Where do profits go?
I have not been spending as much time looking at the markets latetly, but did notice that Barry over at the Big Picture is now perhaps more bullish then those that were bullish in 2006 when, as he says, he was considered one of the most bearish on wall street. I bring up his weekend interview which shows some bullishness to contrast with Mish, who is still on the bear wagon. Don't get me wrong, Barry isn't all out bullish, but that is how the story featured him.
I am still on the sidelines, and Mish probably states my reasons better then I do myself...
"Saut goes on to say that "stocks, in the aggregate, are cheap.” I disagree, but there are many who don't. Stocks are cheaper than they were, but that does not make them "cheap".
Earnings are low and headed lower still. It is a mistake to ignore what hugely rising unemployment is going to do to both demand and profits in 2009 and 2010. And it is an additional mistake to not factor in something for boomers scared half out of their minds headed into retirement."
Personally, I think Mish has an outstanding record on correct calls and I can't see profit growth or sustainability in this market. Going back almost a year now I have been saying I don't expect dividends to remain where they are and two sectors, finance and mining, are cutting dividends. Mining has just started, I've only seen the one company and off hand I don't remember which. But mining has only started cutting dividends.
There are so many things working against the market and I tend to think some are bigger and very different then in the past. I don't know how many people are reliant on their dividends for income, but these people have reduced spending power. With higher unemployment wages are likely to be flat. When I was young I was taught that you get into a home and it is hard at first, but eventually your wages increase and the money you spend on mortgage relative to income declines. That was an utter lie for how my life unfolded. I am comfortable now because I got rid of the mortgage, but if I was still a home owner I'm sure I would look at the bank account and continue to be frustrated, as I was the 14 years of homeownership. I suspect that this challenge is going to play out for many, many people going forward. I always looked at my spending habits and for a household with higher income, well, it was constantly going to mortgage and I always figured the economy would be toast if people spent (which means didn't) like I did. Well, I think many people are being force to not spend. I suspect the average age of vehicles 10 years from now will be 3 years older then today. The idea of vehicle replacement was a huge financial concern for me and I can't see how it will be any different for many people who are stuck in this flat wage with too much debt trap.
So, sure there are people out there like me, who can spend, but I don't think we make up for the sheer numbers that can't. To me that means we go through a period where profits are at record kind of lows, probably for years. The more companies try to cut, the more they cut the hand that feeds them. Used to be companies cut there was slack in the economy that they could benefit. Now I think cuts have a much stronger negative domino effect because disposible income is so low or not there for so many more then in the past.
So, I am watching...