Investing Curiouscatblog

Category: Financial Literacy

  • Investing in the Poorest of the Poor

    I have donated more to Tricke Up than any other charity for about 20 years now. There is a great deal of hardship in the world. It can seem like what you do doesn’t make a big dent in the hardship. But effective help makes a huge difference to those involved.

    My personality is to think systemically. To help put a band aid on the current visible issue just doesn’t excite me. Lots of people are most excited to help whoever happens to be in their view right now. I care much more about creating systems that will produce benefits over and over into the future. This view is very helpful for an investor.

    Trickle Up invests in helping people create better lives for themselves. It provides some assistance and “teaches people to fish” rather than just giving them some fish to help them today.

    The stories in this video show examples of the largest potential for entrepreneurship. While creating a few huge visible successes (like Google, Apple…) is exciting the benefits of hundreds of millions of people having small financial success (compared to others) but hugely personally transforming success is more important. Capitalism is visible in these successes. What people often think of as capitalism (Wall Street) has much more resonance with royalty based economic systems than free market (free of market dominating anti-competitive and anti-market behavior) capitalism.

    Related: Kiva Loans Give Entrepreneurs a Chance to Succeed – Micro-credit Research – Using Capitalism in Mali to Create Better Lives

  • 60% of Workers in the USA Have Less Than $25,000 in Retirement Savings

    2012 Retirement Confidence Survey

    (60 percent) report they and/or their spouses have less than $25,000 in total savings and investments (excluding their home and defined benefit plans), including 30 percent who have less than $1,000

    The data would be better if some value were placed on defined benefit plans; currently it is a bit confusing how much they may help. But the $25,000 threshold is so low that no matter what being under that value is extremely bad news for anyone over 40. And failing to have saved over just $25,000 toward retirement is bad news for anyone over 30 without a defined benefit plan.

    The large majority of workers who have not saved for retirement have little in savings. Almost two-thirds (63 percent) report they have less than $1,000 in savings and investments, and another quarter (25 percent) have $1,000–$9,999.

    Thirty-four percent of workers report they had to dip into savings to pay for basic expenses in the past 12 months.
    …
    Thirty-five percent of all workers think they need to accumulate at least $500,000 by the time they retire to live comfortably in retirement. Eighteen percent feel they need between $250,000 and $499,999, while 34 percent think they need to save less than $250,000 for a comfortable retirement.

    Workers who have performed a retirement needs calculation are more than twice as likely as those who have not (23 percent vs. 10 percent) to expect they will need to accumulate at least $1 million before retiring.

    66% of workers say their family has retirement savings and 58% say they are currently saving for retirement. These results are fairly consistent over the last few decades (the current values are in the lower ranges of results).

    Nearly everyone wishes they had more money. One way to act as though you have more than you do is to borrow and spend (which is normally unwise – it can make sense for a house and in limited amounts when you are first going out on your own). Another is to ignore long term needs and just live it up today. That is a very bad personal finance strategy but one many people follow. Saving for retirement is a personal finance requirement. If you can’t save for retirement given your current income and lifestyle you need to reduce your current spending to save or increase your income and then save for retirement.

    A year or two of failing to do so is acceptable. Longer stretches add more and more risk to your personal financial situation. It may not be fun to accept the responsibilities of adulthood and plan for the long term. But failing to do so is a big mistake. Determining the perfect amount to save for retirement is complicated. A reasonable retirement saving plan is not.

    Saving 10% of your gross income from the time you are 25 until 65 gives you a decent ballpark estimate. Then you can adjust even 5 or 10 years as you can look at your situation. It will likely take over 10% to put you in a lifestyle similar to the one you enjoy while working. But many factors are at play. To be safer saving at 12% could be wise. If you know you want to work less than 40 years saving more could be wise. If you have a defined benefit plan (rare now, but, for example police or fire personnel often still do you can save less but you must work until you gain those benefits or you will be in extremely bad shape.

