The “Big Thing” for Companies This Year

Here Come the Job CutsLast year, the “big thing” with companies was buying back their shares to boost per-share corporate earnings. In 2013, share buybacks hit their pre-financial crisis high. If big public companies didn’t buy back so much of their own stock in 2013, per-share corporate earnings just wouldn’t be that great.

This year, I expect share buybacks to continue at the pace we saw in 2013. Another “big thing” companies will do this year will be labor force reductions (cost-cutting) to make corporate earnings look better in light of generally weaker sales.

Companies have already started to lay out their plans for employee cuts…

Intel Corporation (NASDAQ/INTC) said it will be reducing its workforce by 5,000 this year. Here’s what the company spokesman, Chris Kraeuter, had to say: “This is part of aligning our human resources to meet business needs.” (Source: Randewich, N., “Intel to reduce global workforce by five percent in 2014,” Reuters, January 17, 2014.) Intel had flat fourth-quarter 2013 corporate earnings.

Hewlett-Packard Company (NYSE/HPQ), another major company in the key stock indices, is taking a similar approach. In 2014, it is expected to cut its workforce. According to its long-term restructuring plan, 34,000 jobs, or 11% of the total workforce, will disappear.

And job cuts aren’t just happening at companies in the personal computer (PC) industry…

We see this phenomenon occurring across the board. Companies in the retail sector are struggling as well. Macy’s Inc (NYSE/M) said it will be reducing its labor force to lower costs. As part of the company’s cost-cutting program to boost corporate earnings, it will be eliminating about 2,500 jobs in 2014. (Source: Timberlake, C., “Macy’s Forecasts Profit That Tops Estimates Amid Job Cuts,” Bloomberg, January 9, 2014.) Sales are soft for the retailers, and foot traffic is down.

And manufacturers could be looking at job cuts, too. Over the past few quarters, we have seen massive amounts of inventory build up in the U.S. economy. If this continues, businesses will eventually come to the realization that they need to stop production to get rid of bloated inventory. This will force them to reduce their operations and eventually cut jobs.

How long can companies in the key stock indices continue to use “financial engineering” to make their corporate earnings look better? With 2014 starting out as a terrible year for the stock market, big public companies will pull out all the tricks they can to make corporate earnings look better this year to relieve pressure on stock prices. But how many jobs can a company cut before service to customers starts to be affected?

With corporate earnings weakening, interest rates rising, and the underlying economy still very soft, stock prices, which have gotten far too ahead of themselves, will come under immense pressure in 2014.