Read the quarterlies from P&G, CMG, WMT, et al. and you’ll change your tune. There’s a natural lag, and some companies effectively hedge their costs, LUV being the best example. But, it’s not sustainable if prices remain high, or go even higher. YoY CPI over 5% not concerning you? Or even higher PPI for that matter? What do you think is going to happen to margins when companies can’t pass along the prices? Demand will fall along with commodity prices right? It’s all just transitory… Or we get stagflation and we’re all screwed. Right now I give it a 33% chance.
Commodity prices are cyclical not permanent. That is why those companies hedge, to avoid a temporary squeeze. Historically commodity price run ups have always reverted back to the mean. Some people think “this time is different” but I am not one of them. No CPI and PPI are not concerning to me given the large output gap. Over the long run inflation tends to track oil pretty closesly and oil prices are going down right now. Inflation is a monetary phenomenon of too much money chasing too few goods and services. Right now aggregate demand is too low not too high. I follow those companies you listed. If we can stick to the original point that I was making, I do not see a major driver of margin contraction on the horizon without a rise in the cost of labor, which I would think has to come from significant growth driving down unemployment. The idea is that either of those situations is probably good for stocks. Sure commodity prices bouncing around can help or hinder the process, but I don’t see it as the “end all be all” that you imply.
We’ll see about commodities. I’m not saying anything is permanent, I’ll settle for prolonged. Either way, as far as margins go I don’t believe commodities are the “end all be all.” That distinction goes to revenue. Obviously I’m a bit bearish on our overall economy, so I’m actually expecting the top line to contract anyway. Margins are going to get squeezed from both sides.
I can see the top lines contracting if you are bearish. My question is still regarding profits since companies continue to squeeze more and more productivity out. Time will tell!
Dwight Wrote: ------------------------------------------------------- > I’ve heard the argument a lot recently that > margins are mean-reverting and they will come > down. > > What is going to cause them to mean revert though? > Typically when I think of margins going down it > is because costs are going up or competition is > increasing causing lower prices. > > Costs are unlikely to go up with 9% unemployment > and the largest cost to employers being labor. > > Almost by definition, if competition is increasing > then it seems to me there must be a number of new > companies starting up to move into the most > profitable industries, which would be good for > employment and economic growth, thus growing > company’s top lines even as margins come down a > bit. > > So that is almost a win/win situation from that > perspective. Either companies can stay profitable > by squeezing the low growth economy or they can > earn more overall as the economy expands. > > I’d rather have my money parked with an entity > that has at least some chance of passing along the > costs of inflation over a long period of time. Lower aggregate demand in the economy will reduce expected earnings for all industries, ceteris paribus. Not a macro guy, but the overall economic situation looks pretty bleak in the United States.