    IRAs, 401(k) and 403(b) plans are a great way to save for retirement (giving you tax deferral and Roth versions of those plans are even better – assuming tax rates rise).

    Related: In the USA 43% Have Less Than $10,000 in Retirement Savings – Saving for Retirement

  • Which Currency is the Least Bad?

    I really can’t figure out which currency is something I would want to hold if I had the option. It doesn’t really matter, since I am not going to act on it in a very direct way (maybe if I felt very strongly I would do something but it would probably be pretty limited), but I still keep thinking about this issue out of curiosity.

    The USA dollar seems lousy to me. Huge debt (both government and consumer). Government debt is huge on the books and huge off the books (state and local retirement – and federal medical care [social security is really in much better shape than people think, though it also has issues 30 + years out}).

    The Euro seemed a bit lame 3 years ago. Today it seems crazy to think at least one Euro country won’t default in the next 3 years – and likely more. And if they take steps to avoid that it seems like it is going to make the case for the Euro worse).

    The Japanese Yen is much stronger than makes any sense to me. I think it is mainly because of how lousy all the options are. The huge government debt (worse than almost anywhere) and lousy demographics (and the refusal to deal with demographics with immigration or something) are big problems. The biggest reason for strength is that the individuals have huge savings (when your citizens own the debt it is much less horrible than when others do – especially when you are looking at currency value).

    The Chinese Yuan is the best looking at the economic data. The problem is economic data is questionable for the best cases (looking at the USA, Japan…). China’s economic data is far from transparent. There is also great political and social risk. The current worries of a real estate bubble seems justified to me and China just this week took exactly the wrong action – trying to prop up the bubble (in order to decrease the economic slowdown). I can see either of these cases playing out 10 years from now: It was obvious the Yuan was the strongest currency you are an idiot for not being able to see that or It was obvious China was a bubble with unsustainable policies and likely social upheaval thinking that was anything but a sign to sell the Yuan was foolish.

    Given all this I think I weakly come down on the side that the Yuan is likely to be the strongest.

    The safest play I think is the US dollar (as lousy as it is on an absolute basis the options make it look almost good). It could get clobbered. But that seems less likely than the others getting clobbered.

    Smaller currencies have some promise but they can be swamped by global moves. I really have no idea about the Brazilian Real. That might actually be a really good option. The Australian Dollar and Canadian Dollar may also. But those economies are really small. I don’t trust India: they have many good macro-economic factors but the climate for business leaves far too much to be desired (as does the pace of progress fixing those weaknesses). Many economist like them due to demographic factors. I understand that demographic factors will help, but without systemic reform I question how well India can do (it certainly has the potential to do amazingly well, but they seem to be significantly farther away from reaching their potential compared to many countries).

    The Singapore Dollar seems good on many levels, but the economy is small. I am not really sure about emerging economies, there currencies can get swamped in a hurry. Thailand and Indonesia experienced this recently. Thailand, Indonesia and Malaysia are interesting to me in thinking about what their currencies may experience, I would like to read more on this.

    This is more an intellectual and curiosity exercise than something I see directly tied to my investing strategy. But having clear answers of what I thought reasonable scenarios were for currencies going forward that would factor into my investing decisions. Right now, the confusing this causes me, leads me to favor companies that should be fine whatever happens: Apple, Google, Toyota, Intel (I don’t really like Facebook overall but in this way they fit). Lots of the stocks in my 12 stocks for 10 years portfolio, you might notice.

    Related: Is the Euro Going to Survive in the Long Run? – Why the Dollar is Falling – Strong Singapore Dollar – Warren Buffett Cautions Against Buying Long Term USD Bonds

  • The USA Is Not as Dependent on China Economically as People Think

    3 Economic Misconceptions That Need to Die

    Just 2.7% of personal consumption expenditures go to Chinese-made goods and services. 88.5% of U.S. consumer spending is on American-made goods and services… Walmart’s $260 billion in U.S. revenue isn’t exactly reflective of America’s $14.5 trillion economy. Walmart might sell a broad range of knickknacks, many of which are made in China, but the vast majority of what Americans spend their money on is not knickknacks.
    …
    Just 6.4% of nondurable goods — things like food, clothing and toys — purchased in the U.S. are made in China; 76.2% are made in America. For durable goods — things like cars and furniture — 12% are made in China; 66.6% are made in America.

