What CEOs know that you don't

Despite rising consumer confidence and dubious employment gains, corporate executives are battening down the hatches. Here's why we should pay attention.

By Anthony Mirhaydari Oct 10, 2012 12:53PM

Stella, fStop, Getty ImagesAverage 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.

 

 

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) -- 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) 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).

 

Disclosure: Anthony has recommended CMI short and ROK short to his newsletter subscribers and money management clients.

 

Be sure to check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


53Comments
Oct 10, 2012 3:08PM
avatar
Even after they blew-up the entire system, we still hear how the big bank bankers are so hardworking, smart, talented, ingenious, and indespensible that they deserve to be paid $ tens of millions per year. But is it really that difficult to make good loans (check income, credit, etc) and administer savings and checking accounts? No doubt they are among the world's most grossly overpaid people.
Oct 10, 2012 2:01PM
avatar

 

Steve Wynn casino magnet says it best

 


Wynn on a scrapped business plan: "I'm afraid of the president. I have no idea what goofy idea, what crazy, anti-business program this administration will come up with. I have no idea. And I have to tell you Jon that every business guy I know in the country is frightened of Barack Obama and the way he thinks."

Oct 10, 2012 3:12PM
avatar
16 Trillion.  That's with a T folks.  I don't know, but I learned back in the 3rd grade, if you spend more than you make, for a long time, you may dig yourself into a hole you can't get out of ?  " Mom, can I have some more money for candy, No son, you already spent your allowance and owe me last month's worth........"  Unless that economic model has changed in the last 30 years....well ??
Oct 10, 2012 3:23PM
avatar
These are the same cod-suckers that ask their employees to take pay cuts while they give themselves bonus' for increasing profit margin.  F- all CEO's who think they are above the bottom rungs of the ladder.
Oct 10, 2012 1:14PM
avatar
I guess CEOs don't buy the propaganda on NBC News. 
Oct 10, 2012 2:50PM
avatar
For the second day in a row, msn is running interference for Obama, by buffering the grim reality, and not allowing comments on the front page market article. 
Oct 10, 2012 1:56PM
avatar
"Average Americans are feeling pretty good right now."

A REAL Editor would have never released an article starting out with this sentence. There is a Tsunami approaching and stupidity writing like this is uncalled-for.

CEOs will be seeking shelter, for sure. There are a number of prisons that should suit them fine.

Home prices may LOOK like they are recovering but short sales, bad mortgages and debt default are still flagrant. If we stopped them today, we would still be about 14 years shy of recovery.
Oct 10, 2012 2:31PM
avatar

Of course the CEOs will be right, but not due to insight, but rather a self fullfilling prophacy.  If they felt good, they'd hire, people would work, buy and pay taxes and things would be great.  But they don't, so they don't hire, unemployment goes back up, and sales go down.  The irony is for all their irrational fear of Obama (yeah, I might get hit by a car, but it doesn't stop me from going outside), faltering ecconomic figures due to corporate inaction might just encourage the "anti-business" practives they're so afraid of. 

 

That's the thing.  We had 20 years of pure boom due in large part to globalization and a couple of bubbles, and the corporate world became accustomed to it.  They no longer know how to deal with an ecconomy that doesn't promise double digit returns on stocks and room fo no oversight pay / expense packages.  All I can say to them is welcome to reality: it sucks, but it's all we've got. 

 

At the very least, we need to give the same level of credibility to the guys that "just know" Obama's out to get them that we give people that "just know" Bush was responsible for 9/11: none.  Get over yourself.

Oct 10, 2012 2:21PM
avatar

CEO's know that Obama can't pay for everything he has promised.  Socialism doesn't work.

 

All of these people that are afraid of Romney are just afraid of hard work.

 

I'm afraid of what kind of freedome Obama is going to take away next.  I worked for my money and I want to keep it.

 

The CEO's see the big spead bump coming and they are tightening their seat belts.

Oct 10, 2012 3:01PM
avatar

CEO'S not hiring = better bottom line = BIGGER BONUS!!!

