America’s quagmire

The American economy is in a quagmire. On one hand we have corporate balance sheets so trimmed of fat they could give Armstrong a run for his money in a race. While what trimmed that fat was adjustments to margins. According to Doug Short, the latest ratio of crude goods to finished goods, which is a way to measure profit margins, is in the 96^th percentile but is falling. Companies can only cut so much before they hit bone.

Source: Dshort.com

Lucky for CFOs, analysts have set the bar so low this quarter that you could spit across it and still beat. From the guys over at Bespoke we can see we are having the highest earnings beat rate since the first quarter of 2006 with almost half the S&P 500 companies already have reported for the quarter.

Source: Bespoke Investment Group

On the other hand we have an anemic consumer who refuses to put anything away in the bank and instead keeps hitting Wal-Mart, Apple, and Amazon.com, which is what makes this such a long-term problem.

The economy needs retail sales to keep a positive trajectory. The consumer makes up too much of the U.S. economy for them to pop the savings rate back up to 5 or 7%. A recent poll by TheMint.org found that nearly 80% of respondents would rather have $500 to spend in five years rather than $50 today. What’s surprising is the same poll showed that 67% of Americans under 18 would take the delayed satisfaction as well.

So we have a consumer who wants to save but isn’t, and companies who can’t afford to see them save as the have placed nearly all their chips on red in hopes when the consumer makes that critical decision they will let the wheel stop on ‘spend’ rather than ‘save.’

Bespoke: Earnings and Revenue Beat Rates

TheMint.org poll: Spend Now or Spend Later?

Doug Short: Profit Margin Squeeze

Disclaimer: Everything in this post is meant for educational and entertainment purposes only. Do not construe anything written in this post or blog as a recommendation.