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More Evidence Of A Cyclical Recession Ahead

By Mitchell Clark, B.Comm. For Profit Confidential

The pharmaceutical industry isn't particularly a favorite of individuals, but many of the large players within it make for excellent retirement holdings. With high yields and good visibility, a large pharmaceutical company is a welcome addition in equity market portfolios.

Pfizer Inc. (NYSE:PFE) represents the typical performance we're seeing from many corporations. The company beat on earnings, missed on revenues, and reaffirmed full-year guidance.

Second-quarter sales dropped seven percent to $12.97 billion, of which three percent was due to foreign exchange.

The company had a major gain in earnings, but income from continuing operations was $0.50 per share, up 28% from $0.40 a share.

On the face of it, the company's lack in top-line growth was a disappointment. But in the stock market, things are always relative, and the stock still went up on what can only be described as weak earnings news. Pfizer is currently yielding 3.3%, with a price-to-earnings ratio of approximately 14.

Another company that announced disappointing results was E. I. du Pont de Nemours and Company (NYSE:DD), or DuPont, whose share price was particularly strong in July.

DuPont's second-quarter sales dropped one percent to $9.8 billion. Once again, the company's agriculture division was the strongest with an 11% increase due to seed price gains and volume growth in corn and insecticides. Two-thirds of the company's other divisions experienced a drop in business.

Earnings also fell to $1.03 billion, down from $1.17 billion in the second quarter last year.

So as you can see, there really is a trend of lackluster numbers, but stock market-wise, these blue chip positions aren't coming apart. The monetary expansion is helping with an earnings multiple expansion, but from my perspective, I wouldn't be buying these lackluster results.

Some corporate earnings have been solid among big brand names. A pharmaceutical holding is definitely a worthwhile component in a balanced equity portfolio, but it very much continues to be a zero-growth environment for many companies. Mature companies, despite significant cost controls, just can't grow their businesses. (See "Earnings Reports Masking the Rest of the Equation: Risk Remains High.")

The stock market is very much a hold near-term. The mediocrity in company earnings is just more ammunition for the case for a cyclical recession.

I'd really like the stock market to experience a meaningful pullback before investors consider taking on new positions. It might take a full-blown recession to make this happen. The market's been due for a major correction, but the Federal Reserve has been just too accommodative.

I feel that many individual stocks are well ahead of their own specific fundamentals. Anything is possible in a market like this, but I wouldn't be buying it with the numbers we're seeing now.

It can still be the beginning of a secular bull market in stocks, with the equity market very much a leading indicator. But company earnings right now are not strong enough. It really is a Fed-maintained equity market.