The Bureau of Economic Analysis calculates and publishes an earnings metric known as the National Income and Products Accounts which presents the value and composition of national output and the types of incomes generated in its production. One of the NIPA accounts is “corporate profits.” From the NIPA handbook: “Corporate profits represents the portion of the total income earned from current production that is accounted for by U.S. corporations.”
The BEA’s measurement of corporate profits is somewhat similar to using operating income from GAAP financial statements rather than net income. The BEA is attempting to isolate “profits from current production” from non-production noised introduced by GAAP accounting standards. “Profits from current production provide a comprehensive and consistent economic measure of the net income earned by all U.S. corporations. As such, it is unaffected by the changes in tax laws, and it is adjusted for non-reported and misreported income” (emphasis is mine).
Why do I bring this up – what is the punch line? Because the NIPA measurement of corporate profits is currently showing no growth. Contrast this with the net income “growth” that is generate from share buybacks, GAAP tax rate reductions and other non-cash GAAP gimmicks used to generate GAAP net income on financial statements. This does not surprise me because I use operating income when judging whether or not companies that are reported as “beating” estimates are “beating” with accounting gimmicks or actual products derived from the underlying business.
It’s quite easy for companies to manufacture net income “beats.” But it’s more difficult – though possible – to manipulate operating income. The deferment of expenses via capitalizing them (taking a current cost incurred and sticking it on the balance sheet where the cost is amortized as an expense over time) is one trick to manage operating income because expense capitalization reduces the quarterly GAAP expense that is connected to that particular expenditure (capex, interest, etc).
The point here is that corporate operating profits – or “profits from production” per the BEA – are not growing despite the propaganda from Wall Street and the President that the economy is “booming.” Furthermore, if we were to adjust the BEA numbers by a true inflation number, the resulting calculation would show that “real” (net of price inflation) corporate profits have been declining. Using this measure of corporate profitability as one of the measures of economic health, the economy is not doing well.
August Auto Sales – August auto sales reported the first week of September showed, on a SAAR (Seasonally Adjusted Annualized Rate basis), a slight decline from the July SAAR. The positive spin on the numbers was that the SAAR was 0.4% percent above August 2017. However, recall that all economic activity was negatively affected by the two huge hurricanes that hit south Texas and Florida. The SAAR for this August was reported at 16.5 million. This is 11.2% below the record SAAR of 18.6 million in October 2017. It was noted by LMC Automotive, an auto industry consulting firm, that “retail demand is deteriorating” (“retail” is differentiated from “fleet” sales). Sedan sales continue to plummet, offset partially by a continued demand for pick-up trucks and SUVs.
Casting aside the statistically manipulated SAAR, the industry itself per Automotive News reported 1.481 million vehicles sold in August, a number which is 0.2% below August 2017. In other words, despite the hurricane-depressed sales in August 2017, automobile manufacturers are reporting a year over year decline in sales for August. This was lead by a stunning 12.7% drop in sales at GM. I’ll note that GM no longer reports monthly sales (only quarterly). But apparently an insider at GM fed that number to Bloomberg News. Automotive News asterisks the number as “an estimate.” Apparently GM pulled back on incentives. On a separate note, I’m wondering what will happen to consumer discretionary spending if the price of gasoline continues to move higher. It now costs me about 35% more a year ago to fill the tank in my car.
The commentary above is an excerpt from the latest Short Seller’s Journal. I recommended shorting GM at $42 in an early November 2017 issue of the Short Seller’s Journal. It hit $34 earlier this past week. That’s a 19% ROR over the time period. In the last issue of the Short Short Seller’s Journal, I recommended shorting Wayfair (W) at $149.92, last Friday’s close. W is down $3.50 – or 2.3% – despite the rising stock market. My recommendation include put option ideas You can learn more about this newsletter here: Short Seller’s Journal Information