A Strong Dollar and Weak Gold Threaten Corporate Earnings

The world of money, finances and investments is locked in a wicked "tug-of-war" match that is impacting the corporate earnings of companies that do business all over the planet. The outcome is still up for grabs.

Midway through corporate earnings season, more large U.S. companies are warning their overseas businesses -- once an area of strength -- are flagging as the global economy looks headed toward a deep recession.

Honeywell (HON), Intel (INTC), Starwood Hotels and Resorts (HOT) and manufacturer Ingersoll-Rand Co. (IR) are just some of the big companies that cited the uncertain global economic outlook as they gave downbeat or lowered forecasts, according to the weekend edition of Market Watch. 

Dow Chemical Co.(DOW) said it expects a global recession throughout most of next year. "There's a theme that the recession is spreading worldwide," said Dean Kartsonas, co-manager of the $2 billion Federated Capital Appreciation Fund at Federated Investors.

"Earnings haven't been too bad," Kartsonas said Thursday. "The bigger concern has been the fourth quarter and 2009; it's kind of spooking people."

Earnings of S&P 500 companies, including the 245 that have already reported and analysts' estimates for the rest, are on track for a 21% decline in the third quarter, according to FactSet Research. Such a drop would mark the fifth-straight period corporate earnings have contracted from the year-ago quarter.

"The momentum we had seen in key end markets for most of the year slowed substantially in August and September," particularly in Asia, said Steven Shawley, chief financial officer of equipment manufacturer Ingersoll-Rand Friday.

Economic growth in the U.S., Europe and Japan is expected to be negative next year for the first time since at least 1970, said Deutsche Bank's private wealth management group this week.

Even though the dollar has been quite strong it was especially heartening for gold aficionados to see the metal perform so well in the face of a dollar that was sharply higher vs. the euro, and a crude price that was sharply lower last week.

And many are perhaps coming to realize that gold has been severely oversold as funds and others desperate for liquidity have been selling anything that comes to hand. “The market wants to liquidate everything, everywhere,” was how Dennis Gartman, editor of the Gartman Letter put it.

Yes, that is a primary market driver at the moment, and it is certainly not yet played out, but it will not endure forever.

As Peter Spina, president of GoldSeek.com says, gold may be “still fighting the deleveraging holocaust but as soon as this alleviates, it has significant room to rally.”

With all markets remaining volatile, gold buyers are optimistic, but cautiously so.

“There's some value going into the metal,” says Frank McGhee, of Integrated Brokerage Services in Chicago. “Gold's overall value is holding. Investors should be safe-haven buying here but not using leveraged money. Gold can scream out and turn higher any time, but investors need to be comfortable that gold can go down before it goes higher.”

"Ramifications of the credit freeze that began in August have now filtered into the global economy," said analysts led by chief investment strategist Larry Adam.

Exacerbating tougher operating conditions in Asia, Latin America and Europe is a stronger dollar. The greenback has surged 12% this month against its six major trading partners. That's bad news for technology companies like Google, Inc. (GOOG) among others that get more than half their revenues from overseas.

These pressures mean it could take a lot longer than many Wall Street analysts forecast for profits and stock indexes to recover. "I would expect weak earnings would continue through the middle of next year and maybe longer," said Bob Andres, chief investment strategist for Portfolio Management Consultants, which manages about $12 billion in assets.

A bleaker outlook for global corporations isn't yet reflected in Wall Street's earnings estimates for next year. Brokerage analysts anticipate profits for S&P 500 companies will increase 17%. As they notch down their forecasts to reflect revised company outlooks and economic conditions, analysts say already rocky stock markets could get more volatile.

"Equity investors are finally getting it, that is, how bad the global recession will be and how hard such will hit corporate earnings," said analysts at Ried Thunberg in a note to investors Friday.

Wild swings between lows and highs of the day have become the norm: Seven of the 10 largest point swings in the Dow industrials occurred this month, says Dow Jones Indexes, citing historical data. In terms of the S&P 500, October counts as the most volatile trading month since 1931, as measured by the percent of trading days in a month that are up or down more than 1%.

That volatility has contrasted with some improvement in credit markets, most notably a drop in benchmark interest rates, following efforts by the Federal Reserve and other central banks to bail out bad-debt ridden banks.

On Friday, the London interbank offered rate eased to 3.51625% after pushing to as high as 4.81875% on Oct. 10. Prior to the credit crunch, three-month dollar Libor usually traded slightly above the Federal Reserve's benchmark fed funds rate, which stands at 1.5%.

If these interest rates continue to drop and the Fed eases more in its FOMC decisions this coming week, this might be a temporary boost to investor confidence and once the hedge fund liquidations are completed we might even see a rally that lasts more than one day.

Stock position: Long CEF.

Comments

[messy:]

Some say that two banks are taking down GOLD,,,But they will not come forward and announce why they are doing so, that is buying up as much gold bullion as they can. My guess is that JP MORGAN BANK is one of them, but that is just a guess. if anymore know more about this,,, just blog it on this site as the true facts will be very interesting. Lastly, if they are trying to bring down corporate earnings, what are their true intensions?

2008 Oct 26 08:52 AM

[surgcare:]

I suspect the "big boys" know the dollar is doomed , that is it will be abandoned as a world currency , which of course will cause the dollar to collapse and PM to go up . These heavy hitters are keeping gold down so they can load up on it so when the dollar falls they make a lot of money .

2008 Oct 26 11:44 AM

[Dean Plassaras:]

My understanding is the dollar is in record territory not seen for sometime. There are two possible outcomes here: either the dollar continues on a parabolic rise path or is setting itself up for a fall.

2008 Oct 26 12:34 PM

[Urbane Gori...:]

messy.... If two banks are buying up gold, then there should be less available, which would mean that price should move up.... Price clearly has not moved up, which means that investors and funds are dumping gold not buying it up...

jegan ;-)

2008 Oct 26 04:24 PM