Take General Electric (GE). Its second-quarter sales and earnings ostensibly beat estimates. Yet acquisitions and restructurings – including the $10.3 billion purchase of an energy business from Alstom – were the key drivers.
Core, organic revenue dropped 1% year-over-year. Orders fell 2%. Plus, CEO Jeff Immelt warned of a “volatile and slow growth economy.” After an initial pop in the pre-market, GE shares reversed course and dipped 1.6%.
Then there’s industrial and aerospace giant Honeywell International (HON). It also managed to beat earnings estimates slightly, but on only a 2.2% rise in sales. The company also lowered its 2016 sales forecast by $300 million, citing sluggishness in the airplane equipment division and weak demand from the oil and gas industry. Shares slipped 2.6%.
|Are America’s “smokestack” industries in trouble?|
Airplane manufacturer Boeing (BA)? It dropped sharply at the open before closing roughly at breakeven after warning of $2.1 billion in charges. Those reflected cost and demand issues related to products like the 787 Dreamliner, 747 jumbo jet, and the new KC-46 Air Force refueling tanker.
It’s not just the major household-name companies that are having trouble. Take WW Grainger (GWW), an industrial products distribution firm with customers in industries as widespread as healthcare, construction, mining, energy, and food processing. Its adjusted earnings dropped 20% on a lackluster 2% rise in sales, missing projections. The firm cautioned about below-expectations results in the U.S. and Canada, sending the down 4.8% on Tuesday.
Valmont Industries (VMI) is an Omaha-based company that sells everything from agricultural irrigation equipment to electric poles to paints and coatings used to treat steel and other metals. Total sales dropped 6% year-over-year in the most recent quarter, with widespread weakness across its business units. The stock fell 3.5% yesterday on the news.
Graco (GGG) is another industrial firm I follow, one that makes a wide variety of pumps, sprayers, compressors and other industrial equipment. Its shares dropped 8.6% on Thursday after a disappointing earnings report.
Olin (OLN) has been a standout performer in the chemicals space this year. But the stock plunged 21% today — the most in six years — after the company warned of weak demand for caustic soda and other products used in industries like packaging, textiles, water treatment, and agriculture.
Companies with exposure to industries like housing or autos fared a bit better, with Stanley Black & Decker (SWK) and Illinois Tool Works (ITW) a few noteworthy names there. But even there, organic revenue growth was fairly lackluster.
|“Broad stock averages haven’t been paying much attention to actual fundamental news like this.”|
Sherwin-Williams (SHW) was also a notable exception to the trend, with the housepaint company’s shares falling 6.9% on Thursday on weak earnings.
And if I’m right about oversupply and slumping sales growth in the auto industry, not to mention the dangers of house price increases far outstripping income growth and the credit cycle, the best days may be behind those kinds of companies.
The broad stock averages haven’t been paying much attention to actual fundamental news like this. They’re obsessed right now with the question of whether Japan will launch a “Helicopter Money” program next week, and whether other countries will add their own fiscal stimulus.
But don’t lose sight of what’s happening in real industries and at real companies beneath the surface. The tremors there could ultimately give the averages a major headache.
So what do you think of the news out of Corporate America, particularly the “smokestack” names? Is it concerning to you? Or are you seeing enough offsetting strength in other sectors? Will stocks continue to rise regardless of the news because of stimulus hopes? Or is the rally on those hopes already behind us? Let me hear about it below.
Until next time,
What’s driving stock and junk bonds … and where are they headed next? Will interest rates ever rise? What will Trump’s comments about NATO mean for American policy? Those are just a few of the questions you tried to answer online at Money and Markets.
Reader Frank warned about chasing returns in junk bonds, saying: “A lot of those junk bonds are in the energy sector and are coming due soon. Many of those companies aren’t going to be able to pay the piper. The junk-bond rate is going to soar. I have positioned myself by buying the ProShares Short High Yield (SJB).”
Reader Gordon picked up on that message, saying: “The simple answer is junk-bond buyers did not stop and think as they rushed in, pushed by a herd of greedy investors. The government has created this mentality by all of its QE and stimulus shenanigans.
“All investors – whether it is China, France, Japan, the U.S., or every other country in the world – have become stimulus junkies, making trades on stimulus announcements rather than on earnings, expansion, and growth.
“It’s the same as these fixed-financially, juggled second-quarter reports being issued. The analysts have lowered the bar so much for these companies, but in the end, they cannot beat last quarter’s or last year’s earnings. They are trying to put lipstick on a pig.”
So should we expect the Fed or other central banks to try and get the mania under control by raising rates? Don’t hold your breath, according to Reader Todd S. His comments:
“I am doubtful that the Fed will raise interest rates anytime in the foreseeable future. We’ve heard its plans to do so for quite some time. But when the Fed meetings happen, the decision to follow through has only been made once – and that in a minor way. The result was a rapid drop in equities, and it’s unlikely the Fed wants to risk this again.
“Both the Fed and large investors are probably aware of how dependent equity prices are on low interest rates, especially given the degree to which margin debt and corporate buybacks now drive share prices.”
Reader Justin added that the fear of rising defaults has paralyzed central bankers “This is the poison pill that is preventing normalization of interest rates. We’re stuck in this rut indefinitely.”
Finally, Reader Steve L. weighed in with this take on Trump’s NATO comments: “Trump’s attitude toward NATO shows that no country can ever be sure of any guarantee. Trump seems willing to hand over Asia to China. In the same way, as shown by Putin, the order of things can change so suddenly due to a new leader or a new attitude. So every country needs to be independent and be prepared for anything.”
Thanks for sharing everyone. I agree that policymakers are ignoring dangerous valuation and asset bubbles in several markets, just like they did in the dot-com and housing bubble days. This is absolutely, positively going to end in disaster, and I’m already seeing signs that the “Everything Bubble” is beginning to deflate around the edges – despite the attempted breakout in the averages.
So while I can still find ways to profit in this market, it’s no time to go hog wild with extreme long positions. But I’m always open to hearing your confirming or opposing takes in the comment section.
Donald Trump made his appeal to the country last night in his acceptance speech in Cleveland, focusing on law and order, fighting terrorism, curbing immigration, and boosting the economy. His speech ran for an hour and fifteen minutes, the longest in decades, and spent considerable time slamming presumptive Democratic nominee Hillary Clinton.
Fox News and Roger Ailes reached a deal for the news division’s chairman to step down amid allegations of sexual harassment. Ailes had been sued by a former anchor, Gretchen Carlson, and an internal investigation reportedly turned up a pattern of inappropriate behavior. Ailes will receive a $40 million settlement as part of the exit.
Is there a “Wealth Bubble”? That’s the intriguing question a pair of economists posed in new research, and their answer is a resounding “Yes”!
Former Federal Reserve economist Daniel Thorton and partner Joe Carson say that asset values have soared since 2009, driving household net worth to a record 653% of disposable personal income last year. But a whopping 94% of the rise stemmed from price appreciation, rather than new inflows of money. The last two times that happened, we ended with epic busts – first in tech stocks, then in housing. Hmm.
So what do you think about Donald Trump’s comments last night? How about the news that Ailes is out, but receiving $40 million anyway? And does the idea of a “Wealth Bubble” resonate with you? I’d love to hear your responses to these questions in the comment section below.
Until next time,
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