Corporate Profit Blues (and CEO News)

Friday, April 06, 2007 at 10:13 PM

Corporate profits. If you live in a capitalist society, there are few subjects closer to financial godliness. But now, even in the midst of the most pro-corporte business environment since the 19th century, the news on corporate profits is getting shaky.

You might not have heard this unless you really pay close attention to the financial news, but the Commerce Department reported that corporate profits in the fourth quarter of 2006 kind of went south. Except for Wall Street.

Paul Kasriel of the Northern Trust Company offers up both the bad news and probably as optimistic a view as you could find from this info:

The fourth-quarter contraction in corporate profits would have been worse had it not been for Wall Street's profits and profits of U.S. corporations earned abroad. Profits of domestic non-financial corporations declined 6.63 percent in the fourth quarter while profits of domestic financial corporations and profits earned from abroad increased 4.32 percent and 15.90 percent, respectively. The creation of mortgage-related financial instruments has been a money machine for Wall Street in this expansion. Now that mortgage credit growth is in a steep decline, Wall Street will have to find another money machine. I have complete confidence it will.

Pay particular attention to that "profits earned from abroad increased ... 15.90 percent." Got any idea what happens when the profit center of a corporation moves from the U.S. to its overseas operations? Or why such a thing would happen?

And I don't know about you, but I don't share Kasriel's confidence that Wall Street will find another "money machine," especially when much of the previous money machine -- mortgage-related financial instruments -- is now credited with creating the current mortgage default crisis.

Some analysts think the fourth quarter profit drop is the beginning of a broader economic downturn.

NOTE: The article in the above link also offers this sickening summary of the current "economic recovery" period: "While profits are up 130 percent since the recession ended, industrial capacity in the United States has grown 4 percent, investments in equipment and software are up 22 percent, and employment is up 5 percent."

But the fourth quarter bad news certainly didn't translate into bad news for the CEOs, if you believe our beloved Fox News, which happily reports the results of a corporate survey by Watson Wyatt Worldwide Inc:

CEO Salaries, Bonuses Rise in 2006 on Strong Profits

The CEOs saw annual bonuses increase 13 percent and the value of their equity-based compensation holdings grow nearly 50 percent last year, according to a study by financial management consultants Watson Wyatt Worldwide Inc. ...

The analysis is based on proxy statements of 92 large companies whose CEOs remained in their positions in 2005 and 2006.

Median annual bonuses for chief executives increased to $2.2 million last year. At the same companies, the median growth in earnings per share was 14 percent.

The median value of CEOs' equity compensation, which includes in-the-money stock options and restricted stock awards, increased to $30.2 million last year.

Base salaries grew 4 percent to a median $1.1 million, according to the study.

And strangest of all to my little mind is the fact that the Fox story simply doesn't even mention the fact that the fourth quarter profits fell. Wonder why.