Thursday, February 10, 2011


Israel is a true economic success story that teaches the lesson of brains over brawn.

Jobs <> Profits

Manufacturing jobs are hard to come by these days, but the industry itself is booming. The fruits of this trend show up in the stocks.

For some reason, the decline in manufacturing jobs is incorrectly projected into a decline in the U.S. manufacturing economy in general, which is simply not true. A recent University of Michigan-Flint study points out that over the past four decades, our manufacturing output has doubled, even while employment in the sector dropped 26%! While a disaster for unskilled workers, this is an unadulterated success story for our overall economy. We only need 8% of our population to produce our abundance of wealth, whereas we needed 28% to produce far less 50 years ago. If you don't applaud this trend, perhaps you'd like to be back on the farm, guiding an ox team while they pull your plow through your small plot of land.

All That Matters Is Earnings

And earnings are spectacular right now.

How can this market continue to rally day after day? What about falling housing prices? What about high unemployment and the lack of job creation? What about surging inflation? With so much that can go wrong in the world, how can we keep going up?

The only thing that matters is earnings, and earnings are spectacular right now. Companies have restored their margins and are piling up cash, even if revenue growth is less than spectacular. Expected earnings continue to rise, and valuations are reasonable. At 14x the 2011 earnings estimate, the S&P 500 would not be overvalued in more robust times and is certainly not overvalued in an era of 0% interest rates!

American corporations are doing exactly what recessions force them to do -- namely, doing more with less, shedding workers, increasing productivity and restoring profitability. Higher stock prices are completely justified by U.S. businesses' newfound efficiency, which is revealed in productivity and profit statistics.

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