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Will Trickle of Profit Warnings Lead to a Flood?

Wednesday, August 12, 2015
Money and Markets
YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON’T GET FROM WALL STREET
You can also access this issue on our website.
Will Trickle of Earnings Warnings Lead to a Flood?
MarkeT Roundup
Dow -0.33 to 17,402.51
S&P +1.98 to 2,086.05
NASDAQ +7.60 to 5,044.39
10-YR Yield -0.007 to 2.13%
Gold +$16.60 to $1,123.30
Oil +$0.34 to $43.42

By Mike Larson

Will the trickle turn into a flood? That’s what investors are furiously trying to figure out when it comes to earnings warnings.

Today, we got a handful of them from a diverse group of companies. The first came courtesy of department store chain Macy’s (M).

It said sales dropped another 2.6% in the second quarter that ended August 1. That was the fourth drop in the last six quarters, with the $6.1 billion in revenue missing analyst estimates. Adjusted earnings per share of 64 cents also missed targets, and Macy’s said things won’t get better anytime soon.

Next up was telecom giant AT&T (T), which just finished swallowing satellite television firm DirecTV for $49 billion. It said revenue would grow at a double-digit rate for the remainder of 2015, and that earnings per share and free cash flow would benefit from the acquisition.

But that didn’t satisfy investors, who were apparently expecting better news. Result: The stock fell almost 2% on the day to a three-month low.

Perhaps the most telling – and troubling – warnings came from the Chinese Internet darling Alibaba Group Holding (BABA). It launched the biggest initial public offering (IPO) in the world last September, raising $25 billion. But anyone who bought right after the offering has gotten his or her head handed to them.

Indeed, the stock just sank to a post-IPO low after revenue missed estimates in the fiscal first quarter amid slowing online sales growth. While the company announced it would buy back $4 billion in shares to try to bolster their value, that didn’t placate investors.

Alibaba launched the biggest IPO in world history. But now investors are getting hammered. Photo: www.alibabagroup.com

Why should you care about BABA? Because it’s the Amazon.com of China. It also has other online operations and businesses in China. If it’s having these kinds of problems, it could be just a precursor of what to expect down the road from U.S.-based companies with significant operations in that country and elsewhere in Asia.

After all, China allowed its yuan currency to devalue by as much as another 2% overnight (before intervening to ease the decline to around 1% late in the session). We also got the first competitive response from another regional player when Vietnam widened its currency trading band last night.

Jitters over weakness in that part of the world are already hurting the very popular and widely held tech giant Apple (AAPL), as I mentioned recently. The company has been generating around 25% to 30% of its sales from China in recent months.

Automakers like Ford (F)and General Motors (GM), as well as large diversified manufacturers like 3M (MMM) and Dow Chemical (DOW) are also likely to come under pressure if we get a wave of competitive devaluations in Asia.

Per Bloomberg, MMM generated almost 30% of its sales in the Asia-Pacific region last year, while Dow gets about 17% of its sales there. What about global tech behemoth IBM (IBM)? Almost 22% of sales come from the Asia-Pacific region. Airplane maker Boeing (BA)? Its Chinese sales just topped 12% last year, with another 13% of sales from elsewhere in Asia.

 “Why should you care about BABA? Because it’s the Amazon.com of China.”

See what I’m getting at? China isn’t some small economic backwater like Greece. It’s a major global behemoth.

So don’t believe all those mainstream talking heads on CNBC who keep blathering on about how the weakness in Asia and elsewhere doesn’t matter. It does. It’s yet another reason I have made it crystal clear that I’m more cautious now than I’ve been in a long, long time. It’s also why I have been urging protective action and cash-raising for the last couple of months.

Haven’t gotten started on that yet? Then I urge you not to delay much longer!

So what do you think? Are Macy’s, AT&T, and Alibaba just the first of many to warn about lackluster earnings and sales growth? Is the Chinese devaluation going to cause major headaches for big multinationals? What does all this mean for stocks? Are we finally headed for a real, honest-to-goodness correction … or something even worse? Head over to the Money and Markets website and let me know as soon as you have a minute,.

 Our Readers Speak

China’s aggressive currency move reverberated throughout global markets yesterday, and it was a major topic over at the website, too.

Reader Rick said he sees a distinct motive behind China’s move, offering this perspective: “Looks like the U.S.-influenced decision to keep China out of the IMF for another year is already having consequences.”

Reader Ted F. said China’s economy is suffering because the government failed to re-focus on domestic demand versus exports. His take: “China built way too much of their economy on selling abroad, but failed to build their own internal consumer base. That worked fine for the Chinese until everybody’s economy started slowing. Then China went on massive building programs with no customers.

“The big question is, ‘Will Obama sit on his hands as usual? Or will he counteract the Chinese move, as every other Asian country is a sure bet to do?'”

Finally, Reader John said we should be very worried about the signal China’s actions are sending out. His view:

“What the Chinese devaluation of the yuan means is that things are worse in China that you might think just from reading about it in the news media. And that they did it twice (another cut in the yuan on Wednesday followed the one Mike wrote about on Tuesday) is puzzling – since they seem to have stated on Tuesday that the cut was a ‘one time’ thing. I guess after promising there would be no more, they couldn’t hold off another cut in the yuan, even for 24 hours. Hmmmm.”

Meanwhile, in the other global hotspot of Greece, Reader Carl said the latest deal won’t change the underlying fundamentals at all. He said:

“Greece can’t pay. Their economy must expand enormously to service their debt, and it’s tanking. Everyone knows the fundamentals. Loans and bailouts are political theater and maneuvering to have the bomb go off on someone else’s watch. It’s not even a secret anymore!”

Thanks for sharing your observations. I agree that China’s economy is clearly on the ropes, or else officials wouldn’t be launching so many panicky moves one after the other. Rate cuts, direct stock market interventions, and now currency manipulation aren’t the kinds of things you’d see when things are humming right along.

Throw in the still-simmering European debt problems, and you have a potent mix for more volatility – and potentially severe stock market losses. That’s why I’ve gotten much more aggressive lately with paring down portfolios, and adding downside hedges and/or profit-seeking investments.

Anything I didn’t cover here? Then let me hear about it over at the website.

 Other Developments of the Day

BulletGeneral Electric (GE) confirmed it will sell its health care financing business to credit card and regional banking firm Capital One Financial (COF) for $9 billion. GE has now sold off $78 billion in assets as part of its plan to shrink its financing operations and re-focus on industrial units.

BulletWill they or won’t they? No, I’m not talking about the Federal Reserve and hiking interest rates (this time). I’m talking about Germany, and whether or not the country will sign on the latest Greek bailout deal. The agreement needs legislative approval in the Bundestag, but Chancellor Angela Merkel is having trouble cobbling it together.

BulletI may have issues with Obamacare, and judging by the comments online, many of you do too. But one thing the health care program is doing is cutting the number of uninsured Americans. New figures from the National Center for Health Statistics show 29 million Americans lacked health insurance as of early 2015. That’s down 15.8 million from two years ago.

Will Greece get its (umpteenth?) bailout? Is the drop in uninsured Americans a sign Obamacare is working? Any other stories you want to comment on that I didn’t cover here? Then let the website be your outlet.

Until next time,

Mike Larson

Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

For more information and archived issues, visit www.moneyandmarkets.com.

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