Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Why New Troubles in France and Germany Will Affect 2Q U.S. Corporate Earnings

Wednesday, July 17th, 2013
By for Profit Confidential

Economic GrowthThe eurozone is still a mess. Instead of improvements, I just see more troubles. Economic slowdown in the region’s debt-infested nations is already staggering, but even those that were able to fight it are now experiencing huge problems.

Around this time last year, the European Central Bank (ECB) was very clear about its plan for the eurozone crisis. It said that it’s “ready to do whatever it takes.”

Back then it was the greatest relief to the market—the announcement calmed the rising debt rates in the eurozone and sent a wave of optimism toward the key stock indices.

But it was just a short-term fix. Take my word for it: economic slowdown in the eurozone is here to stay for a long time.

Take, for example, France—the second-biggest economy in the eurozone. France used to have a credit rating of AAA, according to credit rating agency Fitch Ratings, which is the best rating among its other eurozone peers. But France has since been downgraded a notch by the credit rating agency. (Source: Wall Street Journal, July 12, 2013.)

Fitch cited that the eurozone country’s national debt compared to its gross domestic product (GDP) reached 91.7% in the first quarter of 2013. It expects the French national debt ratio to peak at 96.0% in 2014.

Fitch also provided an anemic outlook for the French economy. The credit rating agency expects the country to witness an economic slowdown this year, following mediocre growth in 2012. Unemployment in this France is also troublesome. It stands at a 15-year high of 10.9%.

Germany, the biggest economic hub in the euro region, is experiencing turbulence as well. It’s not seeing an outright economic slowdown, but it’s certainly not far from it. Exports from the country plummeted nine percent in May to 38.1 billion euros. German investor confidence also declined for the first time in three months—suggesting that the economic outlook isn’t very bright. (Source: Bloomberg, July 16, 2013.)

Here’s what all the economic slowdown in the eurozone comes down to: the corporate earnings of the companies trading on key stock indices.

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Dear reader, you need to keep in mind that the eurozone, all 17 member nations combined, consumes a significant amount of goods and services. If the unemployed in the region hits a record high, major hubs start to slow down, and demand becomes the next victim.

In the first quarter, we saw 11 of the 30 Dow Jones Industrial Average companies provide their sales figures from the eurozone. Nine of the 11 reported a decline year-over-year. (Source: FactSet, May 28, 2013.)

We are currently in the midst of second-quarter earnings season. I expect more companies to show struggles in the region. My reason is very simple: even if we disregard the already struggling eurozone nations like Greece and Spain, stronger nations like France are suffering an economic slowdown, and Germany is struggling. There will be consequences.

Michael’s Personal Notes:

Face it: there is no real economic growth in the U.S. economy. The only reasons the key stock indices keep rising are nothing more than easy money and false optimism. They are anything but a key indicator, and you should not use them as one.

The reality of the U.S. economy is completely the opposite of what’s happening in the markets.

I often say in these pages that economic growth only occurs in the U.S. economy when consumers feel good and spend money. But I see more and more evidence of consumers not spending—many are actually struggling. Don’t buy into the mainstream media’s belief in economic growth.

Instead, look at indicators like the U.S. retail and food services sales for June. They increased 0.4% from the previous month to $422.8 billion and have increased 5.7% from June of 2012. In the second quarter (April through June), retail and food services sales in the U.S. economy were up 4.6% from the same period a year ago. (Source: U.S. Census Bureau, July 15, 2013.)

While that might sound impressive, the chart below will show you something you won’t see the in the mainstream. It shows the percentage change in retail and food services sales from a year ago.

Retail Food and Food Service Sales

 Clearly, the retail sales increases aren’t nearly as amazing as they seem at first glance. The rate of change is actually slower than it was a year ago—and has been trending downward since 2011.

But there’s further proof consumers are not buying. Manufacturing and trade inventories for the month of May have increased 0.1% from April, and 3.8% from a year ago.

And some industries are feeling it worse than others. Inventories at motor vehicle and part dealers were up 12.7%, and inventories for clothing and clothing accessories stores increased 4.6%. (Source: U.S. Census Bureau, July 15, 2013.)

Here’s what is actually happening: consumers in the U.S. economy are spending their money on basic needs. From April to June, consumer spending at gas stations has increased little more than 3.3%.

What’s even more troubling is that crude oil prices have jumped due to tensions in the Middle East. That means that gas prices will soar even higher. And that will result in even more trouble for consumers in the U.S. economy.

On top of all this, contrary to economic growth, Americans have another problem. Instead of getting full-time jobs, many are only able to get part-time work. This year, on average, the number of part-time jobs that have been added each month in the U.S. economy, seasonally adjusted, sits at 93,000. But only about 22,000 full-time jobs have been added. (Source: Wall Street Journal, July 14, 2013.)

Dear reader, I find myself tired of saying this, but numbers don’t lie. They are saying economic growth in the U.S. economy is simply a myth. You must keep in mind that consumers are the driving force behind any economic growth in the U.S. economy. The longer they suffer, the longer it will take the U.S. economy to get back on its feet.

We may see higher corporate earnings from big-cap companies for now. They are buying back their shares, but consumers are the ones who buy their products. The numbers will eventually catch up, and their corporate earnings will suffer.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles