Goodyear (GT), which can probably be nominated for the dead money stock of the century, dropped 10% after missing analysts expectations. The market was pricing in a profit of 59 cents per share and the final tally (excluding one-time items) came in at 53 cents. Sales fell to $5.26 billion when analysts were expecting $5.87 billion.
Interestingly enough, the problem at Goodyear is the same problem Ford (F) has, as well as many other global companies. That is, they are making money in North America but losing money in Europe and other global hot-spots. What's interesting is that Goodyear's net profits in North America grew 67% to $130 million while tire income in Europe, the Middle East and Africa fell by 60%.
As evidence of a global slowdown, Goodyear's CFO Darren Wells said "We're looking at what actions we're going to need to take to the extent we continue to see a soft-volume environment, and what actions we would have to take if the volume environment is even weaker than we expect."
If that is not a sign of global weakness, I don't know what is. As far as the stock is concerned, if the company can't find any global patches of growth out there, it will probably glide back to the $10 level.
The worldwide heavy construction industry also deserves notice. Sany Heavy Industry Co, One of China's largest makers of construction equipment reported 59% year-over-year lower profits for the third quarter. Sales for the quarter fell by 18% to 8.9 billion yuan, or $1.4 billion. On the other hand, Komatsu, a Japanese manufacturer of heavy equipment and arch rival of Caterpillar (CAT), reported that sales in China have cooled and expects sales in China falling by 40% in the fourth quarter.
So when two big players and competitors of Caterpillar say they expect lower sales and lower growth in the future, what does one expect Caterpillar to report?
The mean price target for Caterpillar is about $98, however the number of brokers that rate the stock a strong buy inched down by a notch to 10 from 11 a month ago and those that rate it a hold have increased from 9 to 12, from a month ago. Yes the PE of the stock is low, but we all know that cyclical stocks are bought when they are expensive and sold when they look cheap. Also note, a hold in reality is a sell as far as Wall Street in concerned.
As far as the chart is concerned, this stock has been a dead money for the past two years and if a global slowdown in the sector is confirmed, it can remain a dead money stock for some time.
Newmont Mining (NEM) and Barrick Gold (ABX) are two other global bellwethers to keep an eye on. Newmont as well as Barrick can also tell us a lot about the state of global affairs. Not so much because they are miners and mine gold, but because the mining industry is an integral part of the global economy.
The interesting thing about Newmont is that analysts have already lowered expectations ahead of tomorrow's earnings report. About three months ago the consensus for the fourth quarter was $1,04 and the latest consensus call for only 90 cents per share.
As for Barrick, analyst estimates call for Barrick's revenues to fall about 8.7% and earnings to fall by 26.6% year-over-year compared to Q3 last year. While analysts see Barrick much higher in 12 months from now, with an average price target of $68, the market (which always knows best) has already marked-to market the stock below even the lowest of all analysts' consensus of $46.
Both stocks have been dead money for 3 years now, and if you ask me, if a global slowdown is confirmed, they will remain dead money for some time to come.
Japanese exports fell the most since last year's earthquake. Exports were lower by 10.3% and Japan recorded a deficit of about $7 billion.
Tensions with China are the culprit here, however if the state of affairs between the two countries continue, then Japan will start to experience a serious problem.
I mean, how do you make up for a 10% drop in exports over the long term? Where is Japan going to make up for this?
I am keeping a close eye on Japanese exports from now on, because I think this can be a cataclysmic event, to the extent that exports don't rebound in several quarters. Because if they don't, then it's time to think of how a weaker yen might impact the global equation.
U.S Fiscal Cliff
The U.S. fiscal cliff scenario is not dead and has many probabilities to hit markets around the world very hard. Any way you slice it and dice it, the U.S. has to make a decision on how to cut spending or raise taxes (or both), at some point in the 12-24 months. A $1 trillion dollar deficit is not an easy thing to overrun with growth. And if something is not done about it soon, then things will really get out of control.
But the problem, as has been the case in Greece, is the fiscal multiplier, which in the case of spending reductions, will multiply the contraction in GDP more than nominal spending reductions and or tax increases. According to the latest IMF world report, for every dollar in deficit reductions, the actual drain on the economy can be as much as $1,70. So while a 4% in spending reductions might not be the end of the world, if the reduction in GDP turns out to be 6.8% (if the maximum multiplier kicks in), then markets will react very negative to the downside.
The bottom line is that I see many signs of a global slowdown. The U.S. is in a much better position right now, but if the mess is Europe continues (a sure bet) and economies in other parts of the world show sign of weakness, then that will take a toll on the U.S. also.
Finally, I see enthusiasm evaporating for many stocks. Take Google (GOOG) for example. Besides that Motorola is restraining margins, Google is fully valued. Fully valued on Wall Street means it's time to sell. Also, while Google's legal issues are not a big worry, the fact that the company is investigated, one way or another, all over the world, means that it cannot proceed as they would like. Which also means restrains as far as their products and services pipeline, that might also lead to lower earnings.