Both global and domestic economic reality is setting in, with more earnings warnings and weak economic data, particularly from China. Chinese stocks are currently taking it on the chin.
For the last few quarters, railroad companies have been reporting declining volumes of coal, partially due to a slow U.S. economy but mostly because of cheap natural gas prices. Norfolk Southern Corporation (NYSE/NSC) announced that its third-quarter earnings will be lower than its 2011 third-quarter earnings, mostly due to volume declines of coal and merchandise. Third-quarter revenues are also expected to be down about $120 million from the previous year.
Concerning the stock market, there hasn’t been much of a pullback since the Federal Reserve met expectations with its announcement that there would be a third round of quantitative easing (QE3). And while there have been some meaningful earnings warnings for this upcoming earnings season, there’s an equal amount of good news as well.
Chart courtesy of www.StockCharts.com
NIKE, Inc. (NYSE/NKE), for example, announced another share buyback program, totaling $8.0 billion over the next four years. The company is just wrapping up a $5.0-billion share buyback program, and over the last 10 years, it has purchased some $10.0 billion of its own shares, representing over 167 million shares.
On the stock market, NIKE’s share price hit an all-time record high of $114.81 in May of this year. The stock pulled back with the rest of the stock market, and then made a nice recovery to its current level around $100.00 a share. (See “Stock Market Trading Action Signals Breakout Coming.”)
Chart courtesy of www.StockCharts.com
We’re going to see more and more of this going into 2013—more share buybacks and more dividend increases. Earnings might not be growing, but they are relatively stable, and instead of investing in new plants, equipment, and employees, corporations would rather just return shareholders’ money and/or reduce their shares outstanding. It’s an effective strategy for corporations to keep stock market investors happy in such an uncertain economy. It’s not necessarily so effective for improving the Main Street economy, and we see this in the job numbers.
Microsoft Corporation (NASDAQ/MSFT) is another big-name company that recently increased its dividend to shareholders. The company announced that it will increase its quarterly dividend to $0.23 per share, up from the previous level of $0.20. Street analysts have been lowering Microsoft’s earnings estimates for upcoming quarters, but the company has the cash to keep stock market investors happy—about $62.0 billion worth or $7.40 per share.
As I’ve been saying, the stock market is a little ahead of economic reality, especially with China’s economic news showing such a dramatic slowing. This earnings season is likely to be like the previous one—choppy with a good degree of restraint in terms of visibility. As for the stock market, investors like to be ahead of the current reality; my outlook is very subdued, because earnings aren’t growing.
Stock Market: Will it Heed the Warnings? was last modified: September 24th, 2012 by Mitchell Clark, B.Comm.
Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »
Forecasts Aug. 27, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 27, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)