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Chinese and German Manufacturing Now Both Contracting
A recession for the global economy is becoming an increasingly likely scenario.
The Chinese economy, the second-biggest in the world, witnessed a contraction in manufacturing in May. The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) registered 49.6 for May, declining from 50.4 in April. (Source: Markit, May 23, 2013.) Any number below 50 represents contraction in the manufacturing sector.
The Chinese economy exports a significant amount of what it produces to the global economy. Contraction in Chinese manufacturing shows exports are falling—the global demand for goods is falling.
Similarly, Germany’s Flash Manufacturing PMI showed continuous contraction in the manufacturing sector. The index stood at 49.0 in May. (Source: Markit, May 23, 2013.) The German economy is important to observe, because it’s the largest economy in the eurozone and an economic slowdown in the nation can send the common currency region into another downward spiral, again affecting the global economy.
Looking at other key indicators, they are pointing to an economic slowdown ahead in the global economy. Consider the copper market. Demand for copper is suggesting activity in the global economy is sluggish, even deteriorating.
Copper prices are down more than 10% since the beginning of 2013, and stockpiles of … Read More
Six Reasons Why I Remain Skeptical About the Housing Recovery
A healthy housing market is essential to economic growth in the U.S. economy. But despite what we are hearing from the media, the housing market rebound is facing major headwinds.
To start with, home prices in the U.S. housing market are nowhere close to their pre-crash levels. There are millions of homeowners in the U.S. economy whose homes are worth less than what they originally paid for them. From their peak in 2006, home prices in the U.S. housing market are still down roughly 30%. For millions of homeowners to break even on their home investment, home prices will have to go up by at least 40%.
We just learned housing starts plunged 16.5% in April from March. (Source: U.S. Census Bureau, May 16, 2013.) This decline in new housing starts was one of the sharpest declines since mid-2011.
The chart below depicts housing starts from 2001 to today. Notice the recent sharp decline in housing starts.
Chart courtesy of www.StockCharts.com
Housing starts may not be a very exciting number to some, but I follow housing starts to gauge consumer spending. Think of it this way: when a family buys a new home they need to buy things that are … Read More
Eurozone Troubles Starting to Show in Corporate Earnings of American Companies
As companies in the key stock indices, like the S&P 500, reported their first-quarter corporate earnings, some of the most notable names showed concerns about the eurozone.
Conglomerate General Electric Company (NYSE/GE) said, “We planned for Europe to be similar to 2012, down again, but it was even weaker than we had expected.” (Source: “Earnings Insight,” FactSet, May 17, 2013.) General Electric (GE) reported corporate earnings of $0.34 per share in the first quarter, with sales in its industrial businesses declining 5.7% and profit falling 11%. (Source: MarketWatch, April 19, 2013.)
McDonalds Corporation (NYSE/MCD), in announcing its first-quarter results, stated, “For the quarter, Europe’s results were dampened by ongoing economic uncertainty.” (Source: Ibid.)
When talking about the eurozone, the chief executive of Whirlpool Corporation (NYSE/WHR), Jeff Fettig, said, “…demand is not recovering so far.” He added that Whirlpool’s sales were unchanged this year in Europe, and he warned that if the demand continues to slide, Whirlpool will have to make more changes to cut costs. (Source: “Companies Feel Pinch on Sales in Europe,” Wall Street Journal, April 28, 2013.)
GE, McDonalds, and Whirlpool are not the only companies in the key stock indices suffering from … Read More
Interest of One Trillion Dollars a Year on National Debt in the Cards
Looking at the monthly budget statement from the Department of the Treasury, in fiscal 2013, year-to-date (that’s October 2013 to this April), the U.S. government has already paid interest of $227 billion on its national debt. For the entire fiscal year 2013, the government expects to pay a little more than $420 billion in interest payments. (Source: U.S. Department of the Treasury, Financial Management Service, May 10, 2013.)
If I calculate the amount of interest payments relative to the national debt outstanding, which is around $17.0 trillion, the U.S. government is paying interest on the national debt at the rate of about 2.5%.
Now, look at these two scenarios…
If we assume that the U.S. national debt will be $23.0 trillion by 2023, then the interest payments on the debt will rise to about $575 billion, not taking interest rate changes into account.
If in 10 years from now, interest rates go back to historical levels and double to five percent, interest payments on the national debt will exceed $1.0 trillion per annum. 2023 is 10 years from now. You can be assured the economic environment will be very different one decade out from today.
But as I wrote the … Read More
What Wal-Mart’s Same-Store Sales Say About the Economy
Wal-Mart Stores, Inc. (NYSE/WMT), the biggest retailer in the U.S., just reported its second-quarter same-store sales declined 1.4%. As a reader of Profit Confidential, this should come as no surprise to you.
Consumer spending in the U.S. economy is bleak; it doesn’t seem to be improving, and it’s nowhere near what the stock market is depicting. Consumer spending makes up about two-thirds of U.S. gross domestic product (GDP), so if consumer spending continues to decline, our economic growth becomes questionable.
Personal consumption expenditure, a measure of consumer spending, has been experiencing a decline. From between 2010 and 2011, consumer spending increased by little more than five percent. Meanwhile, the rate of change between 2011 and 2012 was only 3.64%. (Source: Federal Reserve Bank of St. Louis web site, last accessed May 16, 2013.)
What Wal-Mart’s contracting same-store sales and slowing consumer expenditure rates show is that consumer spending in the U.S. is not growing. From the statistics, we can see the average American consumer is suffering.
