2nd Q profit growth rooted in shaky ground

[xray s]

This article gives a good summary of the growth in earnings during the 2nd Q that has been touted by Wall Street and the corporate media as proof of a recovery...

http://www.dailyherald.com/business/col_beck.asp


By Rachel Beck

Associated Press

NEW YORK - Corporate earnings sure looked good during the last quarter...But digging into the details of these earnings reports revealed that the gains had little to do with improving business conditions and that big profit surges in a few industries accounted for much of the overall jump.

All this matters because it directly affects the economy's next move. Before executives ramp up hiring and spending again, they need to see that business - not just profits - is on the upswing.

"The corporate sector is mending but at a slower pace than many believe," Merrill Lynch U.S. economist Ron Wexler wrote in a recent report. "And in our view that is one of the reasons business investment has not surged the way it tends to do in recoveries."

(snip)

One big component has been favorable foreign currency translations, a result of the recent weakness in the dollar.

U.S. companies that do business abroad eventually have to convert their money back to dollars when calculating quarterly results. So when foreign currencies are strong, profits and sales from abroad count for more than they otherwise would.

Merrill Lynch's Wexler estimated that the year-over-year 3.8 percent sales gain in S&P 500 companies during the second quarter would be knocked down to only a 0.9 percent rise had foreign exchange translations been excluded.

Also boosting earnings were lower depreciation expenses, which have been falling as companies subtract out the costs of their assets over a longer period of time. Wexler estimates that these costs are down 10.5 percent since the last quarter of 2001 and have accounted for roughly 25 percent of the improvement in corporate profits.

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I have also read that inside selling of stocks is at very high historic levels. One explanation given by a Wall Street apologist was low daily volume make the number of insider sales look bigger than they really are, so there is nothing to be concerned about. My question, why aren't the insiders buying there stocks if things are going to get so rosy?

Buy stocks? Hell, no. Not until Ken Lay is rotting in jail...