NEW YORK (Real Money) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
This past week, Kass wrote about his view that corporate earnings are due for contraction, leading him to boost his net short position. He's also shorting Apple's (AAPL) as its iPhone product cycle winds down, and sees a spike in short-term Treasury yields on Friday's jobs data that could potentially hurt banks' net interest margins.
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A Long-Awaited Contraction
Originally published on Dec. 5, 2014 at 3:15 p.m. EST.
- Some mean regression of corporate margins may lie ahead.
As I discussed Friday morning (referencing a classic episode of The Simpsons), it is now clear to me that a long-awaited contraction in corporate profit margins lies ahead.
Corporate profit margins are among the most mean-reverting economic series extant, and it was only because of unprecedented easing (and zero interest rates) coupled with continued cost-cutting (which has now ebbed) that margins continued to rise over the last two years.
As a result, corporate profits ("the lifeblood of stocks") will likely be pressured -- and might miss relative to optimistic consensus expectations.
This morning, the month-over-month hourly earnings increased by 0.4% compared with expectations of only a 0.2% rise. While the year-over-year rise in average hourly earnings is still only 2.1%, the month-over-month climb of 0.4% is startling -- not just for the Federal Reserve (and its decision-making process) but with regard to the growth in corporate profits as well.
Mr. Market's rapid advance has suggested that it might be too early to worry about wage inflation and profit margin contraction, but I believe he (and market participants) are making a mistake!
For this reason and others, I have raised my net short exposure to more than 20% today.