Low Global Growth Is Worse Than Mega Sovereign Default: Slowdown Will Depress Corporate Earnings And Trigger Our Next Big Market Crash
If global economy is going to get slower, would investors be willing to take on more risk?
Morgan Stanley’s Joachim Fels: ‘We have a global economy that has entered what I call the twilight zone’
Services industries from Asia to Europe cooled last month after the euro-area debt crisis pulled economies including Spain and Italy into recession and damped global growth prospects.
The purchasing managers’ index fell to 53.7 in September from 56.3 in August, the National Bureau of Statistics and China Federation of Logistics and Purchasing in Beijing said today. That’s the lowest since at least March 2011. In the euro-area, a gauge slipped to 46.1 last month from 47.2 and a U.K. measure also fell. Readings below 50 indicate contraction.
Joachim Fels, chief economist at Morgan Stanley, said the euro area’s economic gloom will deepen.
“First of all there’s still fiscal tightening going on,” Fels told Tom Keene and Sara Eisen on Bloomberg Television’s “Surveillance” on Oct. 1. “We have a global economy that has entered what I call the twilight zone — that’s the fuzzy area between sustained expansion and renewed recession. The global data are still weakening. There are domestic and global reasons why the economy in Europe is weakening further.”
As Kleinwort Benson chief investment officer Mouhammed Choukeir commented in the EIU/State Street survey: “Europe is the current eye of the storm, but it is not really a tail risk now as it is known. The United States or Japan defaulting would be, and Japan has a huge burden of debt.”
A bigger problem is that years of low global growth into giant headwinds of demographic change, resource scarcity and climate change throw up more intangibles than even a mega sovereign default. At least you can model the latter.
High youth unemployment in the Western world, rising dependency ratios in aging populations and dashed aspirations of nascent middle classes in the developing world all throw up social and political risks that are almost impossible to measure.
There is a “non-negligible risk that the global economy will enter another recession in 2013,” the Institute of International Finance said Monday.
The IIF, an association of more than 400 of the world’s largest private banks and other financial firms, said a recession isn’t their baseline forecast. But the warning underscores a message in the IIF’s economic report that policy makers must act quickly to address budget and financial problems in Europe and the U.S. to avoid a return to a worldwide contraction.
“Since President Obama took office in January 2009, the U.S. government has implemented more fiscal stimulus and monetary intervention than ever before, yet real [gross domestic product] has slowed from 2.4 percent in 2010 to 2 percent in 2011, and to only 1.6 percent in the first half of 2012,” he says.
At its analyst meeting today in which the Meg Whitman outlined her turnaround plan for Hewlett-Packard, the company dropped this bombshell:
HP’s profit forecast for FY 2013 comes in at $3.40-$3.60 per share, below $4.16 average estimates. Shares have tanked to $15.97, a nine-year low.
Revenue is down 11%, too.
Companies will soon close the books on the quarter, and if comments from Intel and FedEx are an accurate indication, profit warnings could figure prominently in their reports. Multinationals are facing stiffer economic headwinds than at the start of the year. The U.S. dollar has appreciated against the euro, nicking sales in a region that’s already reeling. And growth rates have slowed elsewhere. These worries extend even to China, which is no longer the growth engine many companies had come to rely on.
Caterpillar , the world’s No. 1 maker of construction and mining equipment, issued its 2015 profit outlook Monday, saying it expects to see “fairly anemic” global growth through 2015. It estimated earning $12 to $18 a share in 2015 vs. an earlier forecast of $15 to $20. Caterpillar — dealing with a business slowdown in China, one of its fastest growing markets — is off 4% on the NYSE this year.
FedEx roiled the transport sector Sept. 18 when it slashed its full-year earnings outlook, citing a global economy in bad shape and showing little sign of improving soon. It was the second time in two weeks the parcel carrier had cut its profit estimate, both times blaming “weakness in the global economy.” That weakness has led some customers to seek cheaper way to move goods, even if it means taking longer to get them to market. Still, FedEx shares cling to a 1% gain for 2012.
