Monday, December 3, 2007

Sound the Alarm: Corporate Profits Rollover and Dive

Corporate profits are tumbling across all sectors. The overall profits fell at an annual rate of $19.3 billion in the third quarter driven by a drop in domestic earnings of $41.2 billion. While international profits remain strong, most of this increase is driven by the fall of the dollar against other currencies rather than any true operational earnings enhancement.

Profits for the large firms included in the Standard & Poor's 500 index fell almost 25 percent in the third quarter. The fourth quarter is not expected to provide any improvement; projections have the profits dropping an additional 30%. While the bulk of the drop may be associated with write-downs in the financial sector, the drop to some degree is being observed across all sectors. No sector is immune; chemical, manufacturing, technology, transport, retail, and every other industry has felt the impact of rising fuel costs, spending slow-downs, declining credit availability, and other troublesome factors.

Early in 2007, analysts has expected an increase of over 15% in operating profits; a month ago this figure sat at 8.8% and now this figure has been scaled back to a mere 1.1%.

The rollover of U.S corporate profits, to a scenario of significant declines, increases the likelihood of a recession. It is one of the collective headwinds applying the brakes to both the market and broader economy.

Recession Hits U.S. Profits; Economy Might Be Next
“The earnings recession has already arrived,'' says David Rosenberg, North America economist for Merrill Lynch & Co. in New York. ``We are going to see an economic recession in '08.''

A post from mid-October outlined the increasing headwinds facing the economy – the risk of “Lower earnings and increased warnings” was outlined near the top.

Increasing Risk: Headwinds

Another post from early August out lined the economic scenarios relative to credit and some associated investing thoughts.
Credit Crunch – Increasing Risk