Why Are CEOs So Confident Right Now?

Anthony Mirhaydari MSN Money July 22, 2010

Things may look bleak to many of us, but company chiefs are growing more confident about the recovery. That's good news, because they've been right before.

Do the CEOs know something we don't?

Companies are hoarding cash

But things look brighter from the front office than from the cheap seats. Measures of confidence among chief executive officers have soared and remain high despite the recent debt turmoil in Europe and evidence the economy has hit a rough patch on the road to growth. Why? Cash flows are at record highs, adding to companies' already huge cash reserves. Earnings growth and profitability have been boosted by lower commodity prices and cheaper labor.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 300, 213, {"configCsid": "MSNmoney", "configName": "player-money-articles-16x9", "player.vcq": "videoByUuids.aspx?uuids=0f5d3c33-a898-4bac-bbd7-5a41a22617b7,ece02081-d1ab-472f-9ab7-eb36114bf4a6,64643f47-79fc-477e-b12d-7d11063efe2f,06b7e586-dd9c-4fe9-94a1-7cf47ad2e735,ace289d8-a6b1-4265-bc41-34caa8c3290e,d3db7b2c-bbd0-4d05-aea2-971dc02140e7,0e5ad627-d15f-4a21-ad27-2d845b0152b7,322cc6d8-c309-4182-b0ec-5888a891a22c,572391e9-a8dd-4a67-8ad7-695a4e739d82,e96135c6-6240-4758-809b-b44d743a938d,92ff9da8-7ced-4363-96b1-df2e15adc474,f1ed61b6-76dd-45c3-a4eb-25b2e588b9ef", "player.fr": "iv2_en-us_money_article_16x9-Investing-MutualFunds"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=0f5d3c33-a898-4bac-bbd7-5a41a22617b7,ece02081-d1ab-472f-9ab7-eb36114bf4a6,64643f47-79fc-477e-b12d-7d11063efe2f,06b7e586-dd9c-4fe9-94a1-7cf47ad2e735,ace289d8-a6b1-4265-bc41-34caa8c3290e,d3db7b2c-bbd0-4d05-aea2-971dc02140e7,0e5ad627-d15f-4a21-ad27-2d845b0152b7,322cc6d8-c309-4182-b0ec-5888a891a22c,572391e9-a8dd-4a67-8ad7-695a4e739d82,e96135c6-6240-4758-809b-b44d743a938d,92ff9da8-7ced-4363-96b1-df2e15adc474,f1ed61b6-76dd-45c3-a4eb-25b2e588b9ef;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');This is just the sort of thing to get under the skin of the average American, who likely holds a low opinion of Wall Street bankers and corporate fat cats in general. But it could be a blessing in disguise: History shows that when CEOs' confidence differs from the public's, the CEOs tend to be right.

And right now, there is a huge disagreement on what the future holds. By one measure, the difference between CEO and consumer confidence has reached a record. Though it may be hard to believe, the conclusion is obvious: We're at the beginning of a long and prosperous economic expansion.

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A big dose of confidence The start of the second-quarter earnings season has deepened the differences in perspective between those sitting around their kitchen tables and those sitting in boardrooms. Profits continue to grow. And earnings calls are filled with optimistic ruminations about the future.

Aluminum giant Alcoa (AA, news, msgs) kicked off the second-quarter earnings season July 12 by reporting better-than-expected earnings and revenue. Click graphic to see interactive chartAlcoaIntelCompany executives expect customer demand to continue to improve in all of its end markets this quarter. They boosted their estimate of aluminum-demand growth as factories churn out planes, trains and automobiles at increasing rates.

Alcoa's good news was just the start. A wide swath of the economy is seeing reason for optimism.

In technology, Intel (INTC, news, msgs) beat estimates for profit and revenue as businesses ramped up spending to upgrade outdated computer systems. Executives noted that "PC and server segments are healthy and the demand for leading-edge technology will continue to increase for the foreseeable future."

In finance, the big banks, including JPMorgan Chase (JPM, news, msgs), Citigroup (C, news, msgs) and Bank of America (BAC, news, msgs), are reducing their reserves against loan losses as defaults and delinquencies drop. This is a big vote of confidence in the ability of borrowers to pay.

The list goes on.

Just look at the results from a recent Business Roundtable survey (.pdf file) based on the six-month economic expectations of 106 large-company CEOs. The survey was conducted between mid-May and mid-June, which came as the European debt crisis reached fever pitch and the U.S. economy showed signs of slowing growth.

Nevertheless, business leaders swelled with optimism. The index increased from 88.9 in the first quarter to 94.6 in the second -- the highest reading since mid-2006. The result is just under peak levels reached in the beginning of 2005 and up from a low of -5 reached in early 2009.

