Corporate Profits

http://www.nytimes.com/2010/11/24/business/economy/24econ.html?emc=eta1

Yesterday's report from the Commerce Department showed that "corporate profits" were the highest on record at $1.659 trillion for the third quarter. This is the highest figure since the government began keeping track over 60 years ago (plug in here various inflation caveats).

Profits have grown for seven consecutive quarters at some of the fastest rates in history. Obviously, these numbers can at least partially be attributed to strong productivity growth where companies are testing the outer limits of producing more with less.

More importantly, that same report showed the nation's output grew at a slightly more rapid pace than original estimates for the third quarter: 2.5% (vs. the 2% originally estimated). This is as against 1.7% for the second quarter of 2010. 2.5% GDP growth is the number at which the U.S. economy needs to be in order to keep unemployment from "rising." This is also a number more in line with those economists who feel that that U.S. GDP growth could achieve a number between 3% to 4% by year end 2011. We saw numbers from Yale over the weekend that project GDP growth at 3.69% for the first three quarters of 2012.

As we have observed on more than one occasion, capital has no conscience, and we're pretty sure that Fareed Zakaria's numbers from earlier this year still apply: somewhere between $2 and $3 trillion of Top 500 capital still on the sidelines because those CEOs don't have a clear picture of the regulatory and tax environment in the U.S. Add to this now the growing all time record business profits mentioned above and we have a "spending situation."

We like that term - we don't think we've heard it before so we'll use it here as our idea. The "situation" is this: only so much "capital" can be held back in larger companies. It's almost a law of nature - it gets spent. So, that may start soon - almost like a dam overflowing, it has a life of it's own (we exaggerate, but not by much). And, where are all these profits going? To cash on the books - not likely, because that's just an invitation to acquisition. Then maybe to buy back stock? That's last year's idea. We feel that the cash and the capital will conspire to be spent hopefully in the U.S. or, at least more in the U.S. than elsewhere. If so, then those more optimistic GDP growth numbers mentioned above will happen.

Not everybody can invest in China and we're not sure we'd want to right now.