    Those numbers are significantly less than I expected but the concept matches my understanding – that we greatly underestimate the purchasing of USA goods and services.

    We have an inflated notion of how large the China macro economic numbers are for the USA (both debt and manufacturing exports to us). The China growth in both is still amazingly large: we just overestimate the totals today. We also forget that 25 years ago both numbers (imports from China and USA government debt owned by China) were close to 0.

    We also greatly underestimate how much manufacturing the USA does, as I have been writing about for years. In fact, until 2010, the USA manufactured more than China.

    China owns 7.6% of U.S. government debt outstanding. As of November, China owned $1.13 trillion of Treasuries. Government debt stood at $14.9 trillion that month. That’s 7.6%.

    Who owns the rest? The largest holder of U.S. debt is the federal government itself. Various government trust funds like the Social Security trust fund own about $4.4 trillion worth of Treasury securities. The Federal Reserve owns another $1.6 trillion.

    Ok, this figure is a bit misleading. But even if you thrown out the accounting games 1.13/8.9 = 12.7%. That is a great deal. But it isn’t a majority of the debt or anything remotely close. Other foreign investors own $3.5 trillion trillion in federal debt (Japan $1 trillion, UK $500 billion). The $4.6 trillion of federal debt owned by foreigners is a huge problem. With investors getting paid so little for that debt though it isn’t one now. But it is a huge potential problem. If interest reates increase it will be a huge transfer of wealth from the USA to others.

    Just 9.8% of oil consumed in the U.S. comes from the Middle East. According the U.S. Energy Information Administration, the U.S. consumes 19.2 million barrels of petroleum products per day. Of that amount, a net 49% is produced domestically. The rest is imported.

    The oil figure is a bit less meaningful, I think. Oil import are hugely fungible. The USA cutting back Middle East imports and pushing up imports from Canada, Mexico, Nigeria… doesn’t change the importance of Middle East oil to the USA in reality (the data might seem to suggest that but it is misleading due to the fungible nature of oil trading). Whether we get it directly from the Middle East or not our demand (and imports) creates more demand for Middle East oil. It is true the USA has greatly increased domestic production recently (and actually decreased the use of oil in 2009). So while I believe the data on Middle East oil I think that it is a bit misleading. If we had 0 direct imports from there we would still be greatly dependent on Middle East oil (because if France and China and India… were not getting their oil there they would buy it where we buy ours… Still the USA uses far more oil than any other country and is extremely dependent on imports. Several other countries are also extremely dependent on oil imports, including the next two top oil consuming countries: China, Japan.

    Related: Oil Production by Country 1999-2009 – Government Debt as Percentage of GDP 1990-2009: USA, Japan, Germany, China… – Manufacturing Output as a Percent of GDP by Country – The Relative Economic Position of the USA is Likely to Decline

  • Leasing or Purchasing a Solar Energy System For Your House

    The economics of solar energy make sense today. The main stumbling block is financing the initial purchase (for homeowners, businesses or utilities). For new power generation solar is economically competitive in many locations today and prices continue to decline. One aspect that has harmed financing is the historical depreciation has been high (assuming a short lifespan of solar panels) but the panels now have much longer lifespans, meaning that when computing the return of solar investments you can expect a longer payback period. Combine that with falling prices and the economic case is great.

    For a homeowner there is still the problem of financing what could be a $30,000 installation. Of course, the extremely low interest rates help here. First you have low cost capital (when calculating your return). Second, your alternative yields are very low (so it isn’t like you would earn 8% on your money just buying a CD). But for those that don’t want to take on the loan many companies are being formed to work on the financing for you (they deal with financing and then sell you the electricity they generate with panels on your home). It is a good business model I think. I personally think you are better off cutting out the intermediary and financing it yourself, but if you don’t want to, you can get cheaper electricity and help the environment.

