The Dow Jones Industrial Average has grown about 60 percent since bottoming out in March of this year. As it recently crossed the 10,000 mark, I was starting to sing a rousing rendition of "Happy Days Are Here Again" when I began to wonder what we're all so happy about. What has given the stock market such confidence that it climbed over that psychological 10,000 barrier?
After looking high and low, I concluded there's absolutely no reason to celebrate. Like the hyper-inflated values of the failed housing market, this recent surge of the stock market is just an aberration and, if not controlled, we're going to see a downturn just like we saw last year.
Why such a dire prediction?
Since the end of 2007, when the recession began, we have lost 7.2 million jobs, and more jobs are being lost every day. Unemployment has hit 10 percent -- in Michigan we're over 15 percent -- and is predicted to stay there for quite some time. So how can the market go up? Well, as sad as it is to say, in the short term job loss is good for the economy.
You see, stock analysts sit in their Wall Street offices and predict what a company is going to earn, and if they earn more than predicted the value of the stock goes up. Many companies earned more money than expected. But the reason isn't because they're selling more "stuff." Instead, earnings are going up due to cost-cutting. They've cut so many jobs that the cost cutting has generated more earnings than the revenues have fallen.
Think about that -- they've made more money by eliminating jobs and cutting costs than they make selling product.
Let's look at a couple of examples from the Daily Finance: -
-Pepsico -- revenue dropped 1.5 percent in the third quarter but its net earnings grew by 9.5 percent.
-Abbot Laboratories -- third-quarter revenues jumped 3.5 percent but net earning exploded by 36.5 percent.
-Domino's Pizza -- had a 6 percent decline in the third-quarter revenues, yet net earnings rose by 77 percent.
I understand that when earnings outperform revenue it's a sign of a well-run company. But any CEO worth his/her $200,000,000 a year knows you can't grow a company or have increasing stock prices by cutting costs and eliminating jobs. They realize that they need to increase revenue to see any sustainable growth and the only way to do that is from new customers, new business and new orders for goods and services.
So has the light gone on yet? Do you see the problem?
Let me spell it out for you: 7.2 million laid-off workers, whose layoffs contributed to goosing the earnings of many companies, translates into what, 20 million consumers (worker, spouse and their 2.5 children) not spending money because they don't have any to spend? Foreclosures, credit card defaults and bankruptcies are what these "consumers" are dealing with.
Sure, some companies can weather the storm better than others because they have strong economies in Asia, South America and parts of Europe to sell to, which props up the weak dollar on their balance sheet. But it can't last.
The bottom line is it's the U.S. consumer who makes or breaks a U.S. company.
Without jobs, there can be no consumers to spend money, which translates to a very scary fourth quarter and a harsh dose of reality when the holiday selling season fails to materialize.
Only when the job market and the stock market are heading in the same upward direction will we see an end to our current economic situation. Caution and guarded optimism are the watch words in the near future for all of us.
Fred L. Goldenberg is a Certified Senior Advisor (CSA) and the owner of Senior Benefit Solutions, LLC, a consumer and financial services organization in Traverse City. Questions or comments about this column or other senior issues can be directed to 922-1010 or www.srbenefitsolutions.com
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