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John Hussman On Profit Margins And Un-"Reasonable Valuations"
Just over a year ago we discussed in great detail the cyclical nature of profit margins, the elegance of the Kalecki (profits) equation (and its Japanese outlier real-world fallacy), and the current desire to 'invest' in dividends and not CapEx creating a vicious cycle of cash-flow-sagging aging assets. The situation has not improved.
As John Hussman notes, the Shiller P/E passed its 24x Maginot Line last week and yet, with revenues stagnant and earnings eking out gains, we are to believe valuations are cheap and margins will save the day. "The impression that stocks are “reasonably valued” relative to earnings is an illusion driven by profit margins that are 70% above their historical norm.
Almost universally, Wall Street analysts are making the mistake of valuing stocks on the basis of a single year of forward operating earnings, as if the present estimate is a sufficient statistic that is representative of the entire future stream of cash flows." It is not...
Excerpted from Hussman Funds - Closing Arguments: Nothing Further, Your Honor,
On profit margins
The facts that savings equal investment and that the deficits of one sector must arise as the surplus of another are not theories. They are identities that must hold true by accounting definition. It does not matter how companies are deriving their profits (domestically or internationally). It does not matter how consumers are obtaining their goods (domestically or internationally). It does not matter how the government is financing its deficits (domestically or internationally). It is true merely and strictly by identity that savings equal investment, and that the deficits of one sector must arise as the surplus of another.
The exact way that this comes about is up for grabs, but the end result is not. It is also true empirically in decades of data since the 1940’s that the following aspect of that relationship holds quite robustly: variations in profit margins are essentially a mirror-image of the combined deficit of households and government. This is true not only of levels, but of point-to-point changes.
Corporate profit margins will contract as the combined deficit of households and government retreats (even moderately) from the record levels of recent years. The impression that stocks are “reasonably valued” relative to earnings is an illusion driven by profit margins that are 70% above their historical norm.
Almost universally, Wall Street analysts are making the mistake of valuing stocks on the basis of a single year of forward operating earnings, as if the present estimate is a sufficient statistic that is representative of the entire future stream of cash flows.
Even profit/GDP levels much less extreme than today’s have always been followed by a contraction of profits over the following 4-year period.
In other words, we had it good but it ain't gonna last...
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Especially as there are no more costs to cut. Really encouraging for emplyment prospects (Time to change the birth/death rate calculation again)?
This trend will last for a while yet as middle class entrepreneurs are squeezed out and as more and more automation is introduced. On top of that you have to allow for creative accounting and the possibility of the US dollar being flogged to enhance overseas earnings in both directions, first due to overseas earnings being worth more and secondly by making exports more viable.
I am not entirely sure how these things pan out but it's just my humble opinion.
it's ridiculous; everyone knows that there will be a desperate moment to leave, still they play with the hope that they'll have a chair when the music stops
What drives the economy into the future is corporate profit growth, and after taxes that has turned negative in the 4th quarter 2012. Based on the rate of contraction in profits, thise market is vastly overpriced.
The correction is coming.
85 billion will become 120 billion, then 300 billion, oh it will last...
QE doesn't help the corporate bottom line. It only inflates asset prices. Ever larger government deficits are required to increase corporate profits.
Of course, Japan's government is deliberately increasing its deficit. So there is hope to continue this stock boom for a while.
Instead of Tyler posting a Notice on Racial Discrimination, he should have posted a notice on LOGICAL FALLACIES!!!! lol
Funny. There is sure a lot of that type thinking going around.
Reminds me of housing can only go up.
What happens when stock market tanks despite QE3 and perhaps increased future QE?
All hell breaks loose...
Going short soon ;)
Thar She Blows....
Q-ratio:
http://www.advisorperspectives.com/dshort/updates/Q-Ratio-and-Market-Valuation.php
Snot is running down his nose, Aqualung my friend...where this ends nobody knows!
The bubble used to be stocks... ..or real estate....or commodities.....now the bubble is everything and anything that can be bought and sold....including the souls who are facilitating the endgame.....
ooo kito. i like that one... Year 2065...
Hey Mason, you recall the Soul bubble of 2013?
Yaya sure Hunter, I remember it... I think. Those sure were the good ole bubble days.
Ya Mason, my dear friend, what I wouldnt give to have that all back. I think we use to actually own stuff didnt we?
