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Forbes Magazine article
Anyone following markets closely recently cannot help but notice three dangerous signs that markets seem to ignore:
The first sign is the inability of a large number of US corporations
to pass higher material costs on to consumers, even for items with an
inelastic demand. This morning, for instance, consumer giant Procter & Gamble
(NYSE:PG) said that its third-quarter net income declined by 16
percent, pressured by rising commodity costs like pulp, fuel and
packaging. The company further announced that it would reverse some increases in product categories where it was losing market share due to the intensification of competition. Deckers Outdoor (NASDAQ:DECK) missed earnings estimates, as margins dropped across its product lines. Yesterday, Kellogg Co (NYSE:K) announced that first-quarter net income fell 2 percent, hurt by higher raw material costs, cutting its 2012 guidance. Even mighty Starbucks (NASDAQ:SBUX) experienced weakness on same-store sales, not to mention a slow-down in Apple’s (NASDAQ:AAPL) US sales.
The second sign is a slowing world economy. Most European countries
are in recession; the US is barely growing as evidenced by today’s GDP
growth report, and a string of lackluster jobs reports, even mighty
China has slowed down substantially. A slow world economy can explain a
slow-down in corporate sales, e.g., Ford’s (NYSE:F) and Kellogg’s
European sales, and the inability of corporations to pass on to
consumers higher materials costs—certainly, not a good sign for
corporate profits going forward.
The third sign is investor complacency over the ability of policy
makers to come to the rescue should the economy weaken. The trouble,
however, is that monetary and fiscal policies are maxed-out from
previous easing, so there is very little, if any, policy makers can do
to help the economy grow. Besides, last time investors placed too much
faith to policy makers was in early 2008, that’s when markets peaked.