Rosenberg On The Revenue-Less, And Now Margin-Less, Recovery

Tyler Durden's picture

A week ago, we presented a comprehensive analysis by Moody's highlighting the key items in the cash flow statement of non-financial corporate America. Not surprisingly, we noticed that one of the biggest sources of cash over the past several years, in addition to cutting expenses to the bone and the resulting surge in unemployment, was the lack of investment in organic growth opportunities, via a plunge in Capital Expenditures, meaning that a revenue flat lining is the best most companies could hope for as most have now given up on traditional top-line growth and instead are either hording cash or investing it in an occasional M&A transaction. Now, in addition to that, courtesy of the Fed's free money policy resulting in surging input prices (see Jones Apparel), the next shoe to drop on the path to an upcoming EPS collapse for the S&P is the imminent drop in gross,  operating and net margins for these very companies which are now seeing a contraction at both the top and bottom line. Today, David Rosenberg dissects this issue further, and sees nothing good on the horizon.


And, what the NYT had to conclude about 3M’s results? That it “reduced the top end of its full-year forecast and said rising raw materials costs and other pressures were cutting into margins, sending the company's shares sharply lower.” Margin compression at a time of low single-digit nominal GDP growth does not equate to a $95 operating EPS stream for 2011.

Further on this file of compressed margin pressure, S&P 500 revenue growth is already slowing down, notwithstanding the fact that 80% of the universe is beating their beaten-down profit estimates. The cost-cutting wave certainly did go much further than anyone expected but as the legendary Herb Stein once remarked, “anything that can’t last forever, by definition, won’t.” At some point, the well will run dry on the cost-cutting front and slowing revenue growth will take over — on track for +5.5% YoY in Q3 from 6.1% in Q2 and the consensus now for Q4 is sitting at +4.9%. As an added signpost of how this has proven to have been a revenue-less recovery, the top-line growth since the profits rebound began just over a year ago is running at barely more than half the average pace recorded in the 2002-07 cycle.

For all the talk about profits recovery, sales are still 11% lower now than they were in the spring of 2008. And, if you are wondering why it is that the stock market has still done little more than range trade in 2010, it is because earnings estimates are no longer rising as they were in 2009 — they are falling. The bottom-up consensus now sees 12.9% earnings growth for 2011 from 14.2% a month ago and 20.9% back in the spring. Have a look at the Paul Lim column on page 8 of the Sunday NYT business section — Raising a Caution Flag on Corporate Revenue.

From Gluskin-Sheff (full report pdf)

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SheepDog-One's picture

Pump anemic markets ever more GREEN! Only game in town, as insiders dump at a 6 month 3,000:1 ratio, 'cost cutting' is played out and growth will take a huge hit, way sooner than most people think.

Everyone finishing their last call drink while nervously eyeing the narrow exit door. And for those who think perpetual melt-up is the new normal, they'll be the ones trampled hardest.

Cleanclog's picture

The largest asset class, MBS, that barely existed 30 years ago, is the only place the Fed could actually make a shock and awe difference. And further screw up the mortgage/housing world by keeping real market actions at bay.

Everything else is just more of the same.  Lower rates have no juice anymore - they aren't driving any economic activity differently.

Oh regional Indian's picture

Clean, lower rates are all very well if you could actually get aloan at those lower rates, right?

That is the joke, low or next to nothing rates on savings and credit tap dry. I hear SME's are squeezed tight because no one is doing Working Capital loans etc. So yes, economic activity driving does not seem to be the goal here for CB's/FED.

It's the grab-all-you-can-as-ship-sinks time.


billhilly's picture

Damn, I wish this would hurry up and happen already, I'm getting killed on the short side.  Luckily I have some PM's that are helping but for all the negativity (reality) on this site (I'm not trying to complain) the downside sure hasn't materialized like one would have thought/believed.

There is No Spoon's picture

Maybe the market's not going down because of rising inflation expectations, not because anyone really believes the economy is going to do well. As this site has pointed out, holding precious metals is a de facto short position on the stock market, so there's no point in taking the risk of shorting stocks if you're holding precious metals.

jus_lite_reading's picture

As expected, the largest amount of talk about "GROWTH" the day before elections. Reality. Bites. Hard.

OutLookingIn's picture


 Cost cutting will work until it doesn't. Okay. Now it doesn't. Next step - close the door. More unemployment. Less consumers. More tax dollar support. Higher deficits. Less tax revenues. Government (at all levels) labor force shrinkage. More doors close. Re-load, wash, rinse, repeat...

MachoMan's picture

bingo.  The biggest problem right now is that this is only largely happening in the private sector...  while the public sector (dependent on taxable revenues from the private sector) churns right along oblivious to its certain demise.  Eventually, the day where the productive (1%) shake the non-productive (most of us) off their coattails, will come...  and it will be unpleasant.

Rainman's picture

Between the gutting of capex and the tax windfall of NOLs, there's no reason to raise revenue or even have a sales, marketing or advertising department. Lots of " earnings " opportunities remain.

drb48's picture

Apparently, "the markets" didn't get the word re future corporate profits - they're busy pushing higher.  Any wonder BTW, that the retail investor - i.e. me - won't go near the place?

Vampyroteuthis infernalis's picture

How long can they perpetuate this kind of fraud? As an engineer, I am waiting for the SHTF so I can get into the next true, organic big thing product. The way it is now, we are just defending the status quo sucking the life out of everything in the economy. It frustrates and sickens me to the core.

aerojet's picture

Yup, you're not alone. And what perplexes me most of all is all the new commercial construction going on where I live.  Who the fuck are the customers going to be?  Didn't we learn a single lesson 2008?

Something Wicked This Way Comes's picture

Like most of us, my problem was always the issue of timing. That a collapse is coming is evident.

The stock market is the prize. That is the battleground. The government and the FED are absolutely willing to do anything to create the illusion of market health. They have to.

When the market has its grand mal seizure, the lie will be officially over. Every retirement fund in this country will be fucked. Politicians and the FED will be dragged to the square and hung. That is how serious it is. We know it, they know it, and thus we have this grand tug of war. Sooner or later, peeps are gonna see that the emporer has no clothes.

No Mas's picture

"Politicians and the FED will be dragged to the square and hung."

Hyperbole.  Don't leave home without it.

Lucius Cornelius Sulla's picture

Trying to effect change with the Demopublicans is kind of like playing a long game of Whac-A-Mole.  I'm guessing that's what's in store for us.

Instant Karma's picture

It's hard to generalize. Often, it's industry by industry, or company by company.

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