Question of the Week: Readers Respond to Money Morning's Corporate Profits Query

[Editor's Note: Last week we asked what you thought about the booming corporate profits many companies are posting and whether or not they they're indicative of a sustained economic recovery. Some of our readers responses are listed below - along with next week's question, "Is U.S. Offshore Oil Drilling Going to Disappear?"]

Corporate profits returned in full in the first quarter of the year, with company after company topping Wall Street estimates.

JPMorgan Chase & Co. (NYSE: JPM) raked in $3.33 billion in first-quarter net income. Ford Motor Co. (NYSE: F) beat analysts' estimates with a $2.1 billion profit. Apple Inc (Nasdaq: AAPL) brought in $3.38 billion.

"There is clear and broad-based improvement in the economic factors in the United States and around the world," said JPMorgan Chief Executive Officer Jamie Dimon. "It appears to be strengthening, not weakening. It is possible that they will strengthen enough to end up with a strong recovery."

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But there's a bigger story behind these numbers that has analysts cautious to use the word "recovery." Year-ago comparisons can be misleading in that 2008 was a rough year across the board, and companies have since drastically cut costs to turn a profit. With unemployment still at 9.7%, companies continue to face a weak consumer base.

"We continue to operate in an uncertain environment," Family Dollar Stores Inc. (NYSE: FDO) Chairman and Chief Executive Officer Howard R. Levine told analysts on April 7. "While economic conditions appear to be stabilizing it is unclear whether we will see sustainable improvement."

The debate over how to interpret these numbers and analyze U.S. economic improvement prompted our sixth installment of Money Morning Question of the Week: Do you think booming corporate profits are the sign of a strengthening U.S. economy? Can these billion-dollar earnings be sustained for the rest of 2010? Or are these first-quarter numbers too good to be true?

Here is a collection of reader responses relating to what corporate profits mean for our economy and financial reform.

Profits Are Short-Lived Gains

The "booming corporate profits" have three primary sources. First, profits are booming when compared to first quarter profits from a year ago, which is where most comparisons are made. When comparing to such a low baseline, the percent improvement in earnings and profits from a year ago looks very good, but in the real world profits are still not very good for many companies, although there are exceptions.

And that brings me to the second source. Banks and financial institutions account for a large portion of the total profits reported in the last quarter, and most of these profits are from borrowing short-term from the government at near-zero interest rates, and then lending long-term back to the government at 4%+ interest rates, and then leveraging this up (where have I heard that term before?) ten times or more to rake in the big bucks. Essentially this is just another government subsidy to the banks, except that when interest rates start rising, the banks are going to find themselves in a crunch again, and likely needing another bailout.

Question of the Week

The third source is government spending and stimulus. Governments borrow or print money, and spread it around in an effort to buy votes and good will, assuming that the bill will never come due, or that if/when it does, the politicians will be able to divert the blame to some other "crisis du jour." The home purchase tax rebate is just ending, and it remains to be seen what happens to the housing market in its wake. Income tax rebates are mostly received and spent as well, and increases in wages and employment appear to be insignificant, so it is hard to see where the spending to support real economic growth can come from.

Conclusion: Wall Street is looking pretty good for the moment, but Main Street is not seeing much of those "booming corporate profits", and if housing takes another turn lower, then the rest of the economy will follow, especially if inflation starts to pick up.

- Gordon F.

Smoke and Mirrors

If we are having companies like General Motors fabricate financial news like their supposed early repayment of bailout funds while at the same time facing an additional $30 billion is losses, there is little hope for the economy later this fall. Without honest and open reporting of the true financial condition of the companies involved there is little hope for any "recovery." In fact, they are just cooking the books once again and the average investor is going to be robbed yet again when it all collapses.

The so-called "profits" are mostly the results of massive cost cutting and lay offs and not due to significant increases in sales. With the current real unemployment rate well above 17%, where are the customers? Claims of profits are merely the smoke from over cooked books reflecting off the glass of the corporate offices. Yep, you got it - smoke and mirrors.

- Kent G.

Time Will Tell

Optimistic! But hard to say earnings will be sustained. There are several uncertainties.

- Posted on MM's Facebook page by Ken L.

Profits Mean Fewer Works

Booming corporate profits come from management effectiveness and efficiencies. They are reducing costs of goods sold, which in turn increases profits.

One efficiency is producing with less labor. All the people they laid off caused a savings in labor and benefit costs. Why should they hire the laid off employees back if they can manufacture the same amount of product with less people?

Therefore, booming corporate profits are not a definition of a strong U.S. economy.

- Posted on MM's Web site by "Sandra"

One in the Same

Booming corporate profits is the definition of a strong U.S. economy.

- Posted on MM's Web site by "Ben"

Not "Real Money"

You rant about these corporate profits, which are only coming from the combination of cost cutting (i.e., fewer employees and lower wages) and free, corrupt money pouring in because "there is no better place to put it." What ever happened to [the] grand ol' capitalist idea of actually making real money through the goods that are produced or the services actually provided by companies?

- Posted on MM's Web site by "Rodney Whitacre"

Profit Greed is Nothing But Trouble

MM: Here is an additional response addressing how companies' - specifically Wall Street's - desire for profits contributes to the need for financial reform

The key to financial reform is to remove the profit motive. Make the companies' penalties, fines and restitution 5-10 times more than any potential profit and suddenly the fiscal games come to a screeching halt! Fear and greed drive the market so let the fear of financial loss be greater than the greed for profit at any cost and equilibrium will be restored to the market. Prison time if appropriate, but as other episodes have shown the fear of prison time is not enough to stop this creative financial chicanery!

- Joseph G.

[Editor's Note: Thanks to all who responded to our sixth installment of the Question of the Week feature regarding U.S. financial reform. Be sure to answer next week's question: Is U.S. offshore oil drilling going to disappear - why or why not? How does the industry affect you as an investor, taxpayer and consumer?

Send your answers to [email protected]!

Is there a topic you want to see covered as a Question of the Week feature? Then let us know by e-mailing Money Morning at [email protected]. Make sure to reference "question of the week suggestion" in the subject line. We reserve the right to edit responses for length, grammar and clarity.

Thanks to everyone who took the time to participate - via e-mail or by posting their comments directly on the Money Morning Web site.]

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