Cutting Into Muscle - The Record Corporate Margin Juggernaut Has Just Rolled Over

Tyler Durden's picture

In this week's chartology from Goldman's David Kostin there is the usual plethora of useful data, but two slides deserve a very special mention because with 39% of the S&P already reporting Q4 data, the implication is quite dire. If Kostin is correct, then the corporate margin juggernaut, which recently hit an all time high in Q3 of 2011, and which has for all intents and purposes been the one offset to deteriorating economic conditions, recurring Fed stimuli to the economy aside, has officially peaked and is now rolling over. This has huge implications for virtually everything, as it means that after 3 years of layoffs, corporate America has finally cut through all the fat and is now officially chopping into muscle with every additional layoff. It also means that going forward no matter how many workers are laid off, the corporate margin rate wil not increase. Furthermore, if Bernanke or Draghi officially launch another inflationary easing episode which more than anything exports inflation to China, which in turn reexports it back to America in the form of rising COGS, margins will compress even more. In other words, the US economy, which sadly has been "defined" as the Russell 2000 and/or the DJIA, is tipping over. And with companies posting a near record low positive earnings surprise ratio, we are once again amazed how yet another Goldman team may have well called the absolute peak in the market with its long Russell call from two days ago.

The two smoking guns:

And another chart which confirms that the good times are now over:

And the full weekly commentary from Kostin:

S&P 500 index was unchanged this week despite two major positive news announcements that might have been expected to spark an equity rally: Stellar quarterly results for Apple (AAPL) and the FOMC announcement that the fed funds rate would remain exceptionally low “at least through 2014.”

A conditional commitment by the US central bank to follow a zero interest rate policy (ZIRP) for three more years and stocks remain flat? S&P 500 has risen 5% YTD but the absence of a rally this week suggests investors had already priced in an extended easing cycle. In a low-yield world, our dividend yield and growth basket should outperform (<GSTHDIVG>).

The Fed now explicitly intends to target inflation at 2% as measured by personal consumption expenditures (PCE) price index. Goldman Sachs Economics expects another round of asset purchases to be announced by around midyear. Based on the central tendency of the Fed’s economic forecasts, the core of the FOMC is at least as dovish, perhaps even more dovish, than Goldman Sachs Economics had believed previously. See US Daily: A more transparently dovish FOMC, January 26, 2012. Less positive macro news this week included 4Q 2011 GDP growth of 2.8% that missed consensus expectations of 3.0%.

AAPL posted stunning results with sales surging 73% to $46.3 billion and EPS rising 115% versus the comparable year-ago quarter. Net margins reached 28% and the stock alone contributes 44 bp to overall S&P 500 net margins. AAPL shares rose 6% this week. Goldman Sachs analyst Bill Shope has a $600 twelve month price target reflecting 35% potential return.

A total of 195 firms in the S&P 500 have now released 4Q 2011 results representing 53% of the equity cap. Below we highlight eight takeaways:

1. On a quarterly basis, 4Q 2011 EPS are expected to grow by 11% year/year while sales for S&P 500 (excluding Financials and Utilities) will rise by 10%.

2. On a trailing four quarter basis, 4Q 2011 will establish a new EPS peak of $97. Trailing four-quarter net margins for the S&P 500 (ex Financials and Utilities) have been hovering at peak levels of 8.9% for the past three quarters. Full-year 2011 EPS will be 16% higher than 2010 ($84) and full-year sales (excluding Financials and Utilities) will be 12% above last year. S&P 500 revenues including Financials and Utilities have not yet returned to peak levels reached in 2008, but 4Q 2011 sales excluding Financials and Utilities may reach a new quarterly peak level.

3. The percentage of firms beating consensus EPS expectations by more than one standard deviation (our definition of a positive surprise) is well below the historical average. The number of firms missing by more than one standard deviation is above the historical average. The ten year historical average of beat and misses equals 41% and 13%, respectively. So far this quarter just 24% of firms beat expectations and 17% have missed.

4. On an aggregate basis, reported results represent a 3% upside EPS surprise for the quarter ($0.45 per share). However, estimates for firms yet to report fell by 2% resulting in 0.9% change to S&P 500 4Q EPS. The median surprise over the past ten years has been 1.6%.

