PowerTrend Brief: Souring Confidence and Earnings Set the Stage for Housing, Bernanke and More

Chris Versace

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

Economic indicators are interesting because we assume that they are signaling the vector and velocity of the economy to us. By vector, I mean the direction, as in the vector of an airplane. Velocity refers to the speed or rate at which something is happening. Looking at the economic data presented during 2Q 2012 and thus far in July, there is little doubt the vector for the global economy is down and its velocity continues to slow.

Backing this rationale up, the JP Morgan Global All-Industry Output Index showed the global economy skirted closer to stagnation at the end of the second quarter. The June reading for that index, which slipped to 50.3 for that month, slipped further from February’s 12-month peak of 55.4, revealing that growth slowed in the service sector and manufacturing production fell back into contraction territory.

Not only do we see a down vector and slowing velocity in “actual” economic data but also in confirming indicators that portend what is likely to come during the next few months. One of those indicators is confidence levels, as in consumer confidence and business confidence. Neither a consumer nor a business likely will take more on, be it in terms of spending or expanding what they are doing, if their confidence is waning.

According to its Global Business Outlooks Survey, which queries 11,000 companies worldwide, Markit Economics found that global business confidence waned in June. The euro zone continued to see particularly weak business optimism in June. Confidence had revived earlier this year, but the survey revealed that business sentiment has again suffered a setback. Confidence fell especially sharply in Germany, and drops also were seen in Italy and Spain. Declines in business optimism were also found in the United States, the United Kingdom, China, Brazil and Russia.

With confidence levels falling, companies have adjusted their employment plans to match less positive views on business activity, business revenues and corporate profits, compared to expectations seen earlier this year. Weaker employment growth was signaled for the United States, the United Kingdom and China, per Markit’s findings, while euro zone employers expect a net fall in employment in the coming year.

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Corroborating this data, 62% of U.S. businesses project no change in employment during the next six months, according to the results of a National Association for Business Economics’ (NABE) survey released today. This finding compares to a reading of 48% in the NABE’s April survey. The June NABE survey also uncovered company concern about the increasingly-talked-about fiscal cliff. In addition, 65% of those surveyed predicted sales will drop if this fiscal cliff can’t be avoided — if Congress does not act to extend Bush-era tax cuts into next year and the $1.2 trillion in automatic spending cuts take place.

In aggregate, the down vector and slowing velocity of the global economy has ratcheted up expectations for further easing. Central banks in Brazil and South Korea lowered their benchmark rates last week, while the Bank of Japan unexpectedly expanded its asset-purchase program. The People’s Bank of China announced the second interest rate reduction in a month on July 5, the same day that the European Central Bank cut its key rate.

While many people are waiting to see what the Federal Reserve does, the question that few are asking is whether or not all the would-be stimulus and quantitative easing we have gotten from the government and the Federal Reserve is working.

My answer is that it has been nothing more than a temporary band-aid that has covered over a symptom of the much larger, underlying problem rather than address it. As hospitality expert James Sinclair once said, “We know that throwing money at the problem doesn’t fix it — it extends the life of the problem.” Even though we know this thinking to be true, it appears that policy makers have yet to figure this out. Perhaps they need to brush up on The 5 Whys to help them better understand the structural problems that consumers, businesses and other institutions face in this third consecutive summer swoon.

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Didn’t Albert Einstein say that insanity was doing the same thing over and over again and expecting different results?


Chris Versace
Editor, PowerTrend Brief

P.S. Today’s challenging market conditions require even more knowledge than ever for investors and traders like you to keep pace with the latest market intelligence to safeguard your portfolio and to profit from opportunities that only may be available for short periods of time. Join me at this year’s MoneyShow San Francisco, August 24-26, at the San Francisco Marriott Marquis to hear recommendations and advice about how best to profit in 2012 and beyond! Register FREE today by clicking here, by going to ChrisVersace.sanfranciscomoneyshow.com or by calling 1-800/970-4355 and mentioning priority code 027877.

This Week Ahead

Last week, the S&P 500 essentially was flat, following a string of disappointing earnings reports which, given the slowing global economy, should not come as a shock. The pace of corporate earnings reports will quicken this week as more than 80 names in the S&P 500 report their quarterly results. We also get the latest on retails, sales, housing and the U.S. manufacturing economy in the coming days, as well as the Federal Reserve’s Beige Book for June.

The Fed’s Beige Book gathers anecdotal information on current economic conditions by each of the twelve Federal Reserve Banks. The report is used by investors and traders to decipher what the Federal Reserve may or may not do at its next Federal Open Market Committee (FOMC) meeting. Given the current state of the economy, there is growing speculation the Fed will venture down the path of further quantitative easing. Aside from the Beige Book, we also will get a hefty dose of Fed speculation this week when Fed Chairman Ben Bernanke discusses the outlook for the economy and monetary policy in testimony to Congress. No doubt traders will be breaking down his commentary to see if any additional easing is in the cards.

While we wait for these data points to unfold, comments from China’s Premier Web Jiabao over the weekend are poised to weigh on the market early this week. Following the news that China’s economic growth fell to a three-year low of 7.6% in the second quarter, Premier Wen said China’s economy has not yet entered a recovery and “economic difficulties may continue for some time.” Certainly, his comments do not indicate the right vector or velocity.

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Aside from the above, here’s what else I’ll be watching this week for PowerTrend subscribers:

Monday, July 16
Retail Sales (June)
Empire Manufacturing Index (July)
Business Inventories (May)
Citigroup Inc. (C)
Gannett Co. Inc. (GCI)
Heartland Express Inc. (HTLD)
Imperial Holdings Inc. (IFT)
NVR Inc. (NVR)
United Continental Holdings (UAL)

Tuesday, July 17
Consumer Price Index (June)
Industrial Production (June)
Manufacturing Capacity Utilization (June)
CSX Corp. (CSX)
Goldman Sachs Group Inc. (GS)
Hanesbrands Inc. (HBI)
Intel Corp. (INTC)
Johnson & Johnson (JNJ)
Mosaic Co. (MOS)
The Coca-Cola Co. (KO)
Wynn Resorts Ltd. (WYNN)
Yahoo! Inc. (YHOO)

Wednesday, July 18
MBA Mortgage Index (Weekly)
Housing Starts (June)
Building Permits (June)
Fed’s Beige Book (June)
Abbott Laboratories (ABT)
American Express Co. (AXP)
eBay Inc. (EBAY)
F5 Networks (FFIV)
Honeywell International (HON)
PNC Financial Services (PNC)
Qualcomm Inc. (QCOM)
Skyworks Solutions (SWKS)
Stanley Black & Decker (SWK)
W.W. Grainger Inc. (GWW)
Yum! Brands Inc. (YUM)

Thursday, July 19
Weekly Initial & Continuing Jobless Claims (Weekly)
Existing Home Sales (June)
Philadelphia Fed Index (July)
Leading Indicators (June)
Arbitron Inc. (ARB)
AutoNation (AN)
Badger Meter Inc. (BMI)
Chipotle Mexican Grill (CMG)
Dole Food Company (DOLE)
Google Inc. (GOOG)
Microsoft Corp. (MSFT)
Morgan Stanley (MS)
PPG Industries (PPG)
Safeway Inc. (SWY)
Sherwin Williams Co. (SHW)
Union Pacific (UNP)
Verizon Communications (VZ)
VF Corp. (VFC)

Friday, July 20
Ingersoll-Rand PLC (IR)
Schlumberger NV (SLB)
Sensient Technologies Corp. (SXT)
Xerox Corp. (XRX)
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