WELCOME TO RICHARD FISHER’S “DARKEST MOMENTS”
by ilene - October 26th, 2010 1:28 am
WELCOME TO RICHARD FISHER’S “DARKEST MOMENTS”
Courtesy of The Pragmatic Capitalist
I wish I could say that I am surprised that Ben Bernanke’s
“In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places.”
Welcome to your darkest moments Mr. Fisher. The one thing we can positively confirm about QE2 is that it has not created one single job. But what has it done? It has caused commodities and input prices to skyrocket in recent months. Reference these 10 week moves that have resulted in the Fed already causing “mini bubbles” in various markets:
- Cotton +48%
- Sugar +48%
- Soybeans +20%
- Rice +27%
- Coffee +18%
- Oats +22%
- Copper +17%
Of course, these are all inputs costs for the corporations that have desperately cut costs to try to maintain their margins. With very weak end demand the likelihood that these costs will be passed along to the consumer is extremely low. What does this mean? It means the Fed is unintentionally hurting corporate margins. And that means the Fed is unintentionally hurting the likelihood of a recovery in the labor market.
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Analyzing Corporate Margins As S&P500 Free Cash Flows Hits Record
by ilene - March 25th, 2010 2:14 pm
Pragcap examined the same phenomenon this morning from a different perspective, that of earnings season surprises. – Ilene
Analyzing Corporate Margins As S&P500 Free Cash Flows Hits Record
Courtesy of Tyler Durden at Zero Hedge
In the recent multiple expansion run up, one of the largely ignored factors has been the dramatic rise in corporate margins, be they Gross Profit, EBITDA, Net Income or unlevered Free Cash Flow. Of course, all this has been a function of massive cuts in corporate overhead as most companies have laid off the bulk of their workers, resulting in a seemingly stronger bottom line. In the meantime, assorted stimulus programs by the government have prevented revenues from crashing, thus boosting EPS, on both a historical and a projected basis.
We demonstrate the dramatic surge in margins by scouring through the S&P 500 companies over the past 3 years, and question just how sustainable this margin pick up is. As more and more analysts predict that future margin expansion is sure to drive the market higher, we can’t help but wonder 1) with stimulus benefits expiring and excess liquidity approaching an inflection point (especially in China) who will keep the top line strong, 2) as companies are forced, as a result, to hire more workers in order to drive sales, how will operating margins maintain their stellar performance, and 3) how will a decline in margins be justified from a multiple expansion standpoint. Lastly, we parse through the thoughts of William Hester of Hussman funds, who has some very critical observations on this very relevant topic.
As the chart below demonstrates, virtually every margin metric is now trading at or above its 3 year average.
One notable observation is the unlevered Free Cash Flow margin, which at 12.6% is now at a recent record. We have preciously discussed how companies have extracted major cash concession by squeezing net working capital, which is likely a factor in the disproportionate rise in FCF margins relative to all other metrics. The immediate result of this cash conservation has been of course the dramatic increase in corporate cash balances, which some have speculated is merely in anticipation of much higher corporate tax rates down the line, as well as general austerity as the reality of America’s insolvency trickes down to individual corporations.
The take home here is that margins have likely little room left to grow. This is especially true…
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IS THE MARKET FAIRLY VALUED?
by ilene - March 24th, 2010 1:17 pm
Pragcap shares a tool he uses to answer the question,
IS THE MARKET FAIRLY VALUED?
Courtesy of The Pragmatic Capitalist
I’ve long argued that most valuation metrics are fraught with pitfalls that the average investor too often falls for. What is often described as “value” is too often a bloated price divided by some analyst’s guesstimate. The myth of “value” and the dream of becoming the next Warren Buffett (see the many myths of Warren Buffett here) has resulted in untold stock market losses over the decades and/or misconceptions of adding “value” to a portfolio that most likely doesn’t outperform a correlating index fund after taxes and fees. Nonetheless, the PE ratio and other faulty valuation metrics remain one of the primary sources of investment strategists, stock pickers and market researchers.
While I am no fan of valuation metrics, I do happen to be a student and believer of mean reversion. In an effort to attach a “value” to this
Corporate margins are extremely cyclical. As companies expand their businesses and revenues grow they are able to better manage their costs, hire personnel, etc. But if the economy weakens for any number of reasons revenues will contract, costs will remain high and margins will ultimately contract. Businesses are then forced to cut costs in order to salvage profits. In other words, margins are constantly expanding and contracting with the business cycle around the mean.
Over the last 50 years
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site