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Global Deterioration
A Sixth Rate Cut Won't Do The Trick
Today’s news provided a virtual litany of what’s going wrong with the global economy. In the U.S., Tellabs drastically reduced their expectations for revenues and earnings, while German semiconductor manufacturer Infineon Technologies warned that revenue in the current quarter would fall as much as 30% from the previous quarter. Infineon said that in just the last three or four weeks they were hit with an “avalanche” of completely unexpected order cancellations. Indicating that this was no fluke, German Finance Minister Eichel stated that the German economy was slowing much more than expected, and may not have grown at all in the second quarter. Research firm IC Insights forecast that sales of integrated circuits would likely fall 21% this year, slightly exceeding the previous worst decline of 20% in 1985. The report also cautioned that sales might not bounce back quickly as a result of the extreme overcapacity that would likely put a lid on pricing. In another indication of industry price weakness DRAM prices have now declined to $2.13 from about $6.50 at year-end.
Argentina, still struggling with a recessionary economy and a massive debt problem, partially unpegged the Argentine Peso from the U.S. dollar, a move that many economists believe is basically a devaluation. As a result, overnight inter-bank rates in Buenos Aires doubled to 10% while the world waits to see if the crisis spreads to other emerging markets. At the same time Japanese authorities are still debating whether to restructure bank loans or reflate the economy or, in any case, which action to initiate first. Either way, things are likely to get worse before they get better.
In the U.S., First Call consensus earnings estimates dropped yet again and the mortgage refinancing index (REFI) declined once more after rising in the previous week. The four-week moving average is now down 25% since late April. This index is highly correlated with consumer spending. That corporate spending cuts are having widespread negative effects was illustrated by the latest data from the Air Transport Association indicating a decline of 11.8% for May domestic unit revenues of U.S. air carriers. This was the worst drop in at least two decades.
The market has not responded to five aggressive Fed rate cuts, and there is no reason to believe that it will respond positively to next week’s prospective reduction, even if it’s another 50 basis points. The global economic picture is deteriorating badly while the market is still priced for perfection, bullishness is rampant and cash reserves are low. This is the recipe for a market peak, not a bottom. |
