There are a number of research firms reporting this morning on how U.S. Black Friday sales fared compared to last year. I have already seen conflicting reports among different sales-tracking research firms. But there is one company I usually follow.
Chicago-based ShopperTrak reported that Black Friday sales in the U.S. fell 1.8% from last year. In 2011, sales on Black Friday were 6.6% above those of 2010. (Source: ShopperTrak press release, November 24, 2012.) The much weaker sales this Black Friday (the U.S.’s biggest retail shopping day) are consistent with what I have been writing about in these pages about the U.S. economy slowing.
At a think tank we held this weekend on the stock market, a couple of individuals said they thought key stock indices like the S&P 500 would go on to new all-time highs. This thinking amazes me in light of the recent market sell-off.
I don’t think these investors realize what the real issue behind the market sell-off is. No, it is not the fiscal cliff. Investors are selling, pushing down stock prices, simply because the corporate earnings of public companies are worse than expected. If companies were reporting weaker earnings, they were reporting declining revenues (not sure which is worse). Look at these key stock indices. They are in sell-off mode.
NASDAQ, DJIA, and S&P 500
Chart courtesy of www.StockCharts.com
As the third-quarter corporate earnings reporting season comes to a close, expectations for the current quarter are turning bleak. The most basic thing that drives the stock market higher or lower is the future expectation of corporate earnings; if corporate earnings growth is not there, key stock indices decline in value.
Let’s look at a couple of examples of what I’m talking about:
Cisco Systems, Inc. (NASDAQ/CSCO) reported a third-quarter rise of 18% in its corporate earnings. That’s great, but at the same time, the CEO of the company mentioned that the economy is challenging. Cisco’s revenue edged up due to a company acquisition, but the revenues of its core business—the sale of switches and routers—each declined two percent. (Source: Wall Street Journal, November 13, 2012).
Wal-Mart Stores Inc. (NYSE/WMT), another S&P 500 company, reported an increase in its third-quarter corporate earnings, but reported revenues were below what the market was expecting. In addition, the company decreased its full-year corporate earnings outlook and issued a forecast for the fourth quarter that disappointed analysts on Wall Street. (Source: Associated Press, November 15, 2012.)
There is a staggering amount of companies on the S&P 500 and other major key stock indices that have given warnings to investors about possible corporate earnings disappointments for this quarter.
No matter which sector or stock index I look at, there is a significant amount of weakness present in them. The risk in being involved in stock markets is increasing; fewer and fewer companies are looking like safe bets.
Key stock indices are shedding the gains they’ve accumulated since the beginning of this year. I expect the trend to continue. Until I see corporate earnings increase (which I don’t see happening for months), I don’t for a second believe that the stock market is heading to new highs. (Also see: Two More Key Indicators Turn Bearish on the Stock Market.)
Let’s pause and reflect for a moment. What was the main issue that drove the U.S. economy into an economic downturn in 2008 (that is still taking its toll)? It was the collapse of the housing market. It crippled the U.S. banking system and brought a Great Recession into the U.S. economy that will be remembered for a long time to come.
Since then, the housing market in the U.S. economy has improved in small geographic pockets. But now, data are increasingly coming out suggesting more trouble ahead for the U.S. housing market.
According to RealtyTrac, foreclosures in the U.S. economy actually increased three percent in October compared to the previous month. The company also reported that one in every 706 houses in the U.S. economy was in the foreclosure filing process. (Source: RealtyTrac, November 13, 2012.)
The Federal Housing Administration (FHA), the agency which insures lenders against losses on their loans, is concerned about its reserves due to increasing mortgage delinquencies. The year 2013 could be the first time in 78 years that the FHA will need taxpayers’ money. The agency has 739,000 loans that are 90 days or more past due on hand—100,000 more than a year ago—representing 9.6% of all the loans it has guaranteed. The FHA has guaranteed $1.08 trillion worth of loans. (Source: Wall Street Journal, November 14, 2012.)
As I have been saying for some time now, my research shows it has been investors fuelling the housing market. Investors are buying troubled properties, fixing them up, and renting them out to tenants. The U.S. housing market, and the U.S. economy for that matter, will only start to bounce once there is an influx of real homebuyers. (Also see: Think There’s a Recovery in the Housing Market? Think Again.)
What He Said:
“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures and the construction market. These events will dampen the U.S. economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in Profit Confidential, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.