5. The Information Technology sector contributed nearly all of the S&P 500 upside EPS surprise ($0.43 of $0.45 total). Industrials and Financials contributed about 40% and 30%, respectively, or $0.18 and $0.14. Energy surprises have been negative, lowering the index aggregate by $0.26.

6. Individual companies matter. AAPL represents 18% and 26% of the Information Technology sector’s market cap and expected 4Q 2011 earnings, respectively. The Information Technology sector should grow earnings by 21% year/year, but by just 5% excluding AAPL. Apple is likely to be the top contributor to S&P 500 EPS for this quarter. 4Q 2011 will represent the first time since 2003 that Exxon (XOM) is not the top S&P 500 EPS contributor.

7. Since the start of earnings season, bottom-up consensus full-year 2012 estimates have declined by 0.5% to $106. Our top-down forecast remains $100. Revisions are largest in Materials (-3.5%), Energy (-2.5%), and Financials (-2.3%). Information Technology revisions have increased by 3% and Industrials revisions have been flat.

8. Year to date, 51 firms representing 13% of 2012 S&P 500 earnings have issued full-year EPS guidance. The midpoint of guidance is slightly negative relative to consensus estimates. Firms like JNJ, GD, CB, RTN, KMB, and EBAY guided below consensus while BA, JCP, CAT, TXT, BWA, and APH guided above expectations.

Next week represents the third of the three major weeks of the 4Q reporting season, with 99 firms representing 18% of the S&P 500 equity cap scheduled to release results. 40% of Energy and Health Care market cap reports next week. Key stocks to watch include: XOM, PFE, MRK, QCOM, UPS, AMZN, LLY, and DOW. See pages 5-7 for next week’s calendar.



Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
LeBalance's picture

(edit) editorial suggestions incorporated: comment removed by author.

this article is awesome. thank you.

(edit) i found this article to be very informative and wished a single grammatical issue not to mar its flow for others.  I apologize to the (neg) voter, if they found my comment out of place.

Irish66's picture

From a maufacturing standpoint, you keep lines running, build inventory waiting for the turn and 

when the turn doesn't come, you lay off 25% of the work force.  Then if it still doesn't come, you start

shutting down plants.

Vampyroteuthis infernalis's picture

No matter how much the CBs print, if the population has no money to spend manufacturers cannot stay in business. The growth over the last few years was in banksters and an IT bubble. Both are in a downward spiral. Debt-saturation is here and mass bankruptcy.

Mr Lennon Hendrix's picture

Stocks are lottery tickets.  People that bought apple got lucky.  Apple did not go up because they have a business model that hires cheap labor and sells their products for crazy money (all corporations do that).  They went up because people are not paying their mortgages (rightfully so), or their student debt (rightfully so), or their child support (no comment).  Who knew that this system would not go broke along the way?

There is also the fact that the devaluation of the dollar makes all stocks more expensive.  When energy reports this week (XOM) they will have made more dollars because of the price of the pump (although refinery cost is hurting the margin, so I am not sure how much they will beat).  For finance expectations are so low that when they beat due to insider information and the Fed giving them an unlimited supply of money, they pop back up from their lows they so deserve.

The markets are a sham, but when someone knows how they work, they can play the game.  I may not have seen AAPL coming, but, like Robo, I knew stocks were going higher, if only because of dollar devaluation.

Will the bubble pop?  Well considering these gains are nominal and not real maybe not.  Maybe the dollar goes and goes and goes until one day Americans wake up on the continent their fore fathers built like Atlantis cold and hungry.

SeattleBruce's picture

The nominal stock market went up and up in Weimar Germany for years, but in looking at it in retrospect, it lost 33% in absolute terms during those year(s) of hyperinflation.  I like your analogy to the stock market as lotto, or another one I've seen a bunch is as casino...and we're supposed to trust that these guys (and gals) have the best interests of the average person at heart...they are the house, and the house always wins, and the little guy always loses!

Jason T's picture

having worked at America's largest PCB manufacturer, that went out of business in May of 2006... been there and done that.  We had a "game room" set up for idle workers to go to where other departments could grab if needed.  sucked to have to lay off workers.  But in the end..things never turned.. PCB's were to be made in China and that was that.  

sethstorm's picture

The mistake was allowing China to have any place in the US.

