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The gist is that writeoffs are distorting the earnings and making them look worse than they are. But then, layoffs are distorting employment and making them look worse than they are. The second statement, my quote. Here is his exposition. I've left out the great stock picks. For that, you will have to register. Sorry, folks.
The bears today bemoan falling profits. What they overlook is that operating margins are rising. Without writeoffs, earnings would rise nicely now. Not bad.
This market is sheer beauty--the most stunning I've ever seen clearly. Maybe not as beautiful as 1974, but perhaps as a young man I didn't see that right. Of course, beauty is in the eyes of the beholder. But I think most of you will never see a market this gorgeous again, ever. Or if you do, you won't see many.
How beautiful? Count the ways. First, big is beautiful. Big bear markets are followed by big rallies. There are no exceptions. This bear, with a 48% decline in the S&P 500 at its worst point this summer, falls in the middle of the range of the seven big bear markets of the last century. With the exception of the Great Crash, which took the Dow down 89% between 1929 and 1932, big bear markets have sliced stock prices 42% to 55%. But if you think this is like 1929-32 you are delusional: Absent are the 1930s' massive global trade barriers, the massive worldwide destruction of the quantity of money and the massive economic dislocations.
Following all the big market drops came 12-month advances, ranging from 29% to 65%, with a 50% average. That's big. And beautiful.
I devoted last month's column to Wall Street's four most dangerous words: "It's different this time," and how folks are fixated on that now, and why that fixation is a bullish sign. More beautiful still is all the hate e-mail that column generated, reiterating how it really is different this time. The more people protest that things are horrible, the more persuaded I am that it's not different this time. Fear is beautiful.
All this hostility to corporate leaders--does that mean more trouble ahead for stocks? No, this is already priced in. Today's antibusiness emotion parallels that of the 1903 bear market, known as the Rich Man's Panic. Then Teddy Roosevelt, as trustbuster, played the role now being played by congressmen who, with perverse irony, lecture business on integrity.
The bears today bemoan falling profits. What they overlook is that operating income is rising. Operating income is the spread between sales and direct costs. (It is also known as earnings before depreciation, interest, taxes and nonrecurring items.) The operating margin is the most basic efficiency ratio for a company. Without writeoffs, earnings would rise nicely now. Profits are about the past. Operating margins are about the future. |
