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Economic Data and Corporate Earnings Signaling Global Recession?

Economics / Corporate Earnings Oct 27, 2008 - 11:29 AM GMT

By: Money_Morning

Economics William Patalon III writes: It's beginning to sound like a broken record.  In a nutshell, we already know that the economic data should be weak. We already know that the earnings reports should be disappointing. And because we already know all this, the information should be built into stock prices. The earnings releases should be soft. That much should already be known – and built into the markets.

Procter & Gamble Co. ( PG ) , Exxon Mobil Corp. ( XOM ) and Chevron Corp. ( CVX ) highlight the list of companies announcing earnings. Remember, crude has plunged more than 50% since halfway through the past quarter and the energy releases will not reflect those moves.

A hectic week on the economic front will be highlighted by a report on third-quarter gross domestic product (GDP), which may reveal negative growth (and renew fears of recession).  By definition, a true recession consists of two consecutive quarters of negative growth. If such a downturn is inevitable, perhaps the stock market will be better off getting that confirmation now, rather than letting the ruinous uncertainty persist.

After all, stocks are considered leading indicators and typically begin rebounding in the midst of a recession (and in advance of any recovery). Finally, the U.S. Federal Reserve meets again to discuss monetary policy and another rate cut to stimulate the economy seems likely (but below 1%?).  That's quite a switch from just a few weeks ago, when inflation was on the march and the U.S. central bank was trying to plan an interest-rate increase.

Market Matters

Wake me when it's over. That's what a lot of investors are thinking these days – at least, the ones that didn't already just give up in disgust and dump everything they own. Perhaps that “ Rip Van Winkle ” approach to investing makes practical sense these days (at least, for folks with an investment time horizon of five years or better.

There is a sound way to deal with all this. Take these steps:

  • Don't panic. It's worth rebalancing your portfolios so that your holdings are consistent with your current long-term objectives and risk tolerances. Fix anything that doesn't fit. But resist the urge to dump everything and walk away.
  • Be smart. While you're adjusting your holdings, take advantage of potential tax losses. With the end of the year looming, consider dumping any holdings that don't fit and aren't likely to recover.
  • Don't obsess. With the investments that you opt to keep, refrain from constantly checking your mutual-fund statements or brokerage reports. Refrain from typing in those ticker symbols over and over again during the day. Quit getting up at 3 a.m. each day to watch CNBC Asia. Give the bailout plans – and the economy itself – the chance to work its way through this mess.
  • Look to the future: If there is a stock, or stocks, you believe have really strong prospects – and that are trading at true bargain levels – consider adding to that position at these levels.

Naturally, this isn't easy to do. But the results will make it worth the effort for you – especially when everyone else continues to panic.

Late last week, the hysteria continued – on a global basis – as the odds of a worldwide recession appeared to escalate. Indexes in Germany (-8.3%), France (-7.8%), Great Britain (-7.3%) and Japan (-9.6%) plunged, as the U.S. indices again ended a week with a lot of volatility. When the dust finally settled, the Dow Jones Industrial Average , the Nasdaq Composite Index and the Standard & Poor's 500 Index each fell more than 3% Friday – and even more for the week.

During the week, U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. provided additional details of the $700 billion bank bailout plan and PNC Financial Services Group Inc. ( PNC ) promptly took advantage by announcing its intent to acquire National City Corp. (NCC) for $5.58 billion after selling preferred equity shares and warrants to the U.S. Treasury Department.

Likewise, financial conglomerate ING GROEP NV (ADR: ING ) became another recipient of the coordinated bailouts by obtaining a $13 billion capital infusion from the Dutch government.  Meanwhile, the Fed announced plans to buy commercial paper from high-rated companies in an attempt to thaw out the short-term credit markets; General Electric Co. ( GE ) said it fully intends to participate in this lending program.  Slowly but surely, financial institutions are determining how best to take advantage of the governmental efforts. 

Third-quarter earnings likely will represent the fifth straight period of declining performance (didn't investors know that going in?). Thomson Reuters predicted S&P 500 companies will reflect a 10% drop in aggregate profits.  Many of the actual results remained strong (relatively), though pessimistic outlooks have garnered most of the attention. 