 

KOOLADE

Oct 10, 2012 2:57PM
avatar
Romney has said if he is elected, he will fire Ben Bernanke and stop QE. That certainly sounds as if it could be a ticking time bomb for the fairly lofty market valuations we have right now. Some pros have speculated the Fed's QE since 2009 has been responsible for at least 30% of present market valuation.
Oct 10, 2012 1:50PM
avatar

Carlos Slim, who has an estimated net worth of $70 billion, owns a controlling stake in TracFone, which makes $10 per phone for each device it provides to poor Americans. The company, whose president and CEO is Frederick “F.J.” Pollak, also makes money from extra minutes and data plans it sells to subscribers who get phones and service through the government's Lifeline program. The program, which began in the mid-1980s, has exploded in the past four years after being expanded from supplying landlines to the poor to providing cellular phones.

 

Pollak has donated at least $156,500 to Democratic candidates and committees this cycle, including at least $50,000 to the Obama campaign. His wife, Abigail, is a campaign bundler for Obama and has raised more than $632,000 for the president this cycle, and more than $1.5 million since 2007. She has personally contributed more than $200,000 to Democratic candidates and committees since 2008.

 

Oct 10, 2012 1:39PM
avatar
Obamanomics at work - still.  When will it all end?  In 26 days.
Oct 10, 2012 3:36PM
avatar
"Romney has said if he is elected, he will fire Ben Bernanke and stop QE. That certainly sounds as if it could be a ticking time bomb for the fairly lofty market valuations we have right now. Some pros have speculated the Fed's QE since 2009 has been responsible for at least 30% of present market valuation."

Did you notice that Romney hasn't suggested WHO he would replace Bernanke with? Market values climbed almost immediately with the Gramm Leach Bliley Act of 1999. The set back (crash) in April 2001 should have stuck the market and forced some badly needed draining of the Kool Aid crowd. Nearly every corporation in America was handing out bonuses and shares to "talent" that really wasn't. Mergers and Acquisitions of junk companies stoked by creative and fictitious accounting was extremely common. What wasn't common and still isn't, isn't departure from hired-in administrators without a business development bone in their bodies. It should occur to market zombies that our cash is buried in European Bonds while both longs and shorts all over the markets are chasing the same manna that ain't gonna be there.

A systematic call of both shares and contracts is absolutely essential. We'll find that a lot of the debt is sitting in the same hoarded vault as the contracts. Derivatives are contracts on borrowed money promised at at maturity that only theoretically could occur. In short, they are JUNK, not the priority liens that Jamie Dimon insists they are. Close the damn banks! Reconcile before we're all sucked into the Black Hole that doesn't add up. Be more worried about how many college degrees without any substance or ability are clogging our job markets. They thrive on somebody else's effort. That HAS to go! If we can make it here, we'd BETTER START making it here again.

Close the banks. End the Federal Reserve (don't put another fool behind the wheel). get rid of Wall Street. Time has almost run out. If we don't FORCE JOB RECOVERY on business and end the platforms, we will NEVER recover. 
Oct 10, 2012 9:14PM
avatar
Consumer Confidence is in the TOILET !   Just wait for the Holiday season to start Small Business will collapse as the Banking Cartel and Multi National Corporations reap the profits= SCREW THE AMERICAN PEOPLE  !!!
avatar

AS FAR as UNEMPLOYMENT going down that was to the change they made in the phone survey they got to ask this question first.

 

Are more than 50 percent of the adults in this household working ??

 

If the answer was yes the survey continued not being unemployment biased.

 

if the answer was no the survey sample was considered biased towards unemployment and dropped and no more questions asked. 

 

Pretty easy way to fudge the numbers

 

Plus Nixon turned it into a phone survey years ago as he wanted the unemployment numbers to drop and not doing door ro door surveys in poor areas of towns cut the unemployment rate by 40 percent.

 

Now they merely use land lines and not cell phones as the poor now have Obama phones

 

Pretty much if they used real numbers of people working and not working they would find a 30 percent unemployment rate add in the welfare people and the number would jump to 40 percent.

