The Three Key Themes From Q3 Earnings

Tyler Durden's picture

Much like the Beige Book attempts to summarize the 'economic conditions' of all the 12 regional Federal Reserve branches, so Goldman's David Kostin screens the companies in the S&P 500 for common themese from their earnings calls. This anecdotal evidence provides critical insight into the current fundamental and thematic trends. The three key findings are (1) Managements delayed capital investment and hiring and gave conservative guidance given uncertainty about the real economy and near-term policy risk from the ‘Fiscal Cliff’; (2) Companies grappled with slow global growth: stagnation in the US, recession in Europe, and an unclear path in China; and (3) Many firms took strong action to protect high margins against tepid revenue growth, rising input costs, and frugal customers. Meanwhile, a near-record percent of small businesses rank government requirements as their biggest challenge!



Theme 1: Uncertainty drives conservative planning

Managements stressed hesitancy to invest in light of both policy and growth uncertainty. A lack of clarity about the path and duration of the US recovery and the looming ‘Fiscal Cliff’ led managements to curtail capital spending and offer more conservative guidance. Consumer facing firms highlighted the risk of a possible retrenchment in sentiment if conditions deteriorate. While some managements focused on the proximate risks through year end, others argued that uncertainty is likely to persist in 2013. Several contended that a reduction in uncertainty would benefit business activity.

Selected examples: AA, BHI, C, COST, DO, DRI, EMC, GCI, GE, GPC, HON, JPM, MCD, MWV, RHI, T, and VZ.

Theme 2: Challenged global growth outlook

Most firms expect 2012’s sub-trend domestic growth will continue in 2013. Recessionary conditions in the euro area were recognized as was the long dated nature of reform, leading some firms to modify operations in the region or sharply reduce performance expectations. In contrast, views on Chinese growth were more mixed. Some firms highlighted the benefits of an orderly slowdown in growth while others raised concerns about the lack of clarity in government policy. Managements reiterated their belief in the importance of high growth markets to overall growth strategies.


Theme 3: Companies buttress margins near peak levels

Margins remain at historically high levels near 9%. Companies aggressively defend margins against a variety of challenges including: slow revenue growth, price conscious consumers, higher labor and input costs, and slower government spending. S&P 500 3Q 2012 revenues increased just 1% vs. 3Q 2011 and we forecast government spending will be a 150 bp drag on US GDP growth in 2013.



Source: Goldman Sachs

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CPL's picture

MacDonalds raped!

Wendy's raped!


Guess people can't afford the dollar menu anymore with exponentially increasing food prices.  What is on the "dollar" menu now.  Is it two bucks...three? 

slaughterer's picture

Other chains are offering healthier food than MCD for reasonable prices.  

CPL's picture
  1. Rent
  2. Food
  3. Fast food.


Pick two.  That is the underlying theme to all these return numbers.  Healthy has nothing to do with it.  Americans (and the world) are fatter than ever and this is the outcome. 

Too fat to work. 

Too poor to buy junk food.



...Healthy on crack?

edifice's picture

There's always community supported agriculture (CSA). The S.O. and I load up on farm fresh veggies, 9 months out of the year, for $600. But, who eats veggies?

JPM Hater001's picture

Yes, I had Soap the otherday and it was excellent.

Go see Cloud Atlas!

RSloane's picture

MCD issued a brief statement this morning which in effect said they are going to be focusing on the dollar menu for 'adjustments'. It sounded as if they are going to limit choices on the dollar menu to herd customers towards the regular menu and thusly higher prices and more spending per transaction. Profit!

Atlasshruggedme's picture

I spoke to my Mother yesturday. We discussed what the Sheeple will do after the Dollar Menu is teh 3 dollar menu. We also discussed shreding (we used the term shred) 401k's. With the comments on article, I am starting to think we are all on the same page or your following me. 

My finacial person told me to borrow against my 401k and buy gold :-) 

edifice's picture

That's why I got out of MCD at $93. Rode it up, during the Recovery(tm). When staple food prices began rising, got out. Easiest trade in the world.

