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Tag: Earnings

Stock Market Today: GE, FB, GOOG Lead Today’s News

U.S. stock futures were weak this morning as Wall Street looks to looming tensions in Ukraine and worse-than-expected Chinese data.

The Dow Jones Industrial Average rose 146 points on Monday to finish at 16,173.24. The Nasdaq increased by 22 points to finish at 4,022.69, while the S&P 500 added 14 points to end the day at 1,830.61.

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Stock Market Today: New Rules for Big Banks

Stock market news today, April 9, 2014: The Dow Jones Industrial Average rose 10 points yesterday to finish at 16,256. The Nasdaq increased 33 points to finish at 4,112, while the S&P 500 added 6 points to end the day at 1,851.

Today, the FOMC will release minutes from its March meeting. Investors are seeking clues on when Fed Chair Janet Yellen and the central bank will exercise an increase in interest rates.

The post Stock Market Today: New Rules for Big Banks appeared first on Money Morning – Only the News You Can Profit From.

Weaker earnings will result in higher corporate default rates; "zombie companies" yet to be hit – Sober Look

Credit Suisse is ringing alarm bells on corporate earnings – both in the US and Europe. The Wal-Mart negative earnings surprise last week for example could be signaling a slower earnings trajectory for other firms.

What CS is particularly focused on is not necessarily the stock market valuations in the US and Europe (which is a separate problem), but corporate default rates instead. So far default rates have been extraordinary low – around the levels seen during 2005-2007 “bubble” years.

US HY issuers default rate (source: JPM)

Increasing numbers of middle market firms are having difficulties growing revenue or even losing money and yet obtaining all sorts of financing (see post). The current earnings situation is simply not consistent with the current level of default rates.

CS: – … the current levels of companies losing money on both sides of the Atlantic is rising. This is not yet a phenomenon in the largest companies – which is why Wal-Mart might be very important – more, it is a problem in the medium-capitalisation range. But it would normally be associated with a very much higher high-yield default rate and therefore much tighter financing conditions of which all markets, not just credit markets, would have to take notice.

Source: CS

As the percentage of money-losing firms rises, corporate default rates should follow. The chart below compares the two trends: “Current profit performance is consistent with a default rate of 6%, not
the current 2.8% in the US …

US firms only (source: CS; slightly modified/simplified)

That is why Q3 earnings results will be vital. If the rise in the number of firms with poor or negative earnings continues, default rates are sure to pick up. And the catalyst could be the sudden spike in interest rates we’ve had – which has the potential to squeeze corporate margins.

CS: – So we have a strong suspicion that the medicine applied to the financial sector has suppressed corporate defaults (the thematic “zombie companies” argument.) Raising the awful possibility that we may be only part-way through a current default event dating all the way back to 2008/9, with the other foot to fall as we all realize that the new normal has to involve some sort of positive interest rate.

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Key factor driving corporate profit margins- Sober Look

Corporate margins in the US are no longer expanding at the rate they were in the first couple of years after the recession. In fact margins are now undergoing a gradual decline.

WSJ: – Revenue at the companies that make up the Standard & Poor’s 500-stock index—excluding banks, whose profits have soared—is expected to creep up by just 1.1% in the second quarter from a year earlier, according to Thomson Reuters, which melds Wall Street analysts’ projections with company reports.

Earnings, meanwhile, are expected to decline 0.6%. That would be the first profit decline for nonfinancial companies since last autumn and the first time in a year that earnings grew more slowly than revenue, a sign that margin widening is petering out.

Analysts are blaming this on weak economic growth and poor business spending. Some are pointing to the end of the refinancing binge that allowed corporate treasurers to capture falling interest rates. That game is now over and lower funding costs will no longer add to margins. If we step outside the US however, most nations – particularly emerging markets – are seeing even sharper downward adjustments to margin growth.

Source: JPMorgan

According to JPMorgan, profit margins are heavily impacted by changing trends in labor productivity gains, which have declined globally. Change in profit margins is in fact proportional to the deviations from longer term growth trend in productivity. And emerging markets have seen the highest correction to that trend, resulting in higher reduction in corporate margins.

Source: The Conference Board

The US actually exhibits a relatively stable productivity trend which had accelerated right after the recession but has since declined. That’s why US margins grew sharply after the recession and have been in a gradual downward drift recently. Nations such as Hungary and Russia on the other hand saw an extreme adjustment in the productivity trend, resulting in collapsing profit margins.

Source: JPMorgan

As we begin to adjust to lower profit margins for US companies, we should keep in mind that the declines are much faster for most other nations. Going forward, while business spending and interest rates will certainly have an impact, it’s the labor productivity gains that will ultimately drive adjustments in corporate margins.

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