Wednesday, November 21, 2007

Kudlow 101: A Bright Side to the Profits Slump

What's driving this downward move in the stock market is a slide in earnings. You can see this in our first chart:

This is the corporate profits picture of the S & P 1500. It reveals the real McCoy, earnings per share. In the third quarter, it’s 8.1 percent below year ago. This thing has flipped in the last year from over 15 percent to minus 8 percent. That’s a big move. It explains what’s going on in the market.

Now, here are the big losers in the profits sweepstakes (disregard the inversion on the y-axis, production glitch...):

Consumer discretionary (retailers, homebuilders) is down 37 percent. The financial sector is down 33 percent due to the whole subprime mortgage loan virus. Energy—because costs are running ahead of gasoline prices—is down around 10 percent. Rounding out the herd is—surprisingly enough—commodities. Despite the bull market, it’s down three percent.

But wait a second, there's more to the story. There are some big winners out there. Six sectors are actually up in positive territory. That spells potential opportunity.

Check this out:

Leading the profits charge are industrials. They’re up 15 percent. Tech is close behind, posting a strong 14 percent. Household staples and healthcare are both up 13 percent. Meanwhile, telecom and utilities are up 6 percent and 3 percent respectively.

So there is a silver lining.

Look, if you have a legitimate, full-fledged recession, virtually every single profit sector would be down. We don’t have a legitimate recession. What we have is a lopsided profits story stemming from the mess in housing. The rest of those sectors are obviously doing much better.

Bottom line: Profits are the mother’s milk of stocks. Profits are the mother’s milk of the economy. If six sectors are all up in positive territory, it doesn’t look like a recession call to me.