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Friday, July 29, 2011

7/29/2011 - Sovereign debt crises … economic slump … and now, earnings trouble?

Sovereign debt crises … economic slump … and now, earnings trouble?

Mike Larson | Friday, July 29, 2011

Things aren’t looking good on the debt crisis front in Europe … just a few days after the “great bailout!” Why? German officials continue to express concern about bailing out their profligate euro-zone neighbors.
Finance Minister Wolfgang Schaeuble warned that the European Financial Stability Facility shouldn’t get a “blank check” to bail out everyone and anyone. The fund currently stands at 440 billion euros. Schaeuble’s comments caused bonds issued by Spain, Italy and other countries — as well as bank stocks across Europe — to tank anew.
What about our debt crisis here in the U.S.? Not much good news there either! With each passing hour, the August 2 debt ceiling deadline gets closer and closer. But the Republicans and Democrats continue to get farther and farther apart when it comes to hammering out a deal!
My take?
We might get a last minute debt ceiling deal, but it won’t satisfy the ratings agencies. So they’ll strip the U.S. of its AAA rating. Or we won’t get a deal, and all heck will break loose!
And the economy?
All signs point to an ongoing slump. In June new home sales fell for the second month in a row, while home prices plunged more than 4.5 percent from a year earlier, the biggest drop in 18 months. The Richmond Fed index slipped back into negative territory in July, at -1 versus 3 in June. 
Most importantly, durable goods orders dropped 2.1 percent in June against expectations for a 0.3 percent rise. A key gauge of business spending fell 0.4 percent.
Bottom line: If you’re looking for macroeconomic or political catalysts for a rise in stocks, you’re going to need a magnifying glass! Worse …
The “Earnings Stool” Is Now Being
Kicked Out from under the Market!
Over the past few months, every time we bearish analysts talked about the slowing economy or the debt crisis, the bulls trotted out a counterargument: Yeah, sure that stuff is bad. But corporate EARNINGS remain rock solid!
The implication? Just stick your head in the sand and buy, buy, buy! Who cares if several countries are going broke and big-picture indicators suggest a new recession is right around the corner!
But now, even that fallback argument is proving to be pure hogwash. With the exception of a few company-specific success stories (Apple,, etc.), there isn’t much positive coming out of corporate America!
Prime examples:
==> Diversified manufacturer 3M (MMM) makes everything from Post-it Notes to auto parts disappointed some analysts on the profit margin and sales front in the most recent quarter. Moreover, it forecast full-year earnings of $6.05 per share to $6.25 per share, the mid-range of which missed the average analyst forecast of $6.31 per share found in a Bloomberg survey. That caused the stock to tank by the most in nine months.
Market bellwether Caterpillar said dismal second-quarter earnings were the result of slow economic growth in the U.S. and developed markets made worse by lower-than-expected demand in China.
==> Or how about Caterpillar (CAT)? The company makes heavy mining and construction equipment, and it sells into every major market around the globe. So Wall Street sat up and paid attention when the company missed profit estimates for the first time in 10 quarters a few days ago. The company warned of slower economic growth overseas, and its shares plunged the most in a single day in more than two years.
==> Then there’s United Parcel Service (UPS), the biggest shipping company in the world. Its shares fell the most in 13 months after the company warned of an “extremely sluggish” U.S. economy and weaker growth in select foreign markets.
==> Juniper Networks (JNPR), the second-largest maker of networking equipment? It whiffed on earnings and sales, causing its shares to plummet as much as 20 percent. Paccar (PCAR), the maker of heavy trucks under the Peterbilt brand? It plunged more than 10 percent after missing earnings targets.
==> Goldman Sachs (GS), the pre-eminent “Too Big to Fail” bank and brokerage firm? It slumped after missing by a country mile. And Boeing (BA), the gigantic military and commercial jet maker, forecast earnings per share of $3.90 per share to $4.10 per share for 2011. That missed the average forecast of $4.12 per share.
What to Do as Recovery Peters Out
For millions of Americans, hopes for a recovery have vanished.
My take here folks? The economic “recovery” that never really felt like a recovery to many Americans is petering out. Growth is slowing around the world. Europe is still embroiled in sovereign debt problems, despite spending hundreds of billions of euros on bailouts. The Federal Reserve is out of bullets to boost the economy. And the politicians in Washington can’t tackle the U.S. debt crisis to save their lives!
So if you still … still … haven’t heeded my warnings on the stock market, I urge you to do so now. Transport stocks … retail stocks … financial stocks … and cyclical stocks all look vulnerable to me, now that earnings are coming up short. Either sell down your equity exposure, add inverse ETFs as hedges, or both!
Also, make sure you own some gold.
With both Europe and the U.S. embroiled in debt crises, it’s absolutely essential that you hold gold bullion, the SPDR Gold Shares (GLD), or related investments. 

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