More Margin Collapse: Cisco (CSCO)


And tonight, we have yet another casualty of the Federal Reserve’s QE2 program.  Yes, Mr. Bernanke, it looks like you are truly helping the real economy….

Well, now this is special….  I want to present two charts.

First, tonight:

Now let’s look at 2007….

Cisco’s 2007 earnings and warning was one of the triggers that told us that we were headed to a real recession.  One that I had talked about driven by margin compression at the time.

What’s going on now?

Companies talking about input cost margin problems (remember the commodity ramps from late 2007 into 2008?) and forward guidance cuts.

Folks, you buy stock on tomorrow’s earnings expectations.  You’ve been buying ’em lately on the premise of multiple expansion driven by The Fed.

I said you would get destroyed doing this, and it might have started this evening.

If you remember this article, I said that it is my thesis that economic Depressions come not from credit collapses so much as they do from margin collapse.  That is, the inability to make a profit due to input cost ramps while you are unable to pass through those costs to the consumer of your product or service.

This in turn forces you out of business, and you then lay off all your workers.  They now have no money, and thus can’t buy as much as they used to.  That in turn tightens the spiral on others in business – they have the input costs but can’t drop prices to what people with damaged incomes can afford.

Cisco seems to have been “blindsided” by public sector, cable company and consumer softness.  How could they be?  I’ve been charting this in durables for the last two months!

As I said at the time: DUH.

Here’s the chart from my durables report from October 27th:


I sure as hell am not.

Now about that so-called reflation trade and economic recovery into collapsing margins…..

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