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Corporate Earnings Forecasting Obama Victory





Looking at the stock market, the story of corporate<br /> American is strikingly different. Balance sheets are flush with cash,<br /> debt is being serviced relatively easily and corporate profits as a<br /> percent of GDP are amongst the highest on record. As the chart shows,<br /> if real corporate earnings are growing over the last two years of a<br /> president’s first term, re-election has been a good bet. In blue are<br /> the presidents who served more than one term in office and the red bars<br /> show one term presidents.







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Corporate Earnings Forecasting
Obama Victory

The
following Pacifica Partners article was also published in the Financial Post

The current U.S. presidential election has seen both candidates locked
in a fairly tight battle with polls showing neither able to garner much
more than 45% support on a week to week basis. However, in upcoming
polls, it is likely that the Obama campaign will receive a boost from
its recent convention – as it is customary for a party to get a shot in
the arm in the polls of about 5-9%. (In 1992, Bill Clinton received a
16% boost.) This year’s election will set a record for campaign
spending as each side tries to convince voters who has the best
policies to fix the economy and put Americans back to work.

Crossborder investment specialistsWhen President Obama
made his acceptance speech earlier at last week’s Democratic Party
Convention, it is likely that he was already debriefed on the August
jobs number as it is customary for presidents to see this sort of data
in advance of its release. The numbers were not great. They showed that
only 96000 jobs were created while the data for the previous month was
revised lower. Job creation for 2012 is averaging just under 140,000
per month while it was about 153,000 per month in 2011. The June –
August period is only averaging 100,000 jobs. Furthermore, over one
third of the jobs created in August were in lower paying categories
such as restaurants and hotels. Importantly — and going surprisingly
unmentioned — is the fact that manufacturing data has been signalling
caution for some months.

On the surface, the employment data does not look as bad as the details
suggest as the unemployment rate clocked in at 8.1% versus the prior
8.3%. But this is only due to the fact that almost 370,000 Americans
dropped out of the labor force (i.e. they gave up looking for work and
therefore are not counted in the labor force). For the economy to hit
its full potential, jobs must become more plentiful otherwise an
increasing number of individuals will be faced with atrophied skillsets.

Some partisans on both sides have claimed that “this is the most
important election of our time.” In some ways it is because of the jobs
problem – or more specifically, the lack of them. On the positive side,
there are undercurrents of optimism in the US employment picture: the
rebound in auto industry jobs, the reigning in of health care costs,
improving real estate and construction, and a renaissance of U.S.
manufacturing.

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The question that has become standard in presidential election
campaigns is Ronald Reagan’s 1980 question “Are you better off than you
were four years ago?” Usually that is an easy question to answer. This
time it is a little more difficult. The economy is no longer in
freefall, jobs are being added not lost, and the economy is growing –
not shrinking. The only trouble is that it is not getting better fast
enough.

Looking at the stock market, the story of corporate American is
strikingly different. Balance sheets are flush with cash, debt is being
serviced relatively easily and corporate profits as a percent of GDP
are amongst the highest on record. As the chart shows, if real
corporate earnings are growing over the last two years of a president’s
first term, re-election has been a good bet. In blue are the presidents
who served more than one term in office and the red bars show one term
presidents. Based on this data, the odds have favored an incumbent
president having to vacate 1600 Pennsylvania Avenue when corporate
earnings turn negative.

While President Obama has presided over an environment of decent
corporate profit growth, this has not translated down to Main Street.
In a perfect world, the positive environment on Wall Street should go
hand in hand with a vibrant and growing economy.  The economy
would have to begin growing at over 2% annually to produce enough jobs
to absorb new entrants into the labor force and provide alternatives
for the displaced workers that are part of a normal economy.

While there is always the chance that Barack Obama will be the
exception to this historical pattern, the corporate profits indicator
says that he will be re-elected again.

Pacifica
Partners – Capital Management

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a Sea of Opportunity

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This
report is for information purposes only and is neither a solicitation
for the purchase of securities nor an offer of securities. The
information contained in this report has been compiled from sources we
believe to be reliable, however, we make no guarantee, representation
or warranty, expressed or implied, as to such information’s accuracy or
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without notice. Past performance is not indicative of future
performance. Please note that, as at the date of this report, our firm
may hold positions in some of the companies mentioned.

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