Market Talk

Today’s Upshot looks at the not-as-mundane-as-it-sounds inventory levels. What makes inventory levels so interesting is that it was a rebuilding of inventory levels that so boosted manufacturing, after businesses depleted inventories in the early stages of the recession.

But now that cycle is pretty much over, and companies are going to have to make money the old fashioned way: petition Congress for tax breaks. No, no, we’re kidding there. But the easy money from inventory rebuilding is over.

From today’s column:

The inventory build that boosted the U.S. economy this year is slowing. Third-quarter earnings reports reflect rising uncertainty among manufacturers whether the inventory elastic stretched too far, and could snap back later this year or next.

The so-called bullwhip effect, whereby a post-recession resumption of demand creates a snap-back effect that’s often larger than customer demand, is waning as inventory gains slow and companies are more closely matching their output to demand.

Tool maker Stanley Black & Decker Inc.’s retail customers are being very cautious with their inventory levels, said Chief Operating Officer James Loree on a call last week. If the holiday season doesn’t prove very strong, the odds will increase for an inventory correction.

“We don’t expect any earth-shattering inventory corrections,” he said. But if sales are weak in late November or early December, “there is a chance that there could be more inventory correction than normal in this particular year.”

Listen, I know what you’re thinking. Utilities? You start falling asleep somewhere between the first t and the third i. But the utilities industry is a reflection of consumer and industrial demand for power, which in turn is a reflection of the relative economic strength of the nation. Given that, today’s Upshot column is actually quite an interesting look at what the electric companies are saying about their business, and what that says about the state of our economy.

From today’s Upshot:

Second-quarter earnings season has been strong overall, and very good for some sectors, such as financial and industrial companies. It hasn’t been as strong for a group that in many ways helps America go, and that’s utilities.

Utilities keep the lights on for the nation’s homes, factories and small businesses, and as such offer a particular insight into the state of the economy’s rebound. The image emerging from the utilities’ second quarter is of a patchwork recovery and generally cautious tone from the industry.

“Consumer confidence is low. Retail spending is low and many of the things that we look at and control, those decisions are telling us let’s be Midwest conservative, and that’s exactly what we intend to do,” said Michael Morris, chief executive at American Electric Power Co., during a conference call last week.

What happened to our customers?

The nation’s banks are certainly in a better place than they were a year ago. Varied and myriad government backstops have erased the threat of imminent collapse and given them breathing space to recapitalize themselves. There was even a nifty little stock-market rally to help things out. But one little nagging problem remains: the demand side of the supply-demand equation is still lacking.

From today’s Upshot column:

Amid signs of increased second-quarter demand among companies including airlines, trucking and heavy machinery, there’s at least one place where demand is a no-show so far—banks.

The reasons are manifold. Some corporations remain reluctant to invest heavily in new business because they’re uncertain the spring uptick will continue. Others are sitting on a veritable mountain of money as profits have soared. Meanwhile, consumers remain fixated on paying down debt, rather than adding more.

Wells Fargo & Co.’s total consumer loans were down about 2.6%, or almost $12 billion from the year-ago quarter. Commercial loans were down 14%, or $48 billion. Finance chief Howard Atkins said the bank “began to see signs” of increased loan demand in the second quarter from businesses and “to a lesser extent” consumers. Chief Executive John Stumpf said business clients’ use of credit lines was “relatively unchanged” from the first quarter and still at “historic lows.”

Other large banks are seeing the same. “As we look on the loan demand side, it continues to remain weak as the consumers continue to delever,” Bank of America Corp. Chief Executive Brian Moynihan said on a conference call last week. “There’s no loan demand, because there’s no demand for the [client's] products,” Mr. Moynihan said, referring to a dearth of commercial lending.

In today’s Upshot column, we’re looking at the the companies that make the stuff that contains all the stuff we buy, the packaging companies:

Despite the recent spate of downbeat economic data, there are encouraging signs in package and container makers’ second-quarter results.