Dr. Engali's picture

4) Nobody has any fucking money,

fonzannoon's picture

Just wait till their 401(k) gets sheared. Then when interest rates climb when the shit really hits. Bob Pisani will have his work cut out for him.

Dr. Engali's picture

I'm sure wallstreet will come up with some paper product to take care of that concern. How's it going Fonz? Any electricity or gas yet?

RSloane's picture

Good morning to you, too, Fonz.

FlyoverCountrySchmuck's picture

How can this be???

The TV has told me, for months, that the RECOVERY!(tm) was in full swing!!!


(hey, what's that cliff ahead? do you see it?)

RSloane's picture

Maybe I still have my party hat that were given out during Obama and Biden's Recovery Summer celebration and tour in 2009.

JPM Hater001's picture

Yeah and I just heard again yesterday that housing was in recovery and there was green grass and apple pie spitt'in out from everywhere.


SheepDog-One's picture

Yea, and these conditions are WITH unlimited free money supporting it all....sheesh just imagine if any reality actually came into the picture!

Joe Davola's picture

4a) Those who have know what's coming and aren't blowing it on worthless crap that won't be of use when the SHTF.

RSloane's picture

Succinct, correct and good morning Doc! That is the one variable that 'analytical thinkers'  do not want to explore too thoroughly. The assumption always is - no matter how bad things get, a bag of hot fat, starches and salt will always be on the menu.  

Dr. Engali's picture

Good morning Sloane. How are things coming along in your neck of the woods? is it getting better? You're right..the anaylyst want to pretend like it's just a matter of getting the growth engines back running, but they won't acknowledge that you can't have infinite growth with infinite debt. There comes a point where servicing the debt becomes too burdensome. I know you already know this, but it just gets under my skin that they won't acknowledge it.

RSloane's picture

Everything is all good here thanks to locals with chainsaws and trucks. Our supply chain is back where it needs to be, kids are in school, all is right with our tiny corner of the world. Thanks for asking, Doc.

It gets under my skin as well. Stagnating wages, more people on part-time work, job loss, people working at lower paying jobs with advanced skillsets, loss of careers, extreme debt...all of these things and more are just ignored. On a national level it translates to extremly poor planning and/or the focus of gov't activity is so out of whack its more dysfunctional and hurtful than ammeliorative. This is compounded by an ever-increasing hyperdependency on government for everything from phones to housing. We're not approaching the fiscal cliff, we're there.

Dr. Engali's picture

I'm glad to hear that life is getting back to normal........You are right....we are there.

ejmoosa's picture

Budgets for 2013 are being prepared now.  If you think that they are budgeting in plans for growth, then you've lost your mind.


Rainman's picture

The number 13 never appears inside the casino elevator for a good reason....jinx

adr's picture

Budgets for 2013 should have been done a long time ago, they are just getting started. In fact most retailers still haven't even purchased anything for spring.

Target usually starts buying holiday items in February and finishes by April. A few buyers I know haven't even set their line for spring yet.

Walmart has put many buys on hold until they get a clear picture of this holiday. Buys from April were cut 40% when the POs actually went out.

Toys R Us bought surplus product from the chinese market and closeout toys from three years ago to fill shelves. When you see Transformers and Star Wars packages written in Chinese on an American shelf, you know somebody got desperate.

Best Buy doesn't know what to do.

Dick's has placed a freeze on all new product and put most buys in a holding pattern.

Across the board open to buy dollars have been cut to zero and inventory is sitting on shelves forever. Average turn at 100% retail is less than 4%. Items need to be marked down 50% or more to move at acceptable turnover rates.

Everything positive you hear about retail is a complete fabrication to boost stock prices. Store comps are blatant lies. There is no YOY increase at any retailer. They use internal inventory transfers to fudge the numbers as well as percentage of on hand inventory to boost reported sales.

If they sold 8 out of 20 items held in inventory last year, but sold 6 out of 10 items this year, a retailer can say they showed a 20% increase in sales even though they actually sold fewer items.

