What CEOs know that you don't

With home prices starting to turn and unemployment rate falling, Americans are starting to feel pretty good. However, CEOs are not buying it. Confidence is down, spending and hiring plans are down and just 9% of CEOs believe conditions have improved since six months ago.

By Anthony Mirhaydari
October 10, 2012
MSN Money

Average Americans are feeling pretty good right now. Home prices are starting to turn. The Bureau of Labor Statistics just reported that over the past two months the unemployment rate has fallen from 8.3% to just 7.8% and is coming off of the strongest one-month drop since the Reagan recovery in the early 1980s. Never mind the statistical warts of the report. Or the fact that it flies in the face of all the ancillary signs that growth is stalling, from a dramatic drop in durable goods orders to the fact that the International Monetary Fund just cut its global growth outlook, citing an "alarmingly high" risk of a deeper slump.

CEOs aren't buying it. Confidence is down. Spending and hiring plans are down. And with the start of Q3 earnings season, we're starting to see the impact this newfound fearfulness is having on the real economy.

The Conference Board notes that just 9% of CEOs believe conditions have improved since six months ago.

All of this matters because it affects spending plans. Nearly one-third of CEOs report scaling back their capital spending plans since January, while fewer than 10% have increased spending. Compare that with where we were last year: 22% had increased their capital spending plans, and 23% had made cuts.

And hiring and capital investment plans, based on the Business Roundtable survey, has fallen back to levels seen as the jobs recession was raging in late 2009.

Concerns are about weakness in Asia, fears over Greece and Spain, and political uncertainty here at home ahead of the presidential election and big decisions on the "fiscal cliff" of tax hikes and spending cuts worth 5% of GDP set to hit on Jan. 1.

consumer

Yet at the same time, consumer confidence is surging. The Conference Board's measure moved above 70 for only the third time since the recession ended. Previous excursions didn't last long, as the European debt crisis, inflation and other ails pulled confidence down in the months that followed.

Historically, when consumer confidence and CEO confidence have diverged, it has been the CEOs who were ultimately proved right. It happened in 2007 ahead of the recession. It happened in 2009 as things were rebounding. And it's happening again now.

Just look at the impact it's already having on corporate results.

After the close Tuesday, industrial engine manufacturer Cummins (CMI -1.09%) -- which I've recommended as a short position to my newsletter subscribers and money management clients for weeks -- downgraded its forward guidance and was hit with intense selling pressure in the after-hours session.

The company is now looking for Q3 revenue of $4.1 billion versus a consensus estimate of $4.42 billion and a fiscal 2012 revenue of $17 billion versus $18.1 consensus. Management highlighted heightened uncertainty, delayed capital expenditures, lower demand, and weak conditions in China for the move.

In response, the company is taking actions, including planned workweek reductions, manufacturing facility shutdowns and layoffs of as many as 1,500 people by year's end.

Alcoa (AA +0.88%) kicked of the Q3 earnings season with a small earnings beat, but the overall trend remains disconcerting. Base metals income was down across the board, while margins narrowed. Operating earnings per share isn't exactly on a healthy trajectory:

1Q11: 95 cents
2Q11: 90 cents
3Q11: 71 cents
4Q11: 42 cents
1Q12: 54 cents
2Q12: 48 cents
3Q12: 40 cents

For now, I continue to recommend investors hold a defensive posture with cash and selected shorts against weak industrial names like Cummins and Rockwell Automation (ROK +0.27%).

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