Margin Pressure and the Coming Wave of Private Sector Layoffs(Updated)

About two weeks ago I started reading reports coming out of Kimberly-Clark complaining about margin pressures due to skyrocketing operating costs-and a market losing it's buying power. Cisco, Campbell's and Dean Foods have also been seeing the same type of pressures on their margins. As a result their stock prices are taking huge hits. This will translate into layoffs not too long from now.

Cisco shares plummet, sink broader market:

(Reuters) - Tech bellwether Cisco Systems (CSCO.O) lost 17 percent of its market value in frenzied trading on Thursday, a day after a gloomy revenue outlook left investors jittery, and some brokerages downgraded the stock.

It wasn't long before I saw Karl Denninger get on top of this mess in far more detail than I understood it. He called it yesterday on Cisco, and on Campbell's.

I too have been addressing this here on ATS though not many have paid attention:
Source Post

We're also seeing margin collapse from Food companies to real estate companies. They've been complaining about this for some time. Margin collapse is what will force unemployment to astronomical levels, and as price inflation grips the country to boot.

Thanks Obama, Thanks Bernanke for wasting precious time on superfluous, politically expedient actions instead of doing the right thing.

You belong in jail along with the Wall St. crooks who helped you loot the people and vice versa.

And again here-Same thread:

I think the Chinese have been preparing quite well to cut their losses in the event the US becomes incapable of paying back the debt. From what I'm seeing, this election won't change much. Gridlock, at any other point in our history would have been a wonderful thing. But we need government to cut down, but my guess is they won't, they'll raise taxes, and prices will continue to go up. Wages will stay stagnant and all of this will culminate in margin collapse. Then the layoffs will come and the real depression will begin. And this is without China cutting down our rating in earnest at the People's Bank of China. Then the run on the dollar will accelerate and we'll be swimming in a sea of crap green paper.

Prices are already going up, especially in food. Food companies are complaining of margin squeeze because they know their customers won't be able to afford higher prices. They will either let people go, or raise prices. Letting people go will abate the problem for perhaps a month or two. but the rate of inflation in the commodities market will out pace the ability of companies to control costs in an environment where people can't afford their goods. So the prices will begin to barrel out of control. Businesses will shutter, we will be left jobless.

Margin collapse across the board is what will cause this depression. With or without China the economy will collapse, and the currency will die. We did this largely to ourselves, and now we're politically locked to our fate.

The Storm is coming folks, and there is a harbinger we can use as a metric. What happened to Cisco today is working evidence of this theory...And If I'm right, I expect this to lead to an initial 2nd quarter unemployment rate of 13% U6 will stand at 28% This may happen earlier than that, but I have learned to be conservative with my timetables.

I hope I'm wrong.



UPDATE: Update
Cisco's rout dents Wall Street but upside trend rules

(Reuters) - Cisco's discouraging outlook dragged Wall Street lower on Thursday, but the market fought back in a sign the bullish trend remains intact.

this post is mostly just a bump and I'll be dropping the obligatory S and F of course too.

You said it my friend... In that same article Karl goes on to state that we can find a LARGE reason for said margin compression in the fact that FINANCIALS now make up a THIRD of the profits made in a year in the US...

There will be NO RELIEF for anyone until we wake up and realize that we need to reform the system to place the PROFIT POTENTIALS where they belong in VALUE ADDED COMMERCE where real physical value is added to an item or service over the cost of producing said item or service... (AKA manufacturing electronics assembly tire factory's etcetera) Rather than "investing" in schemes that bet on or are theoretically bound to real production in some way but do not actively benefit anything but numbers scrolling on a screen...

And yes I know everyone says we NEED banks and fractional reserve etcetera or where would CREDIT come from? Do not forget that factories were built people bought equipment and etcetera LONG BEFORE fractional reserve banking or the FINANCIAL CARTELS were around... it is interesting to note that the United States Never needed to levy an income tax until it allowed the federal reserve to start up... (the self same federal reserve that actively admits to watering down the purchasing power of the dollar by 4.8% or so EVERY YEAR SINCE IT"S BIRTH) The whole thing is nothing more than a ponzi scheme designed to make the rich able to steal your money at loaded games of chance known as the financial services industry. if I had twenty grand to invest I'd go to VEGAS before I put a single penny in the market, at least in VEGAS the odds are against me but if I win they will actually LET ME HAVE MY WINNINGS (well minus the insane tax bracket winnings are taxed in but thats another rant) under the current circuit breaker and other rules set out in the last couple years you can make a brilliant play capitalize on a HUGE market move make the trade successfully etc and then BE TOLD BY FTC That they are ROLLING BACK your transaction to x time and etc and they can literally take you from making money to OWING tens of thousands with NO RECOURSE.... THE best part though is this, THEY GET TO SELECTIVELY DECIDE WHOSE TRANSACTIONS TO ROLL BACK etc.... That's right they can roll back your trade and let Goldman's trade go through!! NICE RIGHT?

