Pricing power. You either got it or you don’t

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.

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