Market Roundup
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It’s crunch time — less than 24 hours before the Federal Reserve announces what it’s going to do with interest rates. But I urge you not to lose sight of what’s happening in the “real world,” either … because the news there is far from encouraging.

First, technology giant Hewlett-Packard (HPQ) said it would slash as many as 33,000 jobs over the next couple of years. Some of the cuts are tied to weakening demand. Others stem from the fact HP is going to split itself into two separate publicly traded companies, one focused on corporate hardware and services and the other on personal computers and printers.

These aren’t the first major layoffs at HP, either. The company already announced it would shed 55,000 jobs, meaning total attrition will sum to almost 90,000 employees. Severance and other costs could total $3 billion.

Second, leading transportation firm FedEx Corp. (FDX) whiffed on fiscal first-quarter earnings – saying it made $2.42 a share rather than the $2.45 a share expected by analysts. It also warned that full-year EPS would come in between $10.40 and $10.90, compared with a previous forecast of $10.60 to $11.10.

FedEx’s issues aren’t company-specific matters and are reflective of the entire economy.

What matters more to me than the disappointing EPS projections are the reasons behind it. FedEx blamed slower worldwide manufacturing, trade and freight activity, as well as rising costs. Those aren’t company-specific issues. They’re major economic problems that could impact a wide variety of firms as we head into earnings reporting season in a couple of weeks.

In other words, so much Wall Street attention remains focused on central bankers that it’s easy to forget there’s a real world out there that influences corporate sales and profits, too! That brings me to one additional chart I feel the need to share with you.

This shows the wholesale inventory-to-sales ratio for durable goods. Or in plain English, it compares inventories against sales for everything from cars to computers to metals to furniture. A low ratio indicates that inventories are lean and mean, while sales are strong … signs of a healthy economy.

Inventory-to-sales ratio, durable goods, 1999-2015

What should jump out at you here is that this ratio has been rising substantially over the last few quarters. It’s now running at roughly the same level we saw at the onset of the 2000-01 recession, and the worst since the tail end of the 2008-09 Great Recession.

That means manufacturers could soon be forced to slash output in order to get inventories back under control. And that’s exactly the kind of thing that has historically led to much weaker (or even negative) GDP readings … not to mention some nasty stock market performance.

Bottom line: Don’t let Wall Street’s obsession with any and all things central bank-related blind you to the real world. That real world is sending out some troublesome signals, and those signals only add to my desire to be cautious and prudent here when it comes to investment risk.

So what do you think of what HP had to say? Or FedEx? And how about these bloated inventories? Are they worrisome signs for stocks, or nothing much to worry about? Should the focus remain on central bank actions, or real-world earnings and growth trends? Hit up the Money and Markets website and share your thoughts when you have time.

Our Readers Speak

The countdown to the Federal Reserve decision is well underway, and many of you shared your view of what the Fed might do – and what impacts it will or won’t have on the markets and the economy.

Reader Howard said: “Economies grow when investors have the confidence to take risks. Intervention from the Fed is just an impact on confidence.”

Reader Bill said the Fed needs to raise rates, and that it could actually help support stocks: “We are in an out of control market because of all the free money. Hiking is actually what they have to do and should have done back in January 2015. They need to raise rates progressively and slowly over the next two years to bring inflation up between 2% and 3%.

“The bond market is not going to do that well for another five years. But equities will do great, and even interest rates on savings accounts will rise with inflation and hopefully a bit more. The value of the dollar will come down and it needs to to make our exports more competitive.”

But Reader Stu said the markets are already wavering, and a Fed hike will only make a bad problem worse. His take: “To raise rates or not — it doesn’t really matter. Even if Yellen stands pat, it’s my belief we are already in a bear market. So conservative investors (especially) would be wise to follow your good advice Mike to ‘lighten up dramatically’ on short-term rallies.

“The financial pundits may convincingly argue for a myriad of reasons why the Fed must (and will) raise rates now; and that the markets can absorb it. But the talking heads don’t mention that the world is drowning in debt and is hanging in there by a thread. So if Yellen does indeed raise rates this week, you can probably expect the markets to react very violently.”

Reader Tommr also picked up on the idea that stocks are in trouble regardless of what the Fed does, saying: “I think the markets are already in a bear. It’s a stealthy, slow-motion kind of a bear that began in mid-April of this year. Many stock prices are down significantly since then. Only a few large and popular names have been [able to] hold the indexes up.”

But he added that investors shouldn’t panic, offering this advice: “What to do about it? Nothing, because that would entail market timing! If you think you can successfully time the markets, good luck. It has never been done except in a few rare cases where someone got incredibly lucky.”

I appreciate all the comments. I think markets are indeed in trouble because it’s not all about the Fed or the ECB or BOJ anymore. We have real economic, emerging market, and credit market problems that are manifesting themselves behind the scenes. Stocks are likely to play “catch down” to those over time, regardless of what Yellen does or says tomorrow.

As for what to do about it, I disagree with the strategy of just standing pat. Many Wall Street firms and mutual funds remain close to 100% invested, and margin borrowing recently hit its highest level ever. That means we could be in for a potentially ugly period of stock market performance. I don’t consider it market timing to raise more cash and attempt to side-step downturns — when and if the risk is great that they will be more than garden-variety corrections. I feel like that’s the case today.

But I also recognize there are two sides to every market. So you may disagree with me. Regardless of which side of the debate you come down on, though, I’d love to hear your views over at the Money and Markets website.

Other Developments of the Day

● Will even more consolidation come to the beer aisle? That’s what Anheuser-Busch InBev NV (BUD) is reportedly shooting for, offering to buy its main rival SABMiller PLC (SBMRY) for more than $75 billion. The deal would provoke an intense antitrust review around the world, considering the companies would dominate approximately one-third of the global beer market if they combined in their current form.

● Ironically enough, considering I just had my teeth cleaned today: Dentsply International (XRAY) just said it would merge with Sirona Dental Systems (SIRO) in a $5.5 billion transaction. The move consolidates two dental supply firms that make everything from dentist chairs to 3-D tooth imaging systems.

● The U.S. and Russia don’t exactly have the smoothest working relationship, with the latest battle focused on the nation of Syria. Russia is backing Syrian leader President Bashar al-Assad with weapons and training in his fight against domestic rebels, while the U.S. has been supporting another group in the region because that group is fighting ISIS.

The question now is whether President Obama will try to engage with President Putin, meeting face-to-face for the first time in ages to try to hammer out a compromise. Both leaders will be in New York at the United Nations later this month.

● The farce that Chinese markets have become was on full display overnight, when the Shanghai Composite Index fell all day until the very last hour of trading – when it miraculously rose like a phoenix to close up 4.9%. China’s government has already spent an estimated 1.5 trillion yuan (or about $250 billion) to artificially prop up stocks, and it looks like another batch of billions must have been used again.

So what do you think of the latest mega-suds deal? Or our potential engagement with Russia over Syria? And how about that Chinese volatility? Let me hear about it over at the website when you have time.

Until next time,

Mike Larson