Summary of the earnings season mostly passed

Good morning everyone! I hope that each of you is doing well and gearing up for a relaxing and rejuvenating series of Holidays.

We are in the 7th week of the 3rd quarter earnings season, meaning that it is just about over. How have the businesses that compose the S&P 500 performed? Of the companies reporting so far 80% have beaten analyst expectations for earnings per share and by a median amount of 7.3%. The number exceeding expectations is a record. So everything must be going great, yes? Not exactly.

The earnings profile of U.S. businesses is a perfect reflection of the state of the economy. Businesses achieved and exceeded earnings expectations mostly by trimming their fat. At this point every penny that can be squeezed by renegotiating supplier contracts has been found. Every employee doing duplicative or superfluous jobs has been fired. All of the consultants have come in and performed their sometimes grotesque liposuction on companies. But…

Sales/revenues are not up. In fact, sales are set to have fallen in the third quarter by 10% vs. the 3rd quarter of 2008. Therefore rising earnings are unsustainable. There are only so many costs to cut. At a certain point sales must rise to prevent the U.S. economy from capitulating into recession again. In other words, the economy, while better than it has been in 15-18 months, is still precariously positioned.

Right now there is a grand game of chicken taking place. Consumers won’t spend more money until their budgets are better, and more importantly, until the employment situation improves. But businesses won’t hire more employees until their is evidence of greater consumer spending to lift the U.S. economy higher. My own personal feeling is that the U.S. consumer will be the last to blink. My intuitive sense of things is that many folks have guiltily (is that a word?) lived under the specter of heavy debt burdens for over 10 years. This recession has forced a gigantic purging of excess debt on the part of the consumer – so we are cutting our costs, too. It seems as if this painful, but necessary, step is truly taking place. That is a harbinger for a long, slow economic recovery.

The holiday shopping season has been a bit stilted so far according to the numbers. Traditionally the day after Thanksgiving, this year November 27th, is the biggest shopping day of the year. It will be an important precursor of the rest of the holiday shopping season and of whether or not the 4th quarter will witness actual revenue growth. I’ll be paying close attention to the early returns.

Be well! No…be very well.

Jason