and market multiples are 10% above average so we’re at 25% above average using the most bullish analysis i’ve ever seen wrt margins.
http://finance.yahoo.com/news/eight-things-traders-saying-todays-161800937.html
Dave Lutz of JonesTrading just circulated an email giving a quick overview of some things traders are looking at, writing that it seems like a “perfect storm of headlines — most them ‘well known’ — but the Holiday conditions accelerating fears.”
Via Lutz, here are eight things that traders are watching during Thursday’s big sell-off:
- The S&P 500 broke below its 50-day moving average, and there is chatter about a large “institutional player” exiting positions in nearly 200 different stocks.
- Growth concerns are taking copper, silver, oil, and bond yields lower.
- There is “major hedging” in futures contracts due after a large broker was sold a block of HYG, the ETF that tracks high-yield bonds.
- “Chatter of a big fixed income sell program.”
- The Yen is climbing due to concerns over Japan’s Government Investment Pension Fund.
- Rumors that a hedge fund is in trouble, with media companies SFX Entertainment, Media General, Nexstar Broadcasting, and Gray Television falling.
- Terror concerns.
- A breakdown in commodities.
and i didn’t even realize it, but Hussman actually reams on your dude’s analysis in the link i posted…
"The problem is that the analyst’s conclusion that profit shares are just fine has absolutely nothing to do with the distinction between national income and domestic income (using either denominator would produce the same graph). Despite claims that this distinction drives the results, the entire analysis is actually driven by the fact that pre-tax profits have been inadvertently used in the numerators. Meanwhile, the analyst has inexplicably opted to use net national income in the denominator, which subtracts out depreciation (consumption of fixed capital or CFC) of fixed private investment and government gross investment. This causes the resulting income figure to diverge from both GDP and GNP in a way that does little but introduce additional noise.
What should we make of this unintentional exploration of pre-tax profit shares? An examination of historical movements in corporate profits produces very straightforward conclusions. First, after-tax profits are the basis of competition and arbitrage among corporations over time, and have a strong mean-reverting tendency. As a result, elevated profits as a share of income are predictably followed by sub-par profit growth over the following 4-years or so. Second, taxes act as a “layer” on top of this mean-reverting process, meaning that pre-tax profits also tend to mean-revert, but the level that they revert to shifts over time with the tax burden. Tax burdens certainly affect profit margins over a small number of years, but a reduction or increase in the tax burden does not have a permanent effect on the long-term level of after-tax profit margins in a competitive economy. In any event, both pre-tax and after-tax margins are inversely correlated with subsequent 4-year earnings growth (pre-tax or after-tax), and for all permutations of these, the implications for earnings are negative for the coming years.
The bottom line is simple. Corporate after-tax profits as a share of GDP, GNP (or even net national product if one wishes to use that number) are steeply above historical norms, and the pre-tax profit share is also at record levels. This fact can be fully explained by mirror image deficits in household and government saving - a relationship that can be demonstrated across decades of historical evidence. As a result of a severe credit crisis and a sustained period of lackluster economic activity, we’ve seen a fiscal deficit (elevated transfer payments to households and shortfalls in tax revenue) combined with weak household saving. The combined effect is that companies have been able to maintain revenues while paying a very low share of income to labor and taxes."
my added point might be that the lower taxes over the past 10 years are a form of government spending and this trend is clearly reversing. Hussman’s whole stance is that unless you expect government’s and household’s to be in deficit forever, corporate profits will revert. considering we will likely see a crisis if governments and households do not rebuild their balance sheets, it is highly likely they will and it is highly likely policy will encourage it.
which market multiple are you using Matt?
S&P: 19x
Implying a 17.3 long term average, over what period?
since 1900. sorry current multiple is actually closer to 18.5x and the long-term average is closer to 16x, if we want to get specific. so current premium is exactly 13.5%.
*U.S. JUNK-BOND FUNDS ADDED $528 MILLION IN PAST WEEK: LIPPER *INVESTORS PULL $382 MILLION FROM LOAN FUNDS IN U.S.: LIPPER
World Wide demand for drinks will not evaporate. It will be orange soda or whatever, but no one except Pepsi can compete with Coke’s infrastructure and capital base. It is one of the few businesses that is certain to be around in 100 years.
Agree. KO is a bottling company. The brand is less important at this point than the general consumer and delivery network. Globalization, yo. Valuation is another story.
del
Matt, thanks for all your thoughtful writing. I too follow Hussman, as he’s one of the few analysts that actually walks us through the math in his analysis. He also goes to show that you can be smart, attentive, and detail-oriented and the market will still give you the big fat finger at times.
My shop has wound down a lot of its macro programs over the last few years and I am doing more real-estate oriented stuff right now, but I used to be on top of all that data. Watching you go through it makes me a bit nostalgic for the days when I was thinking about that on a daily basis. It also shows me how just a little bit of concentrating on other stuff can make one’s data stale (even if the general analytical tools are still there).
Thanks for walking me through that.
I’m not saying that there “isn’t” a bull case for stocks (or HY) at the moment, but it seems that the bull case requires has a much higher standard of proof at these levels than the bear case.