Big Bet: The Bull Market is Back! (almost)
- Oct 04, 2010
- admin
- Investing
YOU WOULD NEVER KNOW OUR ECONOMY WAS STRUGGLING BY WALKING INTO AN APPLE STORE (SYM: AAPL).
The place was an absolute madhouse when I walked in there Thursday afternoon. So I waited five minutes for the sales person to finish speaking with another customer.
I told him quickly that I wanted to buy a desktop and I knew exactly which model I wanted.
To which he replied, “Let me get your name. It’ll be about a 15 minute wait.”
I reminded him that I didn’t need anyone to help me. I knew exactly what computer I wanted to buy and all he needed to do was sell it to me.
He shrugged his shoulders. I walked out. I don’t stand in line to buy electronics. If Apple wants my business they better get their act together.
So there I was at Apple again on Sunday waiting the darn 15 minutes. I had walked in there convinced that Sunday morning wouldn’t be crowded. But once again it was a madhouse. And this time, instead of getting snippy and walking out, I swallowed my pride and waited. Steve Jobs 1,000. Dylan 0.
No wonder Apple is recording blow-out profits year after year. No wonder the company, with a market cap of $260 billion, is now worth more then former arch-nemisis Microsoft (SYM: MSFT).
But Apple isn’t the only company in America earning record profits….
In what may be surprising news to many investors, the Commerce Department estimates that second-quarter after-tax profits rose to an annual rate of $1.208 trillion, up 3.9% from the first quarter and 26.5% from a year earlier.
That means that as a percentage of national income, after-tax profits were the third highest since 1947! This profit explosion even tops each and every year during the dot com boom. The only time U.S. companies earned more was during two quarters in 2006, near the peak of the last economic expansion.
One caveat: all of these outrageous profits have been earned during a time when revenue declined by an estimated 6 percent. That means that even in an incredibly tough business environment, companies are ruthlessly cutting costs and increasing productivity. While this news won’t make anyone who has lost their job during this cost-cutting cycle happy, it is certainly a great sign for the overall health of corporate America.
What does this mean for the market as a whole?
As Benjamin Graham once said, “In the short-term the stock market is a voting machine. In the long-term the market is a weighing machine.”
That means that while the market can be “voted down” in the short-term by excessive fear, in the longer-term the market will weigh the earnings corporate America is producing.
That’s probably why the market seems to have found a “natural” bottom here in the 10,000 range. Every time it looked as if the market was going to break below 10,000 there seemed to be huge buying there giving it big support.
On the other side of the coin, it suggests that the market is very well positioned for a big rally.
Now of course markets don’t make huge gains during times of revenue declines like we’re experiencing right now. And there is only so much that corporate America can squeeze from its costs to keep producing profit gains. Markets as a whole don’t trade higher based on cost cutting alone.
But given the fact that these companies are running at maximum efficiency…and given the fact that these companies have seemingly squeezed as much profit from their income statements as possible…
It seems likely that the minute the revenue picture brightens up those revenues will flow right to the bottom line….when that extra revenue flows to the bottom line that means profits will explode….
And when profits start to explode based on increased revenue the market is almost sure to rally and rally strong.
Folks, what I have just described isn’t unique to this bear market and recession we’ve been in – it’s the way the markets have always historically rallied at the end of virtually every recession in U.S. history.
Some people may disagree because this time, they feel, is “different.” But whether bull market or bear market, people are always saying this time is “different.”
In my view the only way this time will be different is with the intensity the market rallies once the revenue picture shows even the slightest signs of brightening up a bit.
One thing is certain: you’d have to be an incredibly brave person to be putting on any new medium and long-term short positions.
Remember, you are what you read.
Dylan Jovine