PortFolio Weekly

PortFolio Weekly
February 14, 2006

Profit and Loss

by Jim Newsom

Two news stories that were barely noticeable in the business section on the last day of January say volumes more about the state of the union than the president’s much-hyped speech did that night.

First, the Commerce Department reported that Americans’ personal savings rate had fallen into the negative for the first time in 72 years, dropping to minus 0.5% in 2005. As the Associated Press pointed out, this means that Americans “not only spent all of their after-tax income last year but had to dip into previous savings or increase borrowing.”

Our national personal savings rate has dropped into negative numbers only twice before, 1932 and 1933, in the depths of the Great Depression when unemployment was at record highs, banks were failing, businesses were going under and the New Deal had not yet begun. Even more pertinent is this: In 1984 the savings rate was 10.8%, but since then it has steadily declined. By 2004 it was only 1.8%; last year, below zero.

While some may feel better off on paper due to the rising home values of the last few years, far too many have been upping their debt load by borrowing against that increased equity rather than saving for the future. Another underreported statistic is the number of interest-only mortgages being taken out by consumers trying to purchase more house than they can actually afford. My research indicates that interest-only mortgages accounted for 25-30% of all home mortgages last year.

The low savings rate should be a national concern at any time, but especially now, when the economy is statistically strong and unemployment is low. And it is downright frightening when you factor in the pending retirement of the front edge of the baby boom generation.

But there are some folks who are doing quite well, as the day’s second story indicated. Though it only merited four sentences in our local paper, this news is huge: Exxon Mobil, the world’s largest investor-owned oil company, disclosed that it had achieved record profits in 2005, earning $36.13 billion on total revenue of $371 billion. It also said that while its profit rose by 40% over the previous year, its tax bill rose only 14%.

When I say the company earned record profits, I don’t just mean that it set a record for itself. No, this was the largest profit ever earned by an American business in history. The previous record was $25.3 billion, which was Exxon Mobil’s profit in 2004, and prior to that it was Ford in 1998 with $22 billion. By contrast, the money-making mega-merchandiser Wal-Mart brought a mere $10.3 billion to the bottom line in its last fiscal year.

You probably didn’t see or hear much about this banner year for the gasoline titan because Exxon Mobil tried to keep their announcement as lowkey as possible. Where most corporations trumpet their earnings reports, especially when they’re doing well, Exxon Mobil seems to be embarrassed by their good fortunes. As well they should be, profiting as they are from the bad luck of others, like the hurricane-battered folks down on the gulf coast and the war-ravaged populace of the Middle East. At a time when working people are lucky to get a three percent raise as the cost of driving their cars and heating their homes jumps incrementally, it’s no surprise that Big Oil is hiding out while counting the money.

I have yet to see an explanation of the correlation between rising crude oil prices and rising corporate profits. In most industries, when the cost of raw materials rises, there’s a squeeze put on the profit margin, at least for a while until retail prices can catch up with the cost of goods sold. But in the oil business, apparently you can just jack up the price at the pump anytime you want, absorbing none of the extra costs yourself while adding a few cents profit on top. This is why gasoline goes up at the pump on speculation of a natural disaster or political disruption, long before the actual higher-cost crude leaves the oil fields headed for processing. It’s nuts, but we continue to queue up in our SUVs and pay whatever, saving nothing for our own inevitable rainy day.

Maybe it makes sense to somebody; it sure doesn’t to me. As Congress considers additional tax breaks for Corporate America, it just approved a measure that will cut Medicare, Medicaid and student loan programs over the next five years. Total savings for this period are estimated to be $39.5 billion, or about a half-year of fighting in Iraq.

Maybe Exxon Mobil will help make up the shortfall.

copyright © 2006 Port Folio Weekly. Used by Permission.