Gary shilling : Time to be careful

S&P 500 Profit Margin

• Three factors make corporate profits very vulnerable:

1. Foreign earnings,exports or international operation, if the dollar continues to strength, That's translation losses. Foreign earnings translate to less dollars. 
2. global recession, pushes down the top-line, means less revenures. 
3. A huge margin improvement pushed profits in the last three years,it's the ability to cutting cost.Pricing power was nonexistent , volume increase was very limited. Profit margin as share of national income hit a all time high in Q1 because of this. I's getting tougher and tougher to cut cost. They are not getting the factors they were getting at 09 into 10,in terms of  productivity improvement,carrying declining labor unit cost and increasing margin.

• Us economy is going nowhere, same is true with europe, China seems to head for a hard landing. Chinese government now is deciding they are going for fiscal stimulus, they can't do bank lending again because there is too much debt. When you see these reactions, what you see is the reactions to the reactions. Copper rallies because the monetary authorities, in case of china, the fiscal authorities are coming in, it's not fundamental improvements, the reason they are in there is because the private economy is so week, the deleveraging in the private sector is so strong that they are forced to try to do something, the something was not right in the economy in the last four years. 

• If the only people has is a hope you are going to get a monetary stimulus here and abroad, that's pretty lousy reason to invest.

• Markets can remain irrational a lot longer than I can remain solvent. I think that's true for most investments. Our market stance is a risk off trade, short stocks, long treasury, long the dollar,and short commodities. 

• Three things in favor of treasury right now:1) global recession  2) safe heaven  3) increasing concerns about deflation

• German balance sheet backs ECB financing, if german yields go up, that could be indication that ECB is reaching limits.

• Euro could go to parity with dollar, even without european break up.One of the reason euro is held up now is because of the repatriation of money back into Europe. European banks have to shore up its balance sheet domestically, they have to sell US and other assets and converting back. Banks are under a lot of pressure to cut back their leverage. S&P500 has approximately 50% sales outside US.