Market Valuation

[ERICOPOLY]

My portfolio is concentrated in financials which trade well below the mean, however I remain very interested in the market valuation level as a whole.

 

Partly because it impacts financials.

 

What is going to cause this mean reversion in profit margins?  Will it be an investment and hiring boom from upstart competitors that will blow bank earnings and growth through the roof?

 

Is S&P500 mean profit margin reversion something for me to fear as a bank investor or is it instead an opportunity?

 

LOL. You are always so optimistic.

 

Let us ballpark this. I think publicly traded stocks total profits are something like $1200 billion very roughly. This is at a profit margin of about 10%. Say profit margins drop by 2.5% that is about $300 billion or before tax about $400 billion. This amount would go to either consumers via lower prices or to employees via higher compensation or higher costs of raw materials. Let us assume all this goes to either higher compensation or to raw materials for simplicity. I would think of this about 25% would easily go to foreign exporters/subsidiaries as either compensation or raw materials. So at most we have $300 billion in additional money in the hands of consumers. Does this give enough of a boost to bank's profits, given that non-financial businesses that are major customers of banks have lost about $400 billion in pretax earning power?

 

Vinod

 

Hire 6 million people and pay them $50k each.

 

That's $300 billion.

 

Nice dent in the unemployment rate.  What drives bank consumer losses BTW?

 

Hire them? For something productive?  Don't bet on the government doing something productive. 

 

On the other hand, a $300B cut in the most regressive tax of all, the employment security tax, paid by both individuals and employers would stimulate hiring in 1001 productive (translation profitable) ways.  The unemployment rate would soon come down to normal as increased profits by the forgotten engine of the  economy, the small businessperson,would bring into the workforce less desirable workers that big businesses won't hire.  Then, GDP would increase sharply as it has not with handouts.

 

It's been a long time since January, but I believe I was referring to private sector, not government hiring.

 

The discussion was of what would happen if profit margins came down due to competition from upstart competitors.  I was reasoning that if the upstart competitors hired workers and research labs/factories, etc...  well then it would translate to wages/hiring, GDP growth, etc...

 

Translation:  instead of one company employing 1,000 workers enjoying fat profits without competition, there might be a second or third company each with 1,000 workers slaving away attempting to steal market share.  Profit margins fall due to competition, but people are getting back to work too.

 

So when will the hiring boom happen?  Don't people keep forecasting that competition will take away the fat profit margins?  Mechanically, how does that happen if not from new competitors?