A Thought On Corporate Profits

Corporate profits have looked pretty decent this year.  Earnings sometimes amazed and surprised the market. I am wary of this development.  Why?  I don’t think there is anything surreptitious, devious or evil.  I’m wary because the extension of current tax policy happened so late in the year.

Taxes are not revenue generators as much as they are behavior modifiers. People and entities respond to those incentives laid out by the tax code.  Corporations are much more flexible than individuals.  They can use accounting machinations to move expenses and revenue around, as long as they stay within the FASB  and GAAP guidelines.

This year, I think that companies recognized revenue early, and declared revenue when they could.  The coming tax increase and uncertainty over future tax policy encouraged them to do it.  Individuals may have sold off assets in the expectation that capital gains rates would rise.

If I am correct in my assumption, it means that next year, companies have created a higher hurdle to jump over than they normally would have.  It will be very interesting to compare year over year numbers, especially mid year numbers.  Mid year of 2010 was when the most uncertainty permeated the corporate environment.

Hope analysts are brainy enough to take this into account when they try to forecast earnings for next year.  Otherwise, we might get a lot of misses.

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