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Monday, November 26, 2007


3q profit growth officially negative

the implications, via big picture, from merrill's david rosenberg through barron's.

David stresses that profits drive the business cycle -- capital spending and employment feed off them. And he sighs: "It has always been thus." Hence, he's ineluctably forced to the conclusion that a recession in the economy "is either here or no more than two quarters away." And he goes on to note the last two times corporate earnings skidded to a comparable extent into negative terrain were in the fourth quarters of 1989 and 2000 (both instances, we might add, proved the beginnings or a prelude to something ugly in the stock market as well as the overall economy).

There's a tendency, David notes, especially prevalent among the considerable number of die-hard optimists, "to strip financial-related earnings out of the pie" because financials now account for 30% of corporate profits and crow about how good everything else is. Well, everything else isn't so hot and, as David observes, "stripping out financials is like stripping out California, Florida, New York and Texas from GDP."

i've mentioned the trend in profit growth before, indeed as early as february. and i noted the breadth of listlessness in consumer stock sectors here.

i'm certainly long for a trade, but in the larger frame it's time to batten down the hatches for the recession (or is it more?) of 2008. (though many disagree.)

i tend to think that we're in the early stages of something bigger. consider: the united states fell into a period of panics, depression and valuation compression from 1929 to 1949, then again from 1968 to 1982. these were not the first such periods -- consider the 1770s and 1780s, 1819-1848 and 1869-1896 -- but they are the ones most easily researched. each of these depressed periods began with a massive speculative credit bubble that was subsequently unwound, with credit destruction breeding a pessimism eventually so dominating in capital markets that broad-based stock indexes could be bought for something like 12x-to-15x dividends (not earnings) or less. the current s&p 500 is valued at something like 50x dividends, near the most expensive levels in history.

the point is less to forecast such a period than to understand that such periods do occur and will in every probability occur again. moreover, the catalyst for such a period is in place.

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