 2010 at 12:46 PM, MegaEurope (21.47) wrote:

How is European austerity inflationary?

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#6) On July 28, 2010 at 3:08 PM, FreeMarkets (92.06) wrote:

Sorry MegaEurope, but the grammar on that sentence was poor.  It should have said "There's little doubt that with the weakening dollar over the last two weeks, the EU's new found austerity and the latest corporate earnings, which are a harbinger of higher inflation, that market conditions are deteriorating."

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#7) On July 28, 2010 at 3:09 PM, FreeMarkets (92.06) wrote:

Turfscape - you are right, some companies are getting leaner, but basic goods (food, energy, imported crap from China) are getting more expensive.

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#8) On July 29, 2010 at 6:14 AM, drgroup (69.26) wrote:

 danielthebear   that assumes that Bush's tax cuts actually helped. How can peopl being allowed to keep more of the money they earn, not help. What ever you spend your money on is a help to economic growth. The less money you give the gov, the better of you are.

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#9) On July 29, 2010 at 6:37 AM, ragedmaximus (< 20) wrote:

AND FUTURES ARE UP TODAY what a scam,this market is a lie

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#10) On July 29, 2010 at 11:08 AM, Turfscape (41.29) wrote:

FreeMarkets wrote:
"some companies are getting leaner, but basic goods (food, energy, imported crap from China) are getting more expensive."

Some basic goods are increasing in price. Others are not. Steel prices are off their highs. Construction materials prices are down. Construction services costs are down.

Regarding the imported crap from China, one could argue that better labor conditions and pay for Chinese employees has improved, causing the increase in cost of goods produced. That's not a bad thing, and ultimately will lead to greater global parity for manufacturing (or just shift it to the next depressed region...North Korea anyone?).

Overall, I don't think the hyper-inflation scare is that real, yet. We have a lot of buffer zone still in place.

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