subject: The Anorexic Recovery [print this page] Fashion can be a brutal businessFashion can be a brutal business. The starvation look is on the wane, thank goodness - women who look like walking sticks are no longer the envy of the catwalk.
But fashion is fickle in the corporate world too... and now public companies have picked up the anorexia bug.
"Many companies are focusing on cost-cutting to keep profits growing," The New York Times reports, "but the benefits are mostly going to shareholders instead of the broader economy, as management conserves cash rather than bolstering hiring and production."
Harley Davidson (HOG:NYSE) is a case in point. Harley's profits have risen smartly, but mainly as a function of deep cost cuts. Motorcycle sales have fallen three years in a row - and look set to fall further still - but Harley has kept pace by slashing jobs even faster.
"The trend is hardly limited to Harley," the NYT adds. "Giants like General Electric and JP Morgan Chase, as well as smaller companies like Hasbro, the toymaker, all improved their bottom lines despite slowing sales..."
That old line from the Duchess of Windsor, "You can never be too rich or too thin," has now become a mantra on Wall Street. The idea is to ring up short-term earnings gains even as the business shrinks, regardless of whether that means cutting away not just fat, but large chunks of muscle and bone.
Of course, one can hardly fault companies like Harley for acting on a sober reassessment of the future. As management has explained, the latest cuts are not temporary but more or less permanent, as the company plans to operate from a leaner revenue base going forward.
What happens, though, when companies all across America start doing this? And what kind of recovery is it where the profits uniformly come from continued cutbacks rather than expansions? Should we really smile at the news that big employers like Alcoa, which laid off 37,000 people in 2008, are in no hurry to ever hire those workers back?
The market seems to be in an odd sort of twilight zone. The state of the U.S. consumer has not been ignored, but it has not exactly been heeded either. Consumer spending has historically accounted for 70% of U.S. economic output, and the unspoken message from companies like Harley Davidson is that such numbers are history.
So can we really and truly call it "recovery" when such a major economic driver (consumer spending) is under assault... and when company after company is getting shed of jobs and growth?
(If you would like to read more of Justice Litle's investment commentary on other topics, sign up for Taipan Daily.)
Good Money After Bad
In another odd feature of this anorexic recovery, underwater home owners are trying out a little more hair of the dog that bit them - and "doubling down" on even bigger homes. As The Wall Street Journal reports,
Some intrepid homeowners are intentionally taking a loss on their current house - and writing a big check to retire their old mortgage - in order to buy twice the home for not much more money. Others, eschewing conventional personal-finance advice, are even opting for "cash-in" refinancings, paying thousands of dollars out of pocket to settle old loans - and then taking out new mortgages with lower payments, shorter durations or both.
"If you are trading up, what better time than when interest rates are at record lows and the cost of the trade-up is much less than it used to be?" says Christopher J. Mayer, a Columbia Business School economist...
- WSJ, "Doubling Down on Housing"
"Intrepid" homeowners you say? Well, that' one word for it.
The practice of selling a money-losing albatross to leverage up with an even bigger one seems the height of madness. Justifying the practice via super- low interest rates seems akin to "losing on margin but making it up on volume."
But then again, in this crazy mixed- up world of ours, maybe the logic makes perfect sense: If the U.S. housing market registers a phoenix-like rise from the ashes,then a bigger bet on a bigger chunk of house could mean recouping the old losses faster. And if things were set to go down the tubes anyway, what' another bankruptcy filing, right?
This is the real legacy of the can't-lose, free-lunch bailout mentality Wall Street and Washington have jointly created. Bad is good, common sense is now forfeit, and the underpinning logic grows ever more twisted as sustaining the unsustainable becomes an impossible task.
As Journey sang in that old classic, "Don't Stop Believing": "Paying anything to roll the dice, just one more time..."
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