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U.S. Profit-Margin Outlook `Extremely Bad': Chart of the Day

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June 22, 2010 – Comments (8)

Interesing article

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U.S. Profit-Margin Outlook `Extremely Bad': Chart of the Day
By David Wilson - Jun 21, 2010

http://www.bloomberg.com/news/2010-06-21/u-s-profit-margin-outlook-extremely-bad-chart-of-the-day.html

[excerpt]

Profit margins for U.S. companies are likely to tumble from last quarter’s record, a decline that will lead to much lower earnings than analysts expect, according to economist Andrew Smithers.

“The corporate sector’s outlook is extremely bad,” Smithers, founder and chairman of the investment-advisory firm of Smithers & Co., said last week in an interview. “I can’t see any way out of it.”

As the CHART OF THE DAY shows, profit before interest, taxes and depreciation -- accounting adjustments for wear and tear on buildings and equipment -- amounted to 36.4 percent of U.S. corporate output in the first quarter. The calculation was based on data compiled by the Commerce Department.

The percentage was the highest since the department’s quarterly data started in 1947, as the chart depicts. Smithers, whose firm counsels more than 100 clients on international asset allocation, included a similar illustration in a June 18 report.

Margins “are likely to fall a lot” as governments restrain deficit spending next year, reducing cash flow elsewhere in the economy, the report said. Companies will bear the brunt of the shift as opposed to households, which are heavily in debt and save relatively little, in his view.

The decline in margins will lead to profits falling “well short of expectations,” he wrote. Analysts foresee earnings at companies in the Standard & Poor’s 500 Index rising 34 percent this year and 18 percent next year, according to data compiled by Bloomberg.


CLICK HERE FOR THE CHART - (The chart is a Flash embed which the Caps blog system won't allow the HTML for. Apologies for requiring a click through).

8 Comments – Post Your Own

#1) On June 22, 2010 at 11:08 AM, ragedmaximus (< 20) wrote:

 i went short via etf last week can anyone explain other than my conspiracy theories why the hell this crappy market has been up the last 7 days and not crashed? nothing but crappy news bad earnings etc etc and yet dow eeks out gains the last 8 days minus -8 after up 50 yesterday i mean what's holding this crash up a thread of false hope or bs mm manipulation! or what

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#2) On June 22, 2010 at 11:09 AM, outoffocus (23.25) wrote:

Thats because those record margins are fueled by debt.  I can probably picture what thats chart is going to look like over the next decade.  I can't draw it but I'm thinking its somewhere along the lines of a huge drop.  Thats when you'll see fundamentals finally show themselves in the economic data.  You cant suck all the wealth out of the common peoples hands (and replace it with debt) for decades and expect profits to just continue up forever.

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#3) On June 22, 2010 at 11:13 AM, outoffocus (23.25) wrote:

ragedmaximus

My understanding is the recent equity rally was currency based. The USD index topped at somewhere around 88.5 then the dollar started selling off. For the past year equities have had an inverse relationship with the value of the dollar as well as commodites.  Hence gold hitting record highs. The USD now resides around 86.  And if you havent noticed its been incredibly weak. Each rally is weaker than the previous and many days we either end down for the day or up very little.  Even today equities were up for all of about 30 minutes then fell.  Not a good sign and surely not the makings of a bull market.

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#4) On June 22, 2010 at 11:14 AM, vriguy (79.05) wrote:

When profit margins are at 60-70 year peaks, simple reversion to mean suggests they're set to fall.  The real test for would-be soothsayers like Mr. Smithers is to tell us to what level they'll fall: 30%? 25%?  20%? 15%?

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#5) On June 22, 2010 at 11:34 AM, Dow3000 (< 20) wrote:

ragedmaximus, hold on to your short, you are set to make a ton.  The big selloff will most likely come late July through October.  50% dip by year end is extremely possible, economy was already set to fall and Obama simply making it more extreme.

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#6) On June 22, 2010 at 11:36 AM, binve (< 20) wrote:

ragedmaximus,

I too am short, and FWIW I like this spot for a turn: http://marketthoughtsandanalysis.blogspot.com/2010/06/falling.html,

outoffocus ,

>>Thats because those record margins are fueled by debt. 

100% agreed.

>> I can probably picture what thats chart is going to look like over the next decade.  I can't draw it but I'm thinking its somewhere along the lines of a huge drop.  Thats when you'll see fundamentals finally show themselves in the economic data.  You cant suck all the wealth out of the common peoples hands (and replace it with debt) for decades and expect profits to just continue up forever

Exactly. It just baffles me that the whole economy over the last few decades has transitioned from production to debt as the underlying motivator for 'growth', and nobody seems to think this is a problem or that it is fundamentally unsustainable.

Thanks!

vriguy,

>>When profit margins are at 60-70 year peaks, simple reversion to mean suggests they're set to fall.

I agree with this statement

>>The real test for would-be soothsayers like Mr. Smithers is to tell us to what level they'll fall: 30%? 25%?  20%? 15%?

Fair enough...

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#7) On June 23, 2010 at 2:02 AM, Tastylunch (29.39) wrote:

Q3 scares the bejeebus out of me. That's when earnings started to ramp up last year....

 yeah recent margins are definitely outlier like material, doesn't bode well...

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#8) On June 23, 2010 at 8:38 AM, binve (< 20) wrote:

Tastylunch ,

I know man, expectations are pretty high..

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