I have written in these pages about declining corporate profits in the S&P 500 companies. That same decline is occurring with Chinese corporations, which is one of the main reasons why the Chinese economy’s main stock market, the Shanghai Composite Index, is down 17% from a year ago.
The world’s second-largest airline, Air China, warned that its corporate profits would decline by more than 50% this year. (Source: Forbes, August 5, 2012.)
At one time, it seemed every Chinese consumer was buying a cellular phone in the Chinese economy; but this year, two of China’s largest manufacturers of cellular equipment reported drops in corporate profits of over 12%!
More evidence that the Chinese consumer within the Chinese economy is not going to help global growth: China’s largest electronics retailer reported corporate profits that fell almost 30%. China’s second-largest appliance maker saw corporate profits fall by 30% due to slowing demand. In total, roughly 900 large firms within the Chinese economy are expecting lower corporate profits for 2012.
With lower corporate profits due to slowing global demand and slowing demand within the Chinese economy, capital spending by Chinese corporations is down 35% thus far in 2012 when compared to the same period last year. (Source: Wall Street Journal, August 14, 2012.)
This is why, despite The People’s Bank of China pumping 1.4 trillion yuan into the Chinese economy; bank lending continues to fall; corporations and consumers have no appetite to take on new loans. From June to July of this year, new loans fell 41%. (Source: Wall Street Journal, August 13, 2012.)
So while the above is clear evidence that the Chinese economy is slowing down quite dramatically, there is more evidence that money is flowing out of China.
The People’s Bank of China reported that investors and corporations in the Chinese economy are moving money out of China. In 2008, when the rest of the world was falling into recession, money poured into the Chinese economy. Now the money is flowing out.
As with declining corporate profits, this is a clear sign, dear reader, that investors and corporations are not only worried that the Chinese economy is going to slow down, but also that growth there could come crashing to a halt!
If the Chinese economy does crash to a halt, this will create reverberations around the world and will cause significant damage to the U.S. economy. Careful! While economists debate about the severity of the slowdown in the Chinese economy, corporate profits continue to fall and, more importantly, investors and Chinese corporations are choosing to send their money out of the country. Not a good sign at all.
Where the Market Stands; Where it’s Headed:
You are living through a turning point in the history of the stock market—a very exciting time for market lovers like me.
As we all know, after hitting a record Dow Jones Industrial Average high of 14,164 in October 2007, stocks went into a bear market and fell to 6,440 on March 9, 2009. Since then, the Dow Jones Industrial Average has rebounded (what I call a “sucker’s rally”), but has failed to break to new highs. (Yes, stocks are cheaper today than they were five years ago!)
On May 1, 2012, the Dow Jones Industrial Average hit a new post-2007 high of 13,338. In spite of the world economy moving into a recession, in spite of the weakest S&P 500 corporate revenue and earnings we have seen in three years, the stock market is now attempting to break to new highs. This may be the final blow off for the market rally I have been waiting for. Stay tuned!
What He Said:
“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big (cap) stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one-hour waits…people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in Profit Confidential, February 7, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.