V-Shaped Revenue Recovery Combined With L-Shaped CapEx Growth

Tyler Durden's picture

The chart below demonstrates two things: i) the revenue decline in the current quarter indicates no inflection point in revenue pick up, and ii) expectations are for a V-shaped recovery in revenue.

So the logical question is where will all this revenue come from? With massive excess capacity overflowing in the economy, pundits point to inventories, which will be "restocked" in order to increase sales for all these lean and mean companies that continue laying off workers even as the recession progresses. In other words, capex spending should already be picking up, as that is the primary driver of revenue increases down the line: indeed, a simple fact nobody likes to talk about. We shall get back to that in a second.

The other notable fact is that companies which have for the most part shut down the dividend spigot, and are virtually not paying any corporate taxes anymore (hey, if Goldman can get away with it, everyone will be pocketing those NOLs compliments of a horrendous 2008 for a long, long time). So cash should be higher? Presumably. And that cash should be going to paying for capex. At least that is the thinking if one wants to be bullish on revenue increases.

Zero Hedge decided to analyze quaterly revenue and capex trends among S&P 500 companies over the past year, and we also threw in a study of total and net debt, just to get a sense of what the capitalization of these "poised for a recovery" companies looks like.

Here are the results:

Not only has CapEx not been increasing, it continues plunging: both YoY and sequentially. In fact, S&P CapEx likely at maintenance levels on a revenue/capex basis: not one company is interested in investing in revenue growth projects. Which makes sense: if you have a horde of cash and no clue what your access to debt will be like, any IRR on new CapEx projects can be thrown out of the window before it is even started. Forget the revenue V-recovery: companies will be lucky to preserve revenues where they are, let alone grow them in the future. Alas, what the MSM forgets is that you need investment in expansion opportunities to grow the topline - SG&A trimming can only take you so far, and with decimated and unmotivated work forces, good luck growing organically in this oversupplied economy.

Intuitively, if CapEx is dropping cash should be rising, and indeed it is, although while it peaked in Q4 of 2008, it has since been declining. Yet it is not going to fund CapEx, and as the debt chart demonstrates, total debt in the company sample has been actually flat if not slightly growing in the last 3 quarters. All this simply means that companies are not interested in paying down debt: probably the inverse trend is obvious, and the government has given a carte blanche for most. Load up on enough debt, take advantage of a bubble market, (bonus points if you have a sizable unionized labor force), and become too big to fail- the Administration will bail you out. Absent this line of thought, do nothing about the debt load: and total debt being flat at $4.5 trillion in over 6 months, this is as good an indication as any that not only is the consumer not deleveraging, but neither are big companies.

And thus the original question is how quickly can the accumulated corporate cash buffer be converted into revenue growth? It seems companies don't really care to answer that: the growth will come from "elsewhere" they will be happy to announce, and refer you to the GDP - where all "growth" comes from transfer payments, and other fictitious items indicating "growth" yet all those merely do is sucker more and more people into the stock market at bubble valuations (why are not more companies doing follow on offerings, absent REITs of course? Is it because institutional stock managers know that valuations, which this is all really about, are simply insane?). Absent some investment in CapEx you can kiss your V-shaped revenue (and thus earnings) recovery goodbye. But who honestly cares about how a stable economy works any more when you have trillions in excess liquidity provided by Bernanke Capital LLC?

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Cheeky Bastard's picture

just replace my username with the name being said in the vid(but keep the accent)  http://www.youtube.com/watch?v=QRsATgP98K0

Translational Lift's picture

This economy is like a fifty year old rubber raft that the Fed/Treas and talking heads keep afloat by patching and patching patches.....

Anonymous's picture

"But who honestly cares about how a stable economy works any more when you have trillions in excess liquidity provided by Bernanke Capital LLC?"

The US is currently conducting groundbreaking work in the development of the world's first truly virtual economy. Who cares about actually producing anything? That's so archaic. Who cares about jobs? That's what massive day-trading is for.
The numbers on my screen tell me I'm happy and everything is fine.

Kaiser Soze's picture

The perception has become the reality.

blackebitda's picture

my guess is that the G20 nuclear option is the one world currency which just hits the reset button should the dow go lower than 6500 or something...because even though the dow "should, or should not" go to triple digits, the end of civilisation as we know, is not allowed to happen. makes for a fine start to a one world order, nuclear disarmament, environmental cleanliness, and world peace.....seems like a good idea. although ime the way things start and actually evolve are very different. 

