Grantham Calls Corporate Profits Freakish

Although a bit dated this piece in Bloomberg is a great point and counterpoint by two heavy weight investors Jeremy Grantham of GMo and bob Dull of Blackrock.  We have featured Grantham several times here in addition to his quarterly newsletter so it should be surprise to readers that he takes the bullish stance when it comes to corporate profits.  It is Grantham contention that the run in higher profits rates will eventually have revert back to their long-term mean which will be lower than where they sit today.


Bob Dull on the other hand takes the bullish side of this and sees no reason why corporate profits cannot head higher.  He sees the a tight labor market and labor saving technology as the two catalyst to support long-term profit growth.  We have been beating the drum here at DWCM on that very point that new technologies [Robot Works Take Over Warehouses] and [Making It In America].


I can see both perspectives from Grantham and Dull in that corporate profits can not run higher forever but labor savings technologies aren't going away any time soon either.  Companies are always going to be looking for ways to save costs but there comes a point in time when you can no longer squeeze blood from a rock.

• “The implication for the stock market is ugly, because it means earnings are unsustainably high,” Grantham’s colleague Ben Inker, GMO’s director of asset allocation
• U.S. companies’ ability to squeeze more profit from each dollar of sales is pushing earnings higher, even as the economy has grown at a below-average clip since the recession ended in June 2009. Grantham, who called corporate profits “freakishly high” in an August commentary, sees wide margins as an aberration. Some of his competitors say changes in the economy and the way firms operate could keep them near peak levels for another year or two.
• Profit margins have been bolstered by sales to faster- growing economies in Asian and Latin American emerging markets, which have helped companies offset weakness in the U.S. and Europe. American multinationals “are much less dependent on developed-market economies than they have been in the past,” William Stromberg, director of global equity research at Baltimore-based T. Rowe Price Group Inc. (TROW), wrote in a November newsletter.
• Profit margins have been trending higher since the mid-1980s, said Chris Christopher, an economist at IHS (IHS) Global Insight, who has written on the subject. Quarterly margins peaked at 11.9 percent in the 1980s, 13.6 percent in the 1990s and 14.5 percent in the most recent decade, Moody’s data show.
• “Lower margins are the great threat to market performance,” he wrote in the August newsletter. Grantham is known for his bearish investment outlook and for his successful record in identifying stock-market bubbles.
• Margins have been propped up by a “great surge” in government spending that fueled consumption, Grantham said. As political pressures force the U.S. to cut its budget deficit, the economy will suffer and margins will drop, Grantham predicted without laying out a timetable.
• With job growth likely to remain “sluggish” and interest rates low, rising costs are no threat to profits, said BlackRock’s Doll. If the U.S. economy continues to “muddle through” at the growth rates the country has achieved the past two years, sales should hold up as well, he said.   “We didn’t need a strong economy to get margins high,” Doll said. “Why do we need a strong one to keep them high?”