Stack Trace's picture

Heck, I have been arguing myself blue in the face with folks for over a decade about asking them to try buying some products (just some) domestically manufactured.

People...don' They don't understand and really don't care. I can say this after having spoken to thousands of people over the years about this this topic.

Furthermore, the problem isn't just China and just manufacturing.

Software development, legal, financial, and software services have moved largely to India. Garment industry to Vietnam. Auto manufacturing to Mexico. Energy production to Canada.

The reality is this country has already crashed. The shockwaves are finally now reverberating through our economy. Soon the cracks will become gaping holes and the cheap Chi-Merica facade will fall off. All the money printing in the world isn't going to stop this from happening. All the belly-aching about lost jobs isn't either. There is NO WAY manufacturing or other good jobs come back to this country as long as bankers run this country. They want mindless drones that are so desperate they will enlist in the military to be used as fodder.

People will have to revolt first. It will happen only once they understand that our democracy is gone and our freedoms completely destroyed. It will be painful. The monetary morphine needs to be removed otherwise our creditors will do it for us later...only it will be more painful then.


grid-b-gone's picture

Backlogs and bookings are critical, too. Most investors see margins and earnings, but companies already know if margins are eroding to get new orders.

With nine weeks left in Q1 FY12, companies already know how Q1 results will look. They are looking at Q2. They can build inventory now and use layoffs to offset higher finished goods carrying costs to save Q2 and hope that demand picks up by Q3. Without core demand, Q3 is when sales or margin erosion would hit quarterly reports.

Investors should look at inventory levels, business sentiment indicators like the ISM reports, and insider sales trends.

The JC Penny decision to market more on price is anectdotal evidence that customer demand is weak.

This was one downside risk of the Fed's policy. Consumers could have kept their spending intact with slight deflation to offset stagnant wages. With the Fed's inflationary target and weak dollar stance, companies expected to make up lost domestic sales from high-growth BRIC countries. 

The Fed got away with simiilar policies in short recessions such at '91-'92 and 2001-02. 

By successfully stimulating with each slowdown, Fed policy became less analytical and more kneejerk. Dissenting Fed members were ostracized and the Fed has been hamstrung by ideological groupthink.

At this point, it's up to the market to force a market solution. Our politicians, regulators, and central bankers are sitting on a triple-bogey putting from the rough. 

Irish66's picture

Ford's margin was just shy of 6%, quarter before 11%...recollection

DosZap's picture


Mickey D's just had their BEST year on record.

I told the spousal unit, well, that is no wonder.

Since they have cut the size/portions by minimum 33-45%, and doubled the prices.

If I could operate a business like that, and STAY in business I would have record years also.

Seriously 98% on here MIGHT eat something Mickey D's once a year.

Just for giggles go into one, and stand near the order filling /cooking sections.

You would not believe your eyes,the difference in portion sizes, and the new prices.

A double mortal sin.

The same thing is going on on ALL the fast food places I swing by.

Even 75yr old Whataburgers....................are pulling the same crap.

Irish66's picture

I have one fast food sandwich that I like, Arbie's super no tomato, its about 1/2 the size it used to be.

$1.25 more than 3 years ago.

Tijuana Donkey Show's picture

If thats true, why aren't americans shrinking? They are just getting ready for McDz to take SNAP benefits, and serve in prison. Just think, a dollar menu in every school, prison, and goverment office, we could save a fortune! If you want to see something really shrink, look at coffee at the grocery, a "pound" bag is now 12 oz, at best, but the price is the same. Bernanke doesn't have a printer, he has a shrink ray for the 99%

SeattleBruce's picture

"Fed policy became less analytical and more kneejerk. Dissenting Fed members were ostracized and the Fed has been hamstrung by ideological groupthink."


Not to mention unworkable debt based fiat monetary policy.  Time to create non-debt based money, and if Congress won't do it through revamping the Fed, then we need to replace both Congress and the Fed.

Whoa Dammit's picture

It will be interesting to watch the effects of margin compression in the U.S. comapnies on manufacturing in China. Most Chinese plants are on short term contracts with American end marketers. Walmart, etal. comes through on a regular basis with their mantra of "cut prices 10%" when contracts are renewed. 