Not sure Hunter, its kind of a haze now. Hey get your rations this week? I'm starving. President Dimon, promised us two cans of beans for world banker week... didnt he?
This stops when the real economy stops getting paid.
And that is going to happen.
It happened for a few weeks in 2008, and it will happen again.
(just noticed the linked market commentary is dated 13th May 2013 ... been burning the midnight oil)
Hussman's funds have been losing assets like crazy.
Brilliantly prescient and aware.
Tragically mistimed and unprofitable.
Investment is the purchase of goods that are not consumed today but are used in the future to create wealth.
Speculation is the practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market.
John is a old fashon INVESTOR not a speculator.
I would take Hussman's advice over Goldman's any day...
Spot on, he's more likely to still be there with capital after each bubble, to buy at the bottom.
That's beautiful recovery, nobody needs commodities to produce anything material, everybody makes profit of handling money this way or another, people pay for services with money they never made, maniac is printing as there is no other day, the whole world is watching with strange ambivalence at those activities and agrees to finance US economy.
WTF is going on and how long it can last?
Hussman has spent years 'arguing with the market.'
In the late 1990s, he fought the market all the way up, because its dividend yield fell below 3% (where it remains to this day).
From the 2009 bottom, he again fought the market all the way up through a 100%-plus rally, never even dipping a toe in the water.
Anyone can be wrong. But Hussman's contempt for trend following means that he STAYS WRONG for YEARS, while offering ever-shifting pseudo-numerical rationalizations for his stance.
Ultimately, his performance crack-up comes down to egotism: in his mind, he's right and the market's wrong. So too bad for Mr. Market (and his clients)!
How does John Hussman explain that year 2000 and 2008 from that chart when the subsequent 4-year annual profit growth was around 15% for 2000 and close to 20% for 2008, that an investor would buy only to suffer major market crashes later on?
Bullshit. No market can ever crash again unless it is intentionally crashed by our glorious overlords.
How do you expect we'll get Social Security converted into Blackrock ETFs in a few years if the markets do not show 10+ years of fucking awesomeness?
Can't. So it won't crash. EVER. DOW 9001!!!
bitchez.
Wouldn't "Dow 9,001", in fact, BE a CRASH from 15,100ish...??
You mean Maria B and her CNBC cronies have been misleading me? Better beat the rush to the exit doors.
Speaking of doors, I'm going to be exiting my bank's doors with my cash while the line forms by all of the sheep waiting to get sheared (or is it Cypressed?)
Maria may be directly responsible for $9-10 TRILLION of losses, should we go back to 'test' Mar 09 lows.
(actually, maybe more like $12-13 trillion++, when over-priced 'high-yield' is thrown in..!!)
Beware of Tumbleweed Delight!!!
Squeeky Fromm
Girl Reporter
Analcysts don't value anything, they just say 'buy' anything, until it has fallen 90%, then they say 'sell'
A lot of companies pay little if any tax because they exploit loopholes made/allowed by their politican puppets
We could solve that problem by not taxing businesses after all they don't actually pay them anyway. They just pass the cost on to the consumer. I mean; they don't eat or sleep or feel anything.
I smile when people who claim to be in favor of progressive taxes want to tax businesses since it shows that they need to visit the wizard.
Cyclically adjusted PE are over 25 and have been the amuch better predictor of future market activity than what most of the "analysts" are using. This shouldn't suprise anyone as most of the analysts work for someone who has a vested interest in keeping the shell game moving higher.......any true independent analyst has been flashing these and other warning signals about the real economy. It doesn't matter if you are a polyanna or a dooms dayer, the bottom line is growth in the world economy cannot possibly catch up with the overwhelming amount of debt and at some point deleveraging will have to take place. It's just math. To what extent the pain will be is the only question, but my bet is it will be much greater than almost anyone anticipates.
CAPE @ 24x+ now...I agree that "much greater than almost anyone anticipates" is in the cards...
This article is silly. Not because it's inaccurate, but because it speaks to an ever-dropping portion of the western population that has any money in the stawk market. And that's really where the emphasis needs to be: persuading our friends who can't afford to lose to stay out of a rigged casino. Getting into a a nuanced argument about P/E ratios and profitability is irrelevant. It's like arguing over whether you should hold on a 17 in blackjack when you already know the cards are marked and the dealer is crooked.
