The Importance of Flexible Convictions

Earnings

Reporting season starts in earnest this week, and it has been my belief that the bulk of the earnings gains have come not from an uptick in end-user demand but rather from everything else: productivity improvements, debt refinancings, accelerated depreciation benefits, tax cuts, layoffs and currency rates.

So I will be listening very carefully to what the CEOs have to say about hiring and capital expenditures. I expect a modest pop in hiring in the first quarter that will then attenuate as the year progresses, and I expect to see capex slow, now that the accelerated depreciation rules have expired.

It would bode well for the economy's continued expansion, and prove me wrong, if we hear of plans for increased hiring, wages or capital expenditures. The biggest risk to the recovery, in my view, has been the lack of organic job and wage growth. I'd love to be shown up on this one.

Jobs

Employment growth continues to be the most glaring weak spot in this recovery. Slow job creation, weak income gains and decreasing benefits do not bolster hopes for the macroeconomy. Last month's jobs report was barely more than what was needed to tread water. (The number of new jobs has to keep up with the population's growth.) The low unemployment rate is a function of people dropping out of the labor pool, not new hiring.

I continue to believe that the lack of organic job creation is single largest risk factor to the expansion going forward.

What would prove me wrong? Well, I'd like to see three straight months of job creation sufficient to raise the percentage of employed -- figure something on the scale of 150,000 to 200,000 new jobs per month.

Margins

Commodity prices have been rising steadily for the past 24 months, and many manufacturers find themselves in an untenable position where they are paying more (in some cases, considerably more) for raw goods, but they find themselves unable to pass along price increases to their customers. This will eventually create a margin squeeze, a reduction in gross profit that pressures earnings.

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Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].