Profit Margins of Doom

Last Friday I was on CNBC Reports and the other guy was trying to say profit markets were going to get better. Whoa! Hold on there guy. I trade every day and this whole second derivative rally since March is all about high profit margins. In fact, they are near record highs, only slightly lower than 2007 (before the crash). Just check out this link to a piece in Financial Times.

But nothing could be further from the truth. Far from being depressed, aggregate profit margins are near record highs. According to the latest national accounts data, as a percentage of corporate output, second-quarter profits before depreciation, interest and tax stood at about 35 per cent, only a smidgeon below pre-crisis levels in 2007. By contrast, the average margin going back to 1947 is 29 per cent, according to Smithers & Co.

So, what does this mean to you and your money? Its simple. Corporations have cut as much as they can at this point. The market has rallied because of it. But, what we don’t know is if they will be able to permanently keep cost down and generate more money going forward. If consumers don’t start spending and the economy only recovers statistically (meaning it stops going down) it will be a stretch for the margins to stay high. I have never seen it happen, but I suppose things are different this time . . .