Larry Kudlow loves to say “profits are the mother’s milk of stock prices.”
Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) decreased $43.8 billion in the first quarter, in contrast to an increase of $45.4 billion in the fourth. Current-production cash flow (net cash flow with inventory valuation adjustment) — the internal funds available to corporations for investment — increased $110.9 billion in the first quarter, in contrast to a decrease of $89.8 billion in the fourth.
That is not good. Domestic profits decreased materially and so did international profits by US business.
There was nothing material in the GDP section of this report, but the profit report is one that is often overlooked. It shouldn’t be, especially not in this case coming off a fairly decent 4th quarter number.
The Nikkei market has imploded over the last few days and serve as a reminder that what goes up often comes down, and when the thing coming down is the stock market it usually comes down a lot faster than it went up.
In the US we’ve had a roughly 18% increase in market prices since the end of the year. This profit report says that the entire move is unjustified based on the profitability of US businesses, underlining the point I’ve been making that this is almost all flow-based bubble activity coming from both the US Fed and Japan’s central bank.
It’s really quite simple — after four years of “crisis level” injections of “new money” into the system which we were told was both necessary and proper if the “tonic” was going to work it would have. It should have led to durable and sustainable increases in both profits and employment. Instead what we’ve obtained is a mark-up of asset prices but neither investment in people or innovation. Now, with the limits being reached where market volatility will force a cessation of the central bank drug-induced financial stupor, we are going to have to face the reality of our foolish reliance on central bank and government games — like it or not.
With a very real risk that Japan loses control over their markets the risk of an all-on dislocation event in our markets is rising rapidly.
Don’t be complacent.