According to an analysis done last week by the Wall Street Journal, in the first quarter of 2013, corporate earnings growth of companies in the key stock indices like the S&P 500 wasn’t really due to companies doing better. Rather, “research tax breaks” are what pushed 1Q13 earnings up for many S&P 500 companies. (Source: Wall Street Journal, June 14, 2013.)
Consider Intel Corporation (NASDAQ/INTC). The company spent $10.1 billion on research and development, which essentially lowered its effective tax rate from 28.2% in the first quarter of 2012 to 16.3% in the first quarter of 2013! This bolstered Intel’s corporate earnings.
Other big names in the S&P 500 like Google Inc. (NASDAQ/GOOG), Abbott Laboratories (NYSE/ABT), The Boeing Company (NYSE/BA), Yahoo! Inc. (NASDAQ/YHOO), and Xerox Corporation (NYSE/XRX) were able to use “research tax breaks” to also boost their corporate earnings.
While this technique helped companies boost 1Q13 earnings, profit expectations aren’t so rosy going forward.
Expectations for corporate earnings for the S&P 500 companies continue to drop. At the end of the first quarter (March 31), second-quarter corporate earnings were forecasted to grow at 4.5%. Now, corporate earnings growth for the second quarter is estimated to be only 1.3%. (Source: FactSet, June 7, 2013.)
Only four out of 10 industry sectors in the S&P 500 are expected to show corporate earnings growth in 2Q13. The information technology sector of the S&P 500 is expected to report a decline of 6.3% in corporate earnings this quarter and the health care sector could see its profits slide four percent!
Estimates for 2Q13 corporate earnings, in my opinion, are still too high. Underlying economic conditions haven’t improved and companies face severe revenue pressures. After all, the U.S. economy isn’t an island isolated from events in the global economy.
A significant portion of U.S.-based S&P 500 companies (about 40%) operate in regions like the eurozone and China—regions that are experiencing economic slowdowns. This means corporate earnings of companies based here at home are fragile.
Optimism surrounding rising key stock indices are not supported by corporate earnings. Investors beware!
There has been increased volatility in gold bullion prices as investors run from precious metals. According to data compiled by Bloomberg, gold bullion’s 60-day historical volatility reached 28.9% on June 13. This was the highest level since December of 2011. Average volatility over the past five years for gold bullion prices has been around 20%. (Source: Bloomberg, June 14, 2013.)
As the volatility continues in gold bullion prices, the fundamentals remain strong. Actually, demand for gold coins is unprecedented right now.
Aside from individual investors buying gold bullion, central banks continue to diversify their reserves into gold bullion as fiat currencies fail to protect their wealth. In spite of the decline in gold bullion prices, as has been well documented in these pages, central banks form Russia, Turkey, and Kazakhstan continue to add precious metals to their reserves.
Bullish stock advisors are forgetting that we are standing on the cusp of a global economic slowdown—an event that bodes well for gold bullion. It may be difficult for my readers to envision right now, but with the recent exodus by investors out of U.S. bonds, once the stock market starts declining, there will be few other “stores of wealth” for investors to seek aside from gold.
Major economic hubs have been slowing down for some time and now, they are taking with them smaller nations that rely on their demand. China, Japan, India, Australia, Germany, and France—they are all begging for economic growth.
But instead of getting growth, world economies are slowing. The World Bank lowered its forecast for global growth last week. It now expects the global economy to grow by only 2.2% in 2013, down from its previous estimate of 2.4%—and by the end of this year, I wouldn’t be surprised to see that forecast fall again
Meanwhile, while the politicians say there is no inflation, even the government’s own out-of-whack official figures show inflation is a problem.
The Producer Price Index (PPI), an early indicator of inflation, increased 0.5% last month (source: Bureau of Labor Statics, June 14, 2013)—annualized, that’s six percent a year in wholesale inflation that will eventually make its way to consumers!
The Federal Reserve continues to print $85.0 billion a month to purchase government bonds and mortgage-backed securities, even after seeing that aggressive money printing did not work for the Japanese economy.
Dear reader, the historical fundamental reasons that drive gold prices are still present. Gold bullion prices have come under pressure, because there’s a notion that the U.S. economy is improving and conditions are getting better. Imagine that: the U.S. economy has turned the corner because the Federal Reserve has printed trillions of dollars in new money! That doesn’t sound right to me; it actually sounds artificial.
Gold bullion prices still have a bright future. And I don’t expect the scrutiny in the precious metal to last much longer. When all the pieces of the puzzle come together, the gold bears will realize they were wrong.
What He Said:
“We will wish Greenspan never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in Profit Confidential, April 27, 2004. Michael first started warning about the negative repercussions of Greenspan’s low interest rate policy when the Fed first dropped interest rates to one percent in 2004.