Pricing power. Those 2 magic words will be ever so important for those companies that rely on raw materials as an input cost as we ready ourselves for earnings reports from corporate America. With profit margins at about record highs, the ability to pass thru higher costs will be the key factor on whether this can be sustained. While some think the market is ‘cheap’ because the S&P 500 trades at 14 times ’11 earnings estimates. This ’11 consensus is on peak margins. The Shiller 10 yr average P/E ratio, which smooth’s out the earnings cycle as profit margins are mean reverting, is at 24 times vs the long term average of 16. In Europe, Greek CDS is back to record highs after Der Spiegel reported that “despite all the denials, there is a growing realization that a so called haircut can longer be avoided” for Greece. They said its not just the IMF that is pushing for it but support is growing among euro zone finance ministers too.

Category: MacroNotes

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

4 Responses to “Pricing power. You either got it or you don’t”

  1. wally says:

    Pricing power comes from monopoly or near-monopoly. To get into that position is the holy grail of American businesses.

  2. Stochastically Heuristic says:

    Please forgive this question for its nativity but why, oh why, do people compare Shiller’s CAPE to the forward PE? Shiller’s data uses ex-post earnings data and the monthly average of the S&P 500. It makes so little sense to compare one ratio that uses 10 years of historical data to one that uses 12 months of forward earnings estimates. It’s comparing apples to oranges.

  3. wsm3 says:

    @ SH:

    I don’t think your question is naive (“please forgive its ‘nativity’ “). But I also don’t think the post is comparing the Shiller CAPE to the current Fwd PE of the S&P. If anything, it is contrasting the two. The Shiller CAPE is just giving context to the Fwd PE, noting that if one digs deeper into the superficial Fwd PE measure, it ends up looking quite a bit more expensive – i.e. more in-line with the Shiller CAPE currently.

  4. Theravadin says:


    You’re right about the post not comparing the Schiller CAPE to the current forward PE… but I do question the significance of the Schiller CAPE. Averaging over 10 years conceals so much variation. The inherent assumption is that the variation is statistically normal… but there are real reasons to think that that may not be true. Has anyone out there taken an average of the past year’s earnings and the projected earnings, and compared them to average price? Doing that iteratively over a 40 year period across the S&P might produce a more interesting measure of “normal” P/E… and even then it would conceal a mountain of statistical sins… but maybe a smaller mountain.