I figure Chinese manufacturing has 4 choices 1)The Chinese governement will have to provide lower cost/free raw materials-but how long will the Chinese government do so? 2) Go to full on slave labor, with no illusion of a salary-but this will only hold down costs for a little while. 3) Tell Walmart, etal. to stuff it and raise their prices-but that will lead to more margin compression here and thus less buyers for their products. 4) Really stuff Walmart and start their own retail stores here.

Note that I am not holding out for our business leaders to formulate the logical and best solution to this mess which is: American companies begin paying workers enough, so that someone can afford to buy the crap they want to sell.

Marco's picture

China could do the same thing as your American solution ... they could dump the dollar and just sell their shit in China.

As for America's solution (and most other first world countries). Their current economy is not competitive, wages have to fall ... not go up (of course at the same time costs of living have to fall and equality of distribution of wealth and work has to go up, unless you like violent revolutions).

sethstorm's picture

No, the solution is for the First World to become its own trade bloc to provide a counterbalance to the Third World - not give up freedoms, protections, and wages that have defined the First World.



dizzyfingers's picture

...and then you call China? Plenty of excess mfg capacity there.

Caviar Emptor's picture

I call for voluntary restrictions on bonuses, sex and food consumption

cossack55's picture

I don't believe they have any intention of abstaining from screwing everyone on the planet. That is why someone invented hemp.

Caviar Emptor's picture

True. Bonus addiction is an unrecognized illness. Please give generously to my Bonus Addiction treatment fund. 

dizzyfingers's picture

effing effers... sorry if there are bankers among us, but you should be ashamed.

DosZap's picture


What is it with BANKERS?.

But do they make MIN wage, or TIPS $ $2.35hr, and must LIVE on these year end Bonus checks?.

It almost seems so.

(NO OFFENSE to Sonic Waitresses),


SeattleBruce's picture

Would they rather that or to be put in a little cell in an orange jumpsuit - I vote for the latter.

apberusdisvet's picture

This post is especially dire when you realize that the majority of quarterly results are a result of accounting tricks and other BS, whether in the fine print or purposely omitted.

cossack55's picture

It matches well with the BDI, which is just off the record 12/08 lows.  I love the BDI because I think it may be too hard for the manipulators to control, thus a little more clarity of vision.  Not to mention trying to hide all the empty and parked ships off Indonesia.

TempFlashback's picture

BDI may be an indicator of bad things to come but keep in mind that there is a build up of ships on the market right now (excess capacity) likely contributing to the BDI's fall more than anything.

Manthong's picture

It would have to be a pretty big misallocation to just be over-ordering ships (a couple of years ago).

Also as noted by another ZH'r a few threads back, similar pattern on container shipping.

JR's picture

Yes, and it’s important to remember that final EPS figures are manipulated in any way possible, even to the point of selling off subsidiaries to subtract losses, to make annual reports look astoundingly good to investors. They are doctored sales pieces.

dizzyfingers's picture

A blogger SeekingAlpha said:

There is another way of looking at this issue that suggests weakening profit margins soon. Economic progress-different from what Keynesians call (inflationary) "growth"--depends on saving and capital accumulation, rather than consumer spending. When capital accumulates, because people produce more than they consume, real wealth per capita goes up. Rising real wealth is reflected in rising real wage rates, incomes and rents, all due to one essential: rising productivity.

Now Keynesians may give lip service to the importance of capital investment, but contradict such talk with the basic thrust of their policy prescriptions. They consistently recommend more consumption as the Holy Grail of "growth" and "recovery". They imagine that the only scarcity worthy of attention is of "consumer demand"-- oblivious to the fact that people can consume only if producers FIRST produce REAL GOODS. If "stimulating" consumer demand could usher in prosperity, why did not long lines in empty Soviet stores "stimulate" Russian prosperity?

Economic production requires producer goods--scarce real goods used in the process of trying to make a profit. Producer goods do not rain down on us from the heavens; they must be produced using saved real wealth and requiring great effort. Clearly, the more that people spend and consume, the fewer real goods remain for use in productive activity.

Therefore, all the Keynesian prescriptions for "recovery" undermine our capital foundations, because they foster consumption AND capital depletion. Keynesian "solutions" include government spending on salaries that are mostly consumed; money printing which depletes precious capital by promoting malinvestment and profligate behavior; government borrowing that sucks up precious capital and wastes it on wars, giveaways and regulatory enforecement; and taxes that must be paid from funds that would otherwise be mostly saved and invested.

