Surprise, Surprise, Surprise
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Posted 15 July 2012 - 11:23 PM
As we go into the heart of earnings season, consider this: half of the S&P’s 200 bps net margin expansion since the mid-1990s is because of a lower effective tax rate and higher foreign margins. The foreign high margin story is now changing and I am not so sure corporations are going to get the free tax pass they are accustomed to (Jeff Gundlach: Get Ready for the Taxes too Low Party).The next chart shows the unprecedented wealth corporations enjoy relative to the American gente, the result of years of supply side fiscal policy, much of which I have been describing as looting.The takeaway from the next chart and Bernstein commentary is that the notion of positive surprise is increasingly built in out of habit, while the negative surprise is in fact an actual surprise. That is the environment we are operating in. Thus even meeting expectations, let alone coming short, creates havoc with those company’s stock prices.The next chart shows the capital goals by demographics. The fact that baby boomers who are increasing in number are more capital preservation and income directed, well explains the second mutual flow capital flow chart into bonds and away from stock, especially in the last four years.Unfortunately this, along with central bank manipulation, has created a investing- in- nothing-risk-off income bubble. Although it could be argued that stocks are cheap to bonds, that fails to take into account what happens when bond yields surge. In that scenario bond prices would fall alot, and stock prices would fall as well, a dumb and dumber outcome.
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