Set To Wondering....

Total US business sales, in which I also include services revenues and construction spending,
is now running around $15.1 tril. At its peak in mid 2008, sales hit $15.7 tril. At the cyclical low
point in early 2009, the comparable figure was just $12.6 tril. So, peak to trough, we saw an
awful, large plunge of 20%. Sales since have recovered by 20%, but the disturbing element is that
since early 2009, total civilian employment is down 1.7% despite that 20% bounce in US sales.
With labor costs hardly moving since early 2009, profits have of course surged on a huge gain
in profit margin and productivity.

MY SP 500 Market Tracker has the market at a fair value of 1450 based on $88. in 12 month earning
power and a moderate inflation rate. The "500", at 1288, is 14.6x the $88 in eps, and players are skeptical about how fast future earnings can grow if payrolls continue to respond in such an anemic manner. The "discount" of price to fair value is now 11%. The dividend payout ratio on the SP 500 is currently 30%. With a return on book equity of 14% x the 70% plowback ratio, earnings growth potential sits at 9.8% longer term. Investors are not buying that, either.

So, what am I wondering about? Well, with a dividend yield of only 2.0%, companies are going
to have to grow earnings at 8% longer term to provide a sensible 10% return potential to attract
risk capital. The "500" has not been able to sustain 8% earnings growth for more than relatively
brief periods even with large share buy backs. And now, we have this other issue of how well
companies can sustain earnings when they may not, in the aggregate, be hiring enough or paying
sufficient wages to support a decent level of aggregate demand growth. The issue then is must
dividend yield rise more rapidly and the market's p/e ratio contact more below a traditional
fair value level to provide a more realistic balance of current return + growth potential to
attract risk capital.

Right now, I see this as a potential problem for the stock market and one I am going to have to
work on further. It may be  a longer term issue, but with the continuing lousy employment situation,
deserves attention now. Note also a double edge here. Faster employment growth would help
the aggregate demand issue, but perhaps at the expense of profit margin contraction.