Keynesians typically reassure us that every thing will be OK, because the government has more Keynesian policies to implement. But the opposite is true: the big government policies are destroying our prosperity by depleting our aggregate fund of real goods.

The fund of real goods is depleting in the US and European economies. This is why, for example, real wage rates are falling. As real savings are depleted, producer goods become scarcer and more costly to replace. Corporate accounting doesn't reflect this harsh and inescapable reality, because depreciation and amortization are understated. Real taxes paid on exaggerated earnings guarantee that real earnings are much lower than what corporations report.

Most analysts believe that consumer spending is 70% or so of total output, but this is a Keynsian myth. Consumer spending is 70% of GDP accounting totals, but arcane GDP accounting does not properly reflect economic reality. In the real world, probably 70% of total production is for subsequent production--meaning producer goods. So when real savings deplete and production necessarily slumps, the demand and pricing of various producer goods also slumps.

Soon prices will begin rising in response to rising money supply (M1 is up 20% over the last year) and the silent but real depletion of real savings and capital goods. As prices rise from money printing, the dollar will continue to get hammered, which will make imported producer goods more costly and therefore less available for production.

Margins will contract and production will fall in a classic case of serious stagflation. This will inflict great damage on corporations and individuals. I think margins will visibly contract in the next year.

Of course, the economics I have outlined doesn't get a lot of respect these days. But anyone who has lived knows that truth depends on careful reasoning and respect for facts, not popularity.

For anyone who is interested in exploring this Austrian outlook, I recommend George Reisman's "Capitalism". Professor Reisman was a disciple of von Mises and began attending Mises' economics seminar at NYU a the tender age of 15. Reisman's magnum ophus very clearly explains economics, in all its complexity, in ways most people have never had the opportunity to grasp: including why inflation destroys capital and production, why most production is for subsequent production rather than immediate consumption; why government spending only benefits government workers and mercantilists who have, in effect, commandeered a sinking ship; why GDP accounting reflects little of economic reality; why free market capitalism cannot yield monopolies or exploit helpless people; why our prosperity and progress depend on capital accumulation and how big government intrusions erode our capital foundations.

I can only recommend Reisman's book with the highest yet inadequate praise.

Marco's picture

"Keynesians typically reassure us that every thing will be OK, because the government has more Keynesian policies to implement. But the opposite is true: the big government policies are destroying our prosperity by depleting our aggregate fund of real goods."

Reality is depleting our aggregate fund of real goods ... neither Keynesians nor Austrians nor any other economist is going to change the fact that peak oil happened decades ago in the US.

Up till the last couple of years the "Keynesians" seem to have done a pretty good job at holding reality at bay, Austrians would not have been able to do it (I put quotation marks around Keynesians given that Keynes actually fundamentally opposed trade deficits, without which the current situation could not have occurred). Foreign holdings of US debt grew much faster than M1 up to the last couple of years. Basically they have given Americans half a generation of foreign funded high life.

SeattleBruce's picture

"But the opposite is true: the big government policies are destroying our prosperity by depleting our aggregate fund of real goods."


The effects of total debt saturation prove that the Keynesians don't have any more bullets in their gun.

JR's picture

“Reality” has been held at bay by the media and to persons of low information who believe the media. In actuality, Keynesian policies supported by bank tyrants have wrecked the economies of the world at an alarming pace.

JR's picture

Keynesianism is sort of like “eating the seed corn.”

Keynes was a Fabian Socialist, a collectivist, an internationalist in the business of molding public opinion in support of globalism and internationalism, away from nationalism—away from the principles that produced the American miracle. In itself, that tells us the direction of the road down which the Pied Pipers of globalism are leading us.

Keynes and Harry Dexter White, a member of a Communist espionage ring in Washington while he served as Assistant U.S. Secretary of State, are fathers of the bancor (SDR) – the unbacked world reserve currency issued by the IMF World Bank to free all bankers and governments from the discipline of gold.

