Posts Tagged ‘corporate earnings’
The stock market in France has been on a tear! Below, I present a chart of the French CAC 40 Index, the main stock market index in France.
Looking at the chart, we see the French stock market is trading at a five-year high. With such a strong stock market, one would expect France, the second-largest economy in the eurozone, to be doing well. But it’s the exact opposite!
As its stock market rallies, France’s economic slowdown is gaining steam. In January, the unemployment rate in France was unchanged; it has remained close to 11% for a year now. (Source: Eurostat, February 28, 2014.) Consumer spending in the French economy declined 2.1% in January after declining 0.1% in December. (Source: National Institute of Statistics and Economic Studies, February 28, 2014.) Other key indicators of the French economy are also pointing to an economic slowdown for the country.
Chart courtesy of www.StockCharts.com
And France isn’t the only place in the eurozone still experiencing a severe economic slowdown. In January, the unemployment rate in Italy, the third-biggest nation in the eurozone, hit a record-high of 12.9%, compared to 11.8% a year ago.
I have not mentioned Greece, Spain, and Portugal because they have been discussed in these pages many times before; as my readers are well aware, they are in a state of outright depression.
Just like how investors have bought into the U.S. stock market again in hopes of U.S. economic growth, the same thing has happened in the eurozone. Investors have put money into France’s stock market in hopes of that economy recovering—but it hasn’t. We are dealing with a … Read More
The chart below is of the S&P Case-Shiller Home Price Index, an index that tracks home prices in the U.S. housing market. As the chart shows, from their peak in 2007 to their low in late 2011, U.S. homes prices fell by about 30%. Since then, prices in the housing market have improved, but they are still down about 20% compared to 2007. Basically, home prices have recouped only one-third of their losses from the 2007 real estate crash.
Yes, the U.S. housing market has regained some lost ground, but it’s far from being back to where it was in 2007. And I’m very worried about the pace of the housing market recovery; I feel that the recovery is in jeopardy.
Chart courtesy of www.StockCharts.com
Consider this: the interest rate on the 30-year fixed mortgage tracked by Freddie Mac increased to 4.43% in January of this year from 3.41% in January of 2013. (Source: Freddie Mac web site, last accessed February 26, 2014.) While there hasn’t been much mainstream media coverage on this, mortgage rates have increased by 30% in one year’s time. With the Federal Reserve cutting back on its quantitative easing program, interest rates are expected to continue their path upwards in 2014.
Higher interest rates are pushing would-be homebuyers away from the housing market. The U.S. Mortgage Bankers Association reported last week that its index, which tracks mortgage activity (of both refinanced and new home purchases), fell 8.5% in the week ended February 21. (Source: Reuters, February 26, 2014.)
And new homebuilders are seeing demand from homebuyers decline in the housing market as well. While presenting … Read More
On February 24, the S&P 500 broke to a new all-time high. There was panic buying as soon as the markets opened that day, as the chart below depicts.
Looking at this, I can’t help but ask if investors have completely lost touch with reality. It seems the fundamentals that drive stock prices higher—corporate earnings—have been ignored.
And as investors are driving key stock indices higher, the state of the global economy is becoming worrisome. This can’t be stressed enough: the U.S. economy isn’t immune to a disturbance in the global economy. But this isn’t all; if the global economy sees an economic slowdown, the companies on U.S. key stock indices suffer as well.
One clear example of this, as it stands, is Caterpillar Inc. (NYSE/CAT), a giant industrial goods manufacturer and component of the S&P 500. The company reported that annual sales declined 16% in 2013. Caterpillar’s revenues were $55.65 billion compared to $65.87 billion. The company’s corporate earnings per share were down more than 32% in 2013. The reason for this: a challenging business environment in the global economy. (Source: Caterpillar Inc., January 27, 2014.)
The global economy is going to disappoint in 2014.
First in line is Asia. Look anywhere on that continent, and you will see economic slowdown looming in the air. China, the biggest economic hub in the region and the second-biggest in the global economy, is outright slowing down. In February, the manufacturing activity in the country dropped to a seven-month low. The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) registered at 48.3 in February compared to 49.5 in … Read More
In the first five weeks of this year, investors bought $22.0 billion worth of long-term stock mutual funds. (Source: Investment Company Institute, February 12, 2014.)
