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Apple Accounted For 20% Of All U.S. Margin Expansion Since 2010 - Why This Matters
Earlier we explained why Goldman believes that in 2016 the market, which is now about 1% higher than where it closed in 2014, will also go exactly nowhere.
The reason for this pessimism can be summarized in three bullet points:
i) bifurcated thematic returns. Goldman thinks that due to divergent monetary policies (Fed tightening vs. ECB and BoJ easing) the USD will strengthen and benefit some stocks and harm others. Some of those impacted the most will be multi-nationals and luxury retail companies (see Tiffany earnings today). Overall, the biggest headwind cited by companies in Q3 has been the strong dollar - expect this to continue and to further depress revenues, and thus earnings.
ii) higher rates. According to Goldman, "when fund managers eventually realize the tightening process will be more sustained than originally anticipated the P/E multiple will contract and offset the otherwise positive impact of 10% earnings growth."
iii) margin expansion stories. If companies can't rely on top line growth, and multiple expansion is not available, there is just one source of growth: margin expansion.
It is bullet iii) that is the most important, because here the divergence between Wall Street's hopium-driven margin euphoria is most visible.
According to Goldman, "tech accounted for 50% of the overall S&P 500 expansion during the past five years (Apple is responsible for 20% of rise). Tech sector now has margins (18%) that are twice the overall market."
That tremendous tech, but mostly AAPL-driven, margin growth has now ended.
So can this torrid surge in tech margins continue? Goldman's answer is a resounding no.
Many of the drivers of margin expansion during the past few decades appear to be behind us including lower interest rates, outsourcing, and technology. S&P 500 net margins have been essentially flat for five years at just below 9%. We forecast margins will remain flat in 2016 and 2017 at 9.1%. Information Technology has been a notable exception with margins rising in recent years to 18%, or 2x the overall market. However, roughly 40% of the 847 bp leap in Tech margins since 2009 is attributable to Apple (AAPL) alone. Given rising labor and health care costs, firms in most industries will struggle to simply maintain margins. Investors will reward firms able to demonstrate a path to higher sales and margins.
But perhaps the one chart that confirms that one can't have their wage rising cake and eat corporate profits too is the following:
In other words, if the Fed is hiking "because it sees something about the economy" that few others do - i.e., rising wages - then by definition that means that profit margins will contract as growing wages take out ever bigger chunks of the corporate bottom line.
So with sales declines set posied to accelerate due to the soaring dollar, central bank liquidity-driven multiple expansion no longer feasible and corporate margin growth set to resume its contractionary path again, we wonder where will the next leg higher in stocks come from. Unless, of course, the whole "the Fed is hiking because the S&P500 has topped out economy is recovering" was just the latest economist consensus mirage.
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"In other words, if the Fed is hiking 'because it sees something about the economy' that few others do - i.e., rising wages - then by definition that means that profit margins will contract as growing wages take out ever bigger chunks of the corporate bottom line."
Though I don't believe for a minute that wages are rising for anyone in the 99%, it also seems pretty obvious to me that low wages are the root problem of our economy. If the last 40 years is not proof that trickle down does not work, that offshoring is a net negative to the broader economy, and that what makes the US economy function well is a middle class that can afford to live comfortably and retire comfortably without massive debt to fuel spending, I don't know what does. And corporate profit margins mean shit if fewer and fewer people can afford to buy what corporations sell. I'll take a $1 profit on 1000 sales any day over a $2 profit on 100 sales. Pretty basic stuff if you ask me. Henry Ford the famous socialist got it.
of course, history has repeated itself for centuries when it comes to technology.
So, I'm sure an I-phone x.x in 5 years will cost $3,000 and Apple will continue on the exact same trajectory.
Ford realized that higher wages were the only way to STOP the high employee turnover his company was experiencing.
http://www.forbes.com/sites/timworstall/2012/03/04/the-story-of-henry-fo...
It had nothing to do with paying his workers enough money to buy his product. In today's labor makret, few employers worry about turnover. Most employees are grateful to just have a job.
Note that I did not make the argument that Ford explicitly decided to pay workers more so they could afford the cars. He paid them because it ultimately saved the company money, and the middle class was born (perhaps as an unintended consequence). http://www.henryford150.com/5-a-day/
The fact remains that Ford bucked the prevailing logic among US corporations (repeated here often) that wage arbitrage is the long-term answer to corporate profits. And it seems indisputable to me that corporations will make more money in the long term if they have buyers for their products. Chasing profit margin by offshoring is a long-term recipe for disaster, as we see unfolding now.
It's wage costs that are rising not take home pay. What is the difference? - Obamacare.
Just bought one of those SIM adapters, so I can use my old flip phone again and put my 5s spy device in the closet in a soundproof box. I know the old flip phone offers: 3 days of standby and talking, no spyware, the inability to host a virus because its as simple as the mind of a Washington politician. I'm done with Apple, and done with Apple's updates. All the updates do now is make you work to relearn a machine that breaks rules and becomes less and less intuitive as time goes on. When my Apple becomes crippled on the internet due to my resistance to follow instructions, and if I decide the internet still is worthwhile at that time, I'll be using a Linux box. Sorry, but I'm a selfish bastard. I worry about me and my money, not Apple and Apple's money.
"Bifurcated thematic returns."
And here I thought just lawyers made up 5 dollar words.
Are economists also lawyers? Does it help to fleece the flock by legal jargon injected into monetary nonsense?
The biggest fucking problem is the repeated " According to Goldman " line.
So, it is all sex, lies, videotape, blackmail, bum fuckery, and tardish.
Any conclusions will be used against you by the Goldmanites.
I'd love to see the legs come out from under Apple and the whole thing collapse.
The fakest part of the stock "market" is the part that gets inflated via currency printing. Not an accident.
Google has a license to print currency. Issue stock, sell stock, stock bought by Fed with printed currency, price gain to stratosphere.
Tech bubble 2.0 is just a continuation of the print job the Fed is doing on us.
We have all been saying for the last 5 years years here at ZH it's gonna collapse? well is it? Can it? Tech may be the front side of the new rail road barron's era, and we are missing the ride?
I don't buy GS' premise that this is a rising interest rate environment. The whole article is a red herring built on quicksand.
If Mr. Yellen raises, good night to interest rate sensitive derviatives in all their trillions.
And any on-the-margin-corporates trying to roll over debt? Good luck in Chapter 7/11.
AAPL can toss my salad with syrup. I stopped in an Apple store today-- the theme is getting tired and the innvoation is simply gone.
"we wonder where will the next leg higher in stocks come from."
I don't know either...guess the Fed will have to start buying stocks..like the "garbage mortgage securities" they now own...