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 -In A World Of Artificial Liquidity – Cash Is King]

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.

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

[Related -Did The IMF Provide Support To Syriza?]

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 imageIn A World Of Artificial Liquidity – Cash Is King

It's more crucial now than ever for people to consider extracting a portion of cash from their bank read on...

article imageDid The IMF Provide Support To Syriza?

The IMF published yesterday a preliminary analysis on the debt sustainability of the Greek read on...

article image3 Defensive Stocks Offering Safety, Yield In A Turbulent Market

The world can be a scary place to invest these days. Greece can't pay its debts, Russia is a mess, China's read on...

article imageFour Stocks in the Dow Making Fresh 52 Week Lows

“What gets weak tends to get weaker; what gets strong tends to get 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.