Tuesday, May 20, 2008

US corporate profits ex-inflation

Barry Ritholtz has been the drum major of the band of folks taking issue with the Fed's obsession with "core" inflation over any apparent concern with "ordinary" inflation. Barry calls "core" inflation "inflation ex-inflation".

Today he has given us a look at "core" profits, with an assist from Bloomberg.

The Bloomberg article tells us:
Without the $70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor's 500 Index tumbled 26 percent and 30.2 percent, the biggest decreases for any quarter since Bloomberg started compiling data in 1998.
Trouble is,
The industry is getting less profit from a barrel of oil than at any time since 2005, just as the rest of the U.S. economy is sputtering. Still, energy shares posted the S&P 500's steepest gains in the past year, bloating their representation to 15 percent of the index.

[They have a profit margin] that's the smallest margin since September 2005 and about half the profit U.S. energy producers extracted from crude when it traded below $50 a barrel in January 2007.

A 37 percent decline in crude oil to $80 would have a bigger impact on the S&P 500's performance than five years ago, when oil and natural-gas companies only accounted for 5.8 percent of the index's value, according to Bloomberg data.

Half of the world's 10 biggest companies by market capitalization -- Exxon, Beijing-based PetroChina Co., Moscow- based OAO Gazprom, Rio de Janeiro-based Petroleo Brasileiro SA, and Royal Dutch Shell Plc, located in The Hague -- are now energy companies, at a time when the marginal cost of producing a barrel of oil is climbing.

"A lot of that margin which dropped to the bottom line, that's gone," Bank of America's Quinlan said. "The easy money is behind us, for both the oil companies and investors."

Barry has some mean-reverting feelings about this:
Consider what this means in terms of (non-energy) valuations. The trailing 12 month earnings of the S&P 500 is ~21, -- way above its 60-year average of ~16.

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