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CAT's "Blowout" Earnings Due to Cost-Cutting, Tax Gain


Lack of revenue growth shows this is no normal recession.

Caterpillar (CAT) is up over 10% this morning on what Morgan Stanley called "blowout" earnings. Anything good about that description is contradicted by Morgan's description of how it was accomplished: Revenues were down 10% from a beaten-down consensus, while earnings "blew" out from cost-cutting and a big tax gain. Of course, the company raised guidance, and here's why.

The market (i.e. everyone) has determined this to be a normal, albeit extended recession. If companies are cutting costs, both they and the market anticipate a recovery in revenues. Thus stocks like CAT (almost every company has made or beat earnings by cutting costs) are being rewarded for potentially much better earnings in the future, all predicated on a return to normalcy.

But what if those revenues don't grow? That would be because this is no normal recession. Perhaps the country has been running well ahead of our capacity to produce and our actual wealth for some time, because we have been able to borrow and spend money so easily. Maybe we've borrowed our standard of living from the future -- from our children.

There are 2 pieces of evidence that show this to be the case: First, the nature of unemployment, which is dire and looks systemic. We hired so many people in the past because we could borrow money and build, buy houses and strip malls. Those are built, but the debt remains.

Continuing claims have been dramatically high -- around 6 million. Last week, there was an improvement in the number, but the reason gave another clue as to the systemic nature of the employment problem. The reason continuing claims improved was that a large portion of people fell off the statistical measure, because they have been out of work for so long.

They didn't suddenly get jobs, because the measure of extended unemployment claims jumped just as much. The level of EUC is dramatic, as it becomes in "not-so-normal recessions," and indicates a total number of over 9 million people unemployed.

Second, the amount of debt still out there is even higher than it was before the "de-levering" was supposed to occur. The tally of all the government bailouts is near $30 trillion. We're simply doing what the Japanese did in the 1990s: Transferring private debt to public debt.

So if you don't believe that we borrowed our children's standard of living, just look more closely at the amount of debt we're leaving for them to pay off. The Japanese have done this already -- but at least they have some savings to pass on to their children.

As the government becomes ever larger, it will all but annihilate the productivity of the country. Only productivity can increase real wealth, and only the market can create it. Revenues are the lifeblood of companies, and revenues are declining.

Risk is high.
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