Right from the Mouths of Some of the Biggest CEOs

Right from the Mouths of Some of the Biggest CEOsI recently wrote about S&P 500 companies reporting weak corporate earnings growth and highlighted how, for the last three quarters, revenue growth for the S&P 500 companies has declined dramatically.

What is more important to note is what the CEOs of S&P 500 companies are saying about the state of the global economy.

Generally, they are worried about future corporate earnings, because despite the continuing problems in Europe, China is not stabilizing and the U.S. is slowing. Many CEOs are also very upset about the “fiscal cliff” and believe Congress needs to do something to remove this uncertainty, because it prevents businesses from spending, which in turn hurts jobs growth and consumer spending.

United Technologies Corporation (NYSE/UTX) is an S&P 500 company that manufactures everything from refrigeration units, to fuel cells, to helicopters, to elevators and moving walkways around the world. After reporting its corporate earnings and cutting its outlook, the company’s CEO said:

“It is certainly a challenging environment out there, with a slowing global economy.” (Source: Financial Times, July 26, 2012.)

Notice that this comment wasn’t directed solely at Europe and Asia, but also the U.S., which is implied by the slowdown being “global.”

The largest coffee maker in the world and an S&P 500 company, Starbucks Corporation (NASDAQ/SBUX), met its corporate earnings estimate after having slashed it by 10%. The company forecasted weak revenue growth going forward in 2012 due to weakening customer traffic in the U.S. in both June and July. Here is what Starbucks’ CEO had to say:

“This is not a Starbucks issue. This is a macro problem of weak consumer confidence.” (Source: Wall Street Journal, July 31, 2012.)

The Coca-Cola Company (NYSE/KO), Mattel, Inc. (NASDAQ/MAT), and Harley-Davidson, Inc. (NYSE/HOG)—all S&P 500 companies—echoed similar sentiments, citing a challenging global economic environment and weak consumer confidence in China, Europe, and yes, even the U.S.

The world’s largest appliance maker and an S&P 500 company, Whirlpool Corporation (NYSE/WHR), missed its corporate earnings and blamed the recession in Europe and the slowdown in Asia, but, in the company’s earnings call, the head of North American operations said that, in North America, “demand is at recessionary low levels.” (Source: Wall Street Journal, July 31, 2012.)

I’ll leave the last word to the CEO of one of the most important S&P 500 companies, United Parcel Service, Inc. (NYSE/UPS), which moves packages around the world and is involved with almost every industry from all types of services—retail and banking—to all types of manufactured goods. After missing corporate earnings estimates, here is what the CEO of this S&P 500 company had to say:

“Growth in exports is lagging behind global economic growth. This has only occurred once in the past 10 years, and that was during the last recession.” (Source: Wall Street Journal, July 31, 2012.)

Be very selective with that stock market, dear reader. (Also see: “Slowing Worldwide Manufacturing Numbers Point Directly to Global Recession.”)

Michael’s Personal Notes:

With each U.S. jobs report, I highlight the labor participation rate, which measures all people in the working age population (ages 16 – 64) who are actually employed. In April, this measure fell to its lowest level since December 1981: 63.6%— a reflection of fewer and fewer people participating in the labor force, because there is no job creation to be had.

In July, this proof of little job creation remained near 30-year lows: 63.7%. (Source: Bureau of Labor Statistics.)

What is happening to all those people who have been unable to work over the last four years—which the rest of the workforce has to pay for—and how is that affecting economic growth?

In July, disability benefits reached a record of over 8.7 million people!

The stress of losing one’s home, losing one’s job and/or losing one’s wealth since the financial crisis in 2008 has hit people very hard. With no economic growth since the crisis, job creation has been unable to grow in any meaningful way, which means that the people who were hit hardest never had an opportunity to recover, because there was no job creation for them. The only option left was to apply for disability benefits under the category of stress.

The number of people not counted within the labor force increased again to its second-highest reading ever recorded: 86.8 million people were not included within the July job numbers.

They also bring down the participation rate. Although the Bureau of Labor Statistics doesn’t know why these people are not in the labor force, there is no question that this record high has a lot to do with zero economic growth in four years, which has resulted in little job creation.

Certainly there are some caring for sick family members, returning to school, or raising children, etc., but it is safe to assume that a lack of job creation is forcing most of them to not be counted by the Bureau of Labor Statistics.

The number of people considered long-term unemployed—jobless for at least 27 weeks—was unchanged at 5.2 million in July. This number is at a historically high level and is proof of no job creation in an environment of little economic growth. (See: “Number of People Not Working Hits Second Highest Level Ever Recorded.”)

The longer economic growth is absent, the longer these people will remain unemployed due to no job creation. Without government retraining programs and work programs with corporations to stimulate job creation, these people will fall further and further behind.

Not only does it cost the system money to help these people today, but also economic growth in the U.S. is held back, because these people will provide little in the way of consumer spending, which is 70% of gross domestic product (GDP). Furthermore, it will cost the system a lot of money in the future to retrain them if job creation ever returns.

The damage that the financial crisis has caused is severe and continues to be felt. While the jobs number can highlight the fact that some jobs were created in July, the internals continue to deteriorate, as more and more people get left behind and more and more people are unable to find a job in a persistent environment of little job creation.

Until job creation is resolved, expect economic growth to be very weak against the backdrop of more and more Americans not being counted in the labor participation rate, which means they will be unable to spend and so help grow the economy.

For Our Gold Bugs:

Important words from my esteemed colleague and big gold bull Robert Appel:

Readers expecting an “explosion” in the precious metals market will need to be patient. After a 12+ month consolidation, which has been so tedious that even senior traders like John Embry at Sprott are in awe, it is unlikely the reversal will be dramatic.

More likely it will be slow and plodding; and, by the time the public figures it out, as usual it will be too late. In the meantime, we look for omens and portents to try to determine the underlying trend.

Yesterday morning, something interesting happened. It began as a typical low-volume (“summer doldrums”) kind of session, and, as NY opened, the “usual suspects” (tied to one single trading house in particular that has FOR YEARS been whacking gold at the open, every single morning, in full view of the impotent regulators) successfully shaved about $10.00 off the spot price by overwhelming the market with selling. Making a ton of cash in the process.

Ordinarily, the gold market would then need an entire session to recover, even on days when the PM sector is strongish. Yesterday morning, however, the damage reversed within 30 minutes as buyers moved in. Not earth-shattering in itself, but, as far as omens and portents go, very promising…very promising.

Where the Market Stands; Where it’s Headed:

From the end of February until today, the Dow Jones Industrial Average has gone nowhere. That’s almost six months of zero returns in big-cap stocks for investors.

I’ve said it many times before: Europe’s economy has slowed dramatically. China’s economy is slowing. S&P 500 companies will not show negative earnings growth in the third quarter of 2012, the first time in years. A recession knocks on America’s doors again.

Why haven’t stock prices collapsed under the picture I paint above? There’s an unknown called the Federal Reserve. Investors are waiting patiently for the Fed to announce more support for the economy, and investors hope more liquidity will make its way to the stock market.

It will be interesting to see how much the Fed’s actions will really help the market this time. Three times a charm or a backfire? We’ll soon find out.

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.