Tag Archives: Profits

The Profitless Prosperity Sector Will Collapse… by Adventures in Capitalism

There are a lot of hope-and-dream companies sucking up tons of money but generating no profits, with no prospect of doing so in the foreseeable future. The profitless prosperity sector is headed for trouble. From Adventures in Capitalism at adventuresincapitalism.com:

Near the culmination of all great stock market bubbles, at least one of that cycle’s supposed luminaries suffers an epic collapse because of fraud. As a result, fresh capital is restricted from that sector when it is needed most, leading to further crisis and a winnowing out of the sector as competitors cannot raise additional capital. Remember; suckers are always willing to finance bad businesses, but fraud means you immediately sell. It is this fear of endemic fraud tarnishing a whole sector, not economics, that finally ends a bubble.

Following Enron; capital was restricted from pipelines and energy trading. The collapses of WorldCom and Qwest led to a slow-down in fiber-optic buildouts. After the collapses of Ivar Kreuger and Samuel Insull, there was a multi-decade decline in conglomerates and holding companies. Following the collapse of Lehman Brothers, there was a multi-year dearth in underwriting archaic structured products and I’m sure the collapse of Madoff led to a decline in Ponzi investing. There are always second order effects in the sectors where these companies were previously shining lights—along with a lot of carnage. As a rule; if the biggest players were cheating a lot, even the honest guys were cheating a little. With Tesla (TSLAQ – USA) beginning its death rattle it’s worth considering what will happen to the rest of the Profitless Prosperity Sector.

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13 Illustrations of the Benevolence of Capitalism, by George Reisman

Why capitalism works. From George Reisman at mises.org:

By the “benevolent nature of capitalism,” I mean the fact that it promotes human life and well-being and does so for everyone. There are many such insights, which have been developed over more than three  centuries, by a series of great thinkers, ranging from John Locke to Ludwig von Mises and Ayn Rand. I present as many of them as I can in my book Capitalism.

I’m going to briefly discuss about a dozen or so of these insights that I consider to be the most important, and which I believe, taken all together, make the case for capitalism irresistible. Let me say that I apologize for the brevity of my discussions. Each one of the insights I go into would all by itself require a discussion longer than the entire time that has been allotted to me to speak today. Fortunately, I can fall back on the fact that, in my book at least, I  think I have presented them in the detail they deserve.

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Stockman Slams The Greatest Fake Bull Ever, by David Stockman

David Stockman says this bull market is bullsh*t. From Stockman via zerohedge.com:

Now that the raging robo-traders have tagged a double top at 2897 on the S&P 500 it isworth remembering that the booming stock market is the greatest Fake Bull in history. It is entirely a function of massive central bank liquidity injections into the financial system that have transformed Wall Street and other global trading venues into virtual gambling casinos.

Indeed, in today’s fraught environment it can be well and truly said that the chartmonkeys have become deaf, dumb and blind to everything happening on Planet Earth external to the gaming tables where they slosh around in their cups. After all, to use the latest evidence, what could be more indicative of a political system fixing to implode than this weekend’s utterly phony and disgustingly undeserved deification of the late Senator John McCain?

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Record “Wealth” in America: 72% of US businesses are NOT profitable, by Simon Black

Debt-fueled asset appreciation, not business profitability, has been behind the increases in “wealth” since the financial crisis of 2008-2009. From Simon Black at sovereignman.com:

The Federal Reserve in the United States just released a new report showing that “Total Household Wealth” in the United States has reached a record $94.8 trillion.

That’s an impressive figure.

Even more impressive is that Total Household Wealth has increased by $40 trillion since the lows of the Great Recession in 2009.

No doubt there’s probably a multitude of central bankers and bureaucrats toasting their success in having engineered such magnificent prosperity.

And it’s certainly an achievement worth celebrating. As long as you don’t look too closely at the data.

Total Household Wealth is exactly what it sounds like– the total net worth of every person in the United States, from Bill Gates down to the youngest newborn baby.

