Stock prices have been on a tear lately, bolstered by quarterly earnings reports that have in many cases outpaced expectations and growing optimism that the worst of the crisis-cum-downturn is behind us.
The S&P 500 index, for instance, is up more than 40 percent since its early-March lows, while the technology-laden Nasdaq Composite has scored a 13 percent gain -- and, through yesterday, a 12-session winning streak -- in the last two weeks alone.
Ordinarily, a bull run like this would be cause for optimism, on the belief that savvy investors see a light at the end of the tunnel. But in the current environment, could the good news that is powering share prices be bad news for the economy?
Consider the following recent reports from a cross-section of corporate America:
- Microsoft announced that revenues declined more than 17 percent amid falling global demand for PCs and servers. According to the Financial Times, the world's largest software company "sounded a far more cautious note about the prospects for a recovery in the second half of 2009" and its CFO said 'it's going to be difficult for the rest of the year....We're really still not sure we're out of the woods.'"
- The CFO of UPS, the 100-year old package delivery giant with a presence in 200 countries, warned the company didn't have "any confidence that either demand or activity is going to pick up substantially" in the next several months.
- Diversified manufacturer 3M, with operations in 60 countries, cautioned that it's "still facing a challenging sales environment with no meaningful improvement in demand yet from several major industrial customers," the Wall Street Journal reported. "He added there is a risk that recent upticks in orders could be a 'false dawn' caused by an over-correction in inventory levels earlier this year by 3M's customers rather than a sustainable recovery in demand."
- Texas Instruments, the second largest U.S. chipmaker, said "there's little evidence yet that real growth -- based on an improving market for cell phones, computers and other tech products, instead of inventory corrections -- is on the horizon."
- The CEO of WPP, the world's largest advertising company, was less-than-diplomatic when he noted publicly that he saw "no green shoots", "no yellow shoots" and "no moss" in the global economy.
- The Vice Chairman of General Electric, a company with 14 major lines of business and a presence in more than 100 countries, cautioned that "he isn't seeing an increase in orders even as U.S. economic statistics suggest the world's largest economy may soon shift to a recovery."
In sum, while a growing number of investors seem to believe that Main Street is on the mend, many of corporate America's senior executives -- who are normally not prone towards pessimistic outlooks -- are maintaining that they see no real evidence of a revival where it counts -- on the ground.
In fact, amid an almost single-minded focus on reported earnings results, many of which only appear favorable in comparison to the low-ball, company managed estimates that clueless analysts have come up with, Wall Street hasn't been paying much attention to just how dicey things look at the top of the income statement.
Yet as Karl Denninger of The Market Ticker and others have noted, many of the companies that have "beaten" expectations so far this season -- including several of those listed above and others such as United Technologies, Halliburton, AT&T, and Amazon -- have reported flat or falling revenues, with year-over-year declines in some cases of 30 percent or more.
One reason why so many businesses are apparently benefiting amid softening sales comes down to aggressive cost-cutting. They are slashing jobs, paring wages and benefits, scaling back capital expenditures and valuable R&D, and putting constant pressure on suppliers to reduce prices, forcing each of those in turn to do the same.
While such measures can provide a short-term boost to profits, it is revenues -- money coming in the door -- that keeps businesses growing -- and the economy humming. Moreover, even where firms are seeing notable improvements on the bottom line, odds are that few will be looking to boost hiring without seeing solid evidence that sales are also picking up.
Finally, racy bull markets often provide a shot of growth-stoking confidence, encouraging owners and managers to think and act expansively, and investors and lenders to pony up funds that can help turn big plans into profitable opportunities. Not this time, however. The U.S. economy, slammed by the biggest financial crises this century, remains in a vulnerable state, and it is still exposed to numerous potholes and shocks, many of which are just now unfolding.
Among other things, the commercial real estate market is starting to implode, lending conditions are worsening and many credit markets remain frozen, no small number of financial institutions, including commercial lender CIT Group, are close to failing or are utterly dependent on continued public largesse, and, as noted above, employers are shedding jobs, not adding them.
Unfortunately, because stock market investors have decided to ignore reality in favor of false hopes and quick fixes, the euphoria they've spawned may inhibit at least some Americans from taking the steps necessary to cope with the challenging environment that companies like General Electric, Microsoft, UPS, WPP, Texas Instruments, 3M, and others still see around them.
Given all that, you might say that Wall Street's gain is their loss.