All Things in Moderation

Vital Statistics:

World markets are rallying on the positive Greek austerity vote over the weekend.  European finance ministers will meet on Wednesday to approve the second bailout plan.  Does this mean the crisis in Greece is over?  Not really.  Bondholders have to accept the proposed haircuts and if there are holdouts (and the holdout trade is a staple of distressed hedge funds), there will still be risk of default.

Heard on the Street has a good piece on corporate profit margins and what that means for the economy.  Productivity has been falling, and that perversely can portend good things.  After the financial collapse, companies dramatically cut their workforces and held off on capital spending unless it was absolutely necessary.  As demand returned, companies squeezed as much output as they could from existing resources.  They held off hiring and making investment in productivity-increasing capital. Stocks have reacted positively to growth in profit margins as revenues increased while costs stayed stagnant.  This was reflected in the productivity numbers (which measure amount of output per input).  Lately, productivity increases have been smaller and smaller, meaning that effect has largely been played out.  This means if companies want to meet increased demand, they have to hire – their existing workforces are maxed out.  Which bodes well for unemployment and wages.  What does that mean for corporate profits and stocks?  It means that the top line (revenues) will have to drive profit growth.  Tepid economic growth will mean stagnant profits.

The SEC has launched an “informal inquiry” into the private equity industry. What a shock. It must be nice to have government agencies with subpoena power to conduct oppo research. (Couldn’t the NYT find a more menacing picture of Henry Kravis?)

No economic data today.  I am very interested to see the minutes of the FOMC meeting on Wednesday.

Filed under: Economic data, Economy | Tagged: private equity, productivity | 59 Comments »