Professor Ralph Raico explains just how far down the road to socialism Keynes was in 1935:

Keynes reviewed the book (the notorious defense of Stalinist tyranny, Soviet Communism: A New Civilization, by Sidney and Beatrice Webb) in a radio address.”  Beatrice, very pleased, noted how their friend had “boosted” their book. Keynes stated:

"…the new system is now sufficiently crystallized to be reviewed. The result is impressive. The Russian innovators have passed, not only from the revolutionary stage, but also from the doctrinaire stage….They are engaged in the vast administrative task of making a completely new set of social and economic institutions work smoothly and successfully over a territory so extensive that it covers one sixth of the land surface of the world….Methods are still changing rapidly in response to experience. The largest scale empiricism and experimentalism which has ever been attempted by disinterested administrators is in operation. Meanwhile, the Webbs have enabled us to see the direction in which things appear to be moving and how far they have got.’”

This provides a clue as to why today's globalists continually decry Hitlerism; it is to divert the eyes from three quarters of a century of communist terrorism in Russia by the internationalist money power to seize all her human and natural resources.

lolmao500's picture

I met Subby's Mom on She was pretty nice but man - she could eat more bratwurst and boiled eggs then any woman I've ever seen.

Oh and we had sex - but she was going on and on about how I wasn't as good as her son.

/they still have profit margins?

RobotTrader's picture

The market is overdue due for a correction to the 50-day.



So far, I see no negative divergences whatsoever in the NYSE Summation Index.

New 3-year highs:

Advance/Decline line continues to go up faster than the stocks themselves, suggesting that the market internals are very strong:$NYUD&p=D&yr=0&mn=8&dy=0&id=p70273094322&a=122406050

-  No relative weakness seen in XRT or QQQ yet

-  Stocks like POT, TXN, etc. are totally shucking off earnings warnings

-  Muni-bonds still going parabolic, huge amount of money is still chasing Fixed Income, nobody interested in equities yet

-  Gold made a huge statement this week.  Gold $2,500 = Dow 15,000

Any Questions from the "I am 300% short!" crowd?



The Big Ching-aso's picture



I think you're on a 3-year high.

Manthong's picture

Mr. Trader might be piloting his pretty cruise ship a little too close to the rocks,

LongSoupLine's picture

Mr. Trader doesn't have a "cruise ship", but rather a submarine with screen doors.

Caviar Emptor's picture

The magic stimulus has suddenly turned sour: more excess inventory and capacity in the face of a contracting economy.Without the required economic reset after a mega bubble, demand hits a wall and supply-side margins get squeezed. Also there's lack of new business formation and true competition when the Fed keeps zombies alive

dizzyfingers's picture

Please repeat that very loudly, in the direction of D.C.

falak pema's picture

When the financial economy starts eating up the profits of the real economy, ex-financials profit meltdown, that's when the writing is on the wall. As now the sun sets on precisely those whose unending earnings projections fed the financial bonfire of bonus driven exuberation. 15 T central bank debts, 15 T US public debts, 8 T Eu sovereign debts, 7 T Japan Inc debts, we are now an economy where the only growth is in System D, 10 T of it. Now what country would that be? 

How does it feed the real economy? System D is debt slavery, as for System D to grow all real economies must go further into debt. And we know it. All 99% of the real world. Mafias run the world. But don't tell that to TBTB they would scoff at it. Impossible to arrive at such a dire conclusion in public, when you wear purple and make the rules yourself.

Lets find a scapegoat quick!

Scalaris's picture


Every little helps to improve the dismal margins. In this case cutting the luxury that is the workforce, in order to offset their betting losses.

Perfectly natural since banks can generate money by only using algorithms and future artificial intelligence units for their M&A sector, while everythin else is made in China.

A win win situation really.

disabledvet's picture

there are two evil sides to the media. "the merely evil": "you're invading my privacy, putting my whole life on-line and for anyone to see and you're doing so without even asking." then there's "the truly evil side": "My God, they've convinced the Saudi's that they need snowblowers for Rammadan." In short "your forgetting the cuckoo for coco-puffs effect" here of "final sales." Here's an example:

Caviar Emptor's picture

This dire situation calls for Plan 9, resurrection of the dead. GOP is already on it, and Ronnie will be arriving shortly. Not shortly as in smaller than you remember but soon. 

RacerX's picture

but.. but.. didn't Goldman just tell us to go LONG the RUT?

non_anon's picture

the Domino theory

dwdollar's picture

Ah... four years of extend and pretend... Something tells me the "pretend" is going to reach a whole new level of ridiculousness.