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Were on the brink of a profit meltdown in most S&P stocks. Right now, even if you accept Wall Streets optimistic projections, the growth in S&P company profits is plunging by half or more: Instead of 20% to 30% profit gains, youre going to be seeing second-quarter gains of no more than 7% to 9%. On the surface, that may not seem too bad. But put it in perspective: FIRST, bear in mind that stock investors have gotten used to expecting the double-digit profit increases. Anything less will be a disappointment. SECOND, recognize that corporate profits are just beginning to get clocked by surging energy costs and rising borrowing costs. THIRD, remove the energy sector from the S&P index. Then calculate the first-quarter profit growth of the remaining sectors. It was only 4.6%! FOURTH, look at the big picture. In 2003 and 2004, the government pumped up the economy with some of the most aggressive tax reductions and one of the deepest cuts in borrowing costs of all time. Result: Profit growth was strong. Now, more tax cuts are financially impossible. And the Fed is pushing borrowing costs up not down. Result: Profit growth is already weakening. But thats just the first warning of the profit meltdown. Next expect actual profit declines and, in some sectors, outright losses. The two big U.S. auto makers are prime examples. Some people think GM was smart to offer the public its employee discounts on cars. In reality, the company was simply desperate. At these low prices, the more cars they sell, the more money they lose. The big problem: Theyre falling into the same trap as last year. Remember how they couldnt afford to continue their discount financing programs? And remember how they also couldnt afford to discontinue them? In the end, with financing costs rising, they had no choice but to end the deals, and sales plunged. The same is going to happen with their employee-discount-for-everyone campaigns. This week, GM decided to extend its campaign till August 1. And yesterday, Ford joined the club. Now BOTH companies are happily selling cars and, unhappily, losing money hand over fist. The one bright spot in the S&P: Energy! Thats one of Larry Edelsons specialties. But this morning, hes working on his current Energy Windfall Trader issue. So Ive invited Weiss Researchs Michael Burnick to take a close look at the energy sector and also comment on one of Larrys latest picks. I think that helps add a nice, third-party perspective. Tomorrow, Larry will follow up with his own views. If youre looking for solid, double-digit earnings growth, virtually the only place to go right now is the energy sector. In the second quarter, their earnings should be up by an average of 26%. And thats BEFORE the latest round of oil price surges. Among the ten major sectors in the S&P, there is no other sector that comes even close to this performance. Another positive sign: Among all ten sectors, energy stocks have had the most upward revisions in profit estimates since the second quarter started. Chalk that up to higher crude oil prices, which boost profitability for nearly all of the firms. Case in point is one of Larrys recent picks in his Energy Windfall Trader: XTO Energy (XTO). The company, based in Fort Worth, Texas, has built a solid reputation as a highly efficient oil & gas operator with outstanding growth prospects. Sales soared nearly 60% in the first quarter, while bottom-line profits jumped an impressive 77% year over year. And similarly robust results are expected for the second quarter, which XTO will be reporting on the morning of July 20. And every time oil prices go up, the earnings estimates need to be adjusted accordingly. There is some pretty touchy talk coming out of China over CNOOCs takeover of Unocal. China demanded that Congress correct its mistaken ways and permit the CNOOC/Unocal takeover to go through. Their own words:
CNOOC is 71% owned by the Chinese government and very much a state-owned and state-operated enterprise. What riled the Chinese was the 398-15 passage last Thursday by the House of Representatives of a non-binding resolution that calls on the Bush administration to block the CNOOC bid because it would threaten to impair the national security of the United States. Representative William Jefferson of Louisiana summed up the general feeling of Congress.
Things are going to get ugly. But this isnt the first Chinese takeover of a U.S. business. Earlier this year, Lenovo Group bought the PC division of IBM and Haier Group is in the process of buying Maytag. Nor will it be the last. Ran Rui, a professor at Fudan University in Shanghai, warns:
Why is this happening? Its the natural consequence of our massive and still ballooning trade deficit with the fastest growing economy on the planet. China has amassed $650 BILLION of foreign exchange reserves, most of which has been plowed into U.S. Treasury securities. What you and I think about the CNOOC/Unocal deal is a side issue. The primary issue is that the struggle for Unocal, and all its political ramifications, are just more symptoms of the worldwide battle for a scarce commodity (OIL) … and another sign of where its price is headed (UP). It wont be a straight line. Expect dips in between. But use those dips as buying opportunities. Tomorrow, Larry Edelson will show you how with more specifics on what to buy and when. Dont miss it! Best wishes, Martin D. Weiss, Ph.D. Michael Burnick is the editor and chief financial analyst of Elite Stock Trader, the only trading service in the world that translates the Weiss stock ratings into immediate, actionable recommendations. Tony Sagami is the owner of two technology companies: Monocle Systems, a mutual fund/ETF analytical software program, and AdvisorSquare, a web hosting company. Tony is also the president of Harvest Advisors, a money management firm that utilizes his specialized timing strategies. About MONEY AND MARKETS MONEY AND MARKETS is written by the editors and financial analysts at Weiss Research. To avoid any conflict of interest, our editors and research staff do not hold positions in companies recommended in MAM. Nor does MAM and its staff accept any compensation whatsoever for such recommendations. Unless otherwise stated, the graphs, forecasts, and indices published in MAM are originally developed and researched by the staff of MAM based upon data whose accuracy is deemed reliable but not guaranteed. Any and all performance returns cited must be considered hypothetical. Contributors: Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, David Dutkewych, Larry Edelson, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Anthony Sagami, Julie Trudeau, Martin Weiss. 2005 by Weiss Research, Inc. All rights reserved. |
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