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Chart of the Day
Today's chart compares S&P 500 earnings with the capacity utilization rate. Since 1970, capacity utilization has bottomed (and peaked) 6 to 15 months before earnings. Recently, however, earnings have soared while capacity utilization has merely inched its way up. Why? Some have voiced concern over the quality of earnings (i.e. AIG) as a similar divergence occurred in 1999-2016. Some believe that the recent surge in earnings is due in part to the “carry trade.” The carry trade refers to financial institutions borrowing heavily at low short-term rates and then loaning out that same money at higher long-term rates. Another school of thought is that a significant number of US companies are outsourcing to low cost countries (i.e. China), which is driving up profits at the expense of US manufacturers. Stay tuned...

Notes:
- S&P 500 earnings are 'as reported' trailing 12-month earnings.
- Capacity utilization refers to the percentage of total US industrial capacity that is being used at a given point in time.
- For more on earnings and what it means for the stock market, go to Chart of the Day Plus.


Source - Federal Reserve Board
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Quote of the Day
"Managers that always promise to 'make the numbers' will at some point be tempted to make up the numbers." - Warren Buffett

Events of the Day
April 15, 2005 - Personal income taxes due (US)
April 18, 2005 - Boston Marathon
April 22, 2005 - Earth Day
April 23, 2005 - NFL Draft begins (ends April 24th) - Passover (1st day)


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