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Who Is Profiting From This Downturn?

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This is an important week for many investors. This week scores of corporations release their earnings reports. As you may have heard, most companies are posting near-record high profits.

The Wall Street Journal reports that the US Commerce Department is predicting corporate profits will be up 26.5 percent from a year earlier, which comes off of a second quarter year-over-year rise of 38 percent.

Yet, unemployment is still at an all-time high and some companies are even laying off workers despite these record profits. Why?

The answer is that's how they're getting those record profits. The record profits aren't a product of record sales. Sales are still stagnant. They're a product of record cuts in expenses, primarily driven by layoffs.

The Cash Hoard

Not only are companies experiencing record profits, they're also holding onto record cash reserves. Marketwatch reports that non-financial companies in the S&P 500 are holding onto over $1 trillion in cash reserves and assets as of the end of the second quarter. And many experts are predicting those reserves could rise to $2 trillion by the end of the year.

Yet, companies aren't increasing dividends. And they aren't hiring new people. Those are the two things that traditionally happen when profits and cash are so high. Why the disconnect?

Companies still remember the cash crunch they just came through, and because sales are stagnant, they don't want to make aggressive moves without assurances that they'll be able to sell product.

The problem, of course, is that people won't buy product and spend money when unemployment is so high and the economy so uncertain. So, both sides are in a holding pattern, waiting to see who moves first.

The Rich Get Richer

The unfortunate truth of this downturn is that the rich are getting richer. That's because they have control. Entrepreneurs and business owners are able to experience record profits because they can control their bottom line. This time they've done so through cuts and layoffs. It's unfortunate that they are choosing to hoard cash and cut jobs while experiencing so much prosperity. But that is their right, regardless if it's the right thing for the country and economy.

The gap between the rich and the poor is widening, and the middle-class is shrinking. If anything, this downturn has proved the importance of having control. As an employee you have no control. You are at the mercy of your boss and your company. During the financial crisis, many employees found out that even a high salary doesn't mean security.

If anything, the lesson from this downturn should be that the more control you have over money and business, the better position you're in to profit even when others are struggling.

Take Control

Eventually the dam will break. Money will start flowing—both from consumers and from companies. When it does, expect to see inflation take off. There is a lot of cash out there, and when it hits the market, an already weak dollar will become weaker.

The good news is that in the meantime, great deals are out there ready for the right investors. For instance, if you're interested in investing in real estate, there are many opportunities to find cash-flowing properties at rock-bottom pricing. And for those that want to start businesses, now is the time to take control and put your financial intelligence to work. By understanding how money works and by having control over your future, you can prosper even while others don't.

As I've said before, this is the biggest wealth transfer in history. You have the choice today to be on the winning end or the losing end. You have the opportunity to profit from this downturn. But you have to be financially intelligent. Continue to learn. Find great mentors. Make the right moves.

Opportunity abounds for those who can see.

Original publish date: October 05, 2010

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