    In the USA there is a 30% federal tax credit for solar installation. Several states also offer tax credits for solar installation. There are also incentives in many other countries including Japan, Germany, Spain, Italy…

    Where the U.S. Solar Industry Is Shining

    The residential market for solar is still nascent, with less than 0.1 percent of U.S. homes outfitted with panels. That number could climb to 2.4 percent by 2020, estimates Bloomberg New Energy Finance. Prices for solar cells fell 51 percent in 2011, to 88¢ a watt, according to data compiled by Bloomberg.
    …
    Developers in the U.S. added 449.2 megawatts of solar-generating capacity in the third quarter of 2011, the latest data available, up 140 percent from the same quarter a year earlier.
    …
    SunRun hires local companies in 10 states to install solar arrays on customers’ roofs. The company charges clients for the electricity they generate— at monthly rates as much as 15 percent below those of regular utilities. Jurich says she expects SunRun to have a presence in 15 to 20 states within five years.

    I own JinkoSolar stock which manufactures solar panels. This is based on the belief that solar has reached a point where it is a good way to generate electricity and we have huge needs for electrical power generation world wide.

    Related: Top Countries For Renewable Energy Capacity – Global Wind Energy Capacity Exceeds 2.5% of Global Electricity Needs – Solar Energy: Economics, Government and Technology – Oil Consumption by Country 1990-2009

    (more…)

  • USA Individual Earnings Levels: Top 1% $343,000, 5% $154,000, 10% $112,000, 25% $66,000

    Very interesting USA federal tax data via the tax foundation. Top 1% has adjusted gross income of $343,000; over $154,000 puts you in the top 5%; $112,000 puts you in the top 10% and $66,000 puts you in the top 25%.

    The chart only shows federal income tax data. So the costly social security tax (which is directly based on earned income* so in reality is federal income tax but is handled in a separate account so is consistently not classified as income tax data) for outside the top 5% (income above $106,800 [for 2011] does not have to pay the social security tax) is not reflected in the rates paid here.

    Looking at the data excluding social security is fine, but it is very important to remember the social security (plus medicare) tax is the largest tax for, I would guess, most people in the USA. Social security tax is 6.2% paid by the employee plus 6.2% paid by the company – a total of 12.4%. That part of the tax was capped at $106,800 in income for 2011. The medicare tax is 1.45% of income paid by the employee and 1.45% paid by the employer (and it has no cap). So that totals 2.9% (for the employee and employer tax) and brings the total to 15.3%** for most earned income.

      

    Number of Returns with Positive AGI

    AGI ($ millions)

    Income Taxes Paid ($ millions)

    Group’s Share of Total AGI

    Group’s Share of Income Taxes

    Income Split Point

    Average Tax Rate

    All Taxpayers

    137,982,203

    $7,825,389

    $865,863

    100.0%

    100.0%

    –

    11.06%

    Top 1%

    1,379,822

    $1,324,572

    $318,043

    16.9%

    36.7%

     $343,927.00

    24.01%

    1-5%

    5,519,288

    $1,157,918

    $189,864

    14.8%

    22.0%

     

    16.40%

    Top 5%

    6,899,110

    $2,482,490

    $507,907

    31.7%

    58.7%

     $154,643.00

    20.46%

    5-10%

    6,899,110

    $897,241

    $102,249

    11.5%

    11.8%

     

    11.40%

    Top 10%

    13,798,220

    $3,379,731

    $610,156

    43.2%

    70.5%

     $112,124.00

    18.05%

    10-25%

    20,697,331

    $1,770,140

    $145,747

    22.6%

    17.0%

     

    8.23%

    Top 25%

    34,495,551

    $5,149,871

    $755,903

    65.8%

    87.3%

     $ 66,193.00

    14.68%

    25-50%

    34,495,551

    $1,620,303

    $90,449

    20.7%

    11.0%

     

    5.58%

    Top 50%

    68,991,102

    $6,770,174

    $846,352

    86.5%

    97.7%

     > $32,396

    12.50%

    Bottom 50%

    68,991,102

    $1,055,215

    $19,511

    13.5%

    2.3%

     < $32,396

    1.85%

    Source: Internal Revenue Service. Table via the tax foundation.