As of February (the latest available figures), there were more than 47.5 million Americans, which is 15% of the population or 23 million households, on food stamps. (Source: U.S. Department of Agriculture, May … Read More
Warning: 79% of S&P 500 Companies Issue Negative 2Q Guidance
The disconnect between the stock market and the U.S.economy continues to grow, as the key stock indices run way ahead of reality.
The fundamental reasons behind the rise in today’s key stock indices are missing. For a real rally to happen, there has to be rising demand in the U.S. economy, consumers must be confident to spend, and businesses should see their sales rising. None of this is taking place.
Industrial production in the U.S. economy decreased 0.5% in April—marking the second decline since the beginning of the year. (Source: Federal Reserve, May 15, 2013.)
Similarly, manufacturing in the U.S. economy is also portraying a bleak picture of demand. Manufacturing output in the U.S. economy declined 0.4% in April after continuing its slump from March, when it decreased by 0.3%.
In the first quarter, a large number of companies on the key stock indices, like the S&P 500, were able to show better-than-expected corporate earnings. But in hindsight, they showed one troubling phenomenon: as the majority of the companies on the S&P 500 have already reported their corporate earnings, only 48% of them were able to beat revenue expectations. (Source: FactSet, May 10, 2013.)
Looking ahead, the picture for the … Read More
Recovery? Eurozone GDP Now Down Six Straight Quarters
In the first quarter of 2013, the eurozone continued to witness an economic contraction. The gross domestic product (GDP) of the 17-nation region declined 0.2%. This decrease in the GDP marked the sixth straight quarter of economic contraction in the eurozone and the longest since 1995. (Source: Reuters, May 15, 2013.)
The debt-infested countries in the eurozone, such as Greece, Spain, Italy, and Portugal, are already experiencing severe economic contraction; and to say the very least, they have a lot of issues to resolve before they even come close to seeing any economic growth.
What concerns me the most is that the stronger nations in the eurozone are starting to show weakness—the economic slowdown is picking up speed. It could make the economic contraction in the entire region much more severe and could send the eurozone into another downward spiral.
Consider the French economy—the second-biggest economic hub in the eurozone. In the first quarter of 2013, France witnessed an economic contraction—GDP declined 0.2% and France entered a recession. (Source: Bloomberg, May 15, 2013.) For the past few quarters, France’s economy has been witnessing severe pressures, and unemployment in the country continues to be a major problem.
Similarly, … Read More
Wealth, Lower Oil Prices, Increased Spending—Airline Stocks Headed Higher?
The improved global economy has helped to drive up the spending habits of consumers, and an area that has really benefited from the income creation is the travel sector.
Airlines around the world have reaped the benefits from the improved travel sector.
The airline sector is estimated to earn $10.4 billion in profits this year, up from the previous estimate of $8.4 billion, according to the International Air Transport Association (IATA). (Source: “Small Boost to Airline Profitability – Industry Profit Margin Improves to 1.6%,” International Air Transit Association web site, March 20, 2013.)
According to the IATA report, the top market in the airline sector is predicted to be the Asian-Pacific airlines, with estimates calling for $4.2 billion in net profits this year, up from $3.9 billion in 2012 and accounting for a 40.4% share of the total global airline sector.
The North American airline sector is also looking good, with profits estimated at $3.6 billion this year, well ahead of the $2.3 billion recorded in 2012.
Coming in third is expected to be the Middle Eastern airline sector, with $1.4 billion in profits, more than 50% higher than the $900 million in 2012.
The airline sector has been improving … Read More
How Five Hundred Bucks and a Handshake Created a Colossal Stock Market Winner
One company that always reports early is NIKE, Inc. (NYSE/NKE).
The company has doubled on the stock market since 2010, and it has more than tripled since 2006.
This kind of stock market performance really is amazing. In just three years, a $12.5-billion company has become a $25.0-billion company.
From Oregon, Bill Bowerman and Phil Night created Blue Ribbon Sports with $500.00 each and a handshake.
In January of 1964, Bowerman and Night ordered 300 pairs of Tiger brand shoes from Onitsuka Inc. of Kobe, Japan for distribution in the U.S. market. Night began selling the shoes out of his Plymouth “Reliant,” and Bowerman began tearing them apart.
Bowerman took an idea from his wife’s waffle iron and created a new running shoe.
Jeff Johnson (a friend and the company’s first employee) came up with the NIKE name in 1971. Shoes were successfully tested and Carolyn Davidson, a graphic design student at Portland State University, created the “swoosh” logo. The company’s first shoes were sold at the U.S. Track & Field Trials held in Eugene, Oregon. The rest, as they say, is history.
As a stock market investment, NIKE has mostly been excellent. The position was flat between 1997 and … Read More
Great Time to Play Stocks? Maybe Not for Everyone
Not everyone is happy with the current bull market, despite the fact that the S&P 500 and the Dow are headed for their fourth straight year of gains and seemingly more records to break.
As the old saying goes, “the trend is your friend,” and so far, this has played out.
Just take a look at the chart below of the S&P 500 and its rally from the March 2009 bottom. Also note the rising flow of money into the system by the Federal Reserve, as indicated by the green upward-trending line. (Read “Thank the Fed for Your New Car, Home, Investments.”) Cheap and ample money combined with extremely low interest rates and yields on bonds has helped to fuel the stock market rally.
Chart courtesy of www.StockCharts.com
The stock market advance could continue, as long as the Fed and other central banks around the world are willing to continue to print money.
Now, let me explain why not everyone is happy.
With the burden of home foreclosures, job losses, declining wages, and continued uncertainties, many Americans do not have the resources to play the stock market. These lower- and middle-income Americans are just trying to … Read More
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