The Stock Surge and the Profits Paradox
Stocks are roaring this week.
A 6 percent surge is being fueled by better-than-expected earnings — profits that make capitalism go.
Earlier this morning, on the heels of stellar results from Goldman Sachs and Intel , JPMorgan Chase announced record net revenues that easily beat analyst estimates.
The bank’s second-quarter profits rose 36 percent from a year earlier. announced record net revenues that easily beat analyst estimates. The bank’s second-quarter profits rose 36 percent from a year earlier.
Profits remain the mother’s milk of stocks, business, and the economy. Even though profits may be a dirty word in Washington these days, this is the golden rule on Wall Street.
Here’s an unconventional capitalist thought: Businesses are slashing jobs, hours worked, production, and inventories — big-time. Unfortunately, this is driving up unemployment and creating skepticism about a real economic recovery. However, at the same time, these cost-cutting measures are contributing to better earnings and profit margins. This, in turn, is driving up stocks.
I call this the profits paradox. Bad economic news can be good profits news, at least for awhile, as businesses take corrective measures. And from this business discipline comes a big surge in productivity, which ultimately drives us into recovery.
This is all part of the self-correcting nature of free-market capitalism.
Second point: I was right one time in a row about this bank-stock rally. Financials have soared this week. So let me repeat: Borrowing at near-zero interest rates and lending much higher is so profitable that even bankers can do it right. The steep, upward-sloping Treasury yield curve, which has gotten even steeper, is the best bailout for banks. They are earning their way out of their toxic problems.
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