The Profit Recovery: Are We There Yet?

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Looking better, but not there yet: Greenspan

All year it's been a "show me" market, and Tuesday they showed it to 'em. Corporate America finally gave Wall Street what they've been waiting for all year — namely profits, and the possibility of more profits to come. Companies from chiptech (Novellus) to manufacturing (GM) satisfied investors with indications that yes, the economic recovery was indeed showing up on their boardroom radar screens. "Show me" turned into thank-you-very-much; the Dow surged 207, the NASDAQ popped 63, and the good news spread across the land: The profits recovery was here.

Wednesday, it was gone again. Bad news from Boeing offset some decent news from Intel, and Merrill Lynch and JP Morgan Chase hit professional investors close to home by reminding them that only determined cost-cutting was making up for weakness in the brokerage and investment-banking operations, which is what they actually do for a living. The Dow dropped 75. NASDAQ finished about even.

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And while they pretended not to notice — obsessed as they are with the running-of-the-numbers stampede that is the earnings season — Wall Street's big investors may be rediscovering the very reality that Alan Greenspan unspooled Wednesday morning on Capitol Hill to Congress' Joint Economic Committee: We ain't there yet.

Wall Street really only cares about one thing — corporate profits, and growth in same. That's what makes bull markets, and bull markets are how investors make their profits. They play the same game every quarter at around this time: Beat expectations or miss them? Profit or loss? And, perhaps most importantly, what's the future look like?

But this sort of tunnel vision allows the markets to sometimes look past the real unknown: the customers. Whether it's IT spending and capital investment or increased production (and eventually, increased hiring) consumer dollars are the last piece of any profit-recovery equation. With that demand, the recovery feeds on itself and everybody wins; without it, the business cycle will inch up a little, if only because it's been down a little. But mostly it'll just sort of sit there.

And Greenspan, who you can bet won't retire until his wounded bird is flying high again, isn't buying cruise wear just yet. "There can be little doubt that prospects have brightened," he told lawmakers. Inflation is still tame and housing is still strong. Business profits have indeed begun to reappear, and with it the likelihood that some of that money would be plowed back into capital investment. Inventories, after getting cleared out over the winter, are on the rise again; the goods are on the shelves and the recovery awaits.

Someone's just got to reach out and buy it. After grinding the already-deflating tech bubble under his bootheel in May 2000 with that now-infamous half-point rate hike (the Fed's last), Greenspan went so far as to all but declare that he would stay far away from the brake pedal until at least August. But we're on our own until then. "The pickup in the growth of activity, however, will be short-lived unless sustained increases in final demand kick in before the positive effects of inventory investment dissipate," Greenspan said. And thanks to high energy prices, high consumer debt, and the fact that hardly anybody in the whole country is better off than they were two years ago, "final demand" — that's you and me, and our two-thirds of the U.S. economy — "is still uncertain."

That leaves Wall Street doing what it does best, in earnings season when it loves to do it most: count pennies per share, peruse company forecasts and make some quick divinations about what it all means for tech or manufacturing or retail or telecom. The roll call of companies, hundreds upon hundreds of them, churns on Thursday, Friday, next week, the week after — the near-term chart looks to be an EKG of jumps up and down, rallies and sell-offs, little bets made, won and lost, all between the bells.

But none of it will last — or matter much — unless Main Street backs it up with some cash of heir own.