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The lady whose name escapes me kept on talking about how healthy the US economy was, in what a great shape the US consumer was, and how corporate profits were today not only higher but of far 'higher quality' than in 2000, when the S&P sold at its high for 1527. She, therefore, concluded that the stock market was based on a sound economy, rising corporate earnings and their 'high quality' a bargain.
Bridgewater Associates recently published an excellent piece in which they showed that, in the US, money made from manufacturing is 'a pittance in comparison to the amount of money made from shuffling money around: 44% of all corporate profits in the US come from the financial sector compared with only 10% from the manufacturing sector'.
These figures show that whereas manufacturing accounted for more than 40% of corporate profits until the early 1980s, today manufacturing profits have shrunk to 10% of corporate earnings, while financial earnings, which in the past only made up for 10% of profits have surged to over 40%.
I may add that this number understates the full contribution of the 'money shufflers' to corporate profits, since industrial companies such as GE and GM, which derive either all or a large portion of their profits from financial activities (consumer loans, etc) are not included in the above number, which only captures financial companies' profits.
Moreover, another large profit contributor to corporate earnings is the retailing sector whose earnings were just about 20% of manufacturing earnings until the early 1980s but whose profits are now almost as large as profits derived from manufacturing. I leave it up to our readers to judge how 'healthy' and of what kind of 'quality' current corporate profits are in the US!
In any event the stock market seems to have slightly different views about the quality of earnings the above lady was referring to on CNBC.
Financials under pressure
One money shuffler - until recently the by the investment community beloved AIG - has come under severe pressure and is approaching its March 2003 lows. But it is not only AIG that has been weak recently. Fannie Mae, sub-prime lenders, and banks (including Citicorp) have also broken down - certainly not a positive indicator for the entire stock market.
In fact, we would use any strength in financials including mortgage, credit card and sub prime lenders, and providers of financial guarantee products such as Capital One Financial (COF), Countrywide Financial (CFC), Accredited Home Lenders (LEND), New Century Financial Corp (NEW), MBIA Inc (MBI), MBNA (KRB) and banks as a selling or shorting opportunity.
In addition, as far as the great shape the US consumer finds himself in, the stock market seems to have a different view than the 'bullish lady' that appeared on CNBC. Retail stocks have been weak and just recently Best Buy (BBY) and Wal-Mart (WMT) broke down. I may add that Wal-Mart is now also approaching its March 2003 low.
At the expense of boring our regular readers, I have once again mentioned the persistent weakness in financial stocks and retailers because of the implication their poor performance could have on the housing market. Weakness in financial stocks indicates that money is getting tighter and that the ability of finance companies to extend loans at negative real interest rates may be coming to an end.
Dr Marc Faber
