The Debt Demon Lurks—It’s Still Out There Waiting to Strike

Still Out There Waiting to StrikeThe stock market is very much in consolidation mode, and it’s still highly vulnerable to all the risks out there. The sovereign debt crisis isn’t over; the eurozone has just backstopped sovereign debt with additional debt. And while the U.S. housing market is showing signs of improvement, this really isn’t a surprise. Enough years have elapsed that home sales and prices should be improving. Risk is very high in this stock market, and prices may soon become expensive relative to earnings.

You can’t really say that the stock market isn’t holding up well. Large-cap technology stocks have taken a hit, but this group has been one of the strongest performers since the 2009 low. Intel Corporation (NASDAQ/INTC) has really been hit hard, now trading below $20.00 a share. This company illustrates the problems faced by many international businesses. You can’t grow your earnings if there’s recession in Europe and China is slowing. Intel’s stock chart is below:

INTC NASDAQ Stock Market Chart

Chart courtesy of

What I did see this third-quarter earnings season was a lot of improvement in small- and mid-cap technology-related companies whose businesses are mostly in the U.S. market. I read countless earnings reports that showed a significant turnaround in revenues among software companies, in particular.

One business that stood out to me is AZZ Incorporated (NYSE/AZZ). This is exactly the kind of business that can do well in a sluggish economy. AZZ manufactures electrical equipment and sells components to the power-generation industry in the U.S. and Canada. According to the company, its third-quarter revenues improved 34% to $153 million. Earnings grew to $15.9 million from $9.6 million in the comparable quarter, and the company’s order backlog increased to $213 million from $123 million. Company management increased the company’s revenue guidance for its 2013 fiscal year, and on the stock market, AZZ is experiencing solid upward price momentum. (Source: “AZZ Incorporated Reports Record Setting Financial Results for the Second Quarter and Year-To-Date of Fiscal Year 2013,” AZZ Incorporated, September 27, 2012, last accessed November 30, 2012.)

AZZ NYSE Stock Market Chart

Chart courtesy of

If anything, I’m becoming more reticent about the prospects for the stock market going forward. Earnings growth is flat and may even decline in the fourth quarter. But it’s the sovereign debt issue making the stock market vulnerable that has me the most worried. There’s been a lot of sugar-coating from policymakers in many countries with elections this year. The blowback will be next year, when the cycle of debt, rising inflation, and continued recession in Europe really start to throw things off balance.

I think stock market investors need to be highly conservative with their portfolios (if they’re not already) and very domestic-oriented. (See “Where to Get the Best Earnings in This Stock Market.”) There are more shocks coming to the system, and central banks will do everything they can to mitigate them—thereby making problems worse for the future. Like I’ve written before, I’m not bearish on the stock market, only realistic. I sure wouldn’t be loading up on stocks with the earnings outlooks we have now. The next major financial crisis is the next great buying opportunity. Unfortunately, it’s not too far off.