Protect Yourself as the Economy Slows and We Brace for Earnings Season

Chris Versace

Chris Versace is a financial columnist and equity analyst with more than 20 years of experience in the investment industry.

The market closed last Friday with two of the three major indices — the S&P 500 and the Nasdaq Composite Index — in the red.

For the week, all three were down, with the Nasdaq Composite Index falling the most at 2.9%. Closing out the week, on a year-to-date basis, all three were also in the red, with the Nasdaq down modestly and 6-8.5% drops for the S&P 500 and Dow Jones Industrial Average.

Those latter two indices were hit by Caterpillar (CAT) shares, which fell from Wednesday’s closing price of $70.20 to finish the week at $64.98 following the news that the machinery company cut its outlook for 2015 and 2016… plus its announcement of a fresh round of layoffs.

Caterpillar wasn’t the only company to cut its outlook last week. M-chip company Taiwan Semiconductor (TSM) pre-announced a shortfall for its coming December quarter. Even though the company bumped up its 3Q 2015 sales outlook to NT$211 billion-NT$213 billion, up modestly from the NT$210 billion it forecasted in July, it cut its 4Q 2015 sales outlook to NT$198 billion-NT$204 billion from NT$213 billion.

This marks the chip giant’s first quarterly sales drop in four years. It also points not only to continued weakness in the personal computer market — sorry Intel (INTC) -– but sluggishness in the tablet market. I guess those Microsoft (MSFT) Surface tablets just aren’t flying off the shelves. However, we know Apple (AAPL) is looking to jumpstart things with the iPad Pro. We also face slowing growth in the smartphone market.

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Even though we knew it was bound to happen at some point, swallowing that pill as it hits is never easy.

On Friday, Swift Transportation (SWFT), one of the largest U.S. trucking companies, slashed its profit forecast for 2015. Amid contract changes, the company also shared that it struggled with delayed deliveries of new trucks.

Swift also warned that earnings would miss forecasts for the third and fourth quarters. The company sees 30 cents to 33 cents in third-quarter profit per share — below the 43-cent street estimate — as well as 48 cents to 54 cents in fourth-quarter per-share earnings, lower than the 59 cents analysts predict. This follows the announcement from FedEx (FDX) just a few short weeks ago that it not only missed its latest quarterly earnings expectations, but the package-delivery giant also lowered its fiscal year outlook.

Taken together, these two announcements sure read like rear-view confirmation on the Paccar (PCAR) put options that I recommended to subscribers of my PowerOptions Trader service this past summer. Puts — as well as inverse exchange-traded funds (ETFs) — are great ways to hedge against uncertain times. There’s also another strategy I use to help produce subscriber gains… something I call the “forgotten indicator.” You can read more on this strategy — and get a look at my next series of picks — by following this link. Now as you know, today marks the end of the September quarter, and in a few short days we’ll be entering the quarterly gauntlet that is earnings season. Given the global economic data we’ve been getting over the last few months and what we’ll likely get this week, the odds are high that these are not the only three companies that will be cutting expectations for the coming months.

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As we get ready to march into that coming earnings onslaught, let’s step back and take a look at what is expected for the S&P 500 group of companies. On a per-share basis, estimated earnings for the third quarter are now expected to fall 4.4%, which is a full 1% lower than at the start of the September quarter. Turning to the revenue line for those 500 companies, the estimated sales decline for 3Q 2015 is -2.9%, which is also higher than the estimated year-over-year revenue decline of -2.5% at the start of the quarter.

Now here’s the bad news.

Those figures were tabulated before we started to get our first look at how the global economy fared in September. What have we learned? China continued to contract in September, the euro zone was flat month over month and the U.S. economy continued to slow. Buried in the flash September US PMI report, order activity continued to slow as companies contend with year-over-year strength in the U.S. dollar. “Weaker overall new order growth and heightened uncertainty regarding the global economic outlook encouraged inventory streamlining and more cautious job hiring across the manufacturing sector in September.”

That simply adds to the string of missed regional Fed manufacturing reports we’ve gotten over the last few weeks.

Buckle up my friends, this is going to be a bumpy ride. Take my advice and look into puts, inverse exchange-traded funds (ETFs) and other strategies that can help you capitalize on what lies ahead.

In case you missed it, I encourage you to read my e-letter column from last week about how to examine the revenue side of a potential investment. I also invite you to comment in the space provided below my commentary.

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Upcoming Appearances

  • Each Monday, I join Sonoma County’s Morning News with Melanie Morgan’s “Big Story” of the week to talk about the latest in the economy, stock market and more.
  • Each Friday, I join Matt Ray, the host of America’s Morning News, to talk about the latest on the economy, stock market and more. With the show broadcast in more than 170 markets, be sure to tune in.
  • Each Friday, I join Sam Sorbo, host of The Sam Sorbo Show, to share my latest thoughts and insights on the stock market, economy and more. You can listen to our conversation here.

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It was yet another bad week for the markets, with the Dow Jones down 1.72%, the S&P 500 falling 3.02% and the NASDAQ tumbling 5.03%. The MCSI Emerging Markets Index also pulled back 3.86%. All your positions in your Alpha Investor Letter portfolio pulled back, but Berkshire Hathaway (BRK-B) dipped just 0.38% and Markel Corp. (MKL) fell only 0.34%. You were stopped out of Allergan plc (AGN) at a slight gain. I am keeping this on the watch list as I

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