Notes on Profits, Economic Liquidity

Corporate Profits

Measured yr/yr, the $ value of production came in at 4.1% for May.
This matched the April reading, and the two months taken together
suggest that many US companies are experiencing intensification
of downward pressure on profit margins in the quarter. Even
offshore operations, where yr/yr physical volume comparisons may
be better than in the US, cost pressures are nibbling at margins.
The exceptions would continue to be primary materials producers,
many of whom have maintained pricing power that compares
favorably to cost pressures. In all though, and looking ahead to the
release of Q 2 results in July, we may find more somber reading.

Economic Liquidity

I like to compare the yr/yr change in the $ value of production with
the yr/yr change in the broad measure of financial liquidity to see
how much of the financial resources are being claimed by the real
economy. For May, $ production was up 4.1% compared to 5.1% for
the liquidity measure. The 1 point spread for May compares to a
5+ point spread in favor of liquidity over much of the middle part of
2007 when the stock market was strong. Now, the liquidity tailwind
for the stock market is far more subdued.

The modest readings for profit margins and economic liquidity
reflect a continuing sluggish economy, elevated inflation pressure and
the effects of the subprime fiasco on the banking system.