That is how every retailer has been able to fake comparables over the last few quarters.

ejmoosa's picture

I was referring to businesses other than retailers primarily.  The producers. 

As a financial analyst for several large corporations in the past, we were busy setting hardware expansion plans, pay icreases and staffing levels for the next fiscal year based on how things have progressed year to date.

And year to date, things have hit the brakes.


You are dead on on the retail.  My walks through Target have left me amazed at the missing racks of clothing, the items only one or two deep on the shelves.  I wish I had a % for how much less inventory these stores are stocking.  It has to be 40% or more of a reduction.

The unintended consequence? 


You cannot sell what you do not have.




poor fella's picture

Oh they'll find 'growth' allright - Budgeting in and timing layoffs, cost-cutting, and share buybacks throughout the year. It's all perception. We could be in store for another banner year of record corporate profits and expanding multiples. Reality does not exist anymore. Obviously there's no issues cutting muscle, since they ran out of fat about 3 years ago. Somebody, someplace, had an intuitive comment: "nobody has any fucking money..." 

Fiscal cliff? bah! Don't want it, make it go away at least a year... can we do that?    "done and fixed"    *easy*

adr's picture

Q3 earnings can be summarized in three words, just like the election.

Lies, manipulation, and fraud.

disabledvet's picture

I think business...ANY business of ANY size "feared a second term" and thus delayed spending accordingly. I highly doubt now is the time for them to go "hog wild." I would argue ANYONE owning, running or working for a private enterprise is downright worried about "what's to come" in the next four years...and a big reason why businesses of all shapes and sizes...if they don't support Zerohedge and the Zerohedge community of bloggers, commentarians and malcontents...they sure as hell better. "Far more men made a fortune by not losing one than by making one." And this is the only site i know of devoted to that simple truth...and why whatever is thought of me here (as if i care) i will always remain loyal to the cause. Wall Street is OF COURSE peddling to Washington DC "the same crap they peddled to pensioners in Norway." This is the last refuge of the scoundrel..."the bailout tycoon." The monies received however can be a thin gruel when talking to folks who already have to grapple with an overwhelming set of fiscal issues. And of course "if you're so rich why do you have to go to Washington DC anyways?"

adr's picture

I work in real private business and consult startups. There are so many people trying to start new businesses making products that can't even get off the ground, since the doors have been shut to anyone outside the established publicly traded monsters.

Unless you are starting an app company or some other .com bullshit, you have no hope for funding. If investors don't think they can run a quick pump and dump IPO, they won't even talk to you.

If you make a business plan out five years, they laugh and call you an idiot. Three years or less is the average life of a company today. Year one - generate an idea and find angel investor, year two - hype, year three - IPO and buyout.

Zer0head's picture

okay so I stopped watching Bloomberg for a couple of days - turned it back on  just a few minits ago  and who is there but the Steph the Maneater who pronounces that yestreay's selloff was a result of angry white men reacting to Obama's victory - sadly we'll likely never see the video of that

SheepDog-One's picture

Oh, so then angry white men sold their stocks to happy black men? These people make no sense, theyre have no business being anywhere above 40% lower, AT LEAST.

Shizzmoney's picture

Las Vegas employer: "Obama I fired 22 employees"

The rich are going to extract revenge on the people for voting for their "choice".  This is only the beginning of the polarization our "elites" will tryto do to divide people to focus on "left v right" instead of "us v them". 

“Well unfortunately, and most of my employees are Hispanic — I’m not gonna go into what kind of company I have, but I have mostly Hispanic employees — well unfortunately we know what happened and I can’t wait around anymore, I have to be proactive. I had to lay off 22 people today to make sure that my business is gonna thrive and I’m gonna be around for years to come."

I'm sure the guy cried a river when he let his Hispanic employees go...the best part is that this guy probably hired illegals, so he doesn't have to pay Unemployment Insurance!

SheepDog-One's picture

'The only consideration of employers has to be racism-based'

Probably has a lot more to do with knowing the economy is fucked in real-time....just sayin'.

SheepDog-One's picture

Remove all the free money flowing from a firehose and see what happens then.