Profit Margins, Earnings Growth, and Stock Returns

The profit margins of large U.S. companies have ranged between roughly 5.5 percent and 7.5 percent [1955 to present ]

… During the 1990’s they climbed back to their previous highs of 7.5 percent (although a chunk of those earnings would evaporate over the next few years after they were found to be fraudulent). Following the earnings plunge of 2001-2002, the recent economic rebound has put net income at about 8.5 percent of revenues, a 50-year record.

The direction profit margins take from current levels will have a powerful effect on future earnings growth. It will also determine whether or not the stock market’s recent highs will be seen as reasonable, in hindsight.

… But profit margins aren’t at 5.5 percent anymore. They’re at a historical extreme near 8.5 percent. And earnings aren’t at a trough, they’re at record levels. Reinvestment to fuel future earnings growth is at 40-year lows. The financial sector’s 14 percent profit margin contributes nearly a third of the S&P’s earnings. While it’s possible that profit growth will continue to surprise, investors should recognize that they are paying high P/E multiples on high profit margins, and should be prepared for some possible headwinds.

http://hussmanfunds.com/rsi/profitmargins.htm

Should financial information for women be different? Proabably not, but most women of my acquaintance are seriously poorly informed. If putting a gender-specific perspective on financial information gets more women to read it, then fine - do it.

46 Things I Wish My Mom Taught Me About Money
Personal finance can sometimes seem maddingly complex, but it doesn’t have to be; knowledge of some basic principles will make your life much, much easier.
http://www.womenspersonalfinance.net/2006/09/46_things_i_wis.html

• spend less than you earn
  – seems so simple but an alarming number of people just don’t get it
• pay yourself in savings/retirement the equivalent of one hour per work-day (or 12.5%) before anything else
  – I had heard 10% as a rule-of-thumb, but this is even better - catchier and a couple of percent more
• ask for discounts. Many insurers won’t volunteer discounts like multi-policy, safe driver and good-grade deductions on your premium, but will be “reminded” when you mention it, so don’t be afraid to ask.
  – Being proactive about money isn’t something most women do, so this needs to be mentioned regularly - there are lots of “better” rates available for the asking, but you have to ASK to GET.
• shop around for new auto and homeowner insurance every 3 years
  – our friend who works for an insurance company that covers high risk drivers found that the competition provided better cheaper coverage for her - a good driver with an excellent record and good credit score.

While I hate to quibble as most of the advice is really good, there are a couple of things worth mentioning.

Insurance - Not claiming the small stuff is good advice but worrying about insurance cancellation is a “girl-thing” - most insurers will see claims as an opportunity to raise rates, often well above the cost of the payout on the claim.

Saving and Investing - Putting money into a 401K is supposed to be a good idea, right? But choices of investments may be dictated by the financial services company working with the employer. In some cases, employees’ 401K contributions have been “invested” in products that declined in value and wiped out the retirement savings. See advice about the difference between saving and investing, and avoid products you don’t fully understand.

Learn more…

WomensPersonalFinance.net
We cover all things financial, from budgeting, saving, and investing, to marriage, divorce and vacation planning.
http://www.womenspersonalfinance.net/

Just some observations and scenario thinking prior to “it” whatever it turn out to be - finanacial and economic disaster for all or just some bumpy bits over the next couple of years?

2006.12.12
Some of the most deserving won’t get their come-upance while Larry Lawnmower, his wife Mary Mortgage processor and family will endure major disruptions. Perhaps some of the Wall Street and corporate execs (”earning” 300+ times the average employee) aren’t as smart as they think they are and will be hurt by their colleagues and advisors. There are a lot of really mean people out there, who have no problem knowingly taking advantage of others.

Are Larry and Mary going to be out of their good paying jobs? Are their 401(K)s in mutual funds worth anything - fees, inflation? Can they stay in the house even though they are having trouble making the payments? Could they sell the house if they need to?

How bad are things now? “Everyone” says the economy is ok but what are individuals really think ing and experiencing now? Ignoring serious warning signs? Rationalizing the difference between personal financial problems and the upbeat economic “news”?

What happens to the “fat cats” - the folks making million dollar salaries? Marc Faber pointed out that the 17? thousand employees working for the big five financial companies took home more last year than the GDP of Vietnam (pop. 84 million). Definitely something wrong with this picture.

In this service economy, what services continue to be needed and at what price if there are adjustments (large or small)? Expensive restaurant meals? Massage therapy sessions? Sky-high pointy shoes and $20,000 handbags? Starbucks coffee?

What happens to all the big ticket items bought on credit? McMansions? Expensive cars? Boats? Boat sales are still great but there are an awful lot of discretionary expenses for dock fees and mortgage payments that could get cut if things get tight and reality sets in.

What’s in store for all the kids finishing school and starting work? Kids who got a college education because it was expected and their parents paid for them to have a nice life for four more years? Kids from cultures that expect a lot more effort having succeeded in spite of great hardships and adversity?

How bad will it get before some major changes ensure that everyone gets adequate healthcare?

Will there be violence associated with the disparities?

What new and exciting innovations will develop? Hopefully, something more socially resonsible and beneficial than negative-amortization.

Though it isn\’t very exact, I am curious to know how many people are sufficiently well off that they won\’t be significantly impaced in the event of a significant down-turn.

At the highest end of the income scale, $166,000 was the lower limit of the top 5%. The median earnings for households in the top 5% was $281,155. Half of all those top-5% households earned more.

http://www.investopedia.com/articles/06/middleclass.asp

Gini coefficient
http://en.wikipedia.org/wiki/Gini_coefficient

The Gini Coefficient provides an indication of the inequality of the distribution of wealth - the US is more unequal than most other coutnries. Mexico and Brazil are considerably less equal. Interestingly, the inequality is raising quickly, while other countries like France are declining significantly over the same period.

Although the data is for household incomes, the highest bracket is $100,000 and over. About 16% of the households in the US are in this group, so it isn’t very useful.
HINC-01. Selected Characteristics of Households, by Total Money Income in 2005
http://pubdb3.census.gov/macro/032006/hhinc/new01_001.htm

I’m looking for numbers of individuals or households that have so much money, even a decline of 50-80% would not cause them to have to forgo eating out, travel, new cars or designer clothing.