Oil, inflation, banks tightens, dollar, euro, oil – lather, rinse, repeat.

By David B. Armstrong, CFA | Apr 11, 2011 | Weekly Market Commentary

It looks like we have a bit of a cycle here: when oil goes up, inflation goes up, then the European Central banks tighten, then the dollar goes down, then the Euro goes up, then oil goes up again and we start the whole thing over again…

It’s a complicated picture – but when is it ever straight forward?  The reality seems to be that the Middle East is driving a lot of economic uncertainty.  However, if you want to see complicated, try telling a unit of Marines that they may not get paid for their drill weekend!  At least that got worked out – for now.

Earnings season starts this week and Wall Street’s expectations for profit growth is in the neighborhood of 15%…but where is that gonna come from??? We have a few thoughts.

The equity markets we track were mostly losers last week.  The Dow Jones Industrial Average (DJIA) gained 0.03% to finish at 12,380, the S&P 500 Index lost 0.32% to finish at 1,328 and the Nasdaq Composite Index lost 0.33% to finish at 2,780.  The Russell 2000 index, which tracks the performance of small capitalization stocks, lost 0.69% to finish at 841.

With earnings season coming up, we thought we’d remind everyone about the things that we think are important about reported corporate earnings.  Profits – what is generally left over after a company pays all the expenses, (there is more than just cash expenses of course, but I’m keeping it simple) – are influenced by one or all of a few different things.

One is the increase or decrease of any revenue a company experiences.  This is sometimes called “top-line growth”.  It means a company increased sales. Simple – sell more, profits go up.

Unless you spend more, too.  That’s the second influence, expenses.  If they go down, the profit goes up.  Simple.

Over the past few years, companies have done a lot to decrease costs.  But there is only so much you can do before there is no more to cut.  At some point, revenue has to increase to keep profits growing

And that is where we are now.  We are (and have been if you look back at our blogs) looking for revenue growth.  Without revenue growth, we just don’t think that companies will impress anyone and the market action will reflect that disappointment.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.  Stock investing involves risk including loss of principal.  The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index.  The Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.