Last Friday came news that Hewlett-Packard Company (NYSE/HPQ) is considering cutting 25,000 jobs in an effort to help the company trim costs and increase profits.
With the second half of 2012 looking like a continued slowdown in economic growth, I believe we will see more companies like Hewlett-Packard announcing job cuts as the year progresses.
It’s been a snowball effect…
The recessions in various eurozone countries have resulted in big American companies that sell in Europe seeing softness in product/service demand. And the slowdown in China’s economic growth is causing a pullback in demand from one of the world’s biggest economies.
After a couple of years of solid earnings growth from big American companies, I believe earnings growth will falter this year.
Amid stagnant economic growth, companies are finding it difficult to deliver revenue growth. If revenue is not growing, and companies want to increase profits, their next logical move is to cut expenses.
Twenty-five thousand job cuts at Hewlett-Packard is a big number, but percentage wise, it’s only eight percent of Hewlett-Packard’s total workforce. As more companies cut payrolls in the second half of 2012, more pressure will be placed on the unemployment rate and, consequently, economic growth in this country could easily stall.
In a global economy, it is unreasonable to believe a country as big as America can isolate itself from worldwide slowdown in economic growth.
Because of what I have outlined above, the Fed will be forced to keep interest rates low for a very long period of time. As the stock market continues to struggle and economic growth falters, the Fed will be more aggressive in quantitative easing.
So, as investor, I believe you are looking at a prolonged period of low interest rates and more money printing by the Fed, both of which are inflationary.
Eventually, interest rates will be pushed up as a consequence of inflation. It’s just a matter of when. But in the meantime, just expect more of the same…record-low interest rates to continue, government debt to continue rising, and the monetary policy to be very expansive. Oh, and let’s not forget, economic growth to deteriorate rapidly.
Where the Market Stands; Where it’s Headed:
If I am correct, the stock market is just about finished putting in a huge top that will act as the right shoulder of a classic head and shoulders pattern. This means it is more likely stocks are headed down than up.
Facebook, Inc. (NASDAQ/FB) wasn’t able to change the market’s tide on Friday. If there is one thing I know about traders, when the market is fragile, like it was last week, they don’t like to go home for the weekend with too much stock on their books.
Expect a bad summer for the stock market. The economy is slowing rapidly, so corporate profits will be stretched. Those smart corporate insiders I’ve have written about a few times this year…they jumped off the bandwagon at just the right time. (For the benefit of my new readers, corporate insiders have been very big sellers of stock this year; see: Another Key Stock Market Indicator Flashes Red.)
What He Said:
“What group of stocks is next to fall in light of the softening U.S. housing market? The stocks of companies that sell retail products to the American consumer, I believe, are next on the hit list. Many retail stocks are already reporting soft sales. In my opinion, they haven’t seen anything yet in respect to weaker sales.” Michael Lombardi in PROFIT CONFIDENTIAL, August 30, 2006. According to the Dow Jones Retail Index, retail stocks fell 42% from the fall of 2006 through March 2009.