Microsoft Corp. ( MSFT ) posted sales that beat Street expectations (but warned of the future); Apple Inc. ( AAPL ) profits surged 26% (but warned of the future); Inc.'s ( AMZN ) income skyrocketed almost 50% (but warned of the future); United Parcel Service Inc. ( UPS ) reported a lower than expected decline in profits (but warned of the future).  Could the warnings actually be managements' way of setting expectations low so they can beat them in the quarters to come with earnings surprises?  American Express Co. ( AXP ) , Caterpillar Inc. ( CAT ) , and the Seoul-based Samsung Electronics Co. Ltd. – the world's No. 1 chipmaker – were among those companies that reported challenging quarters, while McDonalds Corp. ( MCD ), The Dow Chemical Co. ( ) , and Northrop Grumman Corp. ( NOC ) reaped favorable results. Dow Chemical's results were influenced by the product price increases it put in DOW place as commodities prices soared, Money Morning reported.

On Friday, the Organization of The Petroleum Exporting Countries (OPEC) announced plans to cut oil production by 1.5 million barrels a day to counter the continued slide in prices.  Apparently, energy traders don't trust OPEC to keep its word, as crude tumbled to 16-month lows on weak demand expectations.

The national average price of gasoline fell below $3 a gallon, lending consumers a (slight) hand before the holidays.  On the political front, U.S. Sen. Barack Obama, R-Ill., the Democratic presidential hopeful, tapped former J.S. Federal Reserve Chairman Paul A. Volcker (Volcker's successor, Alan Greenspan, doesn't quite possess the same luster these days), while Senator McCain continued to criticize his opponent's “spread-the-wealth” philosophy.

Perhaps Rip Van Winkle had something after all – and we should just sleep through the election, as well?

Market/ Index

Year Close (2007)

Qtr Close (09/30/08)

Previous Week

Current Week

YTD Change

Dow Jones Industrial

13,264.82 10,850.66 8,852.22 8,378.95 -36.83%


2,652.28 2,082.33 1,711.29 1,552.03 -41.48%

S&P 500

1,468.36 1,164.74 940.55 876.77 -40.29%

Russell 2000

766.03 679.58 526.43 471.12 -38.50%

Fed Funds

4.25% 2.0% 1.50% 1.50% -275 bps

10 yr Treasury (Yield)

4.04% 3.83% 3.94% 3.70% -34 bps

Economically Speaking 

The political grandstanding and blame-placing continued last week as Greenspan, Securities and Exchange Commission (SEC) Chairman Christopher Cox , and former Treasury Secretary John W. Snow became the latest fall guys to get tongue-lashings from the holier-than-thou members of Congress (who seem to believe they have no responsibility for this financial mess).  Meanwhile, Federal Deposit Insurance Corp . (FDIC) Chair Sheila C. Bair promoted a plan to incentivize banks to refinance underwater mortgages with government assistance .  Economists believe housing must lead any rebound and Bair's plan is designed to help stabilize that sector.  On that note, existing home sales climbed by 5.5% in September, the strongest showing since July 2003 (that must account for something), though the favorable news seemed to be lost on investors.  The Index of Leading Economic Indicators unexpectedly rose by 0.3% in September, its first increase in five months.  Interestingly, the Index of Consumer Expectations was among the positive monthly indicators, despite the fact that consumer activity is expected to be dismal in the upcoming holiday season.  

Despite the (slightly) positive signs in the weekly data, the International Monetary Fund (IMF) projected zero to negative growth in the United States economy for the remainder of 2008, with a recovery beginning in the second half of next year. 

Labor will be a huge component of this weakness as companies continue to get “lean and mean” to jumpstart their operations (or merely survive).  Goldman Sachs Group Inc. ( GS ) will be reducing its workforce by 3,260 jobs; Chrysler LLC is planning to eliminate 1,825 jobs; Xerox Corp. ( XRX ) will cut 3,000 jobs; Merck & Co. Inc. ( MRK ) announced a restructuring that includes losses of 7,200 jobs. 

No sector seems immune.  While the U.S. struggles to avoid negative growth (a foregone conclusion perhaps revealed as early as Thursday's GDP release), China's statistics bureau reported that it's country's growth rate fell to 9% for the last quarter, the first time it grew by less than 10% since 2002.

With India projected to grow at 7.9% this year and 6.9% next year. That's hardly the worldwide recession so many economists are expecting.

Weekly Economic Calendar




October 20 Leading Eco. Indicators (09/08) First increase in five months
October 23 Initial Jobless Claims (10/11/08) Larger than expected increase confirms weak labor
October 24 Existing Home Sales (09/08) Strongest increase in 5 years
The Week Ahead
October 27 New Home Sales (09/08)
October 28 Consumer Confidence (09/08)
October 29 Durable Goods Orders (09/08)
Fed Policy Meeting Statement
October 30 Initial Jobless Claims (10/18/08)
GDP (3rd quarter)
October 31 Personal Income/Spending (09/08)


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