An excellent interpretative report by Bloomberg News Friday summarized the two-edged sword nature of continued U.S. productivity growth, and it's one investors should review.

Here's the low-down:

U.S. worker productivity, which increased 1.3% in the third quarter, is creating even-more-lean U.S. corporations. Productivity has also risen at an impressive 3.4% annualized rate over the past five quarters.

The tail-end summer heat has been heavily attributable to the mergers and acquisitions blaze. Companies are putting their cash to work on public companies fetching discounted equity prices in a market environment favoring safety (e.g., gold and bonds).

Recently, Hewlett-Packard (HPQ) edged out Dell (DELL) for the 3Par deal award. With an eye toward the future, HP displayed their powerful desire to own a piece of the data storage and cloud computing pie. Since Dell ended empty-handed, it's only a matter of time before the next stock is a tech heavyweight's prime target.

In this week's (November 9) Preview Section of Barron's (subscription required) I was surprised to find that on Wednesday (11/9) it is noted that Computer Sciences (CSC), Applied Materials (AMAT), and Macy's (M) reported "profits." How do they know this?

On other days they refer to the "earnings" of various companies reporting. Perhaps I am splitting hairs, perhaps it is editorial haste (like you might find on our site), or perhaps there is no difference in some people's minds? From my perspective there is a difference between earnings and profits. Every quarter, public companies report their earnings. They do not always report a profit.

Good news: profits are back. Bad news: it hurts like hell to get them.

With Q2 reports starting to come in, several high-profile companies have turned in positive results, and a few -- like Caterpillar (NYSE: CAT), IBM (NYSE: IBM), Pfizer (NYSE: PFE), 3M (NYSE: MMM), and Lowe's (NYSE: LOW) -- have even upped the ante for the rest of the year.

Expectations were low, making the outcomes look surprisingly strong. According to a Thomson Reuters, a third of the biggest companies in the United States that have turned in their Q2 results, and 76% of them have beaten analyst expectations. Less than a fifth of them are losing money.

Quarterly earnings could be up year-over-year by the fourth quarter. A low threshold for improvement, as a result of last year's Q3 financial meltdown, could set the stage for the appearance of a recovery, but the ride from here to there will be a difficult one.

Data from Bloomberg and S&P suggests that profits for stocks comprising the S&P 500 Index may be down 21% next quarter. It's still a double-digit blow, but a better result than Q2's estimated 34% -- and far ahead of Q1's 60% year-over-year fall in profits. The driver of a recovery, however concealed by low expectations, is likely to be a combination of unemployment and consumer spending. Last month, we saw unemployment reach a 26-year high, putting obvious constraints on purchasing.

Last night it was reported by Reuters, following up on an interview in the Financial Times (subscription required) that James Hackett, chairman and chief executive of independent oil and gas company Anadarko Petroleum (NYSE: APC) said, "Washington's energy and environmental policy risks plunging the United States into an economic tailspin that could make it the world's cleanest third world country."

Seems he is not partial to the global warming crowd as indicated by his statement that "The histrionic and maniacal focus on carbon dioxide is intellectually repugnant to me," but how does he really feel?

This should be the new mantra for all investors: show me the money. In other words, companies can talk all they want about cutting costs or new products or turning the corner or slicing dividends. What investors need to see is profits. Until those start showing up, investors will mostly stay on the sidelines.

There's plenty of talk, very little proof, that stocks might be able to do better. We've seen a decent rally lately. There's piles of cash at venture firms or equity funds, just sitting, waiting to pounce on bargains. But until that money is put to work, it's all talk, no action. Until institutions start moving their money into this market by buying stocks or outright purchases of companies, many individual investors will be interested observers, not participants. They want to see money move from the bench into the game. Then they'll follow suit.

The stock market has fallen about 3000 points in a year. Corporate profits among the Fortune 500 are likely to decline a double-digit rates. Consumer spending is down. And the nation has lost more than 463,000 jobs in seven months, with unemployment rising.

And yet, we're told 'the economy is growing.'

What's going on here? Or, investors and readers may justifiably exclaim, "If this is growth, I'd hate to see what a recession looks like."

On Friday,BloggingStocks asked economist Peter Dawson to give an accurate read on the economic situation in these United States.

"Don't you have an easier question for a summer Friday?," Dawson said. "Kidding aside, what we're experiencing now is a growth-recession. And at this point, and we'll need a few more data points to confirm it, it's looking close to a textbook case of one."

During a growth-recession, the economy continues to grow, barely, Dawson says, but almost all of the other indicators continue to move in a destructive direction.

This past holiday weekend my colleague Doug McIntyre gave support to a blog I wrote in May 2007 when he posted Google (GOOG): The Failure Of YouTube. In my rant I gave a detailed analysis outlining how Google had overpaid for YouTube by a fantastic amount.

In the story Doug quotes projections that 2008 revenue generated by Google might gross $200 million from YouTube. That's revenue, not profit. A 20% profit would be $40 million if that was possible. In the article I wrote: How can I say Google overpaid for YouTube? I stated the case in plain English why the YouTube investment would have to earn $300 million (net, not gross) minimum, in its first year not to be dillutive.

They missed the target by a mile. They will continue to miss the target and I do not expect it to ever justify the cost. Just because Google has lots of cash slushing around does not mean they have money to waste.

U.S. non-farm productivity surged to an annualized rate of 6.3% in Q3, the strongest productivity gain in four years, the U.S. Labor Department announced Wednesday.

The revised statistic is a substantial increase from the preliminary 4.9% Q3 productivity increase announced by the department a month ago.

