Monday, July 30, 2012

John Hussman's Views on Profit Margins, Forward Earnings (July 30, 2012)

Here's a quotation from John Hussman's Weekly Market Comment this week ('No Such Thing as Risk?') on profit margins and forward earnings estimates. He runs the Hussman Funds.

"I recognize that many analysts consider stocks to be cheap on the basis of “forward operating earnings,” but I continue to believe that the 50-70% elevation in profit margins relative to historical norms is an artifact of extreme deficit spending and depressed savings rates, and that as a U.S. recession unfolds, profit margins and forward earnings estimates will collapse. This is currently seen as heresy (as was my assertion just before the tech-collapse that technology earnings would turn out to be cyclical), but that’s how earnings and profit margins work."

It's been an interesting cycle so far. Let's see if the Federal Reserve can backstop earnings and margins during the next recession. The FOMC meets on July 31-August 1 and September 12-13. Hitting the debt ceiling and approaching the fiscal cliff at the end of the year will be interesting as well.

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