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  • av19096 av19096 Nov 26, 2011 5:46 PM Flag

    ECRI Indicators Update

    Peter
    with all the dismal news, currencies being beat up, etc "...is [it] possible that very good corporate profits could continue in a mild recession...?"
    i should mention i always get confused by which way currency fluctuations are good/bad for US corps profits.

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    • AV,

      Is it possible that good corporate profits could continue in a mild recession?

      The answer is absolutely yes. The economy has barely grown in the last three years and corporate profits have soared to the highest levels ever. Part of that has to do with the international component--60% of $SPX corporate profits--and part of it has to do with how disciplined US corporations have become. Indeed, we could see -1.5% US GDP growth next year and still have US corporate profits rise. It doesn't have to happen that way but it could. A good deal of the answer has to do with Europe, of course. If they go into a slight recession, US corporate profits will probably be ok. If they go into a deep recession, worry more. If Europe began right now to simply print money by having the ECB expand their balance sheet with a couple of trillion Euros of their sovereign debt, they could falsely inflate their economy as well.

      To my mind, the $SPX trading at 11-12X earns right here makes sense. If we do actually get a recession, that could fall to 10X or even a little lower. If we get a worldwide soft patch then maybe only 6-8X makes sense on the idea that the $SPX numbers have to fall. If the Europeans kicked the can down the road--a little less likely idea all the time because they are running out of ways to do it--and temporarily put the sovereign issues behind then I could see 13X. It would be hard to keep that last idea going, however.

      Regards,

      Peter

    • AV,

      Don't be confused at all about the dollar and profits. The dollar goes up, profits go down because we earn a lot abroad and a strong dollar means that foreign currency profits get de-valued. Incidentally, I answered this piece separately because the dollar is important both as a predictor of profits and as a thermometer for market confidence (inversely) as well.

      The dollar is in a long term decline but the bits of strength that we have experienced in the last decade or so have all had to do with very rough patches for the markets. The dollar has shown a lot of strength in the past month. Whether it continues to do so means a lot.

      Regards,

      Peter

      • 1 Reply to pddane_01929
      • CLC, AV et al,

        Here is a real sign of the times:

        http://www.bloomberg.com/news/2011-11-23/european-banks-get-false-deleveraging-.html

        I haven't seen this phenomenon, which in US real estate circles is called a Purchase Money Mortgage, since I did business in Detroit in the late 70's. Basically, a seller of something is giving away control of the asset but is also funding the control of it to a significant degree. In most times that would be regarded literally as the worst of both worlds--you don't actually own it any more but you will own it again if the deal doesn't work out for the purchaser. You've sort of given someone a put on the assets sold at, say, 70% of current FMV.

        These types of transactions only happen when the normal lenders will not touch a transaction on any sort of normal course of business basis. In other words, the mortgages being sold are viewed by lenders as assets that aren't suitable in a loan portfolio. This is what got the US crisis going in 2008--assets that had formerly been considered of relatively stable value and suitable in loan portfolios suddenly became untouchable.

        Regards,

        Peter

 
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