"All in all, it's a great productivity number for the quarter, which leads to a good annualized rate," economist David H. Wang told BloggingStocks Wednesday. "This will relieve some inflationary pressure in the economy, and also give the Federal Reserve some leeway regarding interest rates. The Fed can now see that labor is not adding that much to inflationary pressures in the U.S. economy."

Over the past 12 months non-farm business productivity has increased 2.7%, the largest four-quarter gain since late 2004. During Q3, manufacturing productivity increased 5%, while non-financial productivity gained 4.2%.

Economic Analysis: The high Q3 productivity stat is good news for the economy, employers, and employees. With high productivity, the U.S. economy can grow rapidly without inflation, easing pressure to raise prices. This simultaneously means worker productivity per hour is rising, which usually leads to raises, higher real incomes, and higher living standards. After registering productivity giants that averaged 2.5% per year for 1996-2005, productivity had slowed to about 1% in 2006. With the revised Q3 2007 stat, there's now additional evidence that productivity has resumed advancing at an impressive rate.

Note: The Daily Option Update is provided by Stock Options Specialist Paul Foster of theflyonthewall.com.

Volatility Index S&P 500 Options-VIX up .27 to 10.59.

New Century Financial Corp. NYSE: NEW implied volatility bid up as NEW sells off on restatement. New Century Fin'l, a real estate investment trust, providing mortgage products to borrowers nationwide, is recently down $8.72 to $21.45. New Century Fin'l announced it will have to restate operating results for the first three quarters of 2006. Merrill Lynch downgraded NEW to Sell, Jeffries lowered to Hold & Friedman Billings downgraded NEW to Underperform. NEW March option implied volatility of 69 is above its 26-week average of 42 according to Track Data, suggesting larger price risks.

H&R Block-NYSE:HRB April option implied volatility & put volume elevated on hedging. H&R Block is recently down $.30 to $24.54. Soleil said on 2/7/07 "we rate H&R Block Buy; $29 price target. We believe Block is close to entraining sale of the company (whole or in parts)." H&R Block call option volume of 2,945 contracts compares to put volume of 42,299 contracts. HRB April option implied volatility of 33 is above its 26-week average of 26 according to Track Data, suggesting larger price fluctuations.

Option volume leaders today were: Cisco-(NASDAQ-CSCO), Akamai (NASDAQ: AKAM), Bristol Meyers Squibb (NYSE: BMY) and Apple Computer (NASDAQ: AAPL).

ExxonMobil Corporation (NYSE:XOM) made headlines reporting an annual profit of $39.5 billion. So what?!

So what if a company capitalized at $440 billion earns less than 10% profit. Suppose you bought the entire company "lock, stock and barrel"; wouldn't you expect to make far greater than that? You would be taking on a massive amount of responsibility and risk! Currency risk, political risk (you go deal with Putin in Russia and Chavez in Venezuela, or worse in Iraq or Iran or Africa), workman's comp for oil derricks in the Gulf Coast and elsewhere, environmental risk, government regulation -- the list is endless.

When I invest, my anticipation is at least a 10% return. Who in the entire investment world would do this, unless of course you were buying bonds paying 5% to 7% without any work. The 70-year stock market average is about 10%.

There is nothing wrong with Exxon Mobil's profit, given its size. It would be sad if they could not make 10%, and consider that they only made this with very high oil prices! If the profits were so high and prospects so good, why isn't there a run on the stock?

I've been waiting for Yahoo! Inc. (NASDAQ:YHOO) to do something, anything to create some manner of tangible credibility within my thinking. You see, it's not enough for me if a company is just piling up dollars. Yeah, dollars are good and mega profits are exciting but right or wrong, I require more than that to get a good feeling about any company.

I've seen profits dry up quickly from companies which thought they were sitting pretty. I want to see lively management making powerful strides to establish a dominant position. I want to see experimentation, pushing of boundaries, innovation with existing infrastructure, disregard of the status quo. These are some of the things which earn my increased attention to a company.

Shortly after the market closed today, Yahoo! posted its first quarter report. It was not too much of a surprise for those of us who follow tech stocks, but Yahoo!'s profits fell to $160 million, or 11 cents a share, from $195 million, or 13 cents a year ago.

Profits down by $35 million?! Yah-ouch!

What does this mean for the rest of the tech stocks like eBay and Google? Well, my guess is that as its competitors fall, so too will the rest of the sector.

So is this, in the words of eBay, a "Buy-It-Now" item?

Well, I guess we'll just have to wait until the official announcement tomorrow after the bell. I don't know about you, but I'm not going to be holding my breath on this one.

Apple has finally found a product, in the iPod, that is an unqualified profit monster. The company is morphing from niche hipster to provider of music to the masses. And as part of the transformation they're making moves that never before seemed possible, like using Intel chips and (horrors!) Microsoft software on their computers. New strategies indicate that Apple is willing to be creative and do some interesting deals, like the one where the Red Hot Chili Peppers are selling advance tickets to their upcoming tour through the iTunes store.

The obvious next step? Porn, says Mark Gilbert (no relation to yours truly). If iPod owners will watch films on their 2.5" screens, surely they'll watch movies of an, umm, more lascivious nature. It's a huge money business; if Apple could get just a sliver of that $20 billion in adult video sales each year, they might continue their finally-respectable growth. But is growth respectable if it's (literally) made on the backs of the naked and promiscuous?

I love profits and all, but for the same reason I wouldn't invest in cigarettes, I'd feel very different about an Apple (fruit of the tree of good and evil) sinking its strategic go-juice into porn. Mark Gilbert doesn't agree, with the (flawed) rationale: "A search on Google Inc. shows a bunch of companies willing to sell the content and software needed to view erotic material on an iPod. Apple may as well grab some of that revenue for itself." With this logic, you could justify anything. I, for one investor, will pass.