logo
  Join        Login             Stock Quote

Putting Fears Of A U.S. Earnings Collapse In Perspective

 March 27, 2012 09:58 AM


(By Michael Tarsala)

Record corporate profits simply cannot last forever. That said, the market will likely provide cues about when it's time to get far more defensive, says Covestor model manager Bill Deshurko at 401 Advisor.

The chart you see below is the latest from John Hussman, known for predicting the 2008 recession. It makes the case for shrinking profit margins going forward.

[Related -Level 3 Communications, Inc. (LVLT): A Good Time To Buy Says Macquarie]

Source: Hussman Funds

The blue line shows unprecedented corporate profits on the left scale. And on the right is an inverted scale of profit growth 5 years out. You can see that going back 64 years, Hussman's research reflects a strong inverse correlation. When profit margins rise, future profit growth falls. It makes a visual case for declining margins in the future, which could be a threat to stock prices.

[Related -Abercrombie & Fitch Co. (ANF) Q2 Earnings Preview: The Unkind Quarter]

Factors contributing to high margins now and perhaps in the near future include:

  1. Record government stimulus adding to the economy and companies' bottom lines
  2. Very little corresponding corporate wage pressure
  3. Potential for even lower costs if there is a corporate tax overhaul

DeShurko also has talked about getting a bit more defensive recently. Last week, he named the chart formation that would cause him to convert 20% of his investment model to cash.

That said, he is not panicked about the corporate profit picture, or the economy at large right now.

DeShurko has two favorite macro indicators. One is the Chicago Fed National Activity Index, which measures the broad economy and inflationary pressures. Its latest reading shows above-average economic growth, with limited inflation in the coming year.

The other is the St. Louis Finanical Stress Index, which combines 18 different measures of systemic risk. As you can see below, the index reflects a declining overall stress level since the end of last year.

 

Should Q1 earnings guidance get suddenly pessimistic, or his two top risk indicators head the wrong way, DeShurko says that could be a call to move into lower volatility stocks, such as ones in the PowerShares S&P 500 Low Volatility ETF (SPLV), utilities including ones in the Utilities Sector SPDR (XLU) and more preferred stock, such as ones in the iShares S&P U.S. Preferred Stock Index (PFF).

But for now, he sees no imminent danger of an earnings collapse. He continues to seek stable value and high yields.

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.

iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article imageXerox Corp. (XRX): An Insider’s $500,000 Insider Buy

Last week was a healthy week of insider buying as 194 companies reported purchase records. The number read on...

article imageQihoo 360 Technology Co Ltd. (QIHU) Q2 Earnings Preview: A Green Monday

Qihoo 360 Technology Co Ltd. (NYSE:QIHU) will report its second quarter 2014 financial results on Monday, read on...

article imageSix Stocks that Could Outperform in the next 90 days

Earlier today, Goldman Sachs put out its list of the 50 stocks that Matter Most. It’s a list of the 50 read on...

article imageFoot Locker, Inc. (FL) Q2 Earnings Preview: Running Past the Street View

Foot Locker, Inc. (NYSE:FL) plans to report financial results for its second quarter ended August 2, 2014 read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.