The Increasing Divide Between Wall Street and Main Street: The "Pre-Suicidal Profitability Syndrome"

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The Increasing Divide Between Wall Street and Main Street: The "Pre-Suicidal Profitability Syndrome"

NOTE: PRE-SUICIDAL PROFITABILITY SYNDROME is a Lingovation coined by Douglas Castle to describe a scenario where companies with declining sales in a declining marketplace with no resurgence in demand in sight ramp profits up by radically cutting costs -- largely personnel costs, or "jobs" as we regular folks call them. Profitability goes up solely by cutting both non-productive and productive costs. For a time, some shareholders (and some Wall Street hacks and quacks) are happy (hopefully they are slowly selling off their holdings) --- until a point is reached where costs cannot be further trimmed and revenues continue to decline. It is then that the "suicide point" has been reached - irreversible losses simply overtake the company. In the world of instant gratification, this is becoming increasingly common.

In a situation of PRE-SUICIDAL PROFITABILITY, short-term profitability is increased, in essence, by taking fired workers' paychecks, and transferring them over to the bottom line for "re-distribution" to the shareholders. It is every bit as productive as heating a log cabin by pulling off logs one by one and throwing them into the fireplace. -DC

The following appears courtesy of The Daily Reckoning, an investment-oriented newsletter:

"We opined - without doing any research on the subject - that Harley Davidson had probably peaked out. Only old men ride Harleys. The young prefer a different style of bike. We guessed that it was time to sell the stock.

Naturally, the company's earnings have soared since then. But not because of increased sales. Instead, like the rest of corporate America, Harley is learning to earn more money without selling more merchandise.

The New York Times has the story:

Motorcycle sales are falling in 2010, as they have for each of the last three years. The company does not expect a turnaround anytime soon.

But despite that drought, Harley's profits are rising - soaring, in fact. Last week, Harley reported a $71 million profit in the second quarter, more than triple what it earned a year ago.

This seeming contradiction - falling sales and rising profits - is one reason the mood on Wall Street is so much more buoyant than in households, where pessimism runs deep and joblessness shows few signs of easing.

Many companies are focusing on cost-cutting to keep profits growing, but the benefits are mostly going to shareholders instead of the broader economy, as management conserves cash rather than bolstering hiring and production. Harley, for example, has announced plans to cut 1,400 to 1,600 more jobs by the end of next year. That is on top of 2,000 job cuts last year - more than a fifth of its work force.

Everyone is doing the right thing. Households are reducing spending. Business is reducing its costs. GDP growth is falling and investors are taking shelter in Treasury debt.

So what's the problem? Well, the feds can't bear to see people doing the right thing. They want them to do the wrong thing - that is, they want them to spend money they don't have on things they don't need. Why? Because it makes the economy look good...and makes them look like they know what they are doing.

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I tend to agree. Don't be fooled.

Bottom Line: You cannot continue to profit in any endeavor without pushing revenues as well as containing costs.

Faithfully,

Douglas Castle

Douglas Castle

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