So when you add up all the 330+ million folks in the Land of the Free and tally up their combined net worth, the total is $94 trillion.

The thing is that the VAST majority of that wealth, especially the incredible growth over the last 8 years, has been from increases in just two asset classes: real estate and the stock market.

In fact, stocks and real estate alone account for roughly 2/3 of the wealth increase since 2009.

I’ll come back to that in a moment.

Now, simultaneously, we see plenty of other interesting data, also published by the Federal Reserve and US federal government.

Both the Fed and Census Bureau, for example, tell us that over 80% of businesses in the US are “nonemployer” companies, i.e. businesses which only employ one person (the owner), and often provide his/her primary source of income.

Yet according to the Federal Reserve, only 35% of these small businesses are profitable. Most are operating at a loss.

In other words, only 35% of the companies which make up 80% of American businesses are profitable.

You’re probably already doing the arithmetic– this means that a whopping 72% of all US businesses are NOT profitable.

That hardly sounds like record wealth to me.

To continue reading: Record “Wealth” in America: 72% of US businesses are NOT profitable


Tech Wreck Coming, by Bill Bonner

As SLL observed in “The Corporatocracy,” an awful lot of money is being thrown at companies that may never make any money. From Bill Bonner at bonnerandpartners.com:

GUALFIN, ARGENTINA – This week, we got a visit from an Austrian man who recently retired and is spending five years traveling the world.

He has a specially outfitted four-wheel-drive Toyota with such marvels as heated water for a shower, a stove, a kayak, and an iridium-based alarm system.

Bill encounters a truck prepared to travel the world

In case the vehicle gets stuck, it also has a balloon under the carriage that can be inflated to lift the tires up and out of the mud or sand.

“Wow… I guess there’s a lot of new technology involved,” we remarked, just making conversation.

“No… they took the new technology out of it. There are almost no electronics. It has to be fixable… almost anywhere.”

Low-Tech Apple Pies

We do not think much about new technology.

Not only do we know nothing about it, but we also don’t want to know.

We’re perfectly happy with old technology. The low-tech apple pies cooked by our grandmother were as good as any tech-enhanced, plastic-wrapped confection in the grocery store today.

The wood fire we sit in front of every night warms us as well as any electronically controlled central heating system.

And yesterday, Mila – the 10-year-old daughter of one of the gauchos, now enrolled in Elizabeth’s English class – came into our office.

She handed over an old-fashioned note, handwritten on a piece of low-tech paper (no need for batteries or an internet connection).

On it she had drawn a heart, with these words: “I will always be with you and your family.”

Show us the website that can beat that!

River of No Returns

But now, Wall Street seems to be in the middle of a new bubble, even wilder than the last one.

In the bubble of the late 1990s, dot-coms with no proven ability to earn money sold equity worth billions of dollars.

Investors told themselves that the dot-coms would be hugely profitable. Most of them never were profitable at all. In March 2000, their stock prices collapsed.

But today, investors don’t even seem to care about profitability – not now… not ever.

To continue reading: Tech Wreck Coming


Last Two Times After Our Dear Government Reported Data Like This, Stocks Crashed, by Wolf Richter

Earnings, unlike stock prices, have been going down for several years. From Wolf Richter at wolfstreet.com:

Wall Street claims surge in stocks is based on rising corporate earnings.

So, let’s see. The Commerce Department’s Bureau of Economic Analysis released its third estimate of fourth quarter 2016 GDP and corporate profits today. This second revision of its first estimate of January 27 contains more data and is considered a more accurate approximation of what happened in the vast, devilishly hard-to-quantify US economy.

In terms of GDP, the fourth quarter was revised up slightly, but there were adjustments for prior quarters, and overall GDP growth for the year 2016 remained at a miserably low 1.6%. We’ve come to call this the “stall speed.” It’s difficult for the US economy to stay aloft at this slow speed. As Q4 gutted any hopes for a strong finish, GDP growth in 2016 matched the worst year since the Great Recession.

