King Report: Paradox of Corporate Cost Cutting



Because Ben is back in funny money mode, stocks & commodities are rallying.  But the dollar and the Chinese are not happy; and they are clearly expressing their anger.

The FT: China will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.  [China keeps warning; but Ben keeps reverting to pump mode.]

“We should hasten the implementation of our ‘going out’ strategy and combine the utilization of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday…   [It’s going to be an eventful autumn, boys & girls!]…
Qu Hongbin, chief China economist at HSBC, said: “This is the first time we have heard an official articulation of this policy …to directly support corporations to buy offshore assets.”

Several major corporations (including CAT, UTX, LMT, YHOO) reported top-line misses on Tuesday; however most beat earnings estimates.  The trend of top-line misses is so clear that CNBC commentators uncharacteristically lamented the negativity of the occurrence.

CAT shares rallied sharply on better than expected earnings; but it missed revenue consensus by 8.4%!!!

The following table from Bloomberg shows the incongruity of earnings and revenues.

Bloomberg Data: Caterpillar Inc reported quarterly results for the period ended June 30, 2009. The following table displays earnings figures along with Bloomberg consensus mean estimates. Actual values may differ from those included in company reports to make them comparable. All numbers are in millions of dollars except for per-share earnings, quoted in dollars.

Actual   Estimates     # Estimates      % Surprise
6/30/09        6/30/09           6/30/09         6/30/09
Sales                    7975.000      8703.400            15                -8.4%
Net Income Adjusted      445.376    147.909          11          201.1%
EPS Adjusted                     .720               .215             20          234.9%

CAT beat earnings by curtailing capex and vicious cost cutting in jobs and salaries.  Call this the Paradox of Corporate Cost Cutting – it’s good for the individual company but not for the aggregate economy.

The buzz word on Tuesday was ‘stabilization’.  Bernanke told the House Finance Services Committee that the economy is showing “tentative signs of stabilization.”

This was spun by fin media types and pundits as good news.  What happened to ‘green shoots’?  Isn’t ‘green shoots’ a more bullish condition that ‘stabilization’?  One Bubblevision commentator kept averring that ‘stabilization’of the economy is the reason for the stock market rally.  But the stock market is not priced for ‘stabilization’; it is priced for a roaring recovery…UTX CFO Hayes said 2010 profit growth cost-action led”

Caterpillar said it could lose money in Q3 and close a significant number of factories on a rolling basis. But CEO Jim Owens believes the economy will recover in Q4, so he upped full-year guidance. Owens also uttered ‘stabilization’. A Q3 loss, rolling factory closings, capex curtailment and suspension of stock buybacks are not stabilization let alone green shoots.

By the way, someone knew about CAT’s earnings on Monday because the stock gapped higher and traded sideways without retreat for the remainder of the session…CAT gapped again on Tuesday’s open.

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