Issue 53 • November 18, 2009 Revisiting Some Recent ThemesGold Glitters ... China Simmers ... U.S. Sales Growth Still Missing the Mark ...
With nearly ALL S&P 500 companies having now reported third quarter results, 80% of firms did BETTER than expected, beating Wall Street profit forecasts. That said, operating earnings for the S&P 500 still FELL -14% from the same period one year ago.1
Another worrisome sign is that top-line sales continue to fall short, in nearly every sector of the S&P 500, as shown in the graph (at right). In fact, S&P 500 revenues DECLINED -10% over the same period last year — the fourth straight quarterly drop in sales. Cost cutting remains the major theme in corporate America, mainly the result of continuing layoffs and/or lack of hiring.3 On the bright side, analysts expect 2010 S&P 500 earnings to bounce back +26% next year, due in part to easy comparisons with dismal 2009 results. Unfortunately, cost-cutting can only go so far.4 And without an upturn in actual sales, sustainable rebound in corporate profits may prove elusive at best. Gold Keeps Glittering ...Another asset class hitting new record highs is gold, which shot above $1,140/oz yesterday on continued U.S. dollar weakness. I have written previously about the allure of gold as an investment (See Issue#43 and Issue #25). In a world where central bankers are running their monetary printing presses overtime — gold glitters as the “hard asset” of choice. Gold has now gained about four-fold from its $250/oz lows a decade ago and some pundits now claim that it may have entered a “bubble” phase.5
The graph to the left takes the long view ... showing the price of gold RELATIVE to the S&P 500 Index since 1975. What you notice right away is the decades-long downtrend in this ratio (when stocks were outperforming gold) from 1980 to 2000.6 This was, of course, the LAST great secular bull market in stocks ... which ended in 2000 when the gold/S&P 500 ratio bottomed and a new bull market for gold (and other commodities) began. And from this longer-term perspective, the gold bull market may be JUST getting started. In fact, this graph suggests that in spite of large increases in the nominal price of gold in recent years ... there’s still a LONG way to go just to match the old peak in the gold/S&P 500 ratio from the 1970s! What’s also striking is that the massive 60%-plus rally in stocks since March barely registers as a small blip on this graph (at far right) ... a mere counter-trend zig in what still looks like a long-term uptrend in gold relative to stocks. In fact, the big stock market gains this year get cut in HALF when measured in the price of GOLD instead of the U.S. dollar ... stocks are up just +34% since March in gold terms ... compared with a +64% gain in dollar terms.7 This helps put this rally in the proper perspective. For yet another point of view on gold, take a look at the graph below, showing the REAL inflation adjusted price of gold. In nominal terms, gold has certainly enjoyed a nice rally this decade, as noted above, but the real price of gold is not even half way back to its old, inflation-adjusted peak of more than $2,350/oz!8 Again, gold may have a long way to go ... in real terms.
Here’s the punch line: Global gold mining output has been FLAT to DOWN in 7 of the last 10 years. Meanwhile, the global supply of paper (funny) money in circulation has soared +150% in the past decade alone.9 This appears to be one of the MAIN factors driving gold and other commodities higher today, and we expect this to continue for some time yet. Speaking of Bubbles ... What About China?If gold is not yet in a bubble ... there’s plenty of speculation today that China has entered bubble territory. In past issues of Weiss Advice (See Issue #32 and Issue#47), I pointed out that China’s economy is expected to be the NEW engine of global growth ... at some point in the not-too-distant future. Hopes for a durable global recovery seem to hinge on sustained growth in China ... and so far so good! China’s economy has expanded at a pace of 7.7% year to date ... somewhat less than the double-digit growth posted a few years ago ... but positively breathtaking compared to the negative GDP numbers we’ve witnessed in the U.S., Europe and Japan this year.10 The Beijing government moved quickly last year to enact its own $600 billion fiscal stimulus plan. Most of this government spending was targeted at infrastructure investment. Chinese authorities also encouraged a massive increase in bank lending early this year, which has reached a staggering 140% of GDP — considered by some an excessively speculative level that has led to financial crises in other nations (like the U.S.) in the past.11
Still, China’s fixed asset investments soared +31% in October from the same period last year, while industrial production accelerated to a 16% year-over-year growth rate. Real retail sales are soaring +17% year-over-year (adjusted for inflation) in China, while U.S. retail spending is DOWN -6%.12 This shows that Chinese households are stepping up their consumption, but at just 35% of GDP (compared with 70% in the U.S.) China’s consumers have a long way to go to make up for slumping consumer spending elsewhere. Meanwhile, China’s exports — still the MAIN engine of growth — have improved, but shipments are still declining year-over-year.13 China’s ongoing recovery does seem at least somewhat dependent on government spending and lending directives from Beijing ... not unlike budding “recoveries” in the U.S. and Europe. Chinese stocks suffered a sharp bear market in 2008, but were among the first markets around the world to bottom — back in October, 2008 — six months before the U.S. low. A strong rebound rally in China’s domestic market, the Shanghai Composite Index, began ahead of the rest too, and then struggled through a -23% selloff in August. At the time, I said that if Chinese stocks roll over, it could be a major caution flag for U.S. markets too (See Issue #44). Since October, Chinese stocks have established a promising new uptrend, but remain below the July highs ... unlike the Dow and S&P 500, which just reached new highs this week. This non-confirmation in a leading market like China bears watching. Keep an eye on China’s bubbling economy and simmering stock market ... new highs in Shanghai should help reassure investors that all is well in this emerging market bellwether ... at least for now ... but another sell off in China could spell trouble ahead for global stocks. Stay tuned! Good investing, 1 Wall Street Journal: U.S. Earnings Are Strong, But Not Sales, 11/16/09 Disclaimers: 1. Weiss Advice is a publication of Weiss Capital Management, an SEC Registered Investment Adviser. Weiss Research is a separate, but affiliated publishing company. Both entities are owned by Weiss Group, LLC. 2. "Weiss Advice" is published for general information and educational purposes only and should not be construed as a specific recommendation to buy or sell any security. Specific recommendations can only be given to advisory clients of Weiss Capital Management, with the benefit of knowing their financial condition and suitability. Receipt of this publication should not be construed as a solicitation to do business outside the jurisdiction for which the Firm is approved. Currently, Weiss Capital Management offers investment advisory services to individuals maintaining legal residency within the United States. For details, please contact the Firm. View Weiss Capital Management's Privacy Policy. To make sure you don't miss our urgent updates, add Weiss Advice to your address book. Just follow these simple steps. |
Stocks continue to surge higher, fueled in part by better-than-expected third quarter profit reports ... but there are still a few factors lacking in this rally. First, the good news ...
That’s the NINTH quarter in a row of declining profits — a record losing streak going back as far as Standard & Poor’s has kept records.
Perhaps it is, but a bubble is certainly NOT apparent from a longer-term perspective. 
It is feared that much of this lending may have been misallocated into stock market and real estate speculation in China, instead of prudently invested in productive ventures.
