The recent “surprise earnings” that have led to this recent market rally may have surprised most, but not all. Some of us knew that this round of earnings would be good because of several factors. The first is the fact that the financials, which are responsible for starting this whole rally, made money by trading during a three month run-up while using a crap load of free capital given to them by you (taxpayers). This is a topic for another blog entry to be sure.
The second factor is Wall Street’s ability to get investors to believe in the significance of these “earnings estimates” instead of looking for real earnings growth. Instead of real, positive increases in earnings, all you have to do is to do better than the analysts expect you to…..even if you still do badly! And the worst part is that the people who are doing the estimating have a vested, financial interest in the company beating the estimates. Talk about a conflict of interest!
But the real factor that gets me is how most, if not all of the companies in the US increased their earnings per share (EPS), not their revenues! They did this by cutting back expenses including labor and ultimately increasing earnings by decreasing their size. I hear so many analysts talking about these companies getting “lean and mean” and how good it will be for the future of the company…..what a laugh! American companies are downsizing to generate better earnings results but they may potentially be damaging their ability to compete on the global level. Eventually, this will have to be bad. Currently, we can begin to see the error in this concept by looking at the US automotive industry and the US banking industry.
The demise and downsizing of GM and Chrysler and the weakening of Ford have allowed foreign car makers to gain significant chunks of market share not only in the US but globally as well. Plant closings and massive layoffs have shrunk our car makers. This is creating a competitive disadvantage for the US car makers. Meanwhile, the banks have had to sell off assets to meet capital requirements and pay down losses in the credit markets. US banks are nowhere to be seen in the ranks of the top ten banks in the world! When it comes to competing in the global financial markets, size matters!
My father once told me that in basketball, a good big man will always beat a great little man. The saying goes that you can’t teach size. And size (asset base) matters a great deal in this game too….the game of global business. Bigger is often better when in competition. Economies of scale really pay benefits to the companies big enough to exploit that scale. By diminishing the size of our companies here in the US, we lose the advantage of economies of scale and thereby hurt our pricing ability which is already hampered by US law as compared with other countries.
Lean and mean is one thing…..miniscule is another. The US could wind up having trouble competing globally with the big boys in the future because we may no longer be a “big boy” ourselves!