Third-quarter Earnings Reports Coming in Weak; Investors Should Be Careful

dollar in chainsAlcoa, Inc. (NYSE/AA) kicked off the third-quarter earnings season by showing a quarterly net loss due to weaker demand and lower aluminum prices—the company’s loss was $143 million for the third quarter. In the same quarter of 2011, the company enjoyed profit of $173 million. Hence, Alcoa starts off the earnings season on a very sour note.

Although Alcoa’s earrings are important because they show the health of global raw material consumption, it is just one company. The earnings season just started and more companies will release their third-quarter earnings in the upcoming weeks. And, in those weeks, we’ll see just how poor the earnings are and how the stock market reacts.

Will key stock indices continue to see a selloff as the earnings season progresses?

Many companies in key stock indices have already provided negative earnings outlooks ahead of the earnings season. According to Factset, 103 companies in S&P 500 have provided their earnings outlook. Eighty of them have provided a negative outlook and only 23 have provided a positive outlook—this means almost 78% of the companies that have provided a third-quarter earnings outlook expect weakness in their corporate earnings. (Source: Market Watch, October 5, 2012.)

In these pages, I have already discussed in detail how companies like FedEx Corporation (NYSE/FDX), Caterpillar Inc. (NYSE/CAT), and The Procter & Gamble Company (NYSE/PG) have already provided a negative earnings outlook. I think investors should brace themselves as more companies warn about their earnings outlooks. I see the banks providing strong earnings for the third quarter as the Fed pumps more liquidity into the market, but that’s the only sector I see strong as far as third-quarter earnings go.

Chevron Corporation (NYSE/CVX), the second largest U.S. oil company, warned that its earnings in the third quarter will be much weaker than the second quarter. (Source: Reuters, October 10, 2012). Chevron reports its earnings on November 2.

Another S&P 500 constituent, engine maker Cummins Inc. (NYSE/CMI), has also slashed its earnings outlook for 2012. The company expects revenue to fall $1.0 billion and income before interest and taxes to fall by 13.5%.

Those stock advisors who still believe that the key stock indices will reach their all-time highs should note that earnings outlook reports are suggesting the opposite.

Michael’s Personal Notes:

Is the U.S. economy better off now than before? I believe the economy is improving, but for the rich, not the poor. From the Average Joe’s point of view, very little has changed for the better in the U.S. economy. His savings have crumbled, his purchasing power is in decline, and his inflation adjusted income has gone down.

Last week when unemployment rate numbers came out, there was a wave of cheerfulness; the unemployment rate finally went down below eight percent after years of rate being above eight percent.

It is true that the unemployment rate has gone down from its highs of 10%, but does it really draw a clear picture of the U.S. economic condition? No, it doesn’t. The underemployment rate, which includes people with part-time jobs who can’t get full-time jobs and people who have given up looking for work, still hovers around 15%. And we all know that the jobs that have been created since the Great Recession hit are all in low-wage-paying industries.

Troubles are still ahead in the U.S. economy. As earnings growth declines, big businesses will struggle to make cuts so they can show better earnings. Sadly, this time around, these companies will look at employee cuts.

Job openings in the U.S. economy fell for the months of July and August, topping in June at 3.722 million. In August, there were 3.561 million job openings in the U.S. economy; 4.3% fewer job openings compared to June. Compared to July, August job openings fell by 32,000 jobs. (Source: Department of Labor, October 10, 2012.)

“Job openings” are a statistic used by economists to show if there is demand for workers and willingness on the part of companies to hire. Job openings declined for the majority of the summer. The job opening slowdown means the companies are hesitant to hire and demand for workers is low in the U.S. economy.

It will not come as a surprise to me if the “job openings” continue to deteriorate.

There is a significant amount of uncertainty in the U.S. economy. Underemployment, the true measure of the unemployment rate, is still the same.

Businesses in the U.S. economy are already struggling to cope with increasing risks from Europe and Asia. I highly doubt hiring more employees is a priority for American companies. But I can see letting more employees go to improve corporate earnings as more of an option for companies.

Where the Market Stands; Where it’s Headed:

We are in the second phase of a secular bear market that started in October 2007. Phase I of the bear market took stocks to multi-year lows. In March of 2009, Phase II of the bear market started. This phase is often referred to as the “bounce” or “sucker’s rally.” The purpose of a Phase II bear market is to give investors the feeling the economy is getting better and stocks are safe place to put money again. Phase III of the bear market, which we have yet to enter, wipes out all the gains created during the “bounce.”

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public haven taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks because gold bullion prices will likely continue to rise.” Michael Lombardi in Profit Confidential, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended by Michael’s advisories gained in excess of 100%.