Tuesday, June 22, 2010

Smithers the Bear

Regular readers of this blog know that I frequently refer to valuation measures that are updated quarterly by British economist Andrew Smithers, who bravely published a book in 2000 warnings that stocks were vastly overvalued. Bloomberg now reports that he has more negative views to share:

Profit margins for U.S. companies are likely to tumble from last quarter’s record, a decline that will lead to much lower earnings than analysts expect, according to economist Andrew Smithers.

“The corporate sector’s outlook is extremely bad,” Smithers, founder and chairman of the investment-advisory
firm of Smithers & Co., said last week in an interview. “I can’t see any way out of it.”

The article goes on to mention that he calculates corporate profits margins to be at a record since such data began to be collected in 1947 and concludes:

Margins “are likely to fall a lot” as governments restrain deficit spending next year, reducing cash flow elsewhere in the economy, the report said. Companies will bear the brunt of the shift as opposed to households, which are heavily in debt and save relatively little, in his view.

The decline in margins will lead to profits falling “well short of expectations,” he wrote. Analysts foresee earnings at companies in the Standard & Poor’s 500 Index rising 34 percent this year and 18 percent next year, according to data compiled by Bloomberg.

This view appears consistent with ECRI's growing caution on the economy. Even a growth slowdown of moderate severity is likely not baked in the analysts' cakes.

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