    Other interesting data shows that the top 1% earn 16.9% of the total income and pay 36.7% of the total federal income taxes. Those in the top 1-5% earn 14.8% of the total income and pay 22% of the income taxes. Those in the top 5-10% earn of the income 11.5% of the income and pay 11.8% of the federal income taxes. So once you exclude the main tax on income (social security) and use adjusted gross income the tax rates are slightly progressive (higher rates for those that are making the most – and presumably have benefited economically the most from the economic system we have).

    Given that this is skewed by excluding the regressive (higher taxes paid by those earning less – social security is the same rate for everyone except those earning the very most who don’t have to pay it on their income above $106,800 [in 2011]) social security tax I believe we should have a more progressive tax system. But that is mainly a political debate. There are good economic arguments for the bad consequences of too unequal a distribution of wealth (which the USA has been moving toward the last few decades – unfortunately).

    In addition to the other things I mention there are all sorts of games played by those that desire a royalty type system (where wealth is just passed down to the children of those who are rich, instead of believing in a capitalist system where rewards are given not to the children of royalty but to those that are successful in the markets). A good example of the royalty model is Mitch Romney giving his trust fund children over $100 million each. These schemes use strategies to avoid paying taxes at all. Obviously these schemes also make the system less progressive (based on my understanding of the tax avoidance practiced by these trust fund babies and those that believe it is ethical to give such royalty sized gifts to their royal heirs).

    I don’t like the royalty based model of behavior. I much prefer the actions of honorable capitalist such as Warren Buffett and Bill Gates that give their children huge benefits that any of us would be thrilled with, but do not treat them as princes and princesses who should live in a style of luxury that few kings have every enjoyed based solely off their birthright. Both Bill Gates and Warren Buffett have honorably refused to engage in royal seeking behavior that many of their less successful business peers have chosen to engage in. Those that favor trust fund babies are welcome to their opinion and have managed to get most of congress to support their beliefs instead of a capitalist model that I would prefer so they are free to engage in their desire to parrot royalty and honor the royalty model of behavior.

    * earned income – you also don’t have to pay social security or medical tax on unearned income (dividends, capital gains, rental income…). Again this by and large favors wealthy taxpayers. Everyone is eligible for the same favorable tax treatment but only those that have the wealth to make significant amounts of unearned income get this advantage.

    ** the social security tax has been reduced by 200 basis points (this relief was recently extended) as part of dealing with the results of the too big to fail banking caused credit crisis. So under the temporary reduction the personal tax rate is 4.2% and the total cost is 13.2%.

    Related: Taxes – Slightly or Steeply Progressive? – Taxes per Person by Country – USA State Governments Have $1,000,000,000,000 in Unfunded Retirement Obligations – Retirement: Roth IRA Earnings and Contribution Limits

  • Simple Explanation of the Fractional Reserve Banking System

    The webcast is by the great Kahn Academy which produces simple educational content (like the above) on all sorts of topics. I find this too slow but I think it might be good for people that are not really sure how the banking system works. There is a group of people that are very apposed to fractional reserved banking, as a principle. I actually am fine with it, but it needs to be regulated much better than we have done.

