The leading heavy equipment manufacturer Caterpillar (CAT) warned that revenues and profits for fiscal 2012 are going to be lower than expected on the back of weak macroeconomic outlook - in particular the slowdown in China and Brazil. This is coupled with the looming debt crisis in Europe. The revenue guidance has been reduced 5% to ~$66 billion, which translates into profit of $9.00-$9.25 per share. The company is currently implementing layoffs and shutting down plants, with the most recent being a tree harvester facility in Minnesota, trimming payroll by 100 people.
Similarly, Intel Corp. (INTC) is expecting fourth quarter revenues of $13.6 billion, which is lower than the expected $13.7 billion, after missing 3rd quarter numbers badly, citing similar reasons as Caterpillar's. The PC sales have been growing at a modest pace with its dominance being threatened by smartphones and tablets, and the new Atom SoC, Clover Trail, proving to be barely adequate to the current market. The leader in mobile chip industry Qualcomm (QCOM) is putting real pressure on Intel, as is Apple (AAPL), with real world performance coming from their Snapdragon S4's that shows just how quickly the gap is closing between ARM-derived SoCs and x86 performance. The proof is in the market cap, as Qualcomm is now bigger than Intel. The chipzilla's struggle to shift its focus to mobile-capable chips has taken its toll on the company's management, with CEO Paul Otellini announcing his stepping down in May.
The American steel industry is also under pressure from the fall in steel's average prices, and all the major firms in this industry, such as ArcelorMittal (MT) and U.S. Steel (X), are struggling to maintain both the top and bottom line. Lower demand from China in particular is hitting the steel industry hard. ArcelorMittal significantly reduced its dividend level by 73% as it continues with facility closures and trimming its CapEx budget for 2013. For U.S. firms, lowering the dividend is a really bearish sign, one that threatens fund liquidations as much of the supply for these firms is tied up in funds content to collect their passive yield. Although U.S. Steel has doubled its net income from $22 million in Q3-2011 to $44 million in Q3-2012, it still represents a 56% sequential drop from Q2. With no signs of hope coming from the construction industry, regardless of the headlines - the housing market in the U.S. is still just bouncing along a bottom, barley propped up by zero percent interest rates and the Fed buying up worthless mortgage-backed securities at $40 billion per month. Steel firms are hoping that the rise in vehicle sales in 2012 will offset some of the falling demand, but that is a dangerous thing to hope, considering that channel stuffing to avoid inventory buildup on balance sheets is very much industry wide. GM, for example, has more than 120 days' worth of inventory sitting on dealer lots unsold but booked as revenue. However, the global steel consumption will rise by just 2.1% in 2012 compared to 6.2% last year.
The problems go beyond infrastructure, as the bellwether of the global fast food industry McDonald's (MCD) reported a drop in its Q3 income by 3.5% to $1.46 billion while sales dropped slightly by 0.2% to $7.15 billion. The international sales have grown by 1.9% which is alarming as this figure has been above 2% since 2003. McDonald's has also warned that the coming quarters look 'challenging.' Besides the weak macroeconomic outlook, McDonald's is also worried about the rising food inflation levels. One look at the price of corn, wheat and rice on the futures market will confirm this. Meat prices have not quite responded yet as herd thinning has kept the market well-supplied in the short term. The U.S. department of agriculture has warned that food inflation levels may reach 3%-4% in the next year on the backdrop of the severe drought while beef is expected to rise 5%. The farmers I've spoken to have all quoted feed prices rising more than 25% since the summer began.
52 week low
*16th November 2012, Close
Consequently the McDonald's shares were hovering around the 52-week low range of $83.31 falling from more than a $100 from 2011. Similarly, the shares of Intel, Caterpillar and U.S. Steel are trading close to their 52-week low range. All of the U.S. based multinational firms are also bearing the brunt of the strong dollar from this past summer. And with the Fed still being cagey about actually opening up the money spigots, this situation will continue. Although the steel industry is expected to witness some cyclical rise in demand from December 2012 to February 2013 but overall, the outlook remains negative.
Lastly, even when the Fed begins QE in earnest and stocks begin to truly rise, they will likely rise slower than their underlying commodities.