Co. forecasts: Cloudy, with chance of pain
No more paper clips for you. And do you really need to make so many copies?
That seems to be the attitude of companies these days as they penny-pinch their way to the profit levels Wall Street has forecast — even as their businesses deteriorate.
Take a look at these numbers provided by Thomson Reuters.
As of yesterday, 195 companies that are in the S&P 500 Index reported their quarterly earnings. And 64.6 percent of them have beaten Wall Street’s profit estimates.
But only 41 percent have topped revenue forecasts.
Ordinarily, 62 percent beat earnings estimates, and 63 percent top revenue forecasts. So companies are managing to satisfy Wall Street expectations on profits but are coming woefully short on revenues.
What does this mean?
It means that if revenues continue to disappoint, companies will have no other choice but to cut expenses if they want profits to remain high.
And nickel-and-dime stuff like paper clips and copy-machine restrictions won’t be enough. Eventually we could see a new round of layoffs — or, at the very least, a lack of expansion.
That might already be happening. We’ll get a sense of how the job market did when the Labor Department releases its July statistics next Friday.
As I’ve said before, that number could be disappointing, because the economy is weakening and because of statistical aberrations. And the August and September figures could be especially ugly when they are released over the next two months.
The game of beating Wall Street earnings-and-revenue forecasts is, of course, a joke. (And one that I helped originate decades ago — but that’s another story.)
Companies make sure Wall Street analysts have a sense of what their earnings and revenues will be so that there are as few disappointments as possible.
Bad surprises — like shortfalls in revenues — tend to make a company’s stock decline. And since executives are usually among a company’s biggest shareholders, a decline in share price is the last thing they want.
So earnings-and-revenues forecasts are essentially rigged.
But this past quarter, the rig apparently didn’t hold. Revenues seem to have dried up so quickly that corporate executives couldn’t, or didn’t, warn Wall Street analysts fast enough.
There are, of course, some tricks to keep revenues up.
Companies that sell actual products, instead of services, can stuff more of their goods into the sales pipeline. This’ll steal business from the future to make current revenues seem better, but you do what you have to do.
IBM managed a miraculous 6 percent increase in profits during the second quarter, despite a 3 percent drop in revenues.
When IBM reported earnings last week, the Financial Times quoted the company’s chief financial officer, Mark Loughridge, as noting that extraordinary sales in the final week of the second quarter helped keep revenues from being down even more.
Now, how freakin’ lucky was that?
*
Right on schedule, the Federal Reserve leaked that it was moving closer to taking action on the economy.
I’m not going to waste a whole lot of time on the Fed today, or on the people in the media who graciously accept tips and leaks from that organization without analysis.
But the second line in any story about possible Fed action at next week’s Open Market Committee meeting should contain the words: “So what?”
The Fed has been trying to work its magic for nearly five years now.
To put this into perspective, kids who entered college when the Fed started trying to stimulate the economy are already out of school and probably still looking for work.
What has the Fed accomplished? It has managed to get interest rates so low that savers are being punished severely.
And Fed Chairman Ben Bernanke and his team have come across as so panicked that few people are willing to borrow money or lend it. Borrowing costs have been down for so long that even the phrase “historically low rates” has become a cliché.
The economy? It’s barely growing and seems to be sinking again.
But the Fed has managed to get the stock market to bubble (and then pop) with regularity these past few years. And the rumors yesterday did help stock prices snap a three-day triple-digit slump caused by all the bad things the market should be reacting to.
Hey, I guess pumping up stock prices artificially is worth something.
***
Rep. Ron Paul (R-Texas) almost got it right.
He was questioning Treasury Secretary Tim Geithner yesterday at a hearing and asked if the rigging of the Libor rate in London — the latest big financial scandal — is any different from the Federal Reserve determining where borrowing costs should be in the US.
I made this point in a column recently.
The real issue — which Paul and everyone else will soon be talking about, if there is any justice in the world — is how we can criticize British banks for rigging interest rates and the bond market when Treasury and the Fed were rigging US financial markets at the same time.
The FBI and others are looking into the US market manipulation.
Trust me, it’ll be fun when it all comes out.