- - Thursday, September 8, 2011


In recent weeks, a slew of analysts and economists have slashed the U.S. gross domestic product forecasts, and in my view we have yet to see earnings expectations catch up to those growth revisions. However there are signs that the emerging markets are not growing fast enough to carry a global recovery.

Fueling part of that concern is the ripple effect of slower domestic growth as well as that in Europe — weaker demand in those markets will slow import demand for goods and services from the emerging economies, including China, India and other parts of Asia and Latin America.

Leading the concern is the second consecutive month in which the HSBC poll of Chinese purchasing managers was below a reading of 50, which separates the line between expansion (greater than 50) and contraction (below 50). While the GDP in India rose 7.7 percent in the second quarter of 2011, far higher than the U.S. GDP reading of 1.0 percent for the same period, it is viewed as a sign of slowing growth in that country.

When viewed against GDP readings of 7.8 percent in the first quarter of 2011 and 9.3 percent in the second quarter of 2010 it is not that difficult to understand, however in looking deeper in the data there are signs that the Indian economy can achieve that nation’s central bank’s 8 percent growth target for 2011.

Last Friday, we learned Brazilian economic activity grew 3.1 percent in the second quarter below the 3.3 percent consensus forecast from a survey of analysts conducted by Dow Jones Newswires and far slower than the 4.2 percent recorded in the first quarter of 2011. Also driving the concern over slower growth ahead in those and other emerging markets is persistent inflation, which has led to monetary tightening in China and India.

Much the way companies, analysts and investors need to grapple with how earnings will be affected by slower domestic growth, so too will we have to factor in the realization that slower growth is being felt across the globe. Currently, consensus expectations for the S&P 500 stand at $95.91 this year, up from $85.28 in 2010, and the current view calls for those operating earnings to reach $104.59 in 2012.

As various scenarios are formulated and numbers are crunched in order to revisit earnings expectations, there is scant economic data to be had this week other than the Federal Reserve’s September Beige Book and initial jobless claims. The Fed’s September Beige Book, a collection of anecdotal evidence the central bank collects before each interest-rate decision, showed the economy is expanding at a “modest pace,” which in my view simply supports recent economic data.

In times like this, sharpening one’s investor pencil, revising outlooks and expectations and re-calculating entry points or doubling down points is the task at hand. What makes that task more challenging this time around is the degree of uncertainty — slower growth or recession ahead, earnings power near term, the European debt, the decision and ramifications of the congressional supercommittee that is tasked with cutting $1.5 trillion from the federal deficit.

In addition to those uncertainty drivers, we heard from President Obama on Thursday night about his latest efforts to stir domestic job creation. Creating jobs to create jobs, in my view, is not the answer, rather creating a domestic climate that allows companies to compete on a global scale while rebuilding the nations infrastructure and middle class is.

Many will have their own view on how to achieve that, but as always the devil is in the details and that’s what I listened for most in the president’s speech. That and how he plans to pay for the stimulus plan given the controversy over the near federal government shutdown only a month or so ago. With Mr. Obama’s weekly average approval rating at his term low of 40 percent according to Gallup, many, including, myself are wondering how his job proposal will square with needed deficit cuts.

More as it develops.

Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at [email protected] At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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