By Michael Lombardi, MBA
The pieces of the puzzle are coming together. Companies in key stock indices like the S&P 500 are doing what I expected them to do to make corporate earnings look better. They are either buying their own company's stock or laying off employees.
United Technologies Corporation (NYSE/UTX) is expected to reduce its labor force by 3,000 employees this year, and it may continue to make further cuts to keep its costs in line, due to difficult market conditions. (Source: The Republican, February 18, 2013.)
General Electric Company (NYSE/GE) Chief Financial Officer (NASDAQ:CFO), Keith Sherin, said, "For us, our focus is on lowering costs." The company didn't specify how many jobs will be cut, but it plans to reduce costs by $2.0 billion in two years through restructuring to spur corporate earnings. (Source: Sechler, B., "GE CFO Says Job Cuts To Be Part of Ongoing Restructuring," Wall Street Journal, February 21, 2013.)
JPMorgan Chase & Co. (NYSE/JPM), the biggest bank in the U.S. based on assets, plans to cut 15,000 jobs by the end of 2014 for a total savings of $3.0 billion. For every billion dollars the S&P 500 bank cuts, it will add $0.20 per share to its corporate earnings. (Source: Forbes, February 26, 2013.)
Thomson Reuters Corporation (NYSE/TRI), which is not an S&P 500 company but a major company nonetheless, announced 2,500 jobs cut from its core business-its financial and risk division. The reason: the company reported net sales declined in 2012, and it expects 2013 to be a challenging year for revenue growth. (Source: Market Watch, February 13, 2013.)
For the first quarter of 2013, corporate earnings expectations for companies on the S&P 500 have turned negative. Wall Street analysts now expect corporate earnings to have negative growth of 0.2%. (Source: FactSet, February 22, 2013.) So far, for the first quarter of 2013, 72 S&P 500 companies have provided negative corporate earnings guidance!
If companies continue to cut costs in order to show better corporate earnings, the unemployment rate will rise. As I have said in these pages before, healthy companies grow when their sales grow. But since overall demand in the global economy is declining, companies are reverting to cutting costs again. But improving corporate earnings through cost cutting can only go so far before service is compromised.
I'd like to remind readers that in the third quarter of 2012, corporate earnings growth was also negative for the S&P 500 companies. Hence, we've now witnessed negative earnings growth twice in only three quarters. Doesn't quite jive with a rising stock market, does it?
Michael's Personal Notes
While the mainstream certainly loves rising home prices, the reality is that the housing market is still fundamentally damaged and is in an artificial price rebound.
Robert Shiller, the co-creator of the most quoted housing market indicator, the S&P/Case-Shiller index, said this week, "Part of the reason the indexes have gone up is because the foreclosure boom has receded. Foreclosed homes sell at a lower price, and the share of those sales has been falling. People might be deceived by looking at the indexes. The question is whether the gains will be sustained." (Source: Timiraos, N., "Shiller's Bottom Line: Risk Lingers in Housing," Wall Street Journal, February 26, 2013.)
As I have been saying in these pages for some time now, we are still missing first- time homebuyers in the housing market recovery!
In January's existing home sales report, the National Association of Realtors reported first-time homebuyers only accounted for 30% of all purchases-similar to December of 2012 and a decrease of nine percent from January 2012. (Source: National Association of Realtors web site, February 21, 2013.) With mortgage rates at an all-time low, first-time homebuyers are shying away from the housing market-this is definitely not a good indicator.
Dear reader, the truth behind the home prices increasing in the U.S. housing market is simple: average Americans aren't buying homes; it's the rush of investors to buy homes for investment purposes that is causing prices to rise.
At a time when first-time homebuyers are shying away from the housing market, investors are pouring in. In January, investors purchased 19% of all the existing homes, about the same percentage as in December.
Looking at a more regional level, we see a more distorted picture of the U.S. housing market. According to Urban Strategies Council, investors purchased, with cash, 42% of the homes in Oakland that went into foreclosure between January of 2007 and October of 2011. (Source: San Francisco Chronicle, June 29, 2012.)
JPMorgan Chase & Co. (NYSE/JPM), with the funds raised from its clients, has purchased 5,000 single-family homes to rent out in Florida, Arizona, Nevada, and California. The firm plans to sell the houses in three to four years. (Source: Bloomberg, February 4, 2013.)
To see sustainable growth in the housing market, we need first-time homebuyers in the market. Currently, the majority of Americans are suffering, because they are uncertain about their jobs and income-never mind planning to buy a house. Don't just look at rising home prices; look at the underlying factors that could have an impact on the housing market over the long term. Remember, the faster the speculation drives home prices higher, the faster they can come back down.
Where the Market Stands; Where it's Headed:
I continue to believe we are near a top for the stock market. Too much bullishness amongst stock advisors, heavy corporate insider selling, rapid stock buyback programs (to prop-up earnings), a contracting U.S. economy, and negative corporate earnings growth-all are factors that suggest the stock market rally is not sustainable.
What He Said:
"I've been writing to my readers for the past two years claiming the decline in the U.S. property market would not be the soft landing most analysts were expecting, rather a hard landing. My view remains unchanged. The U.S. housing bust will cut deeper and harder than most can realize today." Michael Lombardi in PROFIT CONFIDENTIAL, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worse times ahead.