At least in Vegas THAT doesn't happen
The financial industry is BY IT'S VERY NATURE PARASITIC...

I will not argue this, check into some of the threads i've commented on recently where I do give a break down on the HOWS and WHYS that make this the case.

(short version is when every stage of value added production is FINANCED at 5 to 15% interest rates it adds that percentage AT EVERY SINGLE STAGE to the end cost of all goods and services we depend on to live. When you figure out how many different businesses it takes to make one item like a computer even if you don't factor in the resource extraction and the oil and spare parts etc that go into that and refining and just start at the point where INDIVIDUAL COMPONENTS are manufactured etc you get into a string where it takes ten or twelve hand offs to get something to market AT THE WHOLESALE LEVEL not even retail and at each of these levels the operating costs etc are FINANCED and the interest and other costs are put forward to the next level... so even if you're talking a 5% price jump at each level ... it adds up DEVASTATINGLY QUICK because each 5% is COMPOUNDED and you pay 5% on the 5% at the second transaction level.) This means essentially that by the end of the string there can be a massive portion of the cost to a wholesaler that is just interest on interest payments accrued into a 40 to 80% increase over the items REAL cost if that interest wasn't there AT EVERY SINGLE LEVEL. Add into that the whole paradigm of investors being TAUGHT that it's easier and more PROFITABLE to invest in INVESTMENTS instead of actually investing in PRODUCING TANGIBLE GOODS which effectively creates this ENHANCED LEVEL OF NEED for FINANCING from the banks and you get into what Karl and others are Calling the DEBT SPIRAL.

Obama and the FED's keep kicking the can down the road and making the end result worse then if we just took the hit back in 08 and not bail anyone out. well guess what. we are running out of road to kick the can down.

Hope and Change everyone, Hope and change

For those who don't know what margin collapse is:

Yahoo! Answers

Companies have found themselves squeezed in today's business environment. Input costs have risen but the market has not accepted price increases to cover those costs. As matter of fact, many companies have often been forced to lower prices or increase promotions to stimulate demand. The result of these activities has been a very negative pressure on margins. The input costs that cause this pressure can come in many forms:
Insurance costs
Labor costs
Gas prices
Product costs
That is what marging compression means.

Good post and good detail. Will this lead to hyperinflation then or other ? I am buying more PM's especially with the dip yesterday and of course stocking up on as many long term essentials while they are relatively cheap. I read the Ticker on a daily basis, Denninger calls it straight up and usually well in advance however his ego soaked musings (even though proven eventually accurate) are a tad annoying. A lot of people, myself included at one point, always seemed to be of the impression that the USD would somehow survive. China is simply taking steps to prepare itself with other investments and strategies for when this house of cards comes tumbling down.

To wit, last night on the MSM were recommendations for financial reform that proposed jacking up the US retirement age to 68 and increased gas taxes, to name a few. Given the Europeans response to these measures I can only imagine US public response (provided its not a night that american idol is on Austerity is coming down the throat of the US like it or not it just may be worded differently.

As Durden from ZeroHedge said this week.....fan meet s%*!

brill

reply to post by brill


Agreed.

When the American people internalize the fact that they're getting robbed and squeezed from every direction, they will start to take to the streets. Only now they won't be going anywhere, they will protest for days and days. Not because the government is cutting, but because it isn't.

Our government is politically locked to the fate they've sealed for us. We will collapse, and only then will reform come in earnest. We MUST resist the urge to hand over all control to the government, as they were responsible for covering up this mess to begin with. We have to clean it up ourselves.

We have to innovate, we have to improvise, we have to survive.

Great thread, S & F

Margin compression is not a good thing, but it was inevitable. It will cause unemployment to rise, and make things even worse. Bernanke will not be fixing anything, but somehow, people still believe he has everything under control.

Thank you for the definition of margin collapse, now if only the average person understood what that meant! I think those kinds of terms intimidate people, system is designed that way, but it does seem that people are realizing that QE2 is not good. Didn't anyone notice that Bernanke said QE1 would fix things and it did not work?

You are correct, nothing will change until we change it, until we stop listening to politicians and letting them divide us, nothing will be different, it will just get worse and they will try to keep raising taxes to keep the whole thing going. This will last as long as people believe that if you elect people with a different letter after their name, things will get better, this is just not the way things work.

