The stock market has posted a substantial rally, thanks to additional stimulus measures that were recently announced by the Federal Reserve. However, it appears that investors might be overly optimistic and recent economic data shows that Bernanke's plan to unleash QE3, might have been based on worse than expected trends which appear to be emerging only recently. For example, the Chicago Purchasing Managers Index has dropped below 50 for the first time since 2009. That level could be indicating that a recession is coming.
There is a looming fiscal cliff for the United States, whereby taxes are likely to be raised on millions of consumers, and government spending is poised for big cuts. When you combine that along with an ongoing crisis in Europe and a slowdown in China, it is easy to make a case that earnings estimates and guidance is too high for many companies. Furthermore, a number of prominent multinational corporations have recently warned that earnings might not meet expectations for the current quarter. In recent days, companies like Federal Express (FDX), Intel (INTC), and Caterpillar (CAT), along with others have issued a warning for the current quarter. Warnings from these companies are worth paying attention to because these are multinationals and economic bellwethers. Earnings season will be upon us soon, and I expect that many companies will turn out to report weaker than expected results, and very cautious forward guidance. Most investors have seen that a stock can drop significantly when a company misses earnings or if it makes cautious statements about the upcoming quarter. That's why investors should consider taking profits and raise cash now. This earnings season is shaping up to be full of surprises, and potentially much better buying opportunities will arise when stocks drop over disappointing earnings or guidance. Here is a closer look at some of the companies that recently announced a warning for the quarter, and why these companies could be an indicator that the economy is weakening:
Federal Express Corporation is the second largest package
delivery company in the world and it recently said that a weakening
global economy would force it to cut its profit forecast by about
10% for the rest of the year. It seems that Fedex customers are
selecting cheaper shipping methods and cutting back on overnight
services in response to the softening economy. Federal Express is an
economic bellwether for the global economy because it operates
worldwide, and because a reduction in shipping traffic is often a sign
of economic trouble and a potential recession. That is why so many
stock market investors follow the transportation index as a top
indicator of the where the economy is heading.
Here are some key points for FDX:
Current share price: $84.62
The 52 week range is $64.07 to $97.12
Earnings estimates for 2012: $6.45 per share
Earnings estimates for 2013: $7.76 per share
Annual dividend: 56 cents per share which yields .7%
Caterpillar, Inc. is another bellwether for the health of the global economy because it operates worldwide, and because its products are highly sensitive to the economic cycles. Caterpillar makes heavy machinery which is often used in agriculture, mining, construction, and other infrastructure projects. While agricultural use is likely to remain relatively strong even in an economic decline, the construction and mining industries are much more economically sensitive and Caterpillar appears to be seeing weakness in those areas. The company recently warned that previous expectations for earnings of about $15 to $20 in 2015, appear too high and have now been reduced to $12 to $18 per share.
Here are some key points for CAT:
Current share price: $86.04
The 52 week range is $67.54 to $116.95
Earnings estimates for 2012: $9.49 per share
Earnings estimates for 2013: $10.20 per share
Annual dividend: $2.08 per share which yields 2.4%
Intel shares have been dropping on concerns about the health of the PC industry, however, it is also seeing weakness in sales to businesses and government. This has caused Intel to cut back on capital spending plans and it even withdrew its full-year profit forecast. If government entities are already starting to cut back on tech purchases, it could be a sign that things will get much worse when the mandated government budget cuts hit the economy (along with tax hikes) in the next few months. Based on recent weakness, Intel cut quarterly revenue estimates from as high as $14.8 billion to about $13.8 billion. That is a significant reduction and it likely points to a softening trend in the global economy.
Here are some key points for INTC:
Current share price: $22.66
The 52 week range is $20.40 to $29.27
Earnings estimates for 2012: $2.14 per share
Earnings estimates for 2013: $2.20 per share
Annual dividend: 90 cents per share which yields 4%
Data is sourced from Yahoo Finance. No guarantees or representations
are made. Hawkinvest is not a registered investment advisor and does
not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.