RBC Capital Markets' Chief Institutional Strategist, Myles Zyblock, discusses his insights on how American companies are sustaining their profitability in the post-financial-crisis era.
Myles Zyblock, Chief Institutional Strategist at RBC Capital Markets, talks to Bloomberg's Tom Keene and Ken Prewitt on Bloomberg Surveillance.
APRIL 19, 2011
SPEAKERS: TOM KEENE, HOST, BLOOMBERG SURVEILLANCE,
MYLES ZYBLOCK, CHIEF INSTITUTIONAL STRATEGIST, RBC CAPITAL MARKETS
KEN PREWITT, BLOOMBERG NEWS
09:10
TOM KEENE, HOST, BLOOMBERG SURVEILLANCE: Now joining us Myles Zyblock, RBC Capital Markets. He's the 75th equity strategist for RBC. Good morning, sir.
MYLES ZYBLOCK, CHIEF INSTITUTIONAL STRATEGIST, RBC CAPITAL MARKETS: Good morning, Tom. How are you doing?
KEENE: Very good. In there and bouncing off of Alan Blinder's Wall Street Journal article today, the secretary talked and alluded to a guilded age of income distribution. This equity market recovery we've seen, does it talk about markets that are separate of the haves and the have nots? Do we have another guilded age upon us?
ZYBLOCK: You know, my sense here is if you just look at the survey of consumer finances out of the Federal Reserve itself, the ownership of equities obviously concentrated in the hands of the upper income distribution. So as we know, a near 100 percent rally in the stock market over the past couple years has definitely benefited some of the upper income class more so than the rest.
KEN PREWITT, BLOOMBERG NEWS: Well, isn't that pretty much always the case though?
ZYBLOCK: That is indeed. Well, it is always the case to a degree, but I guess, you know, what a labor economist might look at as you said that the income distribution has never been more skewed as it is today. So in relative terms, I guess the benefits at the margin are going to the upper income class. They have always been going there in level terms, but increasingly so.
KEENE: You have an incredibly powerful page, Myles, and it really goes again, not so much a gilded age, but let's call it an industrial separation. You have the S&P 500 ex the financials. And you have a chart back 30 years of the net margin of the non-banks. I would just simply editorialize I'm observing a miracle here of profitability, aren't I?
ZYBLOCK: A miracle - I'm not sure about a miracle, but I would say a lot of hard work and restructuring of corporate America through - Tom, I think the trend upwards, the 30 year trend upward the next financial net margins, is a function of a lot of things.
And a couple I could point to is labor cost savings efforts - some of that is good obviously and bad, like off-shoring and the declining unionization rates. And there is also a lot of innovative progress, like better inventory management systems. And I think these have all come together to push that long term trend higher.
PREWITT: Are we pretty much at the end of that cycle though?
ZYBLOCK: I think we are nearer to the end. I wouldn't say the end, Ken. It's - you know, can margins make some new highs over the next few quarters? I think so. You know, my sense here is obviously one of the big concerns that analysts are talking about are commodity price pressures or cost inflation through the commodity complex.
And I think that is going to be more a localized problem. What I mean by that is there are some industries or sectors within the market that are more susceptible to rising commodity prices than others. And some of those include the consumer related segments.
But, you know, talking about a broad-based margin compression, when we look back through time, what really drives margins - the primary driver of margins are still labor costs. And that is, you know, as we estimate, labor costs still account for something like 62 percent of the total cost of doing business.
So if you have an acceleration in wage growth on top of an acceleration in payrolls, that is where you usually see - within a quarter or two, that is where you usually see some more noticeable margin compression, not just the isolated stuff I've been hinting at. So in my opinion, I think the margin profile can make some modest gains here. But it will - in my sense, it will start to flatten out as we go into 2012.
KEENE: We're going to come back with Myles Zyblock, RBC Capital Markets, after Secretary Geithner's speech with our Peter Cook.
09:21
KEENE: We continue with Myles Zyblock, RCB Capital Markets, looking at equity investment, return of the fear trade. One little sentence here, Myles, really gets my attention. Main Street is massively under invested. What is it going to take besides healing to get Main Street back on Wall Street?
ZYBLOCK: Yes, I mean you make a great point, Tom. It is, you know, we have seen negative net flows into the equity market almost unabated. There has been some short periods of reprieve here, but almost unabated since 2008. And this is really - you know, obviously there has been a lot of psychological damage created as a result of too [two] big bear markets and the housing collapse in the last decade.