Maybe someday, extremely high prices, or lost entitlements will cause people to wake up and see things for how they really are. Until then, it will be more of the same.

Couple all of this with fraud in ETFs and other BS and we simply don't stand a chance.

Apathy has really done a number to this country. Most people will be blindsided by this no matter what we do or say in order to warn them.

Thank you for the education. The Weather Channel said something the other day about rising food prices coming soon. I watch Bloomberg News daily hoping maybe some of what I see will sink in. I didn't watch Bloomberg today. I Googled margin compression and got this.

pragcap.com...

Very interesting. It laid it all out for me. I watch precious metals prices. I'd have to say inflation is increasing just from watching silver and gold prices going up. What I'm wondering, will the dollar's decline affect other currencies negatively?

reply to post by alonzo730


It most certainly will.

Many other countries rely on the dollar as their reserve currency, and it is that reason why they are screaming at us over our over spending and money printing/debt monetization programs.

The world is getting ready to cut their losses in my opinion, it may not be very long before there's a run on the dollar.

reply to post by brill


Increased taxation and increasing unemployment alone will lead to deflation .. only if the FED comes out with some awesome crazy plan to screw us even further than they have and drastically reduce the value of the Dollar would we see inflation at any severe level. Deflation of the economy as a whole however is far more scarier..

reply to post by Rockpuck


That doesn't seem to matter right now though.

The market is CALLING for deflation right now to bring down costs. The market can't tolerate price increases because of the very high unemployment rate and lack of confidence. 40 million people on food stamps and what not.

And yet, the government is forcing prices up through QE, and now these companies margins are being squeezed because the cost of raw materials is going up, their customer base can't afford the increase-and now they're stuck between a rock and a hard place....Shares plummet. Now they have a set of choices, all predicated on taking huge chances with little room for error:

1 lay people off and buy a little time while keeping prices low-

2 Raise prices and keep your employees even though this will virtually guarantee that you'll be operating at a skin of your teeth margin, and if prices of raw materials don't stabilize and instead keep going up, the good intention will just turn into postponed pain, and the layoffs will happen anyway.

3 Lay people off and raise prices. Which will also fuel the inflation cycle. Mind you, no where in there do we see wage increases, because that would further squeeze margins. So the price inflation in commodities, and the lack of purchasing power through devaluation and unemployment is squeezing businesses from both sides. What do you do?

4 Restructure(if even remotely possible), file for bankruptcy and manage your debts, or go out of business-meaning, KABOOM.

My guess is companies are going to start laying people off real soon, and the price of goods going up is going to feed on the unemployment and vice versa. This is a BAD position to be in. If wages were going up with inflation we would be able to weather this storm, but that would mean businesses are operating at wide margins, which is not the case. So, Kaboom, basically.

The Layoffs are here:

The layoffs are already being announced or planned for. From City governments to the private sector. Firefighters and police, to convenience store workers.

Yahoo layoffs coming?

Layoffs coming at Dex One

Police Union Prepares New Officers For Possible Layoffs
LAYOFFS MAY BE COMING IN SANTA CLARA
SRNS outlines restructuring that will cut 1,400 jobs
750 Health Net workers to lose jobs in Shelton
State letters warn of layoffs
MASSIVE LAYOFFS REPORTED AT TRUMP CASINOS
Astorino’s first budget coming out Tuesday

All of this within the last two days since this post was originally made.

I made this post in the other thread, but I think it helps to illustrate a working theory here.

reply to post by projectvxn

The market is CALLING for deflation right now to bring down costs

IMO, the market is screaming for inflation .. and Bernake is trying all he can to deliver it short of turning on the printing press.. hence he just authorized the purchase of $150b in T-notes.

While WE cannot take any further price increases, businesses cannot withstand another year of marked down prices.. I am very interested to see how this Christmas season plays out.. we will probably spend more, but less per person, and buy more, yet stores will record marginal profit increases..

But of your choices you are missing the most probable one:

Lower prices, sell more goods at a lower profit margin, don't hire additional employees like seasonals, and if worst comes to fruitition, close down stores and or plants, limit inventory and run at bare necessity.

This is what many corporations are doing, and it's what's causing such a slow gain in employment.. and since the QE effects of the Government will push raw materials higher, in the end the only corporations that will profit from the changes will be multi-national corporations (benefiting from the weakening dollar, IE, increased international profits)

the economy as a whole can probably withstand 2-4 years operating like this before attrition begins eroding the entire system..

