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Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Wednesday, January 16, 2013

Profits & Economic Indicators

Corporate Profits
Since the spring of 2010, business sales momentum measured yr/yr has declined from
+10 - 12% down to +3 - 4 as 2012 ended. Historically, when sales growth has dropped
below 5% yr/yr, it has been difficult to maintain profit margin and this time is no different
although my indicators suggest only minor pressure. Top line data is consistent with modest
progress in profits. I would also note that when my top line sales indicator drops below 5%
it signals vulnerability to further sales weakness ahead although not necessarily a recession.
Decelerating Production Growth

Forward Looking Economic Indicators
The leading indicators I follow remain in an uptrend but have been unusually volatile during
this economic recovery. No recession has been indicated, but there have been low points
in each of the past three years which have triggered QE responses from the Fed. The last
of these low points occurred in mid - 2012, and since then, the forward looking measures,
both weekly and monthly, have turned up mildly, with new orders measures for the industrial
sector improving but nominally. On balance though the forwards suggest a mild degree of
acceleration of business sales (and profits) in early 2013 (But, see final paragraph below).

Coincident Economic Indicators
Mine reflect momentum of real retail sales, production, employment growth and real wages
put on a combined basis and measured yr/yr. On my scale, +3% yr/yr for the group
represents solid growth, with +1.5% indicative of anemic growth. The US closed out 2012
with a reading of 1.6% yr/yr. That's a little better than The Oct. '12 reading of 1.2%, but is
still on the slow side.

Inflation gauges are still rather mild, but real take home pay could still take a hit of up to 2%
this year with the payroll tax returning back up to 6%. To keep retail sales growing, consumers
can hope for better wage gains this year, but may have to dip more into savings and increase the
use of credit to keep retail afloat. This change in fiscal poilicy can clearly work against Fed
QE, although we'll have to wait and see by how much.

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