PROFIT MARGINS - Contract as a Percentage of GDP
Mixed Bubble Messages as Profit Margins Contract, VIX Languishes 06-30-14 Bloomberg Brief
Jeremy Grantham — once a bedpan salesman from Doncaster, England, now co-founder of one of the world’s largest asset management funds GMO — is noted for his astute predictions of stock market bubbles and recoveries. His investment philosophy is heavy on statistics and a conviction that asset prices and profit margins mean revert to the long run.
In January 2007, he wrote: “The stock market is overpriced. Everything is overpriced” and in March 2009, he wrote his newsletter titled: “Reinvesting when Terrified.” The timing was perfect because on March 9, 2009, the S&P 500 closed at 676, the lowest since September 1996.
Grantham’s first quarter 2014 letter was titled “Looking for Bubbles Part one.” The chart of aggregate profit margins on U.S. corporations shows they have risen from 7 percent in the fourth quarter 2008 to 12.7 percent in the last quarter of 2013 and have abruptly declined to 11.6 percent recently.
Grantham’s newsletter admittedly exhibits some rare indecision on one hand stating “The bull market may come to an end any time,” pointing to China slowdown and a Russia miscalculation, while also stating it will end badly after it reaches a level in excess of 2,250 or more.
In his defense, the credit, rates and equity markets are also throwing up mixed signals.A chart of the Credit Suisse Fear Barometer compared with the VIX , five year swap spreads and the CDX IG index show stark disagreement.
Grantham pointed to geopolitical risk as an achilles heel of the market. Country risk will be brought into sharper relief Monday with Argentina facing the possibility of another default