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Welcome To The Currency War, Part 20: Corporate Profits Head South, Stock Prices To Follow?

A too-strong currency is, in theory, supposed to make it harder to sell things to cheap-currency countries, thus crimping corporate profits and by implication pretty much everything else.

The US dollar has been rising against the rest of the world for over a year, so let’s see how we’re doing. From today’s Wall Street Journal:

Falling Corporate Profits Blur U.S. Growth Outlook

Profits at U.S. companies during the third quarter posted their largest annual decline since the recession, underscoring the competitive pressure from a strong dollar and weak global demand that could limit businesses’ ability to support stronger economic growth in the coming months.

A comprehensive measure of companies’ profits across the U.S.—earnings adjusted for inventory and depreciation—dropped to $2.1 trillion in the third quarter, down 1.1% from the second quarter, the Commerce Department said Tuesday. Compared with a year earlier, profits fell 4.7%, the biggest annual decline since the second quarter of 2009. That marked only the second time profits have fallen on a year-over-year basis since the recession ended in mid-2009.

Corporate profits

Economists warn weak profits could weigh on business investment, put pressure on stock prices that some analysts think look expensive, and pose a challenge for Federal Reserve officials who are trying to raise interest rates after seven years of near-zero rates.

“Profits are slowing, there’s no way around that,” said Deutsche Bank chief U.S. economist Joseph LaVorgna. “These are things that suggest we’re past the midpoint of the business cycle, unfortunately, but it doesn’t mean we can’t run this [expansion] a bit longer.”

U.S. companies’ profits plunged during the recession then rebounded in the early stages of the recovery. But they’ve been trending lower for years, a reflection of slow growth abroad and moderate growth at home. Profits as a share of overall economic output have shrunk to 11.4% in the third quarter from a recent peak of 12.5% in 2012.

The latest reading highlights the divergence between domestically oriented operations and U.S. companies’ overseas operations, where the stronger dollar has effectively made U.S. products more expensive and global weakness has undercut demand.

Tuesday’s report showed domestic profits rose $7.3 billion in the third quarter, or 0.4%, but fell 2.8% from the third quarter of 2014. Meanwhile, foreign profits fell by $30 billion, a 7.4% decline from the second quarter and 12.2% drop from a year earlier.

We are indeed following the currency war script. And since most major trends — spreading Middle East war, several different kinds of chaos in Europe, an emerging credit crunch in China, a rising Fed Funds rate in the US — point to an even stronger dollar in 2016, it’s safe to predict that corporate profits will keep falling.

The question then becomes, at what point do falling profits become the dominant story for stock market investors? Right now, the markets are focused on foreign capital inflows and central bank liquidity, and have concluded that slightly less profitable corporations are still better bets than most other investments. But what happens when “slightly less profitable” becomes “dramatically less profitable” or “unprofitable?” We’ll find out shortly.

12 thoughts on "Welcome To The Currency War, Part 20: Corporate Profits Head South, Stock Prices To Follow?"

  1. . The melt down will begin slowly
    but as more understand the fear will speed up the process, We live in the
    digital age with a 24 hr news cycle.

    Our nation could have
    been so much stronger, so much better for the free world had it not been for
    the foolish actions of the Obama regime, we have taken a bad situation and made
    it worse by furthering the liberal agenda while socialist disguised the mistake
    and plotted against America.

    But it is just a set back,
    our country will emerge stronger for it and liberals will be written in history
    as one big ass mistake america

    If we let commonsense and
    logic guide us we will prevail.

  2. The banksters know what they are doing. They want a cashless society and are busy stripping away people’s savings with a zero interest rate policy. It is getting very difficult and riskier for the investor to try and earn savings. This does not bode well for future production generated from investments that come from savings. An increasing amount of people are sitting on their laurels waiting to see what happens. I feel the Fed sees no real necessity to raise rates, if their plan is to create a purely digital currency. Bitcoin isn’t their creation so you can watch for an attack on that in the form of fear-mongering. The latest attack being its association with funding terrorism. That’s my view.

  3. The Central Banks will keep it going by “whatever it takes” and “data dependent” statements followed by money printing. All the while the 1% and their cronies keep stripping these companies of wealth because they seem to do everything but invest in their own businesses. They would rather pump the price of the stock through artificial means, buy backs, and M&A’s. Remove the competitors while at the same time removing wealth from the company. In the end there will be a massive financial collapse felt around the world.

  4. I agree with Razz. Most people are still in la la land. Furthermore, there is so much conflicting information, and then what actually happens seems totally unrelated to all of it. Some would argue that real corporate profits haven’t been rising for years but the EPS (earnings per share) have been used as proxy for profits but have risen only because of stock buy backs. There’s even the “myth” that stock prices follow corporate profits (but they don’t always). Although the US stock market has floundered this year it still seems to have “bullish” resiliency so it’s anyone’s guess what will finally derail it.

  5. I’m not sure “We’ll find out shortly.” is a realistic expectation of how far into the future they can pretend and extend. I rather see this as a meltdown similar to a glacier melting over a period of months, or even over several years. Goldman has recently forecast mediocre growth in 2016. Stocks rolling over could take far longer than anyone anticipates. My expectations are that stocks, growth, et al will muddle-through the 2016 elections but after that and into 2017/2018, that’s when “dramatically less profitable” and/or “unprofitable” start to play out in earnest. This is a slow-motion train wreck, that we’re in the early stages of experiencing, not a “fishing line” collapse, where one day its 80 and the next day it’s 6. We’re going to get from 80 to 6, but it’s not going to get there “shortly”. My view of it is that we’ve got a long way to go even to get to the middle of it, and that there is a whole lot more pain ahead for us all versus the part of the “collapse” that is behind us. Just one man’s opinion.

  6. Everything the central Banksters do makes things worse. It’s like a reverse ‘Picture of Dorian Grey’ — the more ugly they make things, the better it looks to them in their mirrors.

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