What Growth?

I was watching CNBC this morning.  And, I heard someone (don't remember who) talking about how good the earnings for companies were going to be.  This individual was clearly excited about the prospect of the market going up as a result of earnings going up.  At first thought, it sounded like good news.  Then, I thought about it ...

Unemployment numbers came out today, and they were not good.  Yeah, I admit the number is getting smaller every month.  And, if we continue on this trend, the new unemployment claims should reach a pre-recession level some time at the end of 2010.  But, we also need to consider that these numbers are not realistic.  You see, the government, by virtue of owning the automobile companies, has effectively kept the unemployment numbers from growing by continuing to pump money into the two now bankrupt car makers (GM and Chrysler).  Think about it ... the government is still paying these folks (and huge salaries by the way).  Yet, the unemployment numbers are not getting worse.  The government is in a win-win situation.  They are keeping a large number of the folks who put them in power employed.  And, they are keeping the unemployment numbers from increasing.  This is great, right?  After all, its all tax payers money.

The reason I took the scenic route on this "rant" was because I wanted to talk about unemployment in context of earnings.  Have you noticed that a number of companies are reporting record earnings?  Haven't you wondered how this is possible?  Well, if that company cut a bunch of its employees in order to cut costs; that would be one explanation.  There are two parts to the earnings calculations: Revenue and Cost.  Growth is typically an increase in Revenue (either by real growth or price inflation).  In an earlier post ("Maximum Wage"), I already talked about what companies are doing to increase revenues, so, I will not go into a lot of details here.  The key point to be made here is that companies are still laying off employees.  Further, companies are not increasing revenue as a result of growth in the market.  If there is any revenue growth, it is because companies are increasing prices in response to increases in the prices of the raw materials they consume. 

So, why do we care?

Before you start buying stocks, you might make sure the company who's stock you are buying is not just increasing their earnings by reducing their workforce.  Eventually, they are going to run out of people to cut.  And, as more and more folks lose their jobs, the demand for products and services is going to drop as well.  So, the company's revenue will have to decrease because demand for products and services will have to decrease.  Its a vicious cycle.  Nevertheless, think very carefully before you invest your cash.  People want to hope that things are going to turn around quickly.  We know this from experience.  Hope will not pay your grocery bill.