Wednesday, May 18, 2011

Beyond The Horizon: REDUX 2011 - By Ed Easterling

Found via Advisor Perspectives. Good graphs showing the current elevated level of profit margins.

Rather than rehash old ground, this article will provide a speed-round of charts and limited commentary to explain the current conditions and the expectation for an earnings decline within the next few years. Once again, since the fundamental principles of the business cycle cause history to repeat itself, a decline in EPS should not be beyond your horizon!

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The business cycle has endured for well more than a century. It generally delivers two to five years of above-average EPS growth before experiencing a year or two of pullback. We have had a dramatic run over the past two years and the forecast for the next two years now positions profits well above its historical relationship to the economy.

Several factors now indicate that a period of EPS decline may be upon us. It does not necessarily portend a decline in the market, although that vulnerability clearly exists. Beware nonetheless! For investors, this means that portfolios should be positioned with diversification and active risk and return management.

As an analogy, winter is not a time for farmers to hibernate; rather it’s a period to approach crops differently. Today’s investors have so many tools and techniques available to them to actively “row” and invest like institutions, thereby seeking relatively consistent returns with a lot less disappointment risk.

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Related book: Probable Outcomes

Related previous post: The Invisible Stock Bubble - By Jack Hough