Two companies that make packaging for a variety of consumer products — Crown Holdings Inc. and Packaging Corp. of America—on Tuesday reported higher volumes and demand compared to a year ago. The results bode well for other suppliers to food makers and industrial manufacturers reporting next week, including Sealed Air Corp., Silgan Holdings Inc. and Pactiv Corp.

Demand was strong in the first quarter “and it has continued to strengthen,” Crown Holding Chief Executive John Conway said during a call with investors. “In more mature markets demand returned to more normal levels,” while business in emerging markets continues to be “exceptionally strong,” he added. Crown Holdings said second-quarter sales and gross profits inched ahead, benefitting from higher volume and lower costs.

It’s interesting that you can see in the packaging industry that all the capacity cuts, shutting mills, getting rid of unprofitable operations, that sort of thing (in one case through bankruptcy court,) has allowed these companies to restore some measure of pricing power. But that isn’t necessarily a sign of broad-based strength: inventories are around record lows. There is just that much less stuff to pack these days.

You saw it out of IBM and Texas Instruments. You saw it this morning with Goldman Sachs. Revenue, it’s down. So, what’s keeping earnings up? Margins. That’s the focus of today’s Upshot column:

More than two years after the recession put corporate America on a cost-cutting binge, companies are still finding ways to squeeze more profit out of smaller operations.

Second-quarter margins are looking great for companies reporting thus far, and the higher margins are keeping the three-quarter-long rebound in profitability running.

Toy maker Hasbro Inc. on Monday posted a surprising 11% jump in earnings, even as revenue fell 7%. The Pawtucket, R.I., company’s operating margin, or profit from ongoing operations, increased to 10.8% from 9.2% a year ago as royalty payments including for its Transformers and GI Joe toys were down 32% and advertising costs fell 12%.

The only problem with this, is that right now magins are running ahead of historic norms, and history suggests they will eventually come back down to those levels. If sales don’t rise over the next couple of quarters, margins will come under pressure. It’s amazing, actually, that companies can still find places to trim, more than two years after the recession started. That, of course, doesn’t say much for prospects in the jobs market, incidentally.

When IBM reports earnings today, Big Blue will do what it usually does, which is to report steadily increasing earnings. Sure, a lot of companies are reporting numbers that look great. But there’s still one little, lingering problem that may eat into some of the those fat profit margins if it isn’t corrected: the state of the consumer.

From today’s Upshot column (written by, as they all are, John and myself,) in The Wall Street Journal:

Why aren’t things better at the kitchen table? For one thing, the nation’s unemployment rate was 9.5% in June, down slightly from its April peak of 9.9%, as more out-of-work people gave up looking for work. Even with that slight improvement, there are still five job seekers for every opening.

The difficulty of looking for a job is compounded for those who can’t sell their existing home and move to a new community for work. In May, pending home sales plunged 15.9% from the year-earlier period to the lowest level since the National Association of Realtors began collecting statistics in 2001.

The disparity of businesses reporting robust earnings and individuals anxious about their personal prospects says a lot about why businesses aren’t celebrating their good fortunes. Corporations regained profit growth through deep cost cuts and small but steady sales gains from depressed levels. That helped first-quarter profit gains reach a record, and the second quarter is expected to boast a healthy 19.3% rise from a year ago.

The consumer isn’t spending money, not at any kinds of rates that are needed to spur material economic growth. Companies sure aren’t in any rush to spend money to expand (and eat into those profit margins) until they see consumers spending. Meanwhile, the government, through a combination of vicious politics and, well, financial reality is reining in its spending.

Where’s the growth going to come from?

University of Michigan’s preliminary July report on consumer sentiment indicates the mood continues to sour. The headline reading fell to its lowest level since last August, and only 39% of survey respondents expect their income to increase during the year ahead. Barclays Capital analyst Theresa Chen noted that is the smallest proportion in the history of the survey.

