Now revenues need to grow

Good morning everyone!  I hope that this posting finds all of you in good spirits.

The Wall Street Journal this morning has an article talking about something I have been talking about for almost 9 months on the blog.  Namely, that corporate revenues need to start growing and not just profits.  It’s like this…

• During the recession many businesses saw the bottom fall out of their profits as revenues dwindled.
• That led to many of them cutting costs rapidly, especially via layoffs.  That, in turn, led to an improved profit picture.
• When corporate earnings are reported the tradition in reporting is that numbers are compared to the year prior’s quarter.  Because profits were so depressed a year ago during the heart of the recession, profits look to be up strongly.  But in fact, it’s just because the comparisons are so easy.
• There is only so much cost cutting that businesses can do to boost profits so at some point additional profits have to come from sales/revenue increases whose dollars then fall to the bottom line.
• The deepest part of the recession was December ’08 to June ’09.  That means we have about one more quarter’s worth of easy profit comparisons.  Then it will start to get very interesting.

What I am a little surprised by is that the mainstream business press is just starting to write about this issue.  I would consider this to be a “dirty little secret” that many in the corporate world have been talking about for sometime.  The big question is: what will happen to investor confidence and stock market levels when the comparisons get tougher?

My personal feeling is that the economy is still slooooooowly climbing out of recession and that the financial markets have been a little ahead of themselves in pricing a strong recovery.  If I am right, then the probability that financial markets are going to fall is slightly higher than that they will rise.  I don’t think any decline would be big, but it would be noticeable.  So what does all of this mean in terms of whether you should be investing now?

I am spending portions of my busy day looking for prospective investments.  I have been in cash since about November and have been quite content to hang out there until some of the economic uncertainty passed.  Now I am about 65% convinced I should be buying – which is why I am looking and examining.

Jason