If companies in key stock indices are beating their earnings estimates, it’s because they are beating already lowered expected earnings. What’s the biggest problem with the corporate reports I’m seeing? Revenue growth is disappearing.
What we have seen so far:
International Business Machines Corporation (NYSE/IBM) reported third-quarter corporate earnings per share were up 11% from the same period a year ago, but revenues fell four percent from the third quarter of 2012. (Source: International Business Machines Corporation, October 16, 2013.)
The Goldman Sachs Group, Inc. (NYSE/GS) reported corporate earnings of $2.88 per share for the third quarter of 2013. In the same period of 2012, corporate earnings were $2.85 per share. And revenues plunged 22% from the second quarter! (Source: Goldman Sachs Group, Inc., October 17, 2013.)
What we have seen so far in respect to the earnings of big public companies isn’t anything impressive. In fact, it’s just more evidence pointing to key stock indices running on nothing but propped-up earnings due to stock buyback programs made largely possible by easy monetary policy.
Going forward, I just expect to hear about more companies struggling with revenue growth; thus, you can understand my skepticism on rising key stock indices. Every “party” comes to an end, and the gains we now see on the key stock indices could disappear very quickly. I believe caution and capital preservation are the best investment strategies right now as key stock indices run ahead of themselves.
The fundamentals: real rising corporate earnings and real rising corporate revenue because of real economic growth in the equation that is missing from the rise in stock prices. On an individual basis: real personal income has been declining since 2009 and jobs created since the Great Recession have been in the low-paying retail and service sectors.
This is the weakest economic recovery on record. Our economy isn’t growing. All we have is the government increasing its debt and the Fed printing new paper money to give to the banks and the government. Take out the rise in the stock prices of big bank stocks since 2009 (who have been supported by the Fed) from key stock indices, and the stock market looks a lot different.
Economists like me who hold contrarian views on key stock indices are ridiculed these days. I don’t mind. (I was also ridiculed in 2005 when I said the U.S. housing market was overpriced and that it would collapse.)
My belief is that we are at the end of the bear market rally in stocks that started in 2009. The bear is doing a masterful job at convincing investors the stock market is a safe place again—just what the bear wants before it takes stock prices down again.
Keeping up with the subject of irrationality, it’s not just key stock indices working in reverse to the fundamentals; I believe gold bullion prices are facing the same issue. They are moving in the wrong direction in spite of fundamentals suggesting otherwise.
India, the biggest gold bullion-consuming country, is experiencing robust gold demand in spite of the government and central bank working together to curb it. According to traders in India, gold bullion premiums have reached a record high of $100.00 an ounce—about eight percent above London prices. Why? There’s a shortage in the supply of gold bullion to meet the demand in India. (Source: Reuters, October 15, 2013.) As per the World Gold Council’s estimates, the demand for gold bullion in India will be about 1,000 tonnes for the year.
Consumer demand for gold bullion elsewhere is significantly higher as well. And one of the gold bullion buyers I follow closely, central banks, are active, too.
According to the International Monetary Fund, in August, Russia, Turkey, and six other central banks across the global economy increased their gold bullion reserves. The Russian central bank purchased the greatest amount since December of 2012, bringing its gold bullion reserves to 1,015.52 tonnes. Turkey’s central bank bought 23.34 tonnes of the precious metal, and its total gold bullion holdings stood at 487.35 tonnes in August. (Source: Reuters, September 25, 2013.)
Looking at all this, I am more bullish than ever on gold bullion, because I’m focused on the long-term prospects of the precious metal.
In spite of the weakness in gold bullion prices we witnessed in early summer this year, the long-term trend in gold bullion prices is still intact. You can see it for yourself in the chart below.
Chart courtesy of www.StockCharts.com
I believe opportunities in the form of depressed prices for well-managed senior and junior mining companies are knocking on the doors of investors. No one likes them right now because they have shed a significant amount of value. There’s blood on the streets for gold, it seems, and that’s why the contrarian investor in me likes gold-related investments so much.
What He Said:
“What group of stocks are next to fall in light of the softening U.S. housing market? The stocks of companies that sell retail products to the American consumer, I believe, are next on the hit list. Many retail stocks are already reporting soft sales. In my opinion, they haven’t seen anything yet in respect to weaker sales.” Michael Lombardi in Profit Confidential, August 30, 2006. According to the Dow Jones Retail Index, retail stocks fell 42% from the fall of 2006 through March 2009.