Profits Indicators

As the economic recovery has proceeded, quarterly profits progression hit its first inflection
point in mid 2010, following a spectacular initial rebound. Since then quarterly profits have
progressed at a powerful 15% annual rate as stronger top line growth and continuing tight
cost controls have held sway. My profits indicators through Aug. this year now suggest a
moderation of volume growth is underway but that increased pricing power has been making
up some of the momentum lost from smaller volume growth. In fact, the pricing has been
"sticky" despite the loss of volume growth momentum. Now, there is a significant differential
which has opened between the pricing of primary processors such as the oil companies
and that of intermediary goods and services providers such as food processors and a number of
manufacturers. So, the advance in pricing power means earnings fillips for early stage guys
and higher costs for most other companies. Thus, there may be some erosion to the aggregate
profit margin ahead, as more companies struggle to pass on higher costs. The banking sector
looks set to show another sizable gain in operating earnings as the loan reserve has dropped
a large $46 bil. or 17% from year ago levels.

On balance, the indicators suggest that earnings progression continues fairly strong in the
near term although the % of companies showing strong comparison reports may start to
tail off. Also, when pricing power becomes a stronger factor to earnings as it is now, the
p/e multiple for the entire market can often contract in view of the higher inflation.