And corporate profits, despite a stock market that has been surging for years, are even worse. A lot worse. They’ve declined for years. In fact, they declined for years during the prior two stock market bubbles, the dotcom bubble and the pre-Financial-Crisis bubble. Both ended in crashes.

However, Wall Street remains assiduously silent on this.

The BEA offers various measures of corporate profits, slicing and dicing them in different ways. One of them is its headline number: “Corporate profits with inventory valuation and capital consumption adjustments.”

It estimates “profits from current production,” based on profits before taxes, not adjusted for inflation, but with adjustments for inventory valuation (IVA) and capital consumption (CCAdj).These adjustments convert inventory withdrawals and depreciation of fixed assets (as they appear on tax returns) to the current-cost economic measures used in GDP calculations.

It’s a broad measure, taking into account profits by all corporations, not just the S&P 500 companies. This measure is reflected in the first chart below. Later, we’ll get into after-tax measures without those adjustments. They look even worse.

To continue reading: Last Two Times After Our Dear Government Reported Data Like This, Stocks Crashed

How the Fed Stopped the “Corporate Profit Recession” (and the Media Fell for it), by Wolf Richter

The corporate profits recession that afflicted the US economy is over because…because…because the 12 regional Federal Reserve Banks made more money! There’s no keeping a great economy down! From Wolf Richter at wolfstreet.com:

This about sums up the US economy in more than one way.

The end of the corporate “profit recession” has been declared last week. It was based on data by the Bureau of Economic Analysis, released on May 27. Corporate profits, after declining with some zigs and zags since their peak in the third quarter 2014, suddenly ticked up in the first quarter 2016. And everyone was ecstatic.

Corporate profits are in the eye of the beholder. For example, “adjusted earnings” – the ex-bad items earnings proffered by companies and analysts – of the S&P 500 companies have dropped four quarters in a row, since their peak in Q2 2015, on a year-over-year basis.

But by BEA’s estimates, one of the broadest measures out there, corporate profits peaked in Q3 2014. The BEA tracks “profits from current production” based on all US corporate entities. It makes a number of adjustments, including the Inventory Valuation Adjustment and the Capital Consumption Adjustment. It thus produces a seasonally adjusted annual rate for each quarter that then can be compared to prior quarters. This annualized rate shows what profits would be like at this rate for the entire year.

By this measure, corporate profits peaked at $1.643 trillion annualized rate in Q3 2014. By Q4 2015, profits had plunged 16% to $1.380 trillion. That’s the “corporate profit recession.” But then there was a tiny uptick of $8.1 billion in Q1 this year, which has been heralded as the long-awaited end of the profit recession.

Note the circled uptick in profits that was used by the media to proclaim the end of the profit recession, and how the overall profit picture since Q1 2012 smacks of stagnation, or worse:

But there’s a detail – a huge detail – that the media conveniently forgot to point out: whose profits are included in “corporate profits.” The BEA tells us (emphasis added):

These organizations consist of all entities required to file federal corporate tax returns, including mutual financial institutions and cooperatives subject to federal income tax; nonprofit organizations that primarily serve business; Federal Reserve banks; and federally sponsored credit agencies.

Ah yes, the Federal Reserve Banks (FRB), which include the 12 regional Federal Reserve Banks, such as the New York Fed. They’re private banks, owned by the largest financial institutions in their respective districts. And as private banks, their consolidated profits are added to US financial sector profits, and thus overall corporate profits, along with those from Goldman Sachs, JP Morgan, and your local bank down the street.

It works like this: the Fed creates money out of thin air, buys securities with that money, adds the interest payments from those securities to “Net Income,” then pays most of it back to the Treasury, whose interest payments became part of this income in the first place. If this seems a bit absurd and circular, so be it. We’re interested in another absurdity here.

To continue reading: How the Fed Stopped the “Corporate Profit Recession” (and the Media Fell for it)

Global Profits Recession Leaves Investors With Nowhere to Hide, by Rich Miller

From Rich Miller at bloomberg.com:

The profits recession is global — and that’s bad news for the world economy and for equity markets.