But as investors poured money into the stock market, hoping to ride the 2013 wave of higher stock prices, stocks did the opposite and went down. The Dow Jones Industrial Average is down three percent so far this year.
Looking at the bigger picture, corporate earnings and key stock indices valuations are still stretched. The S&P 500’s 12-month forward price-to-earnings (P/E) ratio stands at 15.1. This ratio is currently overvalued by roughly nine percent when compared to its 10-year average, and 15% compared to its five-year average. (Source: FactSet, February 14, 2014.)
This isn’t the only indicator that says key stock indices have gotten too far ahead of themselves. In the chart below, I have plotted U.S. gross domestic product (GDP) against the S&P 500.
The chart clearly shows a direct relationship between GDP and the S&P 500. When U.S. GDP increases, the S&P 500 follows in the same direction, and vice versa. When we look at the 2008–2009 period (which I’ve circled in the chart above), we see that when GDP plunged, the S&P 500 followed in the same direction.
Going into 2014, we saw production in the U.S. economy decline; consumer spending is pulling back, unemployment is still an issue, and the global economy is slowing. U.S. GDP is far from growing at the rate it did after the Credit Crisis. Take another look at the chart above. In 2011, you’ll see U.S. GDP was very strong; but after … Read More
The single greatest certainty capital markets are looking for is policy stability from the Federal Reserve, and Janet Yellen, the new Chair of the Federal Reserve, delivered the goods for Wall Street.
With certainty in regards to short-term interest rates and the expectation that quantitative easing will continue to be reduced over the coming quarters, the fundamental backdrop for the stock market remains positive.
Many companies sold off after reporting earnings results that basically met consensus. This was well-deserved, especially in a market that has not experienced a meaningful correction for a number of quarters.
Particularly for large-caps, corporate earnings results in the last quarter of 2013 were decent and corporate outlooks for 2014 were also relatively positive, considering the current state of things.
Add in the high likelihood of rising dividends from blue chips in the bottom half of the year, and you have the makings of another decent year for stocks.
Corporate balance sheets are in top-notch condition, and the cost of capital is cheap. From the corporate perspective, this is the perfect backdrop for greater growth, and sales growth translates to the bottom line.
For the last couple of quarters, I’ve been reticent about investors buying this stock market. Long investors benefitted tremendously in 2013, even by owning blue chips. While the expectation has been for a major stock market correction (or collapse), one has yet to transpire. Instead, we are getting meaningful price consolidation, which is happening again.
The lack of a meaningful double-digit price correction in the stock market illustrates the continued underlying fervor that institutional investors have to be buyers. With continued certainty from … Read More
If there is an investment theme I would follow in 2014, it would be this:
Preserve your capital, be worried about the economy, and don’t for a second believe that key stock indices are going to provide returns like they did in 2013. This year may just be the year when the floor is taken out from beneath stock prices.
Why am I so bearish on 2014? It’s because I believe a perfect storm is in the making for key stock indices.
The main driver of key stock indices, corporate earnings, is under pressure. Of the 344 companies on the S&P 500 that have reported their corporate earnings for the fourth quarter of 2013, 3.3% of them surprised the market with better-than-expected earnings—43% below the four-year average “surprise” rate of 5.8%. (Source: FactSet, February 7, 2014.) Corporate earnings are far from exceptional.
In respect to the future, so far, for their first-quarter corporate earnings forecasts, 57 of the S&P 500 companies have issued negative corporate earnings guidance compared to 14 companies that have issued a positive outlook. (Source: Ibid.) Buying stock when companies in key stock indices are worried about their corporate earnings has never been a wise move.
Then we have the issue of the slow pullback on money printing by the Fed. The Federal Reserve is now printing $65.0 billion a month in new money as opposed to the $85.0 billion a month it printed in 2013. Not a big deal? It has been for the emerging markets, as the U.S. dollar strengthens and emerging market currencies collapse, putting further pressure on U.S. companies that sell abroad.
The … Read More
As more and more public companies warn about weak fourth-quarter corporate earnings reports, quite a number of them are resorting to the use of words like “corporate restructuring” or “cost cutting.” At the very core, these cost-cutting measures mean reducing the number of employees working at these companies.
