Keep eye on sales line, not job line

The Insider

Your Money

March 14, 2004|By BILL BARNHART

MARCH madness on Wall Street is as unpredictable as the collegiate version. This is no time to take your eye off the ball.

Four years ago, the high-flying Nasdaq market peaked in March. Last year, as now, the month opened dismally.

After 12 months of steady advances, stocks have begun to revert to normal volatility.

Not coincidentally, we're in the early period of a presidential election - a game under way on a different court but close enough that the crowd noise resonates to anxious investors.

In particular, the disappointing February jobs report surprised financial markets and political campaigns alike.

On the political stage, new jobs have become akin to weapons of mass destruction in Iraq - they're hard to find.

Republicans side with optimistic experts, who made a series of erroneous job forecasts and now insist a resurgence of hiring lies just ahead.

But it's a hard sell. The press soon will hum with annual reports of exorbitant CEO pay, a depressing coda to the job stats.

Nonetheless, the ruthless fact is that stock prices track corporate profits, not job growth.

Skeptical investors, annoyed by accounting scandals, demanded stronger balance sheets and solid profits.

After falling sharply from early 2001 through the end of June 2002, major-company profits accelerated in 2003.

To be sure, last year's market rally included a burst of speculation in loss-ridden small-company stocks. But traders took their cue from rising profits in the blue chips.

Corporate profit and cash flow stand at record highs relative to the nation's gross domestic product, thanks to greater efficiency and productivity, according to Richard Rippe, economist at Prudential Financial.

"Corporate profits are now higher than they were four years ago, when the stocks peaked," said Marshall Front of Front Barnett Associates. Yet the S&P 500 index stands 28 percent below its 2000 high.

Having squeezed costs and hoarded cash, companies must expand revenues to maintain shareholder optimism.

Sales among the S&P 500 companies rose last year, the first increase in four years. But the gain was less than in 1999.

Revenues as a percentage of corporate debt, a key indicator of solvency, were just 117 percent in the fourth quarter among nonfinancial companies, well below the 121 percent at the low point of the 1990-1991 recession, says Moody's Investors Service.

"Perhaps companies would like to bulk up more on revenues before assuming more risks attendant to expansion," Moody's analysts concluded.

Governance reforms make executives nervous about risk indicators, such as the sales-to-debt ratio, Moody's economist John Lonski said.

"Companies are holding the line, because they're just not convinced that their run of good fortune on revenues is going to continue," agreed Tim O'Neill, chief economist at Harris Bank and the Bank of Montreal.

With inflation low, boosting revenues may require expanding hiring. People with jobs will help increase sales. But if this is a chicken-and-egg problem, jobs come in a distant second.

Sales growth fell in January. Investors need to keep their eye on the top line, corporate sales, not the employment line.

Bill Barnhart is a financial columnist for the Chicago Tribune, a Tribune Publishing newspaper. E-mail him at yourmoney@tribune.com.

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