About Those (Not So) Record Profits

Tyler Durden's picture


With the S&P 500 on track for an 11% gain in Q1, and the foundations of global growth (China?), and European tail-risk (back in a big way) now off the table; it would appear that the asset-getherers are falling back to 'earnings' as the meme-du-jour. Despite the now more-than-anecdotal evidence from several major bellwether stocks, faith is strong that margins will expand...


and the "mother's milk' of stocks will flow.

Miracle 1 and 2


-  in the face of

However, it appears in reality that things are a little different; as we noted here, actual margins have fallen to Q1 2010 levels (even as expectations soar) and with labor costs rising (and Okun's law broken), the following chart should make it extremely clear just where the pain will have to come from to confirm the 'hope'.

US firms have been slashing labor costs for a decade and it appears they have hit a self-destructing wall as sentiment, spending, and employment gang up to ruin the party - no matter how hard the government tries to fund the great rotation from employment to benefits.


Via Gerard Minack of Morgan Stanley,

To the extent that margins have been assisted by fiscal easing, the significant fiscal tightening now being introduced suggests that the gap between US-sourced and foreign-sourced earnings may narrow in coming quarters.


Two forward-looking issues: First, how much further can markets rally solely on the basis that the world is normal? When will investors need to see positives – not just diminished negatives – or can loose money drive further PE expansion? Markets outside the US have now stalled, suggesting we may be at that point. Second, what will it take for investors to realize that the world is not normal? It may be that Cyprus, or US macro weakness, will cause at least a tactical setback.

So it seems that with global investors now well aware that China is going nowhere, and Europe at the edge of a cliff again, the global central bank bath of dirty water has slooshed back to the US - but the point of this brief artucle is - earnings, margins, and thus valuations at some point will force that 'money' to slosh back to other end of the bath (as we see with Treasury yields pushing lows once again)


Source: Morgan Stanley

Your rating: None

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 03/28/2013 - 15:56 | 3386481 fuu
fuu's picture

Maybe RobotTrader was right. Within 7 of the all time high now.

Thu, 03/28/2013 - 16:00 | 3386510 fourchan
fourchan's picture

robo trader is always right even when he is wrong.

Thu, 03/28/2013 - 16:08 | 3386551 camaro68ss
camaro68ss's picture

Just need spain to exit the Euro, that would surly be enought to put the market over all time high

Thu, 03/28/2013 - 16:02 | 3386521 kliguy38
kliguy38's picture

If you haven't "got it" by now then you will "get it" and I don't wanna hear your cryin'

Thu, 03/28/2013 - 16:08 | 3386525 ejmoosa
ejmoosa's picture

Don't just look at the SP 500.  Look at the Nation's performance as released by the BEA today.


Corporate Profits After taxes for the 4th qtr 2012 were lower than the same quarter in 2011.


That's the first negative comp since Q1 2009.


Not a strengthening economy.

Thu, 03/28/2013 - 16:19 | 3386599 Cdad
Cdad's picture

I think you meant, "Note the strengthening economy!"  And over here is an apartment I have found for you.  It's very nice...and look at all your new friends!  

Thu, 03/28/2013 - 16:06 | 3386538 Lordflin
Lordflin's picture

Volatility + suckers = HFT profits... who needs a real economy... reality just gets in the way...

Thu, 03/28/2013 - 16:13 | 3386576 gould's fisker
gould's fisker's picture

The spice must flow . . . until people realize it's worm shit, or dog meat, or dog food, or floating pig, or ... what the hell ever.

Thu, 03/28/2013 - 16:27 | 3386640 natronic
natronic's picture


Thu, 03/28/2013 - 16:47 | 3386721 Winston Churchill
Winston Churchill's picture

Don't need no stinking earnings.

MOAR QE will work until it doesn't.

Thu, 03/28/2013 - 17:56 | 3386958 ghandi
ghandi's picture

Reality is a real twit.

Thu, 03/28/2013 - 23:43 | 3387735 mkhs
mkhs's picture

Are you British?  I would have spelled it twat.

Fri, 03/29/2013 - 09:29 | 3388241 Shizzmoney
Shizzmoney's picture

Wait, you mean corporations are LYING to investors (and the American public)!

I'd never believe a corrupt system would ever churn out a sea of lies just to make money! The horror! 

The profits aren't based off of organic growth; it's based off of gaming the system in the form of buying politicians (via lobbyists and lawyers), cutting the wages of workers, and using that overhead to buy back shares.

US firms have been slashing labor costs for a decade and it appears they have hit a self-destructing wall as sentiment, spending, and employment gang up to ruin the party - no matter how hard the government tries to fund the great rotation from employment to benefits.

"If people are leaving the labor market so that they can get $13,000 per year and health care because that’s better than anything that employers can provide, what does that tell you about the state of the economy?" - Harold Pollack

The thing about cannibalism is that at first, you're still fat and happy eating what's around.  But when you eat everyone around you - there's eventually no one left to eat...but oneself.

This parody video on cable companies is part of what I mean:


Do NOT follow this link or you will be banned from the site!