Cost-Push Margin Compression Begins

From the Kimberly-Clark (NYSE:KMB) conference call: "(The company) experienced the highest-ever cost inflation in Q3 .... [which is] expected to hurt FY10 earnings by 30%.

This is why chasing stocks into this sort of environment is idiotic. It is why Cramer is wrong. It is why Tepper is wrong. And it is why you will be decimated if you follow these clowns.

Inflation always feels good when it first starts. It seems like you're getting something for nothing. The "excess liquidity" flows into stocks, pumping their values. It flows into commodities, and makes them go up. Everyone "feels" richer.

But in a global economy where labor arbitrage is prevalent, you, in fact, get no prosperity at all, as your wages do not rise.

While it takes time for these increases in commodity prices to show up in final goods, it always does. With the consumer having no more money to buy with, this compresses margins even as the stock market cheers due to the "excess liquidity" provided by the machinations of The Fed.

This imbalance is what generates monster sell-offs. Even crashes.

Eventually, someone wakes up and rings the bell. "Heh, you're selling at 20x earnings, but your earnings growth rate has gone negative. What's up with that?"

Nobody wants to talk about this in the media, but that's because the media is explicitly involved in trying to sell you a load of crap.

The foundation of business hasn't changed in hundreds of years. Profit = Sales - (input cost + production cost + overhead)

Add to input cost, profit comes down. Always.

You can't raise prices into a stagnant wage environment. In point of fact we've been in a falling wage environment for all but the top tier of our nation's wealthy for the last decade.

Everyone decries deflation. They're fools. Deflation crushes debtors and we've got a lot of them but it provides real benefits to savers and the prudent, along with creditors. Yes, wild deflation is very damaging, just as is wild inflation. But small amounts of deflation, especially in input costs, are beneficial, as that leads to margin expansion.

You may think you can avoid the price increase in your iScam from China, but you're not going to avoid the cost of wiping your ass - and that's where Kimberly-Clark's warning comes in. - and that's where Kimberly-Clark's warning comes in.