As I have been warning in these pages, corporate revenue growth within the global economic slowdown is going to be very hard to come by for the remainder of 2012.
So far, about 25% of all S&P 500 companies have reported their corporate earnings for the second quarter. Sales have risen among these firms at the slowest rate since 2009. (Source: Financial Times, July 22, 2012.)
This has forced stock market analysts to now cut third-quarter revenue growth projections by 1.0%—1.5%, which is in the territory of recession! So how is it that the S&P 500 stock market index is able to remain steady despite the bad news?
One of the largest S&P 500 companies, International Business Machines Corporation (NYSE/IBM), better known as IBM, reported corporate earnings that beat expectations for the second quarter. IBM also raised its corporate earnings guidance for 2012.
IBM is a great company and its ability to transition to a software firm has proven to be the right strategy; rewarding shareholders many times over. But the way the company will be able to increase its corporate earnings in 2012 is by cutting jobs, not by revenue growth.
IBM warned that it sees technology spending by companies around the world slowing. Other S&P 500 companies have warned of the same global environment of slowing technology spending, including the likes of Oracle Corporation (NASDAQ/ORCL), Cisco Systems, Inc. (NASDAQ/CSCO), and Hewlett-Packard Company (NYSE/HPQ).
When the statistics are finally compiled by Standard and Poor’s (S&P) on second-quarter corporate earnings by S&P 500 companies, IBM will be counted as a success; as having beat corporate earnings estimates and having raised guidance on corporate earnings for the remainder of 2012.
But this doesn’t really reflect what’s going on behind the scenes.
IBM is going to lay off people, which will add to the unemployment rate in this country. It is not going to increase revenue, because global spending on technology by companies is falling, which is reflective of the global economic slowdown.
Thus far, corporate earnings reports from the S&P 500 companies have confirmed the global economic slowdown. Both revenue and earnings growth are becoming harder and harder to come by. And the stock market is starting to see the picture clearly. (Also see: “Earnings Growth at S&P 500 Companies: A Thing of the Past.”)
I focus on revenue growth of major companies because it is very important in determining economic growth. If the big S&P 500 companies see their revenue growth stalling, they will cut expenses (i.e. layoffs) to achieve their projected corporate earnings; a cycle that puts further pressure on our economy—which I’m now believing cannot escape Recession Part II.
MORNING NEWSFLASH — Ford Motor Company (NYSE/F), the only major American car-maker not to ask Washington for a bailout during the 2008 credit crisis, announced this morning that it was lowering its 2012 profit outlook. Sales fell 6.2% in the second quarter, as Ford blamed the European crisis for bringing its corporate earnings outlook down.
Ford shares now trade at their lowest level since late 2009. Yes, the stock is cheap. But remember, the stock market is a leading indicator. It may be signaling very difficult times ahead for the car-makers again. Personally, I believe Ford stock will fall further.
In two days this week, the Spanish stock market fell a staggering 12%. Why?
The Bank of Spain confirmed this week what everyone already knew: that gross domestic product (GDP) contracted at a 0.4% rate in the first quarter of 2012. And although the numbers are not available for the second quarter, we know the recession worsened from the first quarter. Estimates show that GDP contracted by 1.0% in the second quarter for Spain, with more austerity measures to come.
This contraction is forcing home prices to fall further in Spain. As I’ve been detailing, dear reader, the Spanish banks are saddled with mortgage debt. That debt continues to lose value, because home prices continue to fall, further exacerbating the credit crisis.
Home prices in Spain have fallen 30% since 2008, but they have fallen another 12.8% just in the first quarter of 2012!
Since GDP growth in Spain contracted by more in the second quarter, we can assume with certainty that home prices continued to fall, making debt at the Spanish banks worth that much less, inflaming the credit crisis.
This is why the 100 billion euros in bailout money for Spain is not going to be enough to cover the bad mortgage-backed securities. The market knows this, which is why the credit crisis has reignited.
To add to the problem, Spain’s regions—equivalent to states here in the U.S.—are asking for 15 billion euros in bailout money from the Bank of Spain, because they have run out of funds.
We complain here in the U.S. about the “fiscal cliff” at the end of the year, which will amount to three to four percent of GDP; but what about Spain, with almost 25% unemployment, a recession with contracting GDP, and austerity measures that will subtract another 10% from its economy? No wonder Spain’s credit crisis is front-and-center.
When investors saw this earlier this week, they sold Spanish bonds, which sent Spanish interest rates to record highs!
Investors understand that there is no way Spain can make good on its debts because tax revenue will continue to fall with the ongoing recession and austerity measures. Welcome to the next round of the credit crisis.
Certainly Europe, especially Germany, must make demands on Spain for the money they lend the country, but austerity measures to the degree Germany is asking are not livable for the people of Spain. The economy needs some kind of boost. Spain looks like it is guaranteed a depression right now; forget recession! (See: “Economic Situation in Spain Reaches Catastrophic Level.”)
The European credit crisis once again takes center stage. The European leaders must do something and soon or a Spanish bank will go bankrupt. My guess is more money printing is on the way. If they don’t print money and a Spanish bank goes bankrupt, dear reader, hold on tight, because all hell is going to break loose—and that’s why they will print!
Where the Market Stands; Where it’s Headed:
Yesterday marked the third day in a row the Dow Jones Industrial Average lost more than 100 points. Not a fun time to be an investor. But I will let you in on a little secret—it’s going to get much worse!
We are near the end of a bear market rally in stocks that started in March of 2009.
What He Said:
“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings is a recipe for a financial catastrophe.” Michael Lombardi in Profit Confidential, September 7, 2005. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.