SO WHAT IS SURPRISING ABOUT ALL THE REVENUE MISSES?

4/29/13

The most salient feature of this earnings season has not been the number of “makes” and “misses” on the bottom line but, rather, that half of the S&P 500 companies that have reported so far have missed their revenue forecasts.

Why should these revenue misses come as a surprise?   Why were the revenue estimates inflated in the first place?  Europe is essentially in the economic toilet.   China is slowing down with repercussions for all those economies, developing (e.g., Brazil) or developed (e.g., Australia) that provide it with raw materials.   Our tepid recovery has been hurt by a number of factors, the largest of which is the elimination of the social security tax holiday this year.   This last factor has drawn a lot of attention, but not nearly the attention it deserves.  The effective payroll tax hike has done more to hobble the consumer in this country than any other development in at least the last year.   Think about it; a guy making $50,000 has seen his tax bill go up $1000, or $83.33 per month.   Somebody making $100,000 gets hit twice as hard.   That’s a lot of money and it affects everybody who draws a pay check.

European nations’ measures to bring their budgets under control only exacerbate the problem.   Companies’ efforts to fortify, or at least maintain, their bottom lines through cost cuts when they can’t do so through revenue increases have the same effect, continuing a downward spiral that will lead to who knows where.

This is not to say that such efforts to save money, at the government, business, and individual level, are not necessary and ultimately beneficial.   Quite the contrary; if we are ever to get our fiscal houses in order, such measures are necessary.   And, despite our tendency to congratulate ourselves over how much we have “deleveraged,” we have a long, long way to go before we approach what was considered a strong financial position even a few decades ago; see my nearly instantly seminal 4/23/13 post, THE ATTACK OF THE McMANSIONS FOR SALE:  A SECULAR BRAKE ON THE HOUSING MARKET.

The important point to remember here is that these painful, yet necessary, adjustments were made necessary by the spending and debt binge of the last two decades or so.   We lost our fear of being in debt, “reasoning” that fortifying our egos by accumulating junk and living beyond our means justified abrogating financial, fiscal, and personal responsibility.   Modern financial thinkers, and politicians, told us that unprecedented levels of debt were no problem; we could always “grow out of it” or some such nonsense. 

Now we are bearing the pain, the hangover, if you will, of years of binging, and it will be a long, hard slog; what can one expect after such a long bout of financial revelry?   Some deep thinkers, unable to imagine any degree of discomfort, are counseling financial hair of the dog, which will only compound the problem…for our children.  My fervent hope is that, as painful as the economic adjustment may be, we will remember that this pain is simply what happens when we borrow too much money.  

Note that I used the noun “hope” rather than “expectation.”