Read it here 1st: Profits Flip Negative for Q3

On Friday, Merrill Lynch’s David Rosenberg notes that with "90% of the companies reporting, third-quarter earnings per
share dropped 8.5% from the third quarter last year."

As we noted last Monday, S&P 500 Profit Flips Negative for Q3.

Here’s an excerpt via Barron’s Alan Abelson:

"With the tally now
encompassing 90% of the companies reporting, third-quarter earnings per
share dropped 8.5% from the third quarter last year. A bad enough
showing in itself, it’s even worse when compared with a 9.6% gain in
the second quarter over the corresponding ’06 period and 11.6% when the
whole world was smiling a year ago. It’s the worst performance since
that dispirited fourth quarter of 2001, hard on the heels of 9/11.

It won’t shock you, we’re sure, to learn that
financials took a real profits pummeling (down 33% from the
year-earlier total) topped (if that’s the word) only by the shares of
companies that cater to consumers with more than a dollop of
discretionary income to spend, which were off 39%.

David stresses that profits drive the business cycle
— capital spending and employment feed off them. And he sighs: "It has
always been thus." Hence, he’s ineluctably forced to the conclusion
that a recession in the economy "is either here or no more than two
quarters away." And he goes on to note the last two times corporate
earnings skidded to a comparable extent into negative terrain were in
the fourth quarters of 1989 and 2000 (both instances, we might add,
proved the beginnings or a prelude to something ugly in the stock
market as well as the overall economy).

There’s a tendency, David notes, especially
prevalent among the considerable number of die-hard optimists, "to
strip financial-related earnings out of the pie" because financials now
account for 30% of corporate profits and crow about how good everything
else is. Well, everything else isn’t so hot and, as David observes,
"stripping out financials is like stripping out California, Florida,
New York and Texas from GDP."

Indeed . . .

Skeleton at the Feast    
Barron’s NOVEMBER 26, 2007    

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What's been said:

Discussions found on the web:
  1. Scytale commented on Nov 25

    But haven’t they been buying back shares, so the number of shares is smaller?

  2. Greg0658 commented on Nov 25

    Black Friday sales must be balanced with credit card repayment schedules in the months to come. Period.

    Unless your a credit card bank. The season has delivered dependable derivative lending to your vaults with most favored interest status pushing upwards of 10%. Period 2.

  3. Andy commented on Nov 25

    What happens to the totals if you back out GM’s accounting-oriented losses? Is this a case of a single huge outlier overwhelming the rest of the reporting companies?

  4. Winston Munn commented on Nov 25

    “stripping out financials is like stripping out California, Florida, New York and Texas from GDP.”

    Does this mean the recession is contained?

  5. techy2468 commented on Nov 25


    have we not been saying the same thing about consumer using credit card since ever??

    is it not possible that consumers used credit card during on 2006 black friday??

    if so, is this not a indicator that cosumer debt has not peaked yet, he still has room to spend?

    and since we do not have accurate data about consumer actual debt, is it not possible the consumer is in not such a bad shape as we all are anticipating?

    i guess that if consumer is taking his last shopping breath, hitting the ceiling of his credit limit (i am sorry but the real atmosphere is not indicative out there in the malls) then first quarter 2008 will be the start of the great depression led by consumer spending falling off the cliff.

  6. stan commented on Nov 25

    Next thing you know we’ll be quoting corporate profits “ex-housing” and “ex-financials”. Similar to inflation ex- things that are going up, we can just ignore corporate loses. Nirvana at last!

  7. gonzo commented on Nov 25

    Nowadays, people are going to buy Christmas presents whether they can afford it or not. If Black Friday has the best deals of the year and I’m hurting financially, I’m going to get out there to get the best deal possible. Sales in Sept and Oct were bad, I’d expect the rest of the holiday shopping season to suffer as well. I would also expect reduced profit margins from the retailers given the extent of the sales this year over last.
    Just looking at this from a “common sense” perspective.

  8. donna commented on Nov 25

    So, this would be profits-ex-losses, then?

    Oh, good, no recession! Yay!

  9. Winston Munn commented on Nov 25

    Whether or not this turns out to be a good shopping season, a horrible shopping season, or something in between really has little to do with the forward look at the economy. Consider this information from John Hussman concerning recessions:

    “While recessions are often viewed as if there is some ‘representative consumer’ that just backs off for a while, that sort of chararacterization doesn’t fit the facts at all. Though consumption represents about 70% of GDP, it is also the smoothest component of the economy (Friedman and Modigliani were right on this). Indeed, nominal consumption has never declined on a year-over-year basis, even in recessions.

    Recessions are not caused by a general shortfall in spending, but instead by a mismatch between the mix of goods and services supplied by the economy and the mix of goods and services demanded. Though demand shifts away from some kinds of output that the economy produced in the prior expansion (as we saw with tech and telecom in 2000-2002 and are seeing in housing today), we often see continued demand in other sectors, but the mismatch takes time to correct, and output and employment suffer as a result. Most job losses during a recession are typically concentrated in a small number of industries, while other industries experience growth and even growing backlogs and rising employment.”

    The key elements are not consumers and their spending habits, rather it is a mismatch of goods and services offered comcpared to those in demand.

    Goods and serviced offered – like 9-10 months of housing inventory no longer in demand and Asset Backed Commercial Paper no longer in demand and Commercial Property, which just experienced its first price decline in prices in a number of years.

    In the short term, equities may experience a bounce from enthusiastis of retail spending, but looking forward 6-18 months, the imbalances between goods and services offered and goods and services in demand has a long way to go in order to reestablish equalibrium.

  10. Estragon commented on Nov 25

    Looking at a long term graph of corp net cashflows it’s pretty clear that when YoY turns negative, the economy is usually, but not always, heading into a rough patch.

    Two notable recent exceptions were 1986 and 1998. In both cases, cashflows soon rebounded strongly only to fall off again, this time followed by a recession. In both cases, equity markets chopped around a bit in the context of a long-of-tooth bull market. In both cases, there was something of a panic selloff during or shortly after the profits weakness.

    The takeaway might be that something prevented 1986 and 1998 from being sufficiently cathartic to rid the economy of built-up imbalances.

    We could add 1980-82 to the list of exceptions. Although there was a recession with the first profits dip in 1980, the rebound soon failed and a second recession followed shortly. Notably, FF rates were jacked up sharply in 1980, but not held high. A second run was needed to purge inflation more permanently.

    So what we have is a bit of a pattern surrounding the last three major recessions. A pause, a “save”, and then a recession.

    It isn’t a huge leap to suggest the pattern is repeating. Some combination of fed rate cuts, regulatory pressure, and bailouts may “save” the housing/credit mess for now, but without a sufficiently cathartic effect. If that’s the case, we should probably expect some sort of panic low in equities soon, and the real recession in around 2010-11.

  11. noone commented on Nov 25

    If I remember correctly 3rd quarter earnings were unusually high last year. It is not as bad as it sounds.

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