2015-01-02

Are U.S. Stocks Over Valued?

Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly." - Jeremy Grantham, Barron's.

Looks like it.

Pay close attention to the charts on declining sales and effective tax rates. 

More here - with more charts!

Sports, especially baseball, always tell cautionary tales of statistics reverting to their mean. If a player is a career .270 hitter and has a .300 season, you can bet his mean average will revert back to .270.

It's the law or something.

Oh, just like falling gas prices,  rising corporate profit margins have little if anything to do with Obama and his policies. The former was essentially an act of OPEC (not to mention Obama resists any meaningful action that would benefit consumers with regards to oil and gas) and the latter, in part, a process long time in the making for newer businesses impossible to trace back to political action. In other words, it's independent of Washington.

"A bottoms-up analysis of S&P 500 profit margins confirms that profit margins have moved to new highs. However, a deeper dive into the details rejects the hypothesis that much of that improvement is a result of structural shifts towards a service-driven economy. Instead much of the improvements in profit margins have come from the so-called low-hanging fruits: costs that are easy to cut where associated negative impacts do not show up in the short term."

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