Anonymous's picture

the market has held the door open for Bennie- complete with irrational exuberance, rising bond yields and plunging dollar. He even wrote that WSJ op ed a few weeks ago . Will he walk through the door? Maybe at least a hint that there are adults around?

Anonymous's picture

The problem is that companies added capacity in the last 5 years to meet what looked like normal demand, only to find out that it was debt-fueled demand that collapsed when credit dried up. Now they're stuck with too much capacity. Why on earth would they be spending on capex to create more capacity or to run their existing capacity harder when it's already underutilized?

Fruffing's picture

solid point anon 33768

Anonymous's picture

Also the fact that oil prices have gone back up won't help in costs will it?

OBRon's picture

Silly!  V(irtual)-revenue will come from the NYSE/NASDAQ gambling tables as companies sell their own stock into the slipstream of massive s&p futures runups courtesy of Tim & Benny.  Who needs to sell real products when you can issue oodles of new stock with zero risk???

Lock and load!

 

Anonymous's picture

This bear market bounce has beating even the Great Depression bounce now, and will no doubt be put down in history as the Great Green Shoot Bubble fueled by Hopium

Anonymous's picture

This is what the bears thought in 2001-02 after the .com collapse.
Guess what? capex recovered, albeit slowly.
Computing capacity gets old: 3-4 year avg depreciation schedules for a reason.
The stuff fails, becomes obsolete and eventually gets replaced.
How will I rapid fire trade, run monte carlos and multi-task FB, You Tube and ZH on a single core pentium?

If by capex, you mean building actual manufacturing capacity- like steel plants & semi fabs.. HA!
That concepts is so 70s...that's all done by the chinese these days.
Only capex happening around the G-7 is IT investment.

PragmaticIdealist's picture

This is exactly why G-7 is screwed as soon as China unleashes monopoly pricing power on all the necessities of life.

Anonymous's picture

Of course the dot.com collapse was a lot different than what we're looking at currently. The dot.coms were funded almost entirely with equity and that collapse was basically a transfer of wealth from John Q. Public to dot.com execs and Wall Street insiders plus friends and family. The dot.com collapse didn't leave behind a massive amount of bad debt and a banking system on the verge of collapse.

Anonymous's picture

Dot.com left a lot of goodwill on many balance sheets and fasb et al had to change the accounting rules to prevent more blow ups. Right now there is a ton of goodwill just waiting to be tested for failure. Adios shareholder equity when that occurs....if ever.

40muleteam borax

Anonymous's picture

If today fails to break the highs from a few days ago, looks like we'll have another head and shoulders.

Question is, can they manipulate another explosion like they did after the last h and s

Anonymous's picture

What do you think yesterday was for... lure a load of shorts back in and wham get them staight at the open and hit them hard. All the mug punters will go hurray look back above the 1000 and buy the dips after all most companies beat estimates easily didn't they? Jobs loss was better last week too in the headline and Bennie Boy will say green shoots in fed statement and recovery end of this year with more recovery next year and housing is bottoming and with financial markets stabilised prospects looking more favourable for the economic outlook.

Rally rally, green shoots, green shoots, hopium.

blackebitda's picture

sounds like all the good news is priced in. i would need bad news to justify higher future stock prices, not more good news, which has already been priced in. hell, even the upcoming q3 wonderous eps season already priced in, except maybe the opp to sell in to the rally that the suckers will buy up. i thought tapes rise on bad news? 

Comrade de Chaos's picture

well, if anyone runs a regression of CapEx vs. SP values, they will be amazed by one of the strongest correlations out there. (I was.)

Fed: we don't need the strong CapEx for the V shaped recovery.

Guest: this is CRAZY!?!

Fed: this is SPARTA!!!!! (Fed LLC.)

Anonymous's picture

The problem about manias, bubbles, delusions is that they go on much longer if they are fed and encouraged!

Anonymous's picture

you've just defined the American public.

Burst's picture

Well said TD. Improving the bottom line by cutting costs aggressively can by definition only take us so far, as long as we continue to experience double-digit % revenue declines. And moribund capex doesn't bode well for top-line growth going forward as you well note.  Additionally, might the widely-heralded inventory restocking story be over-hyped as well? Inventory-to-sales ratios in the manufacturing sector have barely budged off of multi-year highs. I acknowledge a one-off boost to growth from an auto sector restarting from near-shutdown levels, but until final demand picks up, where's the incentive to aggressively 'restock'??

Anonymous's picture

it is sad but true that even in the best of times, capacity utilization was running at 80% in the u.s. and around 85-90% in the e.u.
the slack in the economy is so big that gdp growth can pick up by at least 20% everywhere around the world before we see any meaningful increase in capex.