Market Talk

Today’s Upshot column focuses on the paradox if you will of recovering profits and stagnant hiring:

Corporate profits are humming, dividend increases are up sharply and the Dow Jones Industrial Average is back above 12000. It makes job growth the missing link as the U.S. economy mounts a rebound.

With 73% of the Standard & Poor’s 500-stock index by market value having reported fourth-quarter results, earnings are up 28% from a year earlier and sales are up 7.7%. But the contrast between profit and job growth remains a big hurdle for companies hoping to keep expanding their business.

“I am cautiously optimistic that we will see continued improvement in 2011. It’s just that it’s hard to see sustained growth until the housing market and unemployment improve,” said MasterCard Inc. Chief Executive Ajay Banga last week.

The lack of significant job gains 18 months after the recession was declared over isn’t such a mystery when considering how companies were able to return to strong profit growth in a relatively short period. They mainly relied on aggressive job cuts, and with companies now pleased with their revitalized earnings and demand still choppy, they seem to be in no hurry to add to their payrolls.

There’s no paradox, no mystery when you just accept that for a large swath of the American population, most of it in fact, there has been no appreciable recovery.

I’d like to see some kind of survey that questions whether people are better off, worse off or the same as they were in December 2007. I really would. What are you salary levels? You debt levels? Do you have the same job? Same house?

Because there hasn’t been a true recovery, except for the people at the top of the income pole, there hasn’t been a big uptick in demand here in the U.S. So companies aren’t hiring domestically, not in any great amounts in any case.

We’ve previously skewered here a couple times the cockamamie notion that companies panicked and fired too many workers during the recession. That supposition was popular about a year or so ago as economists and other pundits forecast a big snap-back in employment that was supposed to arrive after last year’s midpoint.

The hiring snap-back never came, of course, and companies are the better for it as they finished 2010 with amazing profit growth. As we’ve noted before, there never was any panic — just cold, hard calculation on how to regain strong profitability in an environment of greatly diminished demand.

And it continues, with UK gas and electric operator National Grid PLC saying it’s cutting 1,200 jobs in its US business in a restructuring effort.

As reported by Newswires’ Selina Williams, note the words of National Grid CEO Steve Holliday regarding the layoffs: “It’s not a knee jerk, it has been thought through for some time.” He went on to say that despite increased revenue, the company was not earning adequate returns in all its US businesses. Operating costs “are still higher than we are recovering through today’s rates,” Holliday added.

We’ve been over this ground many times, so in case you’ve been extremely out of touch, here it is again: Profitability in corporate America has rebounded sharply during the past year because companies aggressively cut costs — mostly by reducing their workforces — to meet a greatly reduced level of demand. Demand has picked up a little, but not enough to inspire much hiring.

Apparently this dynamic still hasn’t sunk in yet with a lot of folks because the New York Times has an explainer today titled “Profits are booming. Why Aren’t Jobs?”

It does a good job of answering the question, but feels the need to characterize it as “the enduring mystery of this Great Recession and Not So Great Recovery,” which is irritating. No mystery here whatsoever. If profits were smoking because sales were exploding, driven by incessant demand, and businesses still weren’t hiring, then yes, that’d be screwy. But that ain’t the case.

The Times could’ve actually saved some space and gotten right to the point, instead of leaving this comment from Simon Johnson for the very end of the piece: “I don’t see a pop in corporate hiring, because why should they hurry?” said Professor Johnson, the former International Monetary Fund economist. “They are paying themselves well and with demand so low, they don’t feel they are missing out on anything.”

Bingo, Mr. Johnson. What’s so mysterious about that?

Stocks have been rallying almost unabated since March 2009. Bonds have been rallying too. Those two assets are telling two very different stories. In the stock market, it’s recovery time, it’s corporate America getting back to doing what it does best, produce profits for its owners. In the bond market, it’s a much darker vision, it’s a slide into recession, renewed banking crises, terrorist attacks. Those are two very competing visions, but if you just follow where the money’s going, you can see which story has more currency with the investing public.

From the Journal:

The stock market just posted its best September in decades, but hardly anyone seems to be joining the rally. Hedge funds, high-frequency trading firms and individual investors have all cut back on stock trading, leaving third-quarter trading volume 25% below the level in the second quarter.

Trading on the New York Stock Exchange, the Nasdaq Stock Market and the American Stock Exchange is averaging 7.1 billion shares a day for the past three months, far below the 2010 average of 8.8 billion shares a day and back to levels not seen in more than two years.

I’ve had this sense lately that the stock market isn’t actually telling us much. Oh, it’s telling us that corporate America is healthy again, but you don’t need the stock market to tell you that. Just look at the earnings reports.

The stock market has this hold in the popular imagination, and when it’s rising, most people assume that means the economy is doing well. The stock market is telling corporate America’s going to post record profits over the next year. Yet Americans’ wages are flat, when 15 million people are out of work, when thousands of people are exhausting even two years of jobless benefits and tumbling into oblivion. It seems there’s a disconnect between the real world and the stock market.

There is no disconnect, however, between the real world and the bond market, and that’s where the money’s going.

Continue reading…

The future, as they say, is uncertain.

If you’d been unconscious for the past three years, and suddenly woke up in a hospital bed, and your first words were “how’d earnings do?” And they told you, well, they came in 46% higher, you’d think things were just great, right? Hope you woke up in time to place a buy order.

But there is so much swirling around that number, from the easy comparisons to a year-ago to the focus on cost-cutting rather than sales to the very shaky, very cautious outlook for the rest of the year to the fact that profit growth is going to narrow sharply. In other times, that 46% might fly as a rally flag, but in these times, it’s merely another red flag.

What sticks out the most about the crop of earnings reports is the stark divide that’s appeared between the relative health of the corporate sector, and the enduring problems of the citizenry. Wall Street’s talking about peak earnings, while Main Street’s just trying to scratch out a living. I don’t know how long that situation can persist. That is the great divide these days.

From the last installment this quarter of the Upshot:

As corporate America winds up its third straight quarter of impressive profits, trends that have emerged during the earnings season, along with signs of sluggishness in the economic recovery, indicate companies are likely headed for much less showy gains.

With more than 80% of the companies in the Standard & Poor’s 500-stock index having reported through Wednesday, earnings were up 46% on an as-reported basis, according to S&P. A number of sectors experienced robust growth. Financials’ earnings nearly tripled from a year earlier; materials companies’ profits doubled; technology earnings rose 72%; consumer discretionary, 66%.

Such sizzling numbers followed massive cost-cutting last year, largely as companies jettisoned millions of workers, in response to sharply reduced demand. Now, with their new svelte profiles and strong profit growth, companies don’t seem to be in any hurry to hire or expand, especially with net margins running at 9.5%, near the record of 9.6% set in the third quarter of 2006.

“We have no intention of letting costs creep back into our operations, so you should expect to see continued margin expansion over the long term,” CBS Corp. Chief Executive Les Moonves told analysts during a conference call this week, echoing an attitude expressed by many executives.

(Illustration: James Yang)

The second quarter started off with a lot of promise, and it’s ending it with a lot of doubt. That’s the topic of today’s Markets Hub (now moved to about 11 a.m. ET.)

Three months in three minutes. Where else can you get that?