Tuesday, June 23, 2009

Companies Say Cuts are Here to Stay

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I have to give US companies credit; despite reporting some awful earnings in many cases they were able to beat the previously slow to react analyst herd's numbers (who at this time last year were forecasting 60% year over year earnings growth in Q4 2008 based on the "2nd half 2008" recovery talk - only missed it by a year I suppose). While I understand the obsession with earnings since a penny here or there costs many companies 10, 20, 30% of their value within minutes, the bottom line is now a place of "creation" - accounting movements here, there or everywhere has made "making a number" a much easier thing. One place you cannot lie (unless you are Enron) is in sales (revenue). Revenue last quarter was very poor year over year, but companies were able to make "beat the number" earnings via the normal accounting tricks along with a bevy of cost cutting measures lower on the Income Statement. And we all know the #1 cost for the vast majority of companies (chop, chop, chop). But for Americans who truly believe that the 401k is their friend, the company match will always be there, that their pensions in corporate America are safe, that more and more of the benefits mix won't be placed on them - they are living in a dream world. As global competition becomes even more stark in the years and decades to come, being one of the few (maybe only?) developed country(ies?) where the corporation - rather than the government - has to chip in to subsidize these benefits will only lead to more of what we just saw the past 6-12 months.

This is just another reason why the house ATM was so necessary ("prosperity") and why people living as if there is no tomorrow to worry about, are going to get repeated slaps to the face in the future. The US savings rates must go up ... in a permanent nature. It must simply to stay flat with current living standards ... as the average American (ex government workers) will need to provide much more for themselves. [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?] [May 10, 2009: NYT - Shift to Savings May be Downturn's Lasting Impact]

As I've said the same people who completely missed the financial meltdown and effect on consumers, are again making the same mistake. I have to use 2 hands now to count all the "early cycle" recovery rallies we've had since early 2008. This consumer is not coming back anytime soon... and I'll be saying that for the next 2-3 "early cycle consumer discretionary" rallies we'll have in the future. The consumer WANTS to act like he did the past decade, but he won't be able to. Even with all the easy money thrown at him so he spends like its 2005 again.

Here is what those same consumers - who still have jobs - face in the workplace.... and let me make an exclusion to all my above statements when it comes to federal govt (and many state) workers who apparently live in a parallel universe of continuing benefits that never (federal) or rarely (state) take a hit no matter what economy we live in. Just tax the rest of the people and keep on living in said parallel universe.

Via WSJ:
  • Many companies that have cut jobs, pay and benefits during the recession may not be quick to restore them. According to a new survey, 52% of companies expect to employ fewer people in three to five years than they did before the recession began. The survey of 179 companies was conducted this month by consulting firm Watson Wyatt Worldwide Inc.
  • Among employers who have cut salaries, 55% expect to restore the cuts in the next year. But 20% expect the cuts to be permanent. Of employers who have increased employee contributions to health-care premiums, 46% don't plan to reverse the increases. Of all survey respondents, 73% said they expect employees to shoulder more of the cost of health care than before the recession began. (inflation in things we need)
  • Nearly half of the employers who have cut their contributions to retirement plans expect to reinstate them in the next year. The remainder plan to restore the contributions after that, expect the cut to be permanent, or aren't sure.
  • "We're not going to go back to the status quo," says Laurie Bienstock, national director of Watson Wyatt's strategic-rewards practice.

The jobless (ex government jobs) recovery I predicted a long time ago is well on track for 2010-2011. On the plus side it should actually be a good thing for the stock market as any pickup in demand - however weak - with so much costs carved out of companies, should drive profits in a very positive way. But until that happens they can only "shrink to prosperity" so much. At some point to justify continued ramping of the stock market they will need to begin growing again as simply chopping heads, benefits, and the like won't justify premiums out more than a quarter or two more.

Momma, raise your kid to be a government worker....


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