Warning! Warning! Weak profits ahead

Of course earnings estimates are too high. They’re based upon wholly unrealistic expectations of >10% annual ROI.

Even the supposed experts haven’t figured out that the real-world economy can’t support such expectations. Before the Reagan administration started the project of transferring income from labor costs to balance sheets, paper ROIs have been at unsustainably high levels. In a sustainable economy, annual ROIs of 6-8% are excellent, and 5%’s reasonable. Until investors realize that those ROI levels aren’t coming back, they’re going to sit on their hands, and the economy will continue to languish.

When earnings forecasts come down into a reasonable range, investors accept that the new levels are what they’re going to be able to get, and the sidelined capital comes back into the markets, businesses might start hitting their numbers again.

Just a little bit of straight talk here: Profit is a form of economic inefficiency. If you take so much out of your business this year that you can’t provide your employees with disposable income, you’re going to find that you don’t have a business in another year or so. Ten percent ROIs bleed the economy white, and if businesses don’t pay a wage that supports a decent standard of living, the whole economy becomes equivalent to a giant Ponzi scheme.

I agree on health care. Uninsured people are less likely to see the doctor. With some kind of socialized health care in the works, price controls are not out of the question either. The health care gravy train might derail in grand fashion just like the financials.
We are in a deflationary environment and will likely stay there longer than most people think. Some of the consumer staples might fare OK as people are down sizing from Whole Foods to Burger King. E-bay might do OK as people are trying to turn their stuff into $$.

It’s too bad that Alcoa always reports first; I can’t remember them ever meeting (much less beating) their own earnings estimates. They set an awful tone for the markets. Maybe they should report somewhere in the middle of the pack …

Earnings estimates are probably still a little bit too high, mostly due to financials, which may never recover to bubble levels. (If they do, it means we’re in a new bubble.) On the other hand, it would be interesting to see earnings estimates WITHOUT financials, so we could compare apples to apples.

It’s not likely that many companies or industries can post strong profit growth when total demand is falling. The best they can do is cost-cutting to try to keep earnings from falling. We’ll have to wait until GDP starts growing again to see earnings grow.

Growth could resume as early as Q2, with reports starting in July.

I just don’t get why everyone seems to think that Health Care is going continue to improve (corporate profit wise).

I have yet to see one single commentator, analyst, or politician, who doesn’t think that Health Care in this nation is grossly over priced.

Or many doctors and health care people who don’t think it is over used.

Over priced, over used products don’t fair well in hard times.

Just like this nation actually DID figure out they can get by using less gasoline, they actually WILL figure out they can put a bandaid on their cut themselves, that more activity will help them feel better, that the doctor can’t cure their cold, and that those expensive daily medications don’t really improve their life a third of the time.

And, as more people are un-employed or just plain broke and thus un-insured, both they and the health industry will start driving down prices and apply expensive procedures with some prudence.

Add to that the fact that the government agencies that are providing health care to many are facing gross deficits (that are only getting worse) and they also will be forcing down prices.

Maybe health care profit reports will miss the blood bath. This quarter.

But look out below next year.

Earnings estimates have been too high for quite some time, and I think it’s because everyone wants to call an end to this recession as soon as possible.

As long as job losses and unemployment continue to be worse than expected, earnings will also. People can’t spend money that they don’t have and corporate earnings will suffer as a result.