Friday, May 4, 2007

It's All About Liquidity

News of Microsoft looking to acquire Yahoo is keeping the markets afloat today. This at a time when the economy is growing at 1.3% annually and employment growth appears to be slowing.

However, looking at the Flow of Funds report, a different measure comes up. Retained corporate profits came in at $731 billion dollars in 4Q 2006. That number is $499 billion with capital consumption adjustments. That's one of the primary ways that companies are fueling all of the merger and acquisition in the market right now.

Take a look at this chart from the St. Louis Fed of corporate profits with inventory adjustments. In short, companies are doing very well.

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Here's the year over year change in corporate profits.

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There's a ton of liquidity in the market right now.