With revenue streams drying up and fewer places to cut costs, corporate America’s outlook for third-quarter earnings is looking grim.
So far, 103 companies in the index have provided guidance for the third quarter. Of those, 80% have guided below Wall Street consensus estimates, according to John Butters, senior earnings analyst at FactSet. That’s the most negative outlook since FactSet began tracking the figures in the first quarter of 2006.
The outlook doesn’t bode well for a market that’s at multi-year highs and will soon be facing added volatility as the November elections and the January “fiscal cliff” come closer.
Adding insult to injury, S&P 500 companies are projected to see earnings drop year-over-year for the first time in 12 quarters. Third-quarter earnings are currently estimated to drop by 2.7% for the S&P 500 as a whole, the worst forecast growth rate over the past 12 quarters, Butters added. At the beginning of the quarter, analysts had been forecasting earnings growth of 1.9%.
CNBC: Adami pointed to the stock hitting a multiyear high last week.
Earlier, S&P Capital IQ Senior Manager Christine Short highlighted the threat of an earnings cliff.
“What the estimates are telling us right now is that we’re certainly heading for a earnings slowdown, if not a decline,” she said.
Earnings expectations for the third quarter have been contracting. Currently, S&P Capital IQ analysts expect earnings for the S&P 500 to fall 1.7 percent, which would be the lowest expected growth rate since the third quarter of 2009. Meanwhile, Citigroup ( c) has a negative 2.4 percent estimate.
Lee Adler talks about why the technicals and liquidity point higher and why the economic data is not inconsistent with that. Russ Winter disagrees, and says that durable goods suggest a profit cliff. There’s something here for both bulls and bears. It’s up to you to consider the evidence we point to, and decide.
However, any reading below 50 signals economic contraction and the current reading is near a 3-year low.
“The average index reading for Q3 2012 as a whole (46.3) was slightly below that recorded in Q2 (46.4) and the worst outcome since Q2 2009,” wrote Markit in their report. “Rates of contraction were broadly similar in the manufacturing and service sectors in September. The rate of decline in manufacturing output eased a five-month low, whereas the contraction in services output accelerated to its fastest since July 2009.”
Here’s a regional breakdown of the latest composite PMI readings:
Harry Dent: If earnings of U.S. companies tank and a stock market that now appears attractively valued at roughly 13 times earnings, will suddenly feel expensive
“We are in the highest-risk period since the 1930s,” says Dent. “When you inject trillions of dollars into the economy, everything bubbles up. Stocks. Real estate. Commodities. Oil. Gold. In the next crash, everything is going to fall in value.”
And Dent says it won’t necessarily take a war to trigger a downward spiral in stock prices. The domino effect could be triggered by a financial crisis in Europe, or what he calls the “No. 1 threat.” A megaplunge could be caused by a “technological freak-out” on the stock exchanges, similar to the May 2010 “flash crash,” that sparks a selling panic. The bursting of China’s real estate bubble could also do the trick, he says.
If those major economic engines stall, it will spell major trouble for U.S. exporters. With fewer sales overseas, earnings of U.S. companies, which have been driven more and more by foreign growth in recent years, will tank. And a stock market that now appears attractively valued at roughly 13 times earnings, will suddenly feel expensive, Dent says.
“When stocks are selling at 13 or 14 times earnings (just below the long-term average of 15), it says things are good,” says Dent. “But things are not good. We have the greatest debt bubble in history. We will see a worldwide downturn. And when you are in this type of recessionary environment stocks should be trading at five to seven times earnings.”
The coming stock market plunge, Dent says, will be sizable. More sizable than the last downturn in 2008-2009. The Dow could fall as much as 60%, he says.
“The Dow will hit a new low of 6000 or lower,” says Dent. “Unfortunately, that is what investors have to look forward to.”