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Friday, May 30, 2014

Maybe this explains it

I was reading a piece on the latest GDP report and it mentioned a big drop in corporate profits.  So I went to see what I could find about that in FRED and found this chart.  Maybe it explains why the market looks like it is making a top to me.

Only one big drop in profits of this magnitude was not associated with a recession.  That was 1998.  However, SPX had a 20% sell off into Oct. of that year. This chart is based on actual profits, not earnings per share which are obviously manipulated by share buy backs.  I guess with Q1 GDP now reported to be -1% it is certainly possible we are going to have a recession.  That makes sense to me since earlier this year economists unanimously gave the U.S. a 0% chance of entering a recession this year, LOL.  That would also be consistent with the move down in interest rates we have been seeing this year.  With valuations very high continued earnings problems would be bad for stocks.

There was a lot of talk about how cap ex was supposed to pick up this year and drive the strength in the economy.  I posted a piece earlier this year about the tax changes making cap ex spending less attractive now.  While I was at IBM a drop in profits always caused reduction in cap ex and other things the company could do to lower costs.  Travel restrictions were one of the first things to be put in place.  Between the tax changes and the profits problems it seems very likely to me that cap ex will be lower this year.  That would certainly hurt growth if that turns out to be the case.


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