When You are at Peak, Which Way is Next?

To appreciate the amount of oil that we consume I have added a video (two years old, but not much changed) that illustrates the amount. I have also  added a thoughtful analysis on the current demand for housing in the US. Gasoline at the pump is rapidly increasing to the $4 per gallon mark. Oil price reachesd to a new 30-month high of $108 per barrel. Where is this going? Where do you think?

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US peak profits warning from Chris Mayer
Posted on 02 April 2011 Arabian Money

Rising star of the US financial newsletter world Chris Mayer has a stark warning for readers in his latest issue of Capital & Crisis. Profit margins in the US have reached unprecedented levels and can now only fall as commodity price inflation hits home.

‘One of the vulnerabilities in today’s market is that profit margins are near peaks’, he says. ‘Investors tend to like companies with fat profit margins, but high profit margins are like honey pots that attract competitors. They are rarely sustainable for long’.

Top ten crisis

If you take a list of the top 10 technology stocks in the US Nasdaq market then the average net profit margin is around 25 per cent, and similar high profit margins are also seen across the S&P 500 stocks. The boost to profit margins has come from cost cutting in the downturn, mainly in the form of job cuts that do nothing to boost domestic consumer demand.

‘Today, though, I doubt many of these firms have much more to cut,’ suggests Mayer. ‘Instead, the focus is now growing sales and taking business from competitors or defending an existing business. The focus, too, is how to deal with rising raw material costs. All of these put enormous pressure on margins. We should expect to see them fall.’

That of course is the contrarian view. It is not what the bulls of Wall Street are saying. They see a recovery in the US economy that is raising all boats.

If the Wall Street consensus is again wrong then the reverse will be true and all boats will sink. Mr Meyer is stock picking to locate the boats that will stay afloat, so at least he is thinking in the right direction. But the tendency always is for the good to get cast down with the bad, particularly if the numbers are overwhelming.

Naturally this situation is most dangerous when company profits have recovered sharply and the domestic economy is still in the dumps. And what do US auto and house sales figures quite clearly show us?  The domestic US economy is still in a depression with activity well down on the boom years.

Domestic depression


(US auto sales down 19% last year and that’s for smaller cars)
(US disposable incomes drop for the first time since September)

Now if domestic demand is not rising, and indeed consumer personal disposable income is falling  then what prospects are there for pushing up company revenues to keep profits surging ahead? You have to look to exports and repatriation of multinational income.

Yes but does the world not have a few worries of its own right now? To briefly summize: Japan just had its worst earthquake in history and nuclear reactors are leaking plutonium; the UK is facing three years of austerity; the eurozone has a massive debt crisis; and the Middle East and North Africa is in a state of revolution, civil war and protest that has pushed oil prices to a two-year high.

Will Asian sales hold up under these circumstances? Or will stocks sell-off and the dollar rally, making US exports uncompetitive again? This peak profits warning is very well timed.