Alcoa as it always does unofficially kicks off the second-quarter earning season today when it reports its results after the market close. It’s going to be another quarter where the profit numbers for corporate America look good (given they’re coming off a bad year-ago number,) but what is going to really get investors’ attention this time around, more so than usual, are the outlooks for the second half.

Why? Well, with earnings season back, The Upshot (the real Upshot, not that hack blog Yahoo’s working on) is back in the pages of the Wall Street Journal, and to tell you:

Results tell more about the road behind than the journey ahead. Some companies and analysts say the strong second-quarter profits were fueled on businesses restocking inventories and helped by stimulus spending and Census Bureau hiring that won’t help this quarter.

“Earnings per share for the second quarter are fairly irrelevant,” said Heiko Ihle, an analyst for brokers Gabelli & Co. “What people want to see is in the outlook and what we’ve seen in the last couple of weeks doesn’t bode well for a ridiculously good outlook.”

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Hey yahoos, get away from the journalism equipment.

Dave Benoit, a reporter here at the wires, yesterday said to me casually, See that new Yahoo column? The Upshot?”

The Upshot? The Upshot!?

True it is. Yahoo has a new feature, The Upshot, which is apparently nothing more than a glorified news aggregator. Some little team of “reporters” and “editors” somewhere surfs the web and reposts other outlets’ stories. You know, so you don’t have to go through the drudgery of reading the news.

“Our goal is to be blunt narrators of the day’s news, to cut through the noise and misinformation and get to the heart of what’s important and why,” editor Andrew Golis wrote in the introductory post.

So let me be a blunt narrator, Andrew.

We write The Upshot.

We write The Upshot.

We write The Upshot.

“The Upshot” is the name of the corporate earnings-focused column John and I have been writing for the Wall Street Journal. We’ve been using that name since January, after sending the name to our corporate offices, who had to make sure nobody else was using it. (The column was initially called “The Wrap,” but we didn’t like that. But that’s another story.) So listen up, you yahoos: “The Upshot” is ours. We got there first. It’s bad enough you’re stealing other people’s news, you don’t also have to steal our name.

Go find another name, you hacks. Call it “News Rehash.” Or maybe “Yahoo’s News Aggregator.” I think “News You Can Get Elsewhere But Which We’ve Put Here In An Attempt To Siphon Off Ad Revenue For Ourselves” is quite catchy.

But “The Upshot” is taken. You will be hearing from our lawyers.

Earnings season is over, for us at least. While the market was in the middle of its insane meltdown, nearly 800 points in like 20 minutes is pretty insane, John and I were under the gun, too, but to get this column done on deadline. We got it done, the market recovered, kind of, sort of, we think, and well, if anybody still cares about earnings season, here is the Upshot’s, well, upshot:

U.S. corporate profits vaulted back last quarter, supported by increased consumer and business demand, stripped-down overhead and walk-in-the-park comparisons to last year’s dour first quarter.

As the first-quarter earnings season winds down, the superlatives are hard to dismiss: Profit growth for members of the Standard & Poor’s 500-Stock Index is expected to rise a stunning 87% compared to year ago results, and effortlessly eclipse the previous record of a 35% year-over-year gain in the second quarter of 1993.

Tight cost control continues to be key to this earnings growth. With companies running so lean, it’s easier for a larger portion of revived sales gains to fall straight to the bottom line. Sales, though, are rising at a far less impressive rate than profits, and that is a concern for future quarters as corporation’s ability to shave more costs wanes.

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In today’s Upshot, we take a look at dividends, and how companies are feeling better about paying them out:

Robust first-quarter earnings have more companies raising dividends, a sign that American businesses are more confident in their prospects.

The improved economy is giving corporations ranging from Procter & Gamble Co. to International Business Machines Corp. the confidence and cash to compensate their shareholders for holding their shares.

Last month alone, 25 members of the Standard & Poor’s 500-Stock Index raised their dividends, and one initiated a dividend. That’s a big improvement from a year ago, when just 14 S&P 500-member companies raised their dividends, and 10 cut their payouts.