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Stocks are cheap right now (I, II)... oh really? "The cheapness argument falls on its face once...

Stocks are cheap right now (I, II)... oh really? "The cheapness argument falls on its face once we realize that pretax profit margins are hovering close to an all-time high of 13.3%, almost 58% above their average of 8.4% since 1980," Vitaliy Katsenelson writes. When the Fed stops easing this June, then "we will see what kind of legs the economy and stock market really have."
Comments (6)
  • bbro
    , contributor
    Comments (9330) | Send Message
     
    Wouldn't mean reversion imply significant job growth also???
    24 Mar 2011, 10:17 AM Reply Like
  • Gaping hole in the ocean
    , contributor
    Comments (207) | Send Message
     
    But will the Fed stop easing? Doubt it.
    24 Mar 2011, 10:18 AM Reply Like
  • bbro
    , contributor
    Comments (9330) | Send Message
     
    3 months of +200 payroll growth....yes...
    24 Mar 2011, 10:21 AM Reply Like
  • tigersam
    , contributor
    Comments (1711) | Send Message
     
    Vitaliy Katsenelson,

     

    If economy goes up after that will u please shut up? I guess not you will have your antother theory.
    24 Mar 2011, 10:29 AM Reply Like
  • tigersam
    , contributor
    Comments (1711) | Send Message
     
    Vitaliy Katsenelson,

     

    How is your sister Meridith Whitney?
    Say my hi to her.
    24 Mar 2011, 10:30 AM Reply Like
  • Denis Ouellet, CFA
    , contributor
    Comments (73) | Send Message
     
    Interesting but incomplete analysis. I checked what happened to S&P 500 EPS and the index itself while the margins were being squeezed.

     

    In 3 of these 4 “mothers of all margin squeezes”, S&P 500 EPS kept growing. Shrinking margins do mean profits grow more slowly than revenues but, as the chart above shows, not necessarily that multiples “usually”contract. In fact, based on the evidence from the chart, the jury is about evenly split on multiple movements when margins contract meaningfully from current high levels. History convincingly shows that PE multiples are primarily a function of interest rates, therefore of inflation rates and trends thereof (see S&P 500 P/E Ratio at Troughs: A Detailed Analysis of the Past 80 Years).

     

    It is also important to note that often margins did not go straight down, staying elevated for periods of 9-15 months after peaking. Furthermore, in all four instances, equities did rather well, at least in the early part of the margin contraction period.

     

    I transposed on a semi-log earnings chart the 7 instances when the Philly Fed “Margins” index reached extreme levels. The “R” on the chart indicates US recession periods. S&P 500 profits have, in fact, declined after the “Margins” index rose smartly but only when there was a US recession, negating the usefulness of the indicator.

     

    So, simply saying or implying that elevated profit margins are bearish is incomplete analysis to say the least.

     

    Complete analysis: www.news-to-use.com/20...
    24 Mar 2011, 10:53 AM Reply Like
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