Investment Contrarians

If You Don’t Believe the IMF, How About What the Multinationals Are Saying?

By for Investment Contrarians |

Don’t Believe the IMFThe global economy is stalling, don’t let anyone tell you otherwise; and unless the eurozone and Europe can recover from the financial crisis, my prognosis for the global economy is not good.

Judging from what I’m currently witnessing in the market action, unless the third-quarter earnings season provides abundant upside surprises, which I doubt, stocks could be set for a shock in the upcoming quarters. The reality is that I continue to feel traders are lackluster in their assessment of the current global risk and the potential impact on stocks.

The International Monetary Fund (IMF) and World Bank are warning us. China saw its gross domestic product (GDP) growth for this year reduced to below the key eight-percent threshold to 7.7% by the World Bank. In China, there are clear indications of slowing economic recovery resulting from the lower demand for copper, cement, and energy. The World Bank also cut its GDP growth estimate to 7.2% this year for the East Asia and Pacific area. (Source: “Growth to Slow in East Asia and Pacific in 2012,” The World Bank, October 8, 2012.)

We also have a potential letdown in China’s neighbor, India, after the IMF cut GDP growth in this emerging market to 4.9% for this year compared to the previous 6.1% estimate. (Source: International Monetary Fund)

And if you don’t believe the IMF or World Bank, take a look at what the multinational companies are saying, many of which source much of their revenue flow from the global marketplace. These companies with worldwide operations have firsthand accounts of the business conditions and, therefore, should not be ignored.

Bellwether Caterpillar Inc. (NYSE/CAT), a global manufacturer of construction and mining equipment, came out and warned against economic slowing, especially in its key market of China.

In a company press release, CEO Doug Oberhelman said, “There are a number of geopolitical and economic factors driving uncertainty in the world today, but our base case scenario calls for modest global economic growth over the next few years.”

Then there’s global parcel shipping company FedEx Corporation (NYSE/FDX), which cited the deterioration in the global economy when it made a deep cut in its earnings guidance for fiscal 2013. The revision was the second time FedEx cut its earnings season guidance, and since the company is a good barometer on the global business environment, the news is a concern; in my view, it clearly points to the global growth issues.

In the technology area, we are seeing downward or cautious warnings as technology spending falls. In a recent press release, bellwether chipmaker Intel Corporation (NASDAQ/INTC), the world’s largest maker of computer chips, cited cautious customers and dwindling demand from emerging markets after cutting its revenue projection for its third-quarter earnings season.

In the consumer cyclical area, The Procter & Gamble Company (NYSE/PG) is an excellent barometer of global demand for daily use consumer goods. Procter & Gamble has cut its earnings three times over the past 12 months. Projected sales growth of 0.4% in fiscal 2013 earnings season is dismal, followed by 3.1% growth in the fiscal 2014 earnings season. (Source: Yahoo! Finance.)

Online travel giant Incorporated (NASDAQ/PCLN) warned of slower growth in its third-quarter earnings season due to the economic situation in Europe.

Looking ahead for the third-quarter earnings season, Thomson Reuters suggests that S&P 500 companies will report their slowest annual revenue growth for the last decade with the exception of the recessionary climate in 2008–2009. Since the beginning of the third-quarter earnings season, 82 S&P 500 companies have issued negative earnings warnings.

In all, I would be concerned about what the companies are telling us; but then the third-quarter earnings season should help support the slowing.

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