    I suppose it might be true that our political leaders are much too subservient to those giving them lots of cash to regulate in a manner even close to acceptable: and therefore fractional reserve banking is dangerous. I am not sure that they are so hopeless that this is the case, though the more I see of how much they don’t know, and how often they seem to just vote based on what those giving them cash want it gets to be harder to believe they can be trusted to act close to properly (this is extremely sad). And it is mainly an indictment of ourselves: we keep putting people back in power that act mainly to reward those giving them cash and don’t seem interested in actually what is important for the long term interests of the country.

    I believe the FDIC actually does quite a good job of providing a solution to manage some issues with a fractional reserve banking system and people being able to rely on getting their money back.

    Related: Charlie Munger’s Thoughts on the Credit Crisis and Risk – Leverage, Complex Deals and Mania – Lobbyists Keep Tax Off Billion Dollar Private Equities Deals and On For Our Grandchildren

  • Investing in Stocks That Have Raised Dividends Consistently

    The Dividend Aristocrats index measures the performance of S&P 500 companies “that have followed a policy of increasing dividends every year for at least 25 consecutive years.” S&P makes additions and deletions from the index annually. This year 10 companies were added and 1 was deleted.

    Stock Yield
    		div/share 2011 div/share 2000 % increase
    AT&T (T) 6% $1.72 $1.006 72%
    HCP Inc (HCP) 4.9% $1.92 $1.47 31%
    Sysco (SYY) 3.7% $1.04 $0.24 333%
    Nucor (NUE) 3.7% $1.45 $0.15 867%
    Illinois Tool Works (ITW) 3.1% $1.40 $0.38 268%
    Genuine Parts (GPC) 3.1% $1.80 $1.10 64%
    Medtronic (MDT) 2.8% $0.936 $0.181 417%
    Colgate-Palmolive (CL) 2.6% $2.27 $0.632 259%
    T-Rowe Price (TROW) 2.9% $1.24 $0.27 359%
    Franklin Resources (BEN) 1.2% $1.00 $.0245 308%

    You can’t expect members of the Dividend Aristocrats to match the dividend increases shown here. As companies stay in this screen of companies the rate of growth often decreases as they mature. Also some have already increased the payout rate (so have had an increasing payout rate boost dividend increases) significantly.

    The chart also shows that a smaller current yield need not dissuade investing in a company even when your target is dividend yield, giving the large dividend increase in just 10 years. Nucor yielded just 1.5% in 2000 (at a price of $10). Ignoring reinvested dividends your current yield on that investment would be 14.5%. To make the math easy 10 shares in 2000 cost $100, and they paid $1.50 in dividends (%1.5). Dividends have now increase so those 10 shares are paying $14.50 in dividends (14.5%). Of course Nucor worked out very well; that type of return is not common. But the idea to consider is that the long term dividend yield is not only a matter of looking at the current yield.

    The period from 2000 to 2011 was hardly a strong one economically. Yet look at how many of these companies dramatically increased their dividend payouts. Even in tough economic times many companies do well.

    Related: Looking for Dividend Stocks in the Current Extremely Low Interest Rate Environment – Where to Invest for Yield Today – 10 Stocks for Income Investors

  • We Need to be More Capitalist and Less Cronyist

    I am frustrated that we have largely allowed those that don’t believe in capitalism to claim their beliefs are capitalist. I believe capitalism is the best system to provide economic gain to human society. When we allow non-capitalist to claim their ideas are capitalist we often lose by allowing bad policies to be adopted and failing to adopt more capitalist ideas.

    Robber barons and their ilk are not capitalists. Those attacked today as capitalists are much more like European nobility that fought to let the nobility take most of the economic profit from everyone else.
    Capitalism is a wonderful thing.

    The foolish economic policies the politicians we have elected over and over again for decades are idiotic and not capitalist (they are somewhat capitalist but the things people are complaining about are not capitalism but the corruption of the system by those subverting capitalism). They are the result of favoring cronyism and bribery over capitalist regulated markets.

    What we need to do is not throw out the capitalists. We need to actually throw out those that say their cronyistic policies are capitalist.

