Don’t Be Fooled By These Profit Reports

By Michael Lombardi, MBA — Today’s Profit Confidential column

As I write this issue of PROFIT CONFIDENTIALon a flight returning home from Miami, several large American companies have reported their first-quarter earnings. In specific, for the first quarter: JPMorgan Chase earned a profit of $3.3 billion, Google posted a profit of $2.0 billion, mighty GE made $2.9 billion and the biggest bank, Bank of America, posted a profit of $3.2 billion.Add it up, and the stock market enjoyed $11.0 billion in profit this week only from these four companies.
There is no doubt that corporate profits are better than expected. It’s amazing what a severe recession will do, like getting companies to focus on their core businesses, while slashing payrolls and other costs.But talking to businesspeople in Miami, the mood is very different. It is a very difficult environment for small businesses. They are struggling. The economy is improving, and while sales are rising, they are still way below the 2005-2007 levels. Banks are not lending to small businesses, and small businesses are certainly not hiring.Small business makes up 70% of all employment in the U.S.; however, the government has done very little to help small businesses during the recession. The government chose to help big business, and, in particular, the banks. But the banks did not continue the chain and help small businesses. Let’s put it this way: if you owned a bank, would you take the risk of lending to small businesses? Of course not.Let’s face it — if a bank can borrow money from the Fed at 0.25%, or take money from their depositors at next to zero percent interest, and then put that money in 10-year U.S. Treasuries at close to four percent, why would they take any risk?Don’t be fooled by the great 2010 first-quarter profit reports you will continue to hear about today and in the weeks ahead. At the core, the fundamental economic problems facing the U.S. are only worsening.

The bear market in stocks is alive and well. A classic…a real beauty. Bring stocks up so investors feel the economy is getting better, deliver profits of big companies to add credence to the market advance so more people are lured into the market…that’s how a bear market works.

Each day that passes, investors feel better about the stock market and the economy. This means the bear is doing his job. By the time the second leg of the bear market falls, investors will have no idea what him them.


Michael’s Personal Notes:

If there is one thing I do not like, it is pushy waiters. And boy, did I have a doozy of one Wednesday night.

The businesspeople I was with chose the restaurant in Boca Raton, Florida. Nice place. Very fancy. Food was good, wine selection poor.

Had I followed the advice of the waiter, I would have eaten what he likes, drank what he likes, ate the dessert he likes…but I pay the bill. I understand that high-end restaurants have suffered greatly because of the recession, but getting waiters to push food and wine is not the answer. Why would I go back?

A friend of mine in the business told me that many restaurants have adopted a model whereby the table bills of waiters are tallied and monitored to see which waiters bring in the most revenue. Waiters bringing in low revenue are eventually fired.

So if a waiter gets too many couples that don’t drink and don’t order appetizers or deserts, he could eventually be fired. It’s a funny thing, these recessions…they force business owners to come up with the most ingenious (although not necessarily moral) ways to squeeze even more profits out of their businesses.

Where the Market Stands:

The Dow Jones Industrial Average opens this morning up 6.9% for 2010. The party for investors that started in March of 2009 continues with no hangovers as of yet.

Most analysts and investors can’t believe we are here, that the stock market is so high. I can. In fact, I called it. Just look at my PROFIT CONFIDENTIAL writings from the early summer of 2009.

If the money supply is flooded with easy money, if interest rates are zero, if big business is being propped up by the government, if the U.S. government ended up with 50% of all the residential mortgages outstanding in the country, how could the stock market not go up? That’s the good news.

The bad news is that everything I wrote in the paragraph above (all stuff the stock market likes) will eventually cause us severe economic problems, maybe even financial hardship.

Enjoy the bear market rally while it lasts!

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Back in January 2002, I personally started buying gold shares.” Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories gained in excess of 100%.