Corporate earnings are also referred to as “company earnings” and “corporate profits:” basically, the amount of money a company makes in certain period of time. The price/earnings multiple is still the most common tool used to value a company. The stock market values a company based on the amount of money—the earnings and profits—the company has after all expenses, including taxes, have been paid. In a stock market where stocks are traded at an average of 12 times earnings, a company making $1.00 a share per year would be valued at $12.00. All things being equal, the more money a public company makes, the higher its stock price.
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 key stock indices in the U.S. economy doesn’t look bright. For example, as of May 10, out of all the companies on the S&P 500 that have issued their corporate earnings guidance, more than 79% of them have issued a negative outlook. The estimated earnings growth rate for companies on the S&P 500 stands at 1.6%, compared to 4.5% near the end of March.
On top of all these troubles … Read More
Everyone said that in their respective professions (a manufacturing sales manager, an insurance adjuster, a foodservice executive, and a bank manager) business conditions were flat.
I’ve heard this from many people. Countless businesses are holding steady, but despite profound efforts, they can’t generate meaningful top-line growth.
Yet, the stock market just hit an all-time record high on modest first-quarter earnings results.
Quite obviously, this stock market is overbought.
Wall Street and institutional investors are in the business of betting on the future using someone else’s money.
Corporate earnings over the last several quarters have held up. But the earnings have mostly been squeezed out of worker productivity and cost controls.
Blue-chip balance sheets continue to grow stronger, and the lack of certainty in the global marketplace has dampened the willingness of corporations to make new investments.
The result is continued growth in quarterly dividends and share buybacks; and this is one of the many reasons why institutional investors have been buying this stock market—there is nowhere else to go.
I think it is still worth keeping a sharp eye on the crucial movements in the Dow Jones Transportation Average. It is old-school, but I believe that many component companies do provide a decent reflection of economic activity in the U.S.—at least from a corporate perspective. (Read “BlackRock Takes In Billions for Equities: A Signal the Stock Market Is Near a Top?”)
What I learned from many large-cap earnings reports was that sales … Read More
The key stock indices have been rising since the beginning of the year, and there is still room for them to rise even higher as optimism concerning stocks continues to grow. But the risks associated with the stock market are piling up very quickly—investors may be standing in front of a train wreck.
I continue to believe the key stock indices have been propped higher by unprecedented money printing by the Federal Reserve. I say this because the fundamental reasons behind the stock market rally are just not there.
Companies on the key stock indices are struggling to get sales going. McDonald’s Corporation (NYSE/MCD), the fast food giant, reported that its global same restaurant sales fell 0.6% in April. In its Asia/Pacific territory, sales plummeted 2.9%; in Europe, they declined 2.4%; and sales only rose 0.7% in the United States. (Source: Reuters, May 8, 2013.)
The demand from consumers is anemic. Businesses are building up inventories. Data from the U.S. Census Bureau showed that inventories at merchant wholesalers increased 0.4% in March compared to February, and they were up 4.7% from a year ago. (Source: U.S. Census Bureau, May 9, 2013.)
As of May 3, the majority of the companies on the S&P 500 had issued their corporate earnings. Only 47% reported sales above earnings estimates—the average for beating sales estimates over the last four quarters was 52%. (Source: FactSet, May 3, 2013.)
And of the companies that have provided corporate earnings guidance for the second quarter of 2013, almost 79% of them issued a negative outlook; they expect their corporate earnings to be lower.
Meanwhile, investors are taking much … Read More
In April, as gold bullion prices dropped in the futures market, or the “paper market” for gold, the United States Mint reported it sold 209,500 ounces of gold bullion coins, up 950% from the 20,000 ounces of gold bullion coins it sold in April 2012. (Source: United States Mint web site, last accessed May 1, 2013.)
While this shows that demand for gold bullion in the U.S. is strong; elsewhere in the world, investors are also rushing to buy more gold bullion.
In April, Britain’s Royal Mint sold more than three-times the number of gold bullion coins it did in April of last year. The director of bullion and commemorative coin at the Royal Mint, Shane Bisset, said, “…since the dip in the price of gold we have seen increased demand for our gold bullion coins from the major coin market, and this presently shows no sign of abating.” Bisset added, “…the Royal Mint continues to supply to its customers and is increasing production to accommodate the higher demand.” (Source: Kolesnikova, M., “U.K. Royal Mint Gold Coin Sales More Than Tripled in April,” Bloomberg, April 24, 2103.)
Major markets for gold bullion are showing robust demand. According to Standard Chartered PLC, on April 23, its gold bullion shipments to India doubled compared to the week before, and they were 20% higher from previous records.
On the other side of the world, in Australia, the situation is the same; gold bullion buying is increasing. In an interview, Ron Currie, Sales and Marketing Director at Perth Mint, said, “…we haven’t seen levels like this since the 2008 global financial crisis.” Without providing … Read More
The Chinese Purchasing Managers’ Index (PMI) fell to 50.6 in April, compared to 50.9 in March. (Source: Fung Business Intelligence Centre, April 30, 2013.) While it’s not a big decline, it’s important to note that any number below 50 represents contraction in the manufacturing sector of the Chinese economy. In April, output, new orders, new export orders, backlog orders, and stocks of finished goods in the manufacturing sector of the Chinese economy were all lower than the previous month’s.
The obvious fear is that the economic slowdown in the Chinese economy will eventually send ripple effects through the U.S. economy, as a significant number of U.S.-based companies operate in the Chinese economy.
Unfortunately, the economic slowdown in the Chinese economy is picking up speed.
YUM! Brands, Inc. (NYSE/YUM), the parent company of many fast food eateries, including Pizza Hut, Taco Bell, and Kentucky Fried Chicken (KFC), reported its profits plummeted 27% in the first quarter of 2013 compared to the same quarter of last year. One of the main reasons for the decline in the company’s profits was a significant decline in sales in the Chinese economy. (Source: MarketWatch, April 23, 2013.)
YUM! Brands is not the only company that operates in the Chinese economy. Wal-Mart Stores, Inc. (NYSE/WMT), the biggest retailer in the U.S. economy, has more than 380 stores in the Chinese economy. (Source: Wall Street Journal, April 1, 2013.)
Not only will the economic slowdown in the Chinese economy decrease the profits of U.S.-based companies, it will also drag their share prices lower. And I’m worried these companies will be forced to take measures … Read More
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