When Did Sales Become Insignificant in Earnings?
I am not the first person to talk about the strange nature in which Q1 earnings are being interpreted by investors, however it is a bit unsettling that it is not being spoken about at length. The markets are showing unfounded positivity in the face of earnings that are shiny on the outside, but extremely dubious on the inside. I say this because a lot of the positive earnings that we are seeing are bottom-line strong and top-line weak. This is not surprising because when you end up laying off thousands of employees, your earnings look better from the lack of expenses. Many companies that are beating profit expectations, such as Schering-Plough, LG, and others, while at the same time showing disastrous decreases in their sales numbers. It's important to remember that sales represent growth and it illustrates the real picture going forward. Job cuts in an economy this precarious need to be viewed as a band-aid that only stops the bleeding but not the infection that is coming. The obvious problem is that you can't downsize forever as I discussed in a previous article entitled, "Downsizing to Death".
So why are the markets ignoring the obvious and moving higher? All the typical answers are out there such as, money sitting on the sidelines, short squeezes, and denial. This is reasonable for a something like a 10% move upward, but hailing these earnings as a positive sign that the economy is turning around and pushing the markets up over 30% is openly ignoring the long term fundamentals. Fundamentals like, the more people that are laid off, the less people are going to spend; not just the ones being laid off but the ones left over that are scared of losing their jobs. This is what creates further reductions in sales and economic activity overall. Examining the earnings from a surface level will provide the false optimism needed to push forward, but at the same time, laid-off workers are going home survival mode and setting us up for further contraction. Being a fund manager of an alternative lending fund, we have the luxury of running our business on a platform that doesn't involve the trading of securities. Meaning, we don't make our living by being market experts, and we don't claim to be such. However, because of our model we have our finger on the pulse of real estate, and commercial real estate gives you a front line perspective. Commercial landlords are suffering because tenants aren't paying their rent and eventually running away from their leases. We all know the reason that tenants can't pay their rent is because people aren't buying products and services. When you look at companies reporting numbers in the billions of dollars, you lose the tangibility of those numbers unless you put them under the microscope. However, it hits home when you go to your favorite restaurant and the only thing you'll be able to get is a nice look at the "Out of Business" sign. As a private business, if you can't sell things, you can't survive. As a publicly traded company, it is only a matter a time before insufficient sales hits the bottom line, because the bottom line is, "how much profit can you make on a product you don't sell?"
Copyright: Dominic Mazzone, Regent Global Funds 2009
This article was written by Dominic Mazzone, Managing Partner and Fund Manager of Regent Global Funds.
This article and other like it can be viewed at Investingsymposium.com which is part of the Regent Global Funds Network.
Regent Global Funds, Rgfunds.com, is an alternative investment fund that offers its participating investors and asset backed investment through asset based lending.
The Fund Managers of Regent Global Funds have an expertise in commercial real estate lending and have created a successful alternative investment vehicle that is diversified through this structure. They separate themselves from other fund mangers by personally investing their own money side-by-side with their investors in the fund, creating an absolute structure of accountability.
Dominic Mazzone has written about the need for this type of accountability in an article titled "Fund Managers Need to be Accessible and Personally Invested."
About the Author:
As a Managing Partner of Regent Global Funds, a private equity and debt fund, Dominic Mazzone brings a track record of success and innovation to his current position as a fund manager with his experience in the real estate and lending business. His experience in real estate led him to being responsible for maximizing revenue through strategic best-use practices, as well as property rehabilitation in a portfolio of investment properties within the U.S. Dominic has been involved with development projects throughout the U.S. including California, Arizona, Florida, Kansas, and Hawaii, and is currently part of a consortium of investors in Scottsdale, AZ, developing an 80-acre site for an exclusive enclave of luxury homes overlooking the Estancia Golf Course. Dominic had his start in the lending business underwriting loans in Canada on properties that were precluded from conventional financing. This led to similar lending opportunities in the U.S. and the eventual formation of Regent Global Funds in Chicago. Formal education includes Mesa College in San Diego and the University of Southern California in Los Angeles. Dominic is a general partner of Scottsdale Partners LLP, which is involved in real estate development in Scottsdale, AZ, as well as Waikoloa Partners LLP, a syndicate of real estate investors in Hawaii. Dominic sits on the advisory boards for the technology companies Voice Cloud and Nile Source Outsourcing.