As our readers are no doubt aware, we have documented the strange dichotomy between stock market action and global economic fundamentals for some time. Obviously, increasing economic confidence due to massive money printing – whether actual or just announced – has served to buoy stock markets regardless of recessionary conditions in Europe, a wobbly looking China and an extremely tepid recovery in the U.S.
As a result of the Fed's monetary pumping, the market has also chosen to look beyond the fact that SPX year-on-year earnings growth has been negative in two of the past three quarters.
We would stress here that the Fed took a great risk when it decided to up the rate of monetary pumping with "risk assets" such as stocks and high yield bonds already severely overbought. What will it do for an encore if asset prices begin to fall? After all, no matter how much money is printed, this cannot alter the underlying economic reality – it can only create what is known as the "money illusion", by diverting scarce resources into what are actually uneconomic bubble activities.
Yesterday FedEx and Caterpillar, two companies the earnings of which are considered economically sensitive, both managed to disappoint. These reports didn't really receive the attention they deserve in the hubbub over the FOMC decision and the thoroughly botched Cyprus bailout. As Marketwatch reports:
“Investors got a double-whammy Wednesday from FedEx and Caterpillar, underscoring why profit growth expectations for S&P 500 companies have been coming down ahead of April’s parade of first-quarter earnings reports.
FedEx and Caterpillar both issued disappointing business updates, sending their shares lower as the broader U.S. stock market edged higher. The two, long considered proxies for economic demand world-wide, have been restructuring their businesses to adapt to current conditions.
In afternoon trade, FedEx shares were down 6% at $100.01, cutting into solid gains so far this year. Caterpillar was the biggest decliner of the Dow 30 stocks, falling 2% to $86.57. In its fiscal third-quarter report on Wednesday, FedEx cut its May fiscal-year profit forecast to between $6 and $6.20 a share, down from its December estimate of earning as much as $6.60. FedEx is being dragged down by the international package market. While volumes rose 4% in the most recent quarter, customers are choosing to receive shipments via truck or ship — both of which are cheaper than air. “Pricing is moving against FedEx in a sharp way,” Edward Jones analyst Logan Purk said in a phone interview.
This is compressing margins. For instance, in the company’s air express business, operating margin fell to 1.8% during the quarter ended Feb. 28, down from 5.3% the previous year. FedEx expects the international packaging trend to continue. Starting April 1, FedEx plans to ground more planes that deliver goods to and from Asia. This may result in more of its older FedEx Express planes being retired.
Caterpillar, the biggest maker of construction and mining equipment, said global retail sales of its machines fell 13% for the three-month rolling period through February, compared with the same year-ago period. Caterpillar is scheduled to report its first-quarter results on April. 22.
Sales tumbled 26% in the key Asia/Pacific region, which includes China and Australia. They were down 12% in North America and fell 9% in Europe, Africa and Middle East. Latin America was a bright spot for Caterpillar during the period, with sales rising 3%.
Investors had been expecting the early months of this year to be weak for Caterpillar, said Matt Arnold, analyst at Edward Jones. The company cut $2 billion in inventories during the last three months of 2012 as dealers digest their current stocks. Meanwhile, mining customers have ratcheted down capital spending on big projects, Arnold said. “Demand for CAT’s bigger ticket machines will be muted this year,” Arnold said in a phone interview.
Clearly economic weakness impacts earnings of cyclical companies even when Ben Bernanke is printing money by the wagon load. In spite of the currently pervasive "all news is bullish" atmosphere, FDX's stock was actually subjected to a noticeable hit as a result of its earnings announcement. CAT's stock reacted in more muted fashion, as it has been declining for a while already. However, considering the recent run-up in FDX one wonders what people were thinking:
FDX gets hit by an 'unexpected' weak earnings report – via StockCharts.
Marketwatch informs us further:
“Overall, profit expectations for 2013 have been coming down for companies in the S&P 500, according to FactSet data. For the first quarter, the consensus analyst forecast is for corporate earnings to decline 0.6% over the same 2012 period. At the start of 2013, Wall Street had expected corporate earnings to grow 2.2% for the quarter.
Much of 2013’s profit growth is expected happen from July through December — even though analysts have trimmed those forecasts as well. Third-quarter profit for companies in the S&P 500 is estimated grow 10.1%, while fourth-quarter profit is expected to climb 15.6%. However, revenue growth rates will be tame during the second half of the year.”
These second half forecasts strike us as unadulterated fantasy. Wishful thinking from Wall Street isn't going to be enough to bring these results about.
So what reason is there exactly to buy this market, now that it has regained its previous nominal highs? Recent buyers may well turn out to need support from the "greater fool theory".