The steady march of positive earnings reports continues to move stock prices higher. Except for a select few, revenues aren’t growing. But profits are. That obviously can’t continue, because earnings growth from the recent quarter is largely a result of cost-cutting. Now, without a rise in revenues, earnings growth will stagnate. So will stock prices, if we’re lucky. Prices could also move lower…
Even though the outlook for profits might be questionable, investors seem to be glad that profits have returned. Because rising profits mean that companies have a cash-cushion. This is especially significant for banks.
Loan losses and write-offs continue to mount for banks. They need to be able to absorb these losses without falling into a precarious situation that will further impair credit markets and investor confidence. (It may be distasteful that they are often doing it with taxpayer money. But don’t ignore the early read on Goldman Sachs’ (NYSE:GS) TARP repayments – The Wall Street Journal reports that the government has made 23% so far in interest and warrant appreciation.)
*****Losses must be taken for the U.S. economy to recover. Even though Goldman’s last quarter was a blowout, it took an $850 billion loss on a loan it made to a company that has since gone bankrupt. And it was reported that Goldman also took a $700 million loss in commercial real estate.
Banks still have losses to take on mortgages, too. 500,000 more existing homes were sold in May than analysts were expecting. The rise in sales is easy to understand – losses on bad mortgage loans have been taken, which means that banks can unload foreclosed properties at prices that make sense.
In other words, rising sales are the result of cost-cutting, just like corporate earnings. The cost-cutting in the housing market is a temporary fix. But it sets the stage for the permanent fix – real estate pricing that makes sense and makes room for appreciation.
Of course, unemployment rates are a key factor in both the need for housing prices to fall and the potential for housing prices to appreciate in the future. So long as unemployment rises, there will be more foreclosures and re-sales at lower prices. Eventually, when unemployment peaks and actually starts falling (hard to imagine, I know), then home prices can actually appreciate from lower levels.
This is the very essence of a deflationary spiral.
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So far this year, we’ve recommended 15 stocks and averaging just about 30% per recommendation. That’s darn good and we’re looking forward to a strong finish to the year. First on our list are oil stocks. We’ve made some nice gains on oil stock, including 142% on one. And we’ll be going back for more over the next few weeks. For more information on how you can profit from oil’s next move up, click here.