According to the results, 79% of respondents expected higher sales over the next six months, compared with 73% in the first quarter. As for hiring, 39% planned to increase payrolls versus. 29% in the first quarter. Though this may not seem like much, the measure stayed near 40% during the entire 2003-07 economic expansion. So this is great news for the job market. Main Street worries Yet at the same time, consumer confidence has sunk back to levels seen last summer. In June, The Conference Board's measure fell 9.8 points, or 15.6% -- a drop of a magnitude normally corresponding with an economic shock. Concerns over jobs and income dominate. For comparison, consumer confidence dropped by a smaller amount in the immediate aftermath of the Sept. 11, 2001, terrorist attacks.

Alternate measures of consumers, such as the Consumer Sentiment Index maintained by the University of Michigan and the polls conducted by Rasmussen, tell the same story. And it's a negative one.

Among investors, sentiment measures have fallen to levels not seen since stocks bottomed early last year. The Investors Intelligence Bull Ratio, which compares the number of bullish investment newsletter writers with bearish ones, has fallen to 48%, meaning a slight majority of writers are now on the negative side. Since newsletter publishers tend to be inherently bullish on stocks, this is a very subdued reading. Before the 2008-09 bear market, this metric fell below current levels on only three brief occasions, in 2001 and 2002.

Continued: Why the CEOs are rightMore from MSN Money

Could the Dow fall to 1,000?

Investor clues in latest earnings

Wait! Was that the recovery?

Is the market too mean for small investors?

Will falling prices sink the economy?

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Rate this Article Click on one of the stars below to rate this article from 1 (lowest) to 5 (highest). LowThank you for rating.UGR('ratCntrl')High var avgRating=0;avgRating=8.444445; if(avgRating!=0){avgRating=avgRating/2;avgRating=Math.round(avgRating*100)/100;var sDisplayText="Average rating: " + avgRating + " from ";var usersCount=18;sDisplayText = sDisplayText + usersCount;if (usersCount==1)sDisplayText=sDisplayText + " user";else sDisplayText=sDisplayText + " users";avgRatingElem=document.getElementById("averageRating");avgRatingElem.innerText=sDisplayText;} View all top-rated articlesE-mail us your comments on this article Discuss in a message board Most Recent Articles7 funds for 2010's second halfHow the downturn is remaking retirement Will falling prices sink the economy?Tough choice: BP or nuclear powerInvestments that crank out cashMSN Money InsightNew Investor CenterMarket DispatchesJubak's JournalTop Stocks blogCompany FocusContrarian ChroniclesSmart Spending blogFast AnswersDecision CentersMutual FundsFind Hot StocksSimple StrategiesPower ToolsInvesting for IncomeReal Estate InvestingRecent Articles by Anthony MirhaydariCould the Dow fall to 1,000? 07/14/2010Wait! Was that the recovery? 07/07/2010Will falling prices sink the economy? 06/30/2010More . . .Fund data provided by Morningstar, Inc. © 2009. All rights reserved.StockScouter data provided by Gradient Analytics, Inc.Quotes supplied by Interactive Data.MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.Msn.Video.createWidget('Gallery8Container', 'Gallery', 500, 230, {"configCsid": "MSNmoney", "configName": "gallery-money-article-site-wide"}, 'Gallery8');msft.msn._ic.cid='dref8ffmrr5648svd4t3n7m6ex7t60cx';msft.msn._ic.pst=false;msft.msn._ic.pgn=1; Join the discussion!Add a commentShow commentsSort by:Newest firstOldest first_uc2f12('iucGo');1 - 8 of 8PreviousNextalwayslearning1 #1Wednesday, July 21, 2010 9:14:12 PMIf I made 50 Million a year to steal American jobs and send them to sweatshops overseas, causing an increase in profit margins, I would have confidence in my personal recovery too!!!! Ask the average CEO how many jobs they expect to add in their company next year. Then, ask how many of those jobs will be in America. Free Trade has no connection to Fair Trade. American's would starve to death on $1 per day, but in Indonesia, Rural China, etc. 10 workers could live in 1 house on these wages. That is the purest form of "Free Trade". ReplyReport AbuseP.O. Carl #2Wednesday, July 21, 2010 9:59:16 PMalwayslearning 1: You are right on. My question is now that corporations have done everything in their power to maximize profits at any cost, what are they going to do now that that everything is made by the cheapest labor on the planet? How are they going to get their super bonuses if they cannot increase the profit margin 40, 50 or 100 percent more than it is today? Where are they going to find people who will work for free? Maybe they will get their lobbyists to bring back slavery. We as a nation are well on our way to becoming a third world country. There will be the very rich and the poor. The middle class is what set this country apart from the rest of the world, now they are almost gone. Young people 25 and under are going to have a lower standard of living than their parents. And we have greedy CEO's and Wall Street to thank for that. Companies are about to find out that when people don't have jobs or any money, the don't buy their products or services. The companies are going to get what they deserve.ReplyReport AbuseP.O. Carl #3Wednesday, July 21, 2010 10:02:06 PMIt is the golden rule. He has the gold makes the rules!ReplyReport Abusedisillusioned101 #4Wednesday, July 21, 2010 10:11:51 PM alwayslearning1 #1 Wednesday, July 21, 2010 9:14:12 PM If I made 50 Million a year to steal American jobs and send them to sweatshops overseas, causing an increase in profit margins, I would have confidence in my personal recovery too!!!! Ask the average CEO how many jobs they expect to add in their company next year. Then, ask how many of those jobs will be in America. Free Trade has no connection to Fair Trade. American's would starve to death on $1 per day, but in Indonesia, Rural China, etc. 10 workers could live in 1 house on these wages. That is the purest form of "Free Trade".

