Thursday, October 25, 2012

Global Economy

The bottom line on the top line is that S&P 500 revenues didn’t grow during Q3-2012, but I predict that it will do so in coming quarters. I don’t expect it to fall off a cliff because I expect that the global economy will continue to grow through next year.

My “CliffsNotes” show that S&P 500 revenues are highly correlated with both the US economy and the global economy. That makes sense since S&P 500 companies derive more than half of their revenues from overseas. I’ve just examined some of the best domestic and global economic indicators for tracking revenues. Let’s briefly review the latest batch of them more broadly:

(1) US. New home sales jumped 5.7% during September, confirming that the month’s 11.0% pop in single-family housing starts wasn’t a statistical fluke. Especially encouraging is that home prices have stopped falling as the inventories of new and existing unsold homes have declined. Indeed, during September, median prices for new and existing single-family homes rose 11.7% and 11.4% on a y/y basis.

The bad news is that October’s regional business surveys available for the Fed districts of New York City, Philadelphia, and Richmond are weak. The average composite index was -2.5, with the average orders index negative for the fifth straight month at -5.2. The employment index dropped to -5.6, the weakest since September 2009.

Yesterday, Bloomberg reported that as a result of the sales slump, “North American companies have announced plans to eliminate 62,600 positions at home and abroad since Sept. 1, the biggest two-month drop since the start of 2010, according to data compiled by Bloomberg. Firings total 158,100 so far this year, more than the 129,000 job cuts in the same period in 2011.”

(2) Europe. There isn’t much good news coming out of Europe other than that real GDP pole-vaulted by 1.0% during Q3-2012 in the UK, helped by the Olympic Games. The country had been in a recession for the previous three quarters.

There’s plenty of bad news in the latest flash estimates for the PMIs in the euro zone reported yesterday by Markit. Yesterday, the news about Germany’s October Ifo business survey was also grim. This morning we learn that loans to euro zone companies dropped significantly during September, i.e., €20 billion below the previous month's level, the biggest drop since December last year. Italy was among the countries reporting weak lending. Over the past three months, loans to nonfinancial corporations are down €144 billion at an annual rate. Loans to consumers are down €44 billion over the same period and on the same basis.

Today's Morning Briefing: Earnings Cliff? (1) Revenue cliff? (2) Revenue growth is down to zero. (3) If the profit margin has peaked, must it fall? (4) CliffsNotes. (5) US business sales are mildly encouraging. (6) The ugliest chart shows orders falling. (7) Purchasing managers are mostly subdued. (8) Commodity prices and the dollar are neutral for revenues. (9) Industry analysts expecting 4% revenues growth in 2013. We're at 6%-8%. (10) The bottom line on the top line. (More for subscribers.)

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