Honestly.. the worst possible thing to happen?? ..... Government will stop spending. They have to. But this is going to have a huge, huge, astronomical impact on our economy in the next year or two ... remember the Gov was kicking the can down the road.. and they did it going on 3 years now.. well .. the can, which is Pandora's box, can't be kicked any further. Government spending and services are 90% of the economy.

EDIT to add: Of all their efforts to get more money into the system.. the problem is it's being rapidly consolidated at the top tier of the economy.. in Corporate coffers and in the hands of the ultra-wealthy ... if they can find a way to prevent the magpie like hording of cash .. they very well could avoid the worst of the situation .. for instance, if you have over a certain threshold of cash not moving in the economy, apply taxes on it, same with corporate coffers. This way companies and the ultra rich will move funds into investment and start up corporations, or apply capital elsewhere to avoid losses through high taxes, but at the same time, give a tax break to funds being utilized to expand the economy.

reply to post by Rockpuck


I think we agree on quite a bit here. But I think Goldman Sachs, wants to devalue the dollar so they can continue their little carry-trade scams and make a huge profit... They have all the right people in place. The rest of the country can't afford their little game with the Fed:

Goldman Says Fed May Need To Print $4 Trillion To Start Inflation They don't want a few billion in monetization they want a few trillion. And they will get it.

Well, here it is folks, confirmation of a working theory, at least in part.

Reuters isn't known for telling it like it is in language people can understand.

Taxes, inflation data to dominate week

DATA BACK ON THE TABLE

Following a week in which the few macroeconomic indicators barely influenced stocks, a slew of data ranging from manufacturing to leading indicators to retail sales, and, perhaps most importantly, inflation, will return investors' attention to market fundamentals.

Producer prices are expected to have risen 0.8 percent month-over-month in October. The U.S. government measure, out on Tuesday, could add to concerns following September's rise, which was twice what analysts expected. With little leverage to pass on costs to cash-strapped consumers, businesses may have to swallow any price increases, weakening margins and profits.

The year-on-year consumer prices index, due on Wednesday, is expected to show a dip to 0.7 percent from 0.8 percent in September when food and energy prices are excluded.

This is also a good case for why we should scrap the CPI for something that tells the truth.

reply to post by projectvxn


Sorry. Same old, same old prediction that never comes true on ats. Been hearing how a bag of rice was going to cost 100 bucks by now w hyperinflation. Yep, that one is two years old. How about the second wave or double dip recession that was supposed to have started by now. Or, was that last year? I cant remember because of ALL of the failed predictions on this site.

These "its coming" threads are out of control right now. The only thing that is coming is another failed prediction thread.

reply to post by projectvxn

Same in Australia there aren't too many 'consumer' items in the consumer price index I remember about a year ago we had an interest rate rise of .25 per cent due to more expensive bananas due to a cyclone destroying the crop,yes newsreaders on all commercial channels delivered this message with a straight face,I dont know whats more annoying the bogus index or the bogus reasons for economic decisions.

Originally posted by amongus
reply to post by projectvxn

 

Sorry. Same old, same old prediction that never comes true on ats. Been hearing how a bag of rice was going to cost 100 bucks by now w hyperinflation. Yep, that one is two years old. How about the second wave or double dip recession that was supposed to have started by now. Or, was that last year? I cant remember because of ALL of the failed predictions on this site.

These "its coming" threads are out of control right now. The only thing that is coming is another failed prediction thread.

edit on 15-11-2010 by amongus because: (no reason given)

I don't make superfluous predictions. I read the data myself. I have laid out the case using data, and third party analysis. I recommend you read through it. No one here is talking about hyperinflation.

I'm talking about something companies are ACTUALLY dealing with. MARGIN SQUEEZE. If you don't know what that is, the answer was provided on page one.

There are all kinds of anecdotal signs that "shadow inflation" is ramping up. Shadow inflation, as you may know, is a common response to margin pressure whereby the prices are kept the same but the quantity/quality of the goods or services offered decline. For example, you pay the same for your meal but the portions keep getting slowly smaller. The hamburger has less meat, they put three fewer fries on your plate each week, they have fewer and waitresses, they don't vaccum or clean as often and its getting mildewy, etc.

I haven' t been in the states for a while now but from what I hear this is underway in force over there and has been for some time. Of course there are no stats kept on this but its a very rational way to squeeze a little extra margin out of the situation without raising prices. In terms of meals, the US has plenty of room to cut corners (I can barely finish a "small" portion at the typical restaurant...) but when its tried in areas such as airlines or medical care or nuclear power production, stuff gets more hectic faster.

Anyone seeing shadow inflation?