 

so with 40 percent of the people in America oh 60 percent forgot the government workers depending on the rest of working 20 percent and the super rich 1 percent depending on the 20 percent working class to give them trillions of dollars a year

 

pretty much we are doomed. And might as well tax the super rich 20 percent of their assets per year to pay off the national debt.

Oct 10, 2012 9:06PM
avatar

How is confidence measured? Probably poorly like everything else.

 

The market is random. It does not follow fundamentals. 

 

One can only buy low and sell high.  

avatar

And the Death Spiral of Lost Jobs and an ever weaker and weaker economy keeps rolling on.

 

Look folks the economy is not about QE3 or QE4 or whatever the Fed does to pump money into the hands of the super rich.

 

Simple fact is basically the economy is like a game of monopoly. The 1 percenters have managed to gain control of every square on the board and max out the number of hotels on each and changed the use rates of the rail roads and utility companies. They are charging like $5,000 per square to land on it and keeping the go pass go amount at $200 dollars.

 

Of course the companies can not keep charging more and more for their product but they have this mind set. They increase their product price 10 percent and cut their labor force 25 percent and this should only effect 2 percent of their business. So their margin grows 35 minus 2 or 33 percent.

 

Not a bad number.

 

Only trouble is they have lost that equation and now it's increase their product price 10 percent and cut their labor force 25 percent and their sales drop 50 percent. So their margins decrease by 15 percent.

 

So what do they do next year increase their prices by 20 percent and reduce their labor force 30 percent.

 

And now they are trapped in a downward spiral of lost jobs and an ever weaker and weaker economy.

 

avatar

So much for government regulators doing their jobs. Like the FDA which allows meat packing plants to operate with infected meat killing hundreds of people over the years and not recalling nor stopping the meat plants. Why do you think the FDA was created in the first place to regulate and punish companies that sold bad food. Now they merely take kick back money and look the other way.

 

Now it's air bags in cars. No recall no throwing the crooks who put lethal air bags into cars. Not even warning the people who may have bad air bags in their cars.

 

Yep it's 1800's all over again no government regulation as nobody in the government is doing their jobs. They are all just collecting a pay check at the taxpayer's expense. More government workers than private industry workers anyway now a days.

 

We are a Banana Republic now folks for real.

 

QUOTE

WASHINGTON (AP) - Thousands of motorists may be driving cars and trucks installed with dangerous counterfeit bags and they should have them replaced at their own expense, the Obama administration warned Wednesday.

Most at risk are motorists who have had their airbags replaced over the past three years by a repair shop other than a new car dealership, the National Highway Traffic Safety Administration officials said.

Only 0.1 percent of the U.S. vehicle fleet — about 250,000 cars on the road — are makes and models for which counterfeit airbags are known to be available, NHTSA said. Auto industry officials briefed by the agency said they were told that tens of thousands of car owners may be driving vehicles with counterfeit airbags.

In government tests last month of 11 counterfeit bags, 10 didn't inflate or failed to inflate properly. In one test, a counterfeit bag shot flames and shards of metal shrapnel at a crash dummy instead of inflating, said NHTSA Administrator David Strickland, who showed a video of the test at a news conference.

"It is an extreme safety risk," he said.

NHTSA is asking car owners to check a government website, www.Safercar.gov, for information on how to contact auto manufacturer call centers to learn if their vehicle model is among those for which counterfeit airbags are known to have been made.

END QUOTE

Oct 10, 2012 10:17PM
avatar
Consumer confidence is high only because of mainstream media Propaganda dsigned to reelect Obamas.
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
265
265 rated 2
429
429 rated 3
612
612 rated 4
499
499 rated 5
525
525 rated 6
701
701 rated 7
533
533 rated 8
337
337 rated 9
131
131 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
UPLULTRA PETROLEUM Corp10
COPCONOCOPHILLIPS9
TAT&T Inc9
DVNDEVON ENERGY CORPORATION9
EOGEOG RESOURCES Inc9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.