Money and Finance
- Phil Fisher On Profit Margins And Marginal Companies...
From Common Stocks and Uncommon Profits: From the standpoint of the investor, sales are only of value when and if they lead to increased profits. All the sales growth in the world won't produce the right type of investment vehicle if, over the years,...
- Hussman Weekly Market Comment: Exit Strategy
Link to: Exit Strategy The S&P 500 set a marginal new high on Friday, in the context of a broad rollover in momentum thus far this year that we view as likely – though of course not certain – to represent a broad cyclical peak of the sort that...
- Hussman Weekly Market Comment: Begging For Trouble
With the daily focus on European crisis and the hope of central bank intervention, one of the essential features of the investment climate – at least for long-term investors – is easy to lose in the shuffle. That feature is valuation. It’s an easy...
- Hussman Weekly Market Comment: Too Little To "lock In"
We've regularly observed that corporate profit margins (and economy-wide, profits as a share of GDP) have a strong tendency to "mean revert" over time - specifically, elevated profit margins are associated with unusually weak earnings growth over...
- Gmo’s Market Outlook: "disappointingly Overvalued"
Opportunities across US and foreign assets classes are unattractive, according to Ben Inker, the head of asset allocation at the Boston-based global money manager Grantham, Mayo, van Otterloo & Co. (GMO). Neither the equity nor fixed income markets...
Money and Finance
Hussman Weekly Market Comment: Do Foreign Profits Explain Elevated Profit Margins? No.
Link to: Do Foreign Profits Explain Elevated Profit Margins? No.
The bottom line is simple. Corporate after-tax profits as a share of GDP, GNP (or even net national product if one wishes to use that number) are steeply above historical norms. This fact can be fully explained by mirror image deficits in household and government saving - a relationship that can be demonstrated across decades of historical evidence. As a result of a severe credit crisis and a sustained period of lackluster economic activity, we’ve seen a fiscal deficit (elevated transfer payments to households and shortfalls in tax revenue) combined with weak household saving. The combined effect is that companies have been able to maintain revenues while paying a very low share of income to labor and taxes.
The role of international activity on profit margins is strictly secondary. Indeed, foreign profits of U.S. companies as a share of GNP have been contracting since 2007, are only about two-tenths of a percent above the 2009 low, and therefore do not have any material role in the surge in overall profit margins we’ve observed in recent years. Moreover, changes in foreign profits actually have a negative correlation with changes in domestic profits. Total profits as a share of national income have no natural reason to grow over time in any persistent way just because foreign profits have grown.
Given the economic landscape of recent years, large offsetting sectoral deficits and surpluses are not surprising, but they should not be taken as evidence that the long-term profitability of the corporate sector has permanently shifted higher. Stocks are not a claim to a few years of cash flows, but decades and decades of them. By pricing stocks as if current profits are representative of the indefinite future, investors have ensured themselves a rude awakening over time. Equity valuations are decidedly a long-term proposition, and from present levels, the implied long-term returns are quite dim.
- Phil Fisher On Profit Margins And Marginal Companies...
From Common Stocks and Uncommon Profits: From the standpoint of the investor, sales are only of value when and if they lead to increased profits. All the sales growth in the world won't produce the right type of investment vehicle if, over the years,...
- Hussman Weekly Market Comment: Exit Strategy
Link to: Exit Strategy The S&P 500 set a marginal new high on Friday, in the context of a broad rollover in momentum thus far this year that we view as likely – though of course not certain – to represent a broad cyclical peak of the sort that...
- Hussman Weekly Market Comment: Begging For Trouble
With the daily focus on European crisis and the hope of central bank intervention, one of the essential features of the investment climate – at least for long-term investors – is easy to lose in the shuffle. That feature is valuation. It’s an easy...
- Hussman Weekly Market Comment: Too Little To "lock In"
We've regularly observed that corporate profit margins (and economy-wide, profits as a share of GDP) have a strong tendency to "mean revert" over time - specifically, elevated profit margins are associated with unusually weak earnings growth over...
- Gmo’s Market Outlook: "disappointingly Overvalued"
Opportunities across US and foreign assets classes are unattractive, according to Ben Inker, the head of asset allocation at the Boston-based global money manager Grantham, Mayo, van Otterloo & Co. (GMO). Neither the equity nor fixed income markets...