Friday, July 22, 2011

Meanwhile, Back at Corporate America

Much investor attention has been focused on government discussions in Washington and Brussels, and market movements this week have been largely driven by macro events.

However, now that we're probably two-thirds through earnings season, it is safe to say that Corporate America is doing just fine.

More than 80% of the S&P 500 companies that have reported have beaten earnings expectations this quarter, according to the Financial Times. Technology companies in particular are doing great: we've seen "blow out" earnings reports from companies like IBM, Apple and Google.

Bloomberg points out that return on equity for the stocks in the S&P 500 rose to 24%. When you compare this to the paltry yields found in the bond market:

Return on equity, a measure of profits relative to investments in plants and labor, rose to 24 percent last month, according to data compiled by Bloomberg. At the same time, a gauge of corporate bond yields fell to 3.61 percent, according to Barclays Plc. That’s the biggest difference in at least 13 years, the data show.

The problem is what what is good for corporate America is not necessarily good for the populace as a whole. Record earnings have largely been achieved through efficiency gains using the internet, and outsourcing jobs to lower cost countries. The average American is not seeing the benefits of the resurgence in business.

What does seem likely is that we will continue to see more M&A activity. Corporations have huge stockpiles of cash - nearly $1 trillion, by some accounts. With top line revenue growth gains difficult, and short term interest rates near zero, there is strong incentives for mergers. Even an old corporate raiders like Carl Icahn is trying to force Clorox management to sell.

On a lighter note, the increase in M&A activity has extended to even the smallest companies, as the Boston Globe noted this morning:

Berkshire Hathaway CEO Warren Buffett is one of the world’s richest men... was in Boston this week for a meeting... Afterward, we’re told, Buffett, his burly bodyguard, and a few folks ...headed over to Boston Speed Dog, the food truck in Roxbury that sells the most scrumptious hot dogs. Not surprisingly, Buffett loved the dog and joked that he wanted to buy the truck. When we asked Speed Dog co-owner Greg Gale about his brush with fame, he was confused. “Really? He was here? I didn’t even know,’’ Gale said. “I love his music.’’ No, we explained, it was Warren Buffett, not Jimmy Buffett. He’s older with gray hair and glasses, we said. “Now that you mention it, I did talk to him,’’ replied Gale. “He said he wanted to buy the place, and I told him, ‘You don’t have enough money.’ ’’