The fact that companies coming out of the Great Recession have been running lean in terms of labor costs cuts both ways. It is a negative factor for employment growth since businesses have been very reluctant to add to staff levels without sustained revenue growth (which never materialized outside of currency translations). However, it also meant that those lucky, official members of the labor force that have jobs have been quite safe. Lean operations lead to businesses and corporations largely unwilling to part with their staffs except in times of sustained weakness.

The past twelve months certainly qualify as sustained weakness. In the latest earnings cycle, the word “overcapacity” has appeared more frequently, particularly as it relates to business’ cumulative perceptions of production levels against actual demand. It was a warning that lean businesses may be about to get leaner as they recognize the current slow growth as something other than temporary.

IBM reported, according to Bloomberg, that it is placing “the majority” of its hardware employees on involuntary furlough to cut costs. At the same time, there is no limit in how much the company repurchases its own shares, a fact that is gaining more and more attention.

“’IBM continues to punish workers with job cuts, furloughs and pay cuts while the company spends billions to buy back stock and inflate the price,’ said Lee Conrad, coordinator of Alliance@IBM. ‘There appears to be no sacrifice at the top.’

“IBM spent $3.6 billion on share repurchases last quarter. Its shares are up 2.1 percent this year, closing yesterday little changed at $195.50. The company raised its forecast last month for 2013 profits to at least $16.90 a share, up from $16.70, excluding the $1 billion restructuring charge.”

Profits can only grow in a revenue environment that is worse than 2008 through additional cost “saving” measures. That boost to net income expectations gets further amplified by reductions in share count, so business focus on EPS will necessarily be tested by sustained revenue pressures and contraction.

ABOOK July 2013 Revenue IBM4 v 08

The real costs of this strategy go far beyond income and revenues. There is an opportunity cost to reducing productive capacity in favor of financial “investment” that may never be fully apparent. It does, however, speak to the priorities of the business in an environment that is far more conducive to asset prices than actual economic progress.

 

Click here to sign up for our free weekly e-newsletter.

“Wealth preservation and accumulation through thoughtful investing.”

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, contact us at: jhudak@4kb.d43.myftpupload.com or 561-686-6844 . You can also book an appointment for a free, no-obligation consultation using our contact form.