Featured StorySo far fourth quarter earnings have made a mockery of things.
Of the 20 S&P 500 companies that have provided Q4 guidance so far, 18 of them have guided lower, "slashing" their forecasts, according to Goldman Sachs and CNBC (as of Monday afternoon).
What's more, roughly one quarter of the reported earnings have come in flat to middling. According to Capital IQ, overall revenues are up only slightly at 0.34%.
Yet, for some reason the S&P 500 is only 3.89% off of its highs and is up 12.01% year-to-date through Wednesday afternoon.
Under the circumstances this suggests two things to me:
- There's a lot of volatility waiting in the wings; and,
- The near-term risk is to the downside.
The Q4 Earnings Story
So far this earnings season, roughly one quarter of the S&P 500 has already reported. That leaves the market with nearly 375 companies that have yet to spit out their numbers, roughly 150 alone this week.
Assuming the balance follows the pattern set so far, companies like Caterpillar Inc. (NYSE: CAT), Philip Morris International (NYSE: PM), and 3M Co. (NYSE: MMM) are going to show "respectable" (under the circumstances) numbers while talking about the "challenges" they see ahead.
Meanwhile, a few others, like DuPont (NYSE: DD) and United Technologies (NYSE: UTX), are going to reflect weakening earnings and revenue pressures leading to further cost-cutting as a means of protecting profits. These will include job cuts.
I also expect the bulk of the remaining companies will take the opportunity to lower their expectations -- especially when you consider that 61% of the companies as of Monday afternoon missed revenue expectations.
The irony here is that 61% of the companies that have reported over the same period have also exceeded analysts' expectations.
Naturally the markets will punish those who missed even when what they should recognize is that the analysts were wrong yet again. But that's another story for another time.
What's important to understand is that top-tier company management is using this earnings season to accomplish three things.
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Stock Market Today: Avoid the Stock Slump with this 40% Gainer
The stock market today (Thursday) is trying to recover from a disappointing announcement yesterday by the Federal Reserve, which lowered its economic outlook and extended Operation Twist.
The markets had hoped for something more out of the two-day FOMC meeting and responded negatively to the stimulus.
Also impacting the markets today are a number of weak economic reports including disappointing manufacturing indicators from overseas.
Europe's PMI index, based on a survey of purchasing managers in both the services and manufacturing industries, held steady at 46 which is near a three-year low. A measure of specifically euro-region manufacturing fell to 44.8 from 45.1 - another three-year low - in May, London-based Markit Economics said today in an initial estimate.
Both of those gauges were dragged down by a decrease in Germany's manufacturing output.
China also reported a preliminary PMI index, which if correct at 48.1 would be its lowest level in seven months. PMI levels below 50 indicate contraction.
In the U.S. existing home sales fell 1.5% in May, weekly initial unemployment claims remained depressingly high at 387,000 and the Fed's Philadelphia economic index fell to negative 16.6 in June, its lowest level since August.
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The World's Two Best Sin Stocks: Diageo (NYSE: DEO) and Philip Morris International (NYSE: PM)
The common misconception is that so-called "sin stocks" only perform well when the economy tanks.
But the truth is that purveyors of alcohol and tobacco take their lumps during a recession just like everybody else.
That was certainly true of the world's largest spirits company Diageo PLC (NYSE: DEO), which traded as low as $42 a share in 2008. Of course, the stock has more than doubled since then, closing Friday at $93.38.
Shares of cigarette-maker Philip Morris International Inc. (NYSE: PM) have nearly doubled in the past two years, as well.
Still, you don't have to worry if you missed either of those rallies because there's still plenty of room for these two sin stocks to run.
Indeed, more and more consumers are returning to their vices as the global economy improves.
For instance, liquor sales, which stagnated in 2009, rose 4% last year, while sales of top shelf spirits increased 5.3% -- a near return to pre-2008 levels.
What's more is that these gains came at the expense of the beer market, which typically has the upper hand in tough economic times.
"People who are doing well are going out and spending on spirits as an affordable luxury," John McDonnell, chief operating officer for The Patron Spirits Co. and chairman-elect of the Spirits Council, told Bloomberg. "Also, spirits companies never stopped spending through the downturn."
The same goes for tobacco products, which have been gathering steam in emerging markets even while they fall out of fashion in developed countries like the United States.
So let's take a closer look.
Diageo is Uplifting SpiritsDiageo - the company behind Baileys, Captain Morgan, Guinness, Smirnoff, and Johnnie Walker - is the most obvious beneficiary of increased liquor sales.
These are powerful brands that helped Diageo actually increase its cash flow during the recession. And now that consumers worldwide are in a slightly more festive mood, sales are set to take off.
Diageo, which produces about 28% of the spirits sold in the United States, reported a 5% increase in liquor sales in the U.S. and Canada in the second half of 2011.
More importantly, the company continued to expand its business in emerging markets.
While volumes were flat in North America and Europe, Diageo generated 14% volume growth in Latin America, 7% in Africa, and 5% in the Asia-Pacific region.
And that's just the beginning for a company that has made developing markets the focus of its growth strategy.
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