What is going on?

 
Developing countries are supposed to be the fastest growing world economies. Sadly, according to a recent report by the World Bank, in 2012, developing countries put in their slowest economic growth rate in a decade. Developing countries saw their economic growth come in at only 5.1% for 2012. (Source: The World Bank, January 15, 2013.)

How about the more developed countries in the global economy?

“High income” countries in the global economy are estimated to have grown by only 1.3% in 2012. In 2013, this growth rate is expected to remain the same.

Gross domestic product (GDP) growth in Europe and Central Asia is expected to have slowed to below three percent in 2012 from 5.5% in 2011. Similarly, Latin America and the Caribbean are expected to see their GDP grow only three percent in 2012, compared to 4.3% in 2011.

Add it all up, the World Bank estimates that, in 2012, the overall global economy grew at only 2.3% and it expects the same rate for 2013.

Dear reader, I don’t want to be the bearer of bad news, but the numbers don’t lie. The risks in the global economy persist. The combination of a recession-infested eurozone, a slowing economy in China, a depressing Japanese economy, a disappointing U.S. economic performance, and the struggles of the other emerging market economies points to bleak world economic growth for 2013.

Even the world economies that were once the strongest are in trouble. The central bank of Germany slashed its GDP growth prospects. It expects Germany’s GDP to increase by only 0.4% in 2013 compared to a previously forecasted increase of one percent. (Source: France 24, January 16, 2013.) The downgrade in Germany’s earnings growth for 2013 gives credence to my theory that the situation in the eurozone will continue to deteriorate as opposed to improve.

Hence, when you hear the mainstream media say the global economy is improving…that the worst is over for the eurozone…don’t believe them.

The reality is that the global economy is still swimming in shark-infested waters and a global recession is becoming a very likely scenario; major and emerging market economies are struggling for growth. Demand is bleak and exports in global economy are declining despite the race to currency devaluation.

The scrutiny is severe, and no country in the global economy is safe. Forget about the stock market’s move to recent post-Great Recession highs—a global recession could be upon us very soon.

Michael’s Personal Notes:

Companies in key stock indices like the S&P 500 have started reporting their corporate earnings for the fourth quarter of 2012.

There is a heavy concentration of earnings in a small number of S&P 500 companies. Only 10 companies in the S&P 500 make up 88% of all corporate earnings for the index as per Morgan Stanley research; the other 490 companies only make up a menial 12% of the total corporate earnings of the S&P 500. (Source: Business Insider, November 26, 2012.)

According to Thompson Reuters, fourth-quarter corporate earnings for S&P 500 companies are only expected to grow 1.9% year-over-year. Only three months ago, this earnings estimate was as high as 9.9%; this past summer, fourth-quarter 2012 earnings were expected to be 13.7% higher than fourth-quarter 2011 earnings. (Source: Streetwise, January 12, 2013.)

Since it’s still early, not many companies in the S&P 500 index have reported their fourth-quarter 2012 earnings, but from those that have reported, it is not encouraging. For example, Bank of America Corporation (NYSE/BAC) saw its corporate earnings fall 63% in the fourth quarter of 2012.

Citigroup, Inc. (NYSE/C), another big bank on the S&P 500, missed its fourth-quarter corporate earnings forecast. The CEO of the bank, Michael Corbat, explained the poor corporate earnings by saying, “It will take some time to work through the challenges of the current environment.” (Source: CNN Money, January 17, 2013.)

But even with the poor numbers in from Bank America and Citigroup, optimism towards key stock indices is increasing at a surprising rate. (Remember, the more optimism increases amongst stock advisor and investors, the more bearish it is for the stock market.)

Corporate earnings growth for the fourth quarter of 2012, at this point, is questionable. With Thompson Reuters predicting growth of only 1.9% for fourth-quarter earnings, a few surprises could easily turn corporate earnings growth into contraction.

As I have been saying in these pages recently, the stock market is piling up a lot of risk and missing the most important ingredient to any sustainable stock market rally: corporate earnings. Investors should be very cautious at these recent key stock market index highs. We could be in the midst of a market top and investors surely don’t want to be caught in it.

What He Said:

“The proof the party is over in the U.S. housing market could not be clearer to me. The price action of the new-home builder stocks is telling the true story—these stocks are falling in price daily (and the media is not picking it up.) Those that will hurt most when the air is finally let out of the housing market balloon will be those buyers who bought in late 2005. In fact, the latecomers to the U.S. housing market may end up looking like the latecomers to the tech-stock rally that ended so abruptly in 1999.” Michael Lombardi in Profit Confidential, March 1, 2006. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.