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Here Comes The Squeeze

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January 14, 2008 – Comments (8)

Stocks that looked good year ago, and had future growth priced into them can quickly look like a big problem in a declining market.   When input costs increase and the ability to charge more declines, margins get squeezed fairly quickly, and much stronger than most expect.

Consider an article today on analysts' earnings expectations.   In October they were projecting 11.5% growth and that has changed to a 9.1% decline.  Third quarter S&P earnings were in fact down something like 4.8%.

I read something like this I am even more critical of these so called "experts," and given that I've never had personal dealings with a competent one yet, I am already very critical of them.

Those projections are different by about 20% in the space of two and half months.  I am not so sure that if I was doing some kind of projection on earnings that I would be correct, but the dollar declined by 15-20% relative to the Canadian dollar.  Energy prices are through the roof.  They've been up long enough that an analyst ought to see that the money to cover increased costs has to come from somewhere and it means household budgets cut back on other things.  This is the environment that analysts were predicting 11.5% growth.  What the heck were they smoking?

With the number of incredibly serious problems in the economy and the level of risk they present I decided that I would take the safe route and perserve capital.  I made that decision in October, but I had dramatically reduced my holdings starting last July, and I was thinking about exiting for about a year now.  I exited my husband out of all his mutual funds by about last April or May.  I had him out of his mutual funds ahead of the declines, and interestingly, in the order of the declines.  He was resistent to letting me sell them so I sold them one at a time, starting with the worst, managing to get him out just ahead of declines.

I suppose I expect S&P earnings to decline to about half at this point and I expect the economy to be sluggish in the range of a decade.  Way more people will be making decisions like mine, they will drive their vehicles for way more years.  Since my car was about 10 years old I've considered the cost of replacing it and just hoped that it would last another 3-5 years without problems.  Five years went by and that hope did not change, I was still hoping I could get another 3-5 years out of the vehicle before it needed replacing.  Well, now that I am not a homeowner anymore I could buy any car I want, however, my 19-year-old car still works fine so I continue to drive it.  Many households have a burdening level of debt and they simply will not be stimulating the economy. 

The truth about debt is that the stimulus that it gives is later paid back with negative stimulus.  Think about if you've ever done one of those "no money down, 0% interest, pay in one year" deals.  I have on furniture.  When the bill has to be paid it squeezes the budget and that list of things you might want gets to remain a list.

There have been many people trading up to new vehicles they can not afford and this is over.  The average age of cars driven by Americans is going to be increasing.

There is a lot of debt, so first there is going to be a squeeze on corporate profits that will bring them down to a new and lower level of earnings.  Then there is going to be a sluggish economy as households work on managing debt and that is going to last a long time.  Corporate earnings are not going to be able to grow as they have in the past.

That's my theory and I am sticking with it until such time as there is some material change in the facts.  And likely, with corporate earnings down, and a sluggish economy, many of these analysts will be changing occupations.  This growth of jobs in wealth management is going to retract as people lose their money and take more proactive roles in managing their money on their own. 

8 Comments – Post Your Own

#1) On January 14, 2008 at 9:24 AM, dwot (46.92) wrote:

I wish for caps to have a reading list.  Here's an unrelated article that is must reading.

 MBIA, Ambac: Dead Men Walking.

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#2) On January 14, 2008 at 11:20 AM, GS751 (27.57) wrote:

yeah it is always nice to have a morning reading list when you wake up.  There are a few blogs I like to muse while eating breakfast.

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#3) On January 14, 2008 at 12:45 PM, WillSurfForFood (79.33) wrote:

I found this short article interesting in relation to your car theme: http://money.cnn.com/2008/01/14/news/companies/taylor_detroit_nissan_future.fortune/index.htm

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#4) On January 14, 2008 at 7:12 PM, eldemonio (98.61) wrote:

The squeeze isn't coming - it has been here for awhile.  Just a reflection that maybe the Trickle Down economic model may need a little revamping.

With upper income earners struggling - the trickle has slowed to a drip. 

Damn, I'm thirsty. 

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#5) On January 14, 2008 at 9:56 PM, dwot (46.92) wrote:

GS, some days my reading list is too long...

WillSurf I tend to think people will go smaller before they give up cars.  If transit was better they'd give up car, but then, I am basing my thoughts on Vancouver.  There are lots of places with better transit and people will use transit if it is reasonable. 

eldemonio, you are correct, what has been happening is only just now showing up in the financial reports. 

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#6) On January 15, 2008 at 2:04 AM, Imperial1964 (98.31) wrote:

A 19-year-old car.  I'm impressed.

I thought I was the only one who could go out and pay cash for a new car, but drive something from the '80s. I currently drive a '85 Dodge and a '90 Chevy truck, and at any time I could replace either for what amounts to two or three months worth of payments for most people..

Six months ago, I retired the '86 Chrysler I bought in 2002, with 225k miles.  It now has 270k miles, and the miles I put on it can best be described as "punishing."  I only have $900 in it total, though I've spent many manhours working on it over the years.  Perhaps I'll get boored and resurrect 'ol Lucy again someday.  She still runs good, but I broke her frame.

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#7) On January 15, 2008 at 8:33 AM, dwot (46.92) wrote:

19-years-old and only about 250k kilometers, I guess 160k miles.  Another choice we made was to live in the neighbourhood where one of us worked so one of us could walk to work.  Hence the sharing of this 19-year-old vehicle for 12 years.

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#8) On January 15, 2008 at 9:25 AM, dwot (46.92) wrote:

This is big news as far as the margin squeeze goes, wholesale prices have risen by 6.3%.  When you consider stock market prices are leveraged, this is enormous.

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