Let’s face the facts: companies on key stock indices are struggling to keep revenue and profits rising. The share buyback “thing” is getting old (after all, how much money do these companies have to throw at stock buybacks?), so to show better corporate earnings, reducing work forces is the easiest thing to do.
Wal-Mart Stores, Inc. (NYSE/WMT) says it plans to lay off 2,300 assistant managers and hourly employees at its Sam’s Club stores. (Source: CNBC, January 24, 2014.)
Abbott Laboratories (ABT) recently let go an unspecified number of employees at its Lake County headquarters. In the conference call to investors about its fourth-quarter corporate earnings, the CFO of the company simply said, “[the company] will take further actions to reduce out expenses… get our support structure at appropriate levels.” (Source: “Abbott Laboratories launches round of layoffs,” Chicago Tribune, January 28, 2014.)
And as I told you last week…
Intel Corporation (NASDAQ/INTC) said it will be reducing its workforce by 5,000 this year. Here’s what the company spokesman, Chris Kraeuter, had to say: “This is part of aligning our human resources to meet business needs.” (Source: “Intel to reduce global workforce by five percent in 2014,” Reuters, January 17, 2014.) Intel had flat fourth-quarter 2013 corporate earnings.
Hewlett-Packard Company (NYSE/HPQ), another major company in the key stock indices, is taking a … Read More
Don’t for a second believe consumer spending in the U.S. economy is improving!
J. C. Penney Company, Inc. (NYSE/JCP) has announced it will be closing 33 stores in the U.S. economy. By doing this, the retailer will save about $65.0 million a year starting in 2014. 2,000 employees will be let go. (Source: J. C. Penney Company, Inc., January 15, 2014.)
Macy’s, Inc. (NYSE/M) is also closing stores.
Best Buy Co., Inc. (NYSE/ BBY) reported that for the nine-week period ended January 4, its comparable sales declined 0.8% from the same period a year ago. The CEO of the company, Hubert Joly, said, “…our holiday revenues were negatively impacted by a number of factors, including: (1) the aggressive promotional activity in the retail industry during the holiday period; (2) supply constraints for key products; (3) significant store traffic declines between “Power Week” and Christmas; and (4) a disappointing mobile phone market.” (Source: “Best Buy Announces Holiday Revenue Results,” Best Buy Co., Inc., January 16, 2014.)
Target Corporation (NYSE/TGT) is another retailer that’s been hurt by dismal consumer spending in the U.S. economy. The company expects a decline of 2.5% in its fourth-quarter comparable sales. Target has also lowered its corporate earnings guidance for the fourth quarter; it now expects to report earnings of between $1.20 and $1.30 per share. Previously, it stated its corporate earnings in the fourth quarter would be between $1.50 and $1.60 a share. The company also plans to close eight stores in the U.S. economy. (Source: Target Corporation, January 10, 2014.)
Each day, it is becoming more evident that consumer spending, which makes up about two-thirds … Read More
To see where the U.S. housing market is headed, we really need to look at what real home buyers—those who are planning to stay in their home for the long term—are doing. Institutional investors, who came into the housing market in 2012 and bought massive amounts of homes, are speculators; they’ll quickly rush out of the housing market if they can get a profit or if they can get a better return on their money elsewhere.
Right now, real home buyers are not very active in the U.S. housing market, as they face challenges. In fact, it looks like the number of real home buyers in the housing market is declining.
Between January and December of 2013, the 30-year fixed mortgage rate tracked by Freddie Mac increased by 31%. The 30-year fixed mortgage rate stood at 3.41% in January, and it increased to 4.46% by December. (Source: Freddie Mac web site, last accessed January 15, 2014.) Higher interest costs are a real challenge for home buyers.
As we can see from the chart below, there was a sudden change in the direction of interest rates after the Federal Reserve hinted in the spring of 2013 that it would start to “taper” its quantitative easing (money printing) program. It is widely expected that the Fed will continue to taper throughout 2014 as it drastically pulls back on its massive money printing scheme.
