Monday, August 28, 2006

Actually, the Glass is Full

Over at the Big Picture, Barry Ritholtz has been all over the important story of rising corporate earnings vs. compensation for as long as I've been visiting his blog it seems, so I'm going to direct your attention to two related posts, here and here (I had saved both articles as a draft for further comment this morning, but as usual I found he'd beat me to the punch).

That chart is hard to see because I copied it from Barry's site. The original, along with a few pages full of other informative charts is available at the St Louis Fed's website (see esp Productivity and Profits).

Obviously US corporatons have achieved peak earnings in this cycle in no small part due to impressive gains in productivity, even as total compensation has dwindled. Which raises a profoundly important question: what do you do for an encore?

Look closely at that chart. People are not going to work for free.

And even if you think it's different this time , and we have reached a new plateau of prosperity, the stock market wants more. Record gross margins and cash flow soon become next years challenging comparisons.

Those of us concerned about the housing market serving as a canary in the broader economic mine consider Exhibit A to be the homebuilder stocks themselves. None of those companies are losing money. None of them are anywhere near bankruptcy. They were NOT expensive stocks a year ago, when trading at 11 times earnings.

Yet the sector has suffered a 50% haircut in the past 12 months.


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