I would like to add that off shoring is on the opposite end of the spectrum from patriotism. If these CEO’s hate this country enough to betray it the way they are maybe they should move to the country where they are sending American’s productive assets.

What we need is a special tax on CEO’s who offshore. Offshore one job and automatically go into the 90% bracket. Maybe that will convince them to pack up their kids and move to someplace like Indonesia where their behavior is appreciated.

ReplyReport AbuseLike a Rolling Stone #5Wednesday, July 21, 2010 11:15:38 PMTo put our trust into today's corrupt, greedy, and incompetent CEOs is like putting trust into Satan. While they're out providing glowing reports about their profits and trying to suck the public in to buy their company's stocks - they're out selling on "distribution days."Oh yeah...CEOs have been wrong before - look at GM, Chrsyler, Fannie Mae, Freddie Mac, Bear Stearns, Lehman Bros., Merrill Lynch, Bank of America, AIG...ReplyReport AbuseOld Dog Learning New Tricks #6Thursday, July 22, 2010 12:09:09 AM

Mr. Mirhaydari, I love your articles but I can't quite comprehend what the CEO's are happy about. I'm sure they look forward to more undeserved bonuses but other than that, what’s there to be happy about?

Could you elaborate on how a nation can prosper when the skills of 75% of its population are out of date and therefore real unemployment will continue stuck at near 20% for the foreseeable future?

Moreover, how can the US prosper when the trade balance has been negative since 1985 and as a consequence most Americans have barely any savings?

In 2006 the national debt was $9T, non-bank corporate debt was $9T, mortgage debt was also $9T, institutional debt was $12T, unfunded Medicare liabilities $30T and unfunded Social Security $12T. Today the total debt is about 25% worse.

CEO’s may be optimistic all right because they are insulated from financial pain and they will be able to cut the cost of labor in half. But for the absolute majority of people this decade will be as awful as the Depression. It appears that the worst will be three or four years from now.

Maybe what you meant is that there is good news ahead for 1% of the population. That, I agree. But what about the other 99% ?

ReplyReport Abusesalimna #7Thursday, July 22, 2010 12:59:16 AMhe has his own capital to do like this,so...ReplyReport Abusexing99 #8Thursday, July 22, 2010 2:51:59 AMIf you post stuff to the INTERnet versus an INTRAnet, it can be public. If you don't want someone to know something, don't post it. Stay in your PRIVATE residence and you can have privacy. Do you think celebrities want all their business in the papers and on TV and the internet? Most don't, yet with all their money they can't have "privacy" and you people can't get enough of their business Try This Booking Engine ! No Credit Card Surcharge & No Booking Fee Find Cheap Hotels, Discount Hotels and Last Minute Hotels Deals --->Budget Travel Packages --->Cruise Holidays destination Looking For Hotels Worldwide? ((Search Free Now)) Looking For $1 Flight Ticket? ((Search Free Now)) Looking For $1 Rental Car? ((Search Free Now)) Looking For cruise vacation ((Search Free Now)) Last Minute Travel Deals. ... LAST MINUTE TRAVEL TIPS | LAST MINUTE CAR RENTALS | LAST MINUTE AIRFARE Package and Save Up To $500: * flight only * flight + hotel * flight + hotel + car * Cruise + Flight + Car >>>>New And Smart way to Search Travel Deals, Try now For Free 1<<<< >>>>All Starting From $1 for some selected Destinations<<<< >>>>Cheap flight Ticket Start From $1<<<< >>>>Hotel Room Start from $1<<<< >>>>Rental Car Start from $1<<<< >>>> Cruise Booking Start from $1<<<< Super Cheap Tickets--- Lowest As $1 Save up to 85% on hotels room Pay as low as you can Book Now Book Here For Great Worldwide Travel Packages In 2010 Compare Major Travel Sites And save up to $500 on Travel Up To 70% Off Hotels Instant Confirmation, Book NowReplyReport Abuse1 - 8 of 8PreviousNext_ucf13('0'); _iuc2Om1('MSNPortalInlineComments','Initial_Load_Comment_View','http://articles.moneycentral.msn.com/Investing/MutualFunds/why-are-ceos-so-cocky-these-days.aspx?','en-us');Are you sure you want to delete this comment?Report AbusePlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease notify us using the Report abuse form below. We will investigate your report and take appropriate action against offenders. We report all illegal activity to authorities.CategoriesSpam or advertisingChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatOtherAdditional comments(optional)100 character limit To add a comment, pleasesign in/*MSN PrivacyLegalAdvertiseRSSHelpFeedbackSite mapAbout our ads© 2010 Microsoft/*