Drawing on a similar idea, back in April, John Hussman posted this chart, which compares corporate profitability to the inverse of government and household savings (with a lag). In other words, when government and household savings decline, the red line goes up. A few months later, the blue line (corporate profits) follow nicely.
Bottom line: The deficit is a major driver of corporate profits.
Investors need to take note that a sharp, sudden decrease in them could mean murder for the bottom line.
Yet 72 percent of the Bank of America Merrill Lynch survey respondents believe investors aren’t doing enough to prepare for the cliff itself or the volatility that will brew as the end of the year approaches, according to CNBC.
“The fiscal cliff impacts the economy both by creating uncertainty and by imposing austerity,” Ethan Harris, Bank of America’s North American economist said, CNBC added.
“If we go over the cliff for an extended period of time, a recession is likely.”
Other experts agree that fears surrounding the fiscal cliff alone can damage recovery.
“There has not only been a fall in corporate confidence while consumer confidence has risen, but durable goods orders have reflected the weakness in CEO business confidence,” Andrew Garthwaite, global equity strategist at Credit Suisse, said in a note, CNBC added.
Roughly one third of the S&P has reported earnings so far, with another third reporting in the next five days and almighty AAPL on deck Thursday evening, and if there is one word to describe what has happened so far, that word would be “ugly.” The same word would be used to describe how Q4 is shaping up to be. And that word will be very a optimistic prediction of what 2013 will bring unless a major catalyst develops that pushes Congress to resolve the fiscal cliff situation. So far that catalyst is missing. But going back to Q3 earnings, here is how Goldman’s David Kostin summarizes events to date: “3Q reporting season is roughly one third finished. Two early conclusions: (1) Information Technology results have been startlingly weak with high-profile revenue disappointments by the four horsemen: MSFT, GOOG, IBM, and ORCL. (2) EPS guidance for 4Q has been overwhelmingly negative across all S&P 500 sectors with 18 of 20 firms lowering 4Q earnings guidance by a median of 5%. Analysts have lowered 4Q EPS estimates for stocks already reported by 0.4%. We expect further EPS cuts of 6% loom ahead. Firms reporting next week: AAPL, T, PG, MRK, CMCSA, AMZN, COP, AMGN, OXY, MO, UTX, MMM, CAT, DD, and FCX.” Sorry Bob Pisani, better luck spinning earnings favorably next QE.
More detail on what is shaping up as the ugliest earnings season (even with DVA and loan loss-reserves included) in years:
Two early conclusions from 3Q earnings season: (1) Information Technology top-line sales results have been weak lead by MSFT, GOOG, IBM, and ORCL. Since the start of 3Q reporting season, analysts have cut 4Q sales forecasts for those Information Technology firms reporting results by 70 bp, lowered margin forecast by 43 bp and cut expected EPS growth by 260 bp. (2) Earnings guidance for 4Q has been overwhelmingly negative across the S&P 500 with 18 of 20 firms lowering 4Q earnings guidance by a median of 5%. Analysts have lowered 4Q EPS estimates for stocks already reported by 0.4%. We expect reductions of perhaps 6% still need to take place.
The distribution of 3Q results has been lower than the historical average. 117 firms in the index have now reported 3Q results (34% of total cap). 37% of companies beat earnings estimates and 21% missed. In a typical quarter, 41% of companies exceed EPS expectations and 13% miss.
The bar for 3Q earnings season is very low. First, 2Q results disappointed with twice as many revenue misses and one half as many beats compared with a typical quarter. Second, guidance heading into reporting season was more pessimistic than usual with 80% of firms guiding below consensus compared with prior quarters when the midpoint of guidance falls below the average analyst estimate roughly 67% of the time. Third, analysts slashed 3Q earnings estimates by 5% during the quarter, leading to the expectation that 3Q 2012 would witness a 1% year-over-year decline in EPS versus 3Q 2011.
Sales are disappointing again in 3Q with year/year growth of just 2% and negative surprises of 30 bp. 15% of firms beat consensus sales expectations by more than one standard deviation (below the historical average of 35%). In addition, 36% of firms have missed sales estimates by that magnitude, versus 19% historically. Revenue estimates for 4Q have declined by 30 bp.
As the world’s largest construction and mining equipment manufacturer, Caterpillar always has some good insight to offer on the direction of the global economy.
About a month ago, at the MINExpo conference in Las Vegas, Caterpillar surprised many observers when it cut its profit guidance for 2015 and the company’s CEO discussed 2013 recession scenarios.
Then, on Friday, Caterpillar released September dealer sales data, which showed a broad-based slowing in machinery sales growth around the world. BofA Merrill Lynch analyst Ross Gilardi wrote in a note to clients that “the data suggests that the third quarter demand environment was noticeably weak vs the 1H 2012.”