Corporate Profits

Profits In Perspective
Based on a long term growth model with a base prior to WW2, SP 500 profits should be around
$90 per share in 2012. Consensus puts net per share this year at around $105. The positive and
cyclical deviation to "normal" is mild and based on past performance, would not qualify as
eyebrow raising unless SP 500 eps were to spike to $115. Profits have made a dramatic recovery
from sub-basement levels in early 2009, but current progress leaves net well below extended levels.

Sales
My primary top line growth model has the yr/yr business sales gain running about 6.7% on a monthly basis since mid - 2010. Physical output growth has moderated sharply from the strong rebound period
running into 2010, but has been a respectable 4% yr/yr over the past six months. Pricing power
has eroded sharply over the past year, especially for materials and fuels. The loss of pricing
power has been partly offset by higher volume growth until just recently.

A significant firming of the $USD over the past 12 months is going to operate as a drag factor
for a number of multinational companies, with currency translation penalties to affect both
reported sales and earnings.

Profit Margin
Profit margin factors were quite strong in favor of higher margins until mid-2011. Since then,
my price / cost index has dropped from a strong +1.4 to -2.9, indicating that an increasing
number of companies are going to show a decline in operating profit margin compared to last
year.

Investment strategists do tend to overdramatize the outlook for profit margin. There was
damage to margin in Q2 '12, but since physical output was quite respectable compared to
last year, there has yet to be the kind of downward pressure on operating rates that do the real
heavy damage to profit margins.

The Bottom Line
Over the past couple of years of economic recovery, investors observed handsome double
digit % gains in SP 500 net per share. With a stronger dollar in hand, and with price / cost
variables deteriorating, it will be much tougher for companies to continue posting such
impressive results. +5% yr/yr for the quarter just ended might not be bad for a goodly
number of companies.

Ongoing mildly positive earnings comparisons can sustain a cyclical bull market. However,
a sharp loss in positive growth momentum in profits as may now be occurring always
rquires extra due diligence for investors.