    Capitalism is an economic system designed to achieve economic gain for a society. Adam Smith (and others) understood that if those with power to destroy the functioning of markets (for personal gain) were allowed to do so then the benefits capitalism can produce are reduced. And they definitely would try to (according to the believes fundamental to the capitalist model) so a capitalist system has to account for that.

    “Free” markets are good. But in capitalism “free” markets means markets where no entity has “market” power – that is the ability to move the market. This is the idea of perfect competition. In the real world this doesn’t happen but capitalist understand the weakness of unfree markets and that has to be dealt with. Things start to get messy here. There is no perfect way to do this and I don’t know of anyone (that I don’t think is naive) that thinks this can be done in some way that avoid economic friction (loss to the society from what is possible in some ideal state).

    Now those that like cronyism and letting whoever has the clout do whatever they want have tried to say capitalism means doing whatever you want to get as much capital as you want. It doesn’t. Capitalism isn’t about letting whoever has the gold get more. It is an economic system to provide gain to society by setting up rules that result in market forces brining benefit to society.

    Those thinking about setting up the rules for a capitalist system understood that many people are going to try and get away with taking what isn’t theirs. So you have to enforce the rule of law. You have to prevent those that seek to destroy markets and take personal gains they should not be able to (due to being allowed to collude with other market players, collude with politicians to gain political concessions that destroy market functions…).

    I happen to believe capitalism is the best economic system we have by far.

    I happen to believe those that have increasingly turned out system into one where croynism is destroying markets to give gains to a few parties dominates are creating great damage. But the problem is not that these people show capitalism is bad. Instead these people show the dangers of not putting in the effort to retain capitalist ideas: your economy suffers and people suffer.

    (more…)

  • Where are Profit Margins Headed?

    Where is the economy headed? With the troubles of huge debt (by governments and consumers) and the possible collapse of the Euro it is very hard to be certain. And where is the stock market headed? That is also difficult to predict. Of course, where the stock market is headed in the short term is never easy to predict. If you can predict, you should be rich (though it likely takes a bit more, knowing how much to risk…).

    At least by knowing what has happened you can be ahead of where many people are. The USA economy has not been in a recession, we have actually been growing. Just doing so very slowly. And doing so without many added jobs. Companies however, have been doing very well.

    U.S. companies’ ability to squeeze more profit from each dollar of sales is pushing earnings higher, even as the economy has grown at a below-average clip since the recession ended in June 2009.

    For investors knowing if this is a positive trend that can be expected to continue or an aberration is key. But I have no way of knowing. My guess is it is at least partially something that will continue (but maybe a portion of the gains are an aberration) – but this is just a guess. This bloomberg article looks more at the issue.

    Grantham, who called corporate profits “freakishly high” in an August commentary, sees wide margins as an aberration. Some of his competitors say changes in the economy and the way firms operate could keep them near peak levels for another year or two. “We don’t think they have to fall,” Doll, whose New York- based firm is the world’s largest asset manager, said in a phone interview. BlackRock oversees $3.35 trillion.
    …
    The margins of non-financial companies in the U.S., a widely used measure of profitability, reached 15 percent in the third quarter, according to data from Moody’s Analytics Inc. in West Chester, Pennsylvania. That was the highest level since 1969. When the recession ended in the second quarter of 2009, the comparable number was 8.7 percent.

    The most compelling data supporting my belief is the long term trend.

    Profit margins have been trending higher since the mid-1980s, said Chris Christopher, an economist at IHS (IHS) Global Insight, who has written on the subject. Quarterly margins peaked at 11.9 percent in the 1980s, 13.6 percent in the 1990s and 14.5 percent in the most recent decade, Moody’s data show.

    But where this trend ends and starts reversing won’t be obvious until years after it happens. But investors that can predict (or guess) margin changes will likely be rewarded financially.

    Related: The Economy is Weak and Prospects May be Grim, But Many Companies Have Rosy Prospects – Is the Stock Market Efficient? – Investment Risk Matters Most as Part of a Portfolio, Rather than in Isolation