So say researchers at the Institute of International Finance, a Washington-based association that represents close to 500 financial institutions from 70 countries.

In their April “Capital Markets Monitor,” IIF executive managing director Hung Tran and his team blamed the global decline in earnings on poor productivity growth, weak demand and a general lack of pricing power. U.S. companies also are being squeezed by rising labor costs as they add people to their payrolls.

The pervasiveness of the downturn means there’s nowhere for corporations to turn. “In the past, if you had poor performance at home, you could recoup and compensate for that with overseas investment,” Tran said in an interview. “But if you suffer declines in profits domestically and internationally, you tend to retrench.”

That in turn raises the odds of an economic recession. He put the chances of a U.S. downturn within two years at around 30 to 35 percent due to the earnings slump, up from 20 to 25 percent.

To continue reading: Global Profits Recession Leaves Investors With Nowhere to Hide

This Is the Worst U.S. Earnings Season Since 2009, by Blaise Robinson

From Blaise Robinson at bloomberg.com:

This U.S. earnings season is on track to be the worst since 2009 as profits from oil & gas and commodity-related companies plummet.

So far, about three-quarters of the S&P 500 have reported results, with profits down 3.1 percent on a share-weighted basis, data compiled by Bloomberg shows. This would be the biggest quarterly drop in earnings since the third quarter 2009, and the second straight quarter of profit declines. Earnings growth turned negative for the first time in six years in the second quarter this year.

To continue reading: This Is the Worst U.S. Earnins Season Since 2009

This Is Why It’s Going to Get Even Tougher, by Wolf Richter

Given the stock market’s central bank induced runup the last couple of days, a return to reality might be helpful. From Wolf Richter at wolfstreet.com:

The third quarter was tough for US corporations. Worse than the prior two quarters. They got waylaid by weak global demand and lack of pricing power. The easiest way to increase revenues and profits is to raise prices, so via inflation, but that strategy isn’t working when consumers don’t have the additional income to pay for higher prices.

Then there’s the “strong dollar.” On Thursday, Draghi evoked more QE and even more negative deposit rates, which eviscerated the euro and made the dollar a heck of a lot stronger. And so many US corporations are now reporting declining revenues.

It isn’t just the energy sector. For the 142 non-energy companies that have reported Q3 earnings so far, revenues dropped 3.0% year-over-year, according to Moody’s Credit Markets Review and Outlook. Operating income of these non-energy companies fell 2.7%. In this environment, companies try to maintain their bottom line by cutting costs.

“Results such as these weigh against expecting much of a pick-up by either hiring activity or capital expenditures,” Moody’s warns gloomily. Both have been dreary recently.

Cheap money is no longer readily available to riskier borrowers. In the third quarter, bond issuance by junk-rated companies plunged 38% from a year ago. Yields rose as the spread between high-yield bonds and Treasuries soared. And in October, according to S&P Capital IQ’s LCD, it has been even worse: just seven junk-bond deals through Thursday, for a measly total of $3.7 billion.

Leveraged loans are in a similar quandary. These loans issued by junk-rated companies, often for special dividends to their private equity owners or for M&A, are so risky for banks that regulators have been cracking down on them for two years. Banks usually sell them, either directly to funds or repackaged as Collateralized Loan Obligations (CLO). But during the Financial Crisis, banks got stuck with them. And now leveraged loan issuance is petering out.

Total high-yield borrowing (junk bonds and leveraged loans combined) plunged 37% in the third quarter from a year ago, according to Moody’s. And for the 12-month period, total issuance is down 29% from the 12-month all-time record in Q4 2013.

But here is the thing: within 15 months of the three prior peaks of total high-yield borrowing – the all-too-familiar periods of Q3 2007, Q4 1999, and Q4 1989 – recessions occurred.

To continue reading: This Is Why It’s Going to Get Even Tougher