Posts Tagged ‘Corporate margins’

WELCOME TO RICHARD FISHER’S “DARKEST MOMENTS”

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 policies are failing, but quite frankly nothing this Fed does ceases to amaze me any longer.  His latest folly of QE2 is having profound effects already and it hasn’t even started yet!  Unfortunately, it is having its impacts in all the wrong places.  The other day, Richard Fisher remarked:

“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

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?

Pragcap shares a tool he uses to answer the question, 

IS THE MARKET FAIRLY VALUED?

Courtesy of The Pragmatic Capitalist

Maria Shriver's 2008 Women's Conference

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 market I’ve used an old Jeremy Grantham tool to see where we are today.  Grantham is a big believer in the cycle of corporate profits and specifically profit margins.  As regular readers know, one of the primary reasons why we have been bullish ahead of the past 5 earnings seasons was due to the expansion in corporate margins and very low analyst expectations.  Analysts became extremely negative in Q4 2008 and severely underestimated the pace at which companies were able to cut costs and support the bottom line.  This stabilization in corporate margins set the table for the massive rally in stocks as profits continued to expand at a far faster pace than anyone expected.

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 corporate profit margins (corporate profits/GDP) have averaged 9.5%.  If we multiply GDP by the average margin growth we can create a long-term trend of what corporate profits should look like.  We can then compare actual corporate profits to this result in an effort to see whether…
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Phil's Favorites

The digital economy is becoming ordinary. Best we understand it

 

The digital economy is becoming ordinary. Best we understand it

The digital economy includes small holder farmers being able to access finance on a mobile device without having to go to a bank. Shutterstock

Courtesy of Brian Armstrong, University of the Witwatersrand

The digital economy has been getting a lot of attention, with increasingly strong headlines offering apocalyptic as well as breathtakingly exciting scenarios. Some warn of job losses due to automation, some wonder at the things digital technology can do. And then there’s real scepticism about whether this will translate into delivering to people who need it most.

With all of this discuss...



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Kimble Charting Solutions

Bad News For Crude Oil Should Come From This Pattern, Says Joe Friday

Courtesy of Chris Kimble

It’s a good idea for investors to be aware of key indicators and inter-market relationships.

Perhaps it’s watching the US Dollar as an indicator for precious metals or emerging markets. Or watching interest rates for the economy. Experience, history, and relationships matter. And it’s good to simply add these to our tool-kit.

Today, we look at another relationship that has signaled numerous stock market tops and bottoms over the years, and especially the past several months, Crude Oil.

When crude oil tops or bottoms, it seems that ...



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Zero Hedge

WTF Chart Of The Day: Bonds Ain't Buying It

Courtesy of ZeroHedge View original post here.

Presented with little comment aside to ask (rhetorically), why - amid the unknown parameters of what appears to be escalating into a global pandemic, and ongoing weakness in economic data despite the 'trade deal' - are stocks soarng to record highs as bond yields collapse to 3-month lows?

Source: Bloomberg

Fun-durr-mentals don't matter...

S...



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Insider Scoop

5 Software-Application Stocks Moving In Thursday's After-Market Session

Courtesy of Benzinga

Gainers

Atlassian Corporation, Inc. (NASDAQ:TEAM) stock surged 9.7% to $145.50 during Thursday's after-market session. According to the most recent rating by Morgan Stanley, on January 13, the current rating is at Overweight.

Diebold Nixdorf, Inc. (NYSE:DBD) shares increased by 8.1% to $11.48. The most recent rating by DA Davidson, on December 13, is at Buy, with a price target of $17.00.

Telaria, Inc. (NYSE:TLRA) stock rose 4...



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The Technical Traders

January 2018 Stock Market Repeat - Yikes!

Courtesy of Technical Traders

Our research team caught a very interesting price pattern that correlates with the Put/Call ratio.  We are alerting our friends and followers with this research post of this exciting, yet unconfirmed, set up today.

In late 2017, the US stock market rallied from July through December with moderately low volatility throughout this span of time.  Near the end of 2017, the US stock market price activity stalled, then began a renewed price rally in early 2018 (see the first BLUE & YELLOW BOX on the chart below). Then, in January 2018, a very broad market reversion event took place which ultimately resulted in a very broad market correction in October through December 2018 of just over 20%.

...

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Biotech

Snakes could be the original source of the new coronavirus outbreak in China

Reminder: We are available to chat with Members, comments are found below each post.

 

Snakes could be the original source of the new coronavirus outbreak in China

Chinese cobra (Naja atra) with hood spread. Briston/Wikimedia, CC BY-SA

Haitao Guo, University of Pittsburgh; Guangxiang “George” Luo, Univers...



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Chart School

RTT browsing latest..

Courtesy of Read the Ticker

Please review a collection of WWW browsing results. The information here is delayed by a few months, members get the most recent content.



Date Found: Monday, 16 September 2019, 05:22:48 PM

Click for popup. Clear your browser cache if image is not showing.


Comment: This chart says SP500 should go back to 2016 levels (overshoot will occur of course)



Date Found: Tuesday, 17 September 2019, 01:53:30 AM

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Comment: This would be HUGE...got gold!


...

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Members' Corner

The War on All Fact People

 

David Brin shares an excerpt from his new book on the relentless war against democracy and how we can fight back. You can also read the first, second and final chapters of Polemical Judo at David's blog Contrary Brin.

The War on All Fact People 

Excerpted from David Brin's new book, the beginning of chapter 5, Polemical Judo: Memes...



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Lee's Free Thinking

Why Blaming the Repo Market is Like Blaming the Australian Bush Fires

 

Why Blaming the Repo Market is Like Blaming the Australian Bush Fires

Courtesy of  

The repo market problem isn’t the problem. It’s a sideshow, a diversion, and a joke. It’s a symptom of the problem.

Today, I got a note from Liquidity Trader subscriber David, a professional investor, and it got me to thinking. Here’s what David wrote:

Lee,

The ‘experts’ I hear from keep saying that once 300B more in reserves have ...



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Digital Currencies

Cryptos Have Surged Since Soleimani Death, Bitcoin Tops $8,000

Courtesy of ZeroHedge View original post here.

Bitcoin is up over 15% since the assassination of Iran General Soleimani...

Source: Bloomberg

...topping $8,000 for the first time since before Thanksgiving...

Source: Bloomberg

Testing its key 100-day moving-average for the first time since October...

...



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Mapping The Market

How IPOs Are Priced

Via Jean Luc 

Funny but probably true:

...

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Promotions

Free eBook - "My Top Strategies for 2017"

 

 

Here's a free ebook for you to check out! 

Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

Some other great content in this free eBook includes:

 

·       How 2017 Will Affect Oil, the US Dollar and the European Union

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About Phil:

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...

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Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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