The bigger picture is more important: The stock game is rigged. The only people who win are those who are Connected. You aren't Connected so stay away unless you like losing.
Keep it simple, folks.
R 101,
You bring up good points. But, the truth is, that everyone IS in the 'stawk' market by osmosis. Every pension fund, endowment, insurance company, etc. is "in". Therefore, EVERYONE is "in".
I believe, after the coming carnage, the invetment system we have will change.
Wall St and "Wealth Management" have been lying for years about the validity of the assumptions, methodologies and practices employed to 'grow wealth'. Yet, 'they' have managed to insert it as policy, and even law, throughout the 'system'.
EMH, MPT, Ibbotsen and 'portfolio management/re-balancing' are all BOGUS concepts routinely peddled to 'investors' as fact.
The backlash is about to upset their "applecart" for all-time. It is all about to change in profound ways.
I have enjoyed reading John's weekly comments for some time. If you take this in context with his other work I believe you will find your view points are not divergent from his, just expressed differently.
The corrections that should have happened since around 1998 were not allowed to occur, this has grossly distorted the system. What happens next is truly frightening. My favorite post of his is Sixteen Cents: Pushing the Unstable Limits of Monetary Policy
http://www.hussmanfunds.com/wmc/wmc110124.htm
The central banks will lose control of interest rates and than all hell is going to break lose.
This supports what Bass is saying about Japan and that is probably were the shit storm is going to start (6 or so months ago Bass made the prediction that in 17 months or so Japan' currency would implode... 12 months to go).
17-6 = 11 to go. but who is counting? ;)
I need to learn more about this guy's work. I find that his accounting identity approach to monetary policy more descriptive than the quantity theory. I guess its like what this linear abstract algebra professor once said to me, "there's always more than one way to get to the party."
Us economy is gutted, few years of bleeding skilled workers, who gradually lose their skills and lack of investment in capital stock will catch up with it at some point. It's like fat guy who can survive few months or years burning his fat and claiming that his health is rapidly improving not to mention savings on food. Then the crisis hits and the guy lands in hospital with terminal problems.
I don't understand all of this teeth gnashing and gnarling. One evening in Nassau,I was playing craps at a particularly interesting table where this Asian chap had been winning sporadically with $1,000 chips in his stack when the pit boss changed the dice and the croupier three times in twenty minutes as the Asian's stack began to grow. I began a program of laying $500 on the "Don't Pass" line and laying down $100 chips on the "ANY CRAPS". As the house relieved him of his stack, it transferred about 5% over to me. I was therefore rewarded by betting "with the house". I have read ZH every day for years now and watched the outrage at how rigged everything is and yet never once heard anyone including Tyler or any other Guest Poster talk about actually going SHORT gold and LONG the E/S which might be classed as a crap table bet "with the house". To fight TPTB, you are effectively seeking justice and revenge by trying to bruise the bully's fist with your nose. I'd rather just stay long stocks and short gold until the trend changes and invest the winnings in farmland and ammo. Seems like an easier route with infinitely less stress.
In other words, you are a conformist and one who has no soul? To bet with the house is to admit to mediocrity and corruptness. Justice will have her sweet revenge. Better off to stay 'out' as ill-gotten gain will tie you to TPTB where those with the real farmland and ammo will destroy each and evry one of them....
A better analysis than most trying to time this fantasy market. Hard to argue with the Shiller PE, though the charts are not clearly derivative of it. Any argument that starts with the premise that this time is not different gets my attention and support. Not enougj articles focus on capex and trailng PE. I'd like to see one that also wraps in durable goods and mortgage origination.
Seldom right...but never in doubt
" As John Hussman notes, the Shiller P/E passed its 24x Maginot Line last week..."
I flip through channels sometimes and watch a few minutes of Bloomberg or CNBC. The other day, some inteview was in progress and the guy was metioning P/E ratios and i never heard him say anything over 15, as though the market was at a good P/E going forward, as it was below 20.
The trailing 1-year PE based on operating earnings is roughly 15x right now... the same level it was at in early 2008 (right before it went #N/A)!
"Analcysts don't value anything, they just say 'buy' anything, until it has fallen 90%, then they say 'sell' "
Those are sales people. When the price has fallen 90%, the company they work for, is buying.