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Where do profits go?



December 09, 2008 – Comments (8)

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...

8 Comments – Post Your Own

#1) On December 09, 2008 at 10:25 AM, outoffocus (22.87) wrote:

If only the government can figure that out.

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#2) On December 09, 2008 at 10:43 AM, OleDrippy (< 20) wrote:

Not to mention "less is more" is becoming chic. If the largest holders of weath in this country (namely old folks and boomers) are scared and ultra risk-averse, along with the young professionals adopting a green, age-of-austerity mindset, who will fuel growth? The only way I see us growing is the US becoming an export nation fueling the international emerging affluent. I would suspect this will be a long, awkward, and painful transistion..


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#3) On December 09, 2008 at 11:29 AM, FleaBagger (27.55) wrote:

A question about your picks: if you think the market is going down, why don't you have picks to outperform the sinking market? If you are right, they would get points for staying flat. And outperforms on ultrashort ETF's would seem like a natural way to play CAPS, given your expectations.

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#4) On December 09, 2008 at 1:11 PM, BigFatBEAR (28.29) wrote:

Fleabagger - I think Mish's reasons for being on the sidelines are pretty sound.

OleDrippy - As for "less is more" becoming chic, I'd venture that being happy with what you have, consuming only what you need, and thinking about the long-term environmental impacts of your actions are BULLISH for the economy in the very long term. Overconsumption (and the debt it implies) is neither sustainable nor efficient.

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#5) On December 09, 2008 at 3:58 PM, DemonDoug (31.41) wrote:

human beings will consume as much as they can.  so will most animals.  you have to force them to not consume as much, and looks like this recession is doing the trick.

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#6) On December 09, 2008 at 4:25 PM, JGus (28.02) wrote:

Dwot - I know that FCX cut their dividend. I'm not sure if that was the company that you were thinking of, but they're one of the biggest miners out there. Also, I wish I had the discipline that you have and was able to just sit on the sidelines. I can't help but try to play the volatility that we're seeing right now. In my real portfolio I've been up close to 40% twice and have fallen back to break even both times over the past 6 months. It could obviously be a whole lot worse (like losses of 40%+) and I keep telling myself that I need to quit while I'm ahead : )

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#7) On December 09, 2008 at 5:59 PM, dwot (28.88) wrote:

JGus, I did play the volatility for a couple months, but I suppose when I tried to move money and I had to complain to the securities commission to get a response it absolutely scared me as to the safety of my funds and I just decided to play it safe.  It took me almost two months to get my money out of my broker, and this was ahead of the problems.  Simply because of bad timing I have lost big time on 3 occasions.  It makes you cautious.  Indeed, if the first hadn't happened I'd have owned a place free and clear by the time I was legal age, but my grandfather mismanaged my mom's estate and lost everything, and again it was due to misreading the housing market.  He completely cut us out of his will as well.  There was no passing on what ought to have been my mother's share to us.  But then, he was also too cheap to put a grave stone on her grave.

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#8) On December 10, 2008 at 11:49 AM, gman444 (28.24) wrote:

Dividend cutting may be the next big thing---I noticed the other day that PVX has cut their monthly dividend for November---theirs has been absolutely bankable for some time now....if you look at some of the dividends, they are outrageous on a percentage basis---don't see how this can be sustained....

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