Corporate Profits

Reality Check: Yes profits are coming in better than expected and
that is a good thing. But the companies that have crashed and
burned or are doing so now, get deleted from earnings when their
market capitalizations shrink enough to be supplanted by stronger
companies. So, earnings are better than they would be if the SP 500
were static. Over time this imparts an upward bias to index eps
and its price value.

That caveat aside, corporate profits are coming in better than
expected and estimates are being raised for Q 4 ' 09 and for 2010.
Q4 '08 eps were so awful that comparisons will be easy. Ditto for a
match with Q1 '09. So the game now is to watch earnings progress
Q to Q through time. S&P estimates that yr / yr sales through Q3
' 09 were down by an astounding $1.52 tril. or more than 15%. Since
companies cannot cost cut their way to prosperity, analysts are
going to focus heavily on a prospective recovery in sales. The profit
margin on extant 500 company operating eps is way off the high
levels of 2007, but is higher than most imagined it would be
nonetheless. The positive leverage to earnings from a recovery of
sales looks awfully good now.

My earnings indicators save for the finance services sector have
been in sharp uptrends since the spring of ' 09. They have been so
strong, some degree of moderation would be normal in the months
ahead. Financial service company net revenues before fees and
trading profits are down reflecting lower private sector credit
demand and low returns on liquid holdings. On the plus side, the
pace of loan and securities loss reserving has moderated. Now,
oil and gas producers face tough comparisons for Q 4 ' 09, but
rising product price realizations suggest some recovery in 2010.

My SP 500 Market Tracker has net per share for 2009 of around
$56. By my calculations, the market is currently pricing in earning
power of $66. per share. So, investors are looking positively well
into 2010 -- a reminder of why a positive turn in sales is going to
be so critical.