Wednesday , 20 September 2017


Corporate Profit Margins Likely to Revert to Mean & Cause Market Correction – Here’s Why

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…[Whether] one sees valuations as attractive or fundamentals as improving,…one should always beInvesting financial markets cautious when profitably reaches extreme levels like we can see today. The fact of the matter is that corporate profits as a percentage of GDP have rarely reached dizzying heights like at present and the most likely scenario is mean reversion in coming quarters. Therefore, I think it is prudent that investors ask themselves…[whether] or not they want to be positioned on the long side right here. Words: 485

So writes Tiho Brkan (http://theshortsideoflong.blogspot.ca) in edited excerpts from his original article* entitled Chart of the Day: Corporate Profits.

This article is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Brkan goes on to say in further edited excerpts:

In today’s chart of the day, we can safety assume that corporate profits tend to track the overall growth of the economy…[the] majority of the time (link here). After a four-year expansion, in recent months my view has been that profitably has most likely reached its peak. There are a few observations we could make by looking at chart below:

  • Corporate profits as a % of GDP are extremely high and rolling over
  • Historically, profit margins are very cyclical and volatile in nature
  • During secular bear markets, mean reversion impacts equity prices
  • Best time to invest into equities is when profits are at depressed levels
Chart 1: Corporate profit margins could soon mean revert
Corporate Profits
Source: Short Side of Long

Historically, the best time to invest into equities has been during [a time of] disappointment in corporate profits. Certain readers are most likely asking why would corporate profits mean revert? Why couldn’t they stay elevated? Well basically, the recent expansion has been built mostly on labour cost cutting and that is why margins have managed to approach record highs despite anaemic growth in the last few years.

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With Federal Reserve and US government closely linked towards a goal of further employment, one has to consider the following:

As US debt problems come to the forefront of global attention (just like Europe), further public support will soon start to fade and austerity will take its place. With wage growth at very low levels, households will not be able to maintain spending for a prolonged period of time (ECRI already thinks we are in a recession).

On the other hand, if CEOs suddenly (read: magically) turn optimistic, they might consider boasting their payrolls but ask yourself, at what cost? Obviously, the answer would be at the cost of decreasing their margins.

If CEOs opt for further cost cutting instead…[the current] sub par growth (last GDP quarter was flat if you believe BLS and most likely contracted if you do not), could definitely increase risks and dip us into a recession.

Conclusion

In my opinion, we are about to…[witness] a mean reversion in corporate profitability regardless of outcome as we have most likely has reached its limits for the cycle. Now comes the painful part, which is usually jam-packed with earning disappointments and investor losses….
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://theshortsideoflong.blogspot.ca/2013/03/chart-of-day-corporate-profits.html
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