Chart courtesy of www.StockCharts.com
Another challenge home buyers face is stagnant growth in their incomes. In 2013, average hourly earnings of production and nonsupervisory employees in the U.S. increased by only 1.85%—less than real inflation. (Source: Federal Reserve Bank … Read More
Some earnings reports are coming in now and a lot of them are pretty decent. At the very least, many are beating consensus and/or previous outlooks for upcoming quarters.
This is all recognizing, of course, that earnings are managed and that a lot of corporations purposely downplay their expectations for the future, so it makes it easier to outperform when results are due. Still, this is the way the system works and the market trades off these relative expectations.
From the numbers that I’m reading so far, the outlook for fourth-quarter earnings season is looking pretty good. There have been a few misses so far, but mostly in regards to guidance for future quarters.
The Container Store Group, Inc. (TCS) was one of the market’s misses in that it reported adjusted earnings per share that beat its comparable quarter by over 37.5%, with a seven percent gain in sales to $188.3 million. Its 2014 full-year sales were forecast to be $754.0 million, just slightly below previous guidance of $756.2 million, and the position sold off.
TCS has been one of the stock market’s hottest IPOs of late and it’s still a decent growth story. The shares doubled in the stock’s market debut back in November. Price volatility is inherent in IPOs; they are almost always overpriced to begin with.
But a lot of companies have so far beaten consensus and increased previous guidance for 2014. Solid earnings results have come from Frischs Restaurants, Inc. (FRS), The Greenbrier Companies, Inc. (GBX), Constellation Brands, Inc. (STZ), Monsanto Company (MON), Team Inc. (TISI), UniFirst Corporation (UNF)…and the list goes on.
UniFirst has been … Read More
All of a sudden, auto sales are declining…
Auto sales in the U.S. economy declined to an annual rate of 15.4 million units in December. In November, this number stood at 16.41 million units—a decline of more than six percent. (Source: Motor Intelligence, January 3, 2014.) Analysts were caught off guard by the decline in December auto sales; they were expecting an increase!
I see the decline in auto sales as being directly related to rising interest rates. And it’s not going to get any better.
For years now (since the Credit Crisis), auto sales have been increasing due to low interest rates. It’s very similar to what happened to the housing market prior to 2007. More and more people went on a house-buying spree when the mortgage rates were at record lows. When mortgage rates started to increase in 2007, the already-inflated housing market got hit hard. The same thing is happening to auto sales now.
Interest rates are rising again. Look at the chart below of the bellwether 10-year U.S. Treasury. Since November, the yield on the 10-year U.S. Treasury has gone up roughly 20%. The higher interest rates go, the weaker auto sales will get. (And we can already see the impact on the auto stocks. The stocks of America’s major car makers are off five percent from their 2013 peak, but key stock indices are near their peaks.)
Chart courtesy of www.StockCharts.com
Rising interest rates will have the biggest impact on auto loans given to subprime borrowers (those who have a lower credit standing).
My readers should note that the delinquency rates on auto loans … Read More
While 2013 will go down as the banner year for the S&P 500 and other key stock indices no one expected, the number of warning signs about this overpriced and overbought stock market has only increased. And my readers need to know about them…
Trading volume, which is the number of shares traded, fell in 2013. The chart below (bottom portion of the chart) shows trading volume on the S&P 500 was the lowest in 2013 since 2006 (circled area). Trading volume on the S&P 500 in 2013 was 573.4 billion—14.4% lower compared to 2012, when it was 670.1 billion. How does a stock market rise when there is less demand for stocks?
Chart courtesy of www.StockCharts.com
Next, the yield on the bellwether 10-year U.S. Treasury surpassed three percent last week—its highest level since July 26, 2011. The yield on the 10-year U.S. Treasury is now higher than the yield on the 10-year government bonds issued by Canada, Germany, the Netherlands, Switzerland, Japan, and even France!
Why is this so important? The rising yield for the 10-year U.S. Treasury makes stocks less attractive (why buy the Dow Jones Industrial Average with a dividend yield of only 2.09% when investors can get a guaranteed government yield of 3.02%) and housing more vulnerable (the standard 30-year U.S. mortgage is closing in on an interest rate of five percent—the last time it hit that rate was back in January of 2010).
But unlike July of 2011, when the 10-year U.S. Treasury was last yielding three percent, interest rates are not expected to decline, but to continue rising. The Federal Reserve has started pulling … Read More
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