Juggling Dynamite

Of the 173 S&P 500 companies that have reported Q3 earnings as at October 23, the blended earnings decline is -3.8%, making for the first back to back quarters of earnings decline since 2009. See: Factset Earnings Insight October 23, 2015.

And its not just earnings that are in decline, sales are on pace to fall 4% for the third straight quarter as well. The last time sales and profits fell in the same quarter was also in 2009. See: US companies warn of slowing economy, to post first decline in earnings and sales since the last recession:

From railroads to manufacturers to energy producers, businesses say they are facing a protracted slowdown in production, sales and employment that will spill into next year. Some of them say they are already experiencing a downturn.

“The industrial environment’s in a recession. I don’t care what anybody says,” Daniel Florness, chief financial officer of Fastenal Co. , told investors and analysts earlier this month. A third of the top 100 customers for Fastenal’s nuts, bolts and other factory and construction supplies have cut their spending by more than 10% and nearly a fifth by more than 25%, Mr. Florness said.

Caterpillar Inc. last week reduced its profit forecast, citing weak demand for its heavy equipment, and 3M Co. , whose products range from kitchen sponges to adhesives used in automobiles, said it would lay off 1,500 employees, or 1.7% of its total, as sales growth sagged for a wide range of wares.

The weakness is overshadowing pockets of growth in sectors such as aerospace and technology.

Last week the International Energy Agency (IEA) lowered its forecast for global oil demand growth from a 5-year high of 1.8 million barrels a day in 2015 to 1.2 m barrels a day in 2016.  As global production remains at all time highs, the agency sees further price weakness amid oversupply imbalances likely to persist through at least 2016.

At the same time, rating agency Moody’s and The Economist issued fresh warnings about Canada’s over-valued real estate and heavily indebted consumers.

Ratings agency Moody’s and The Economist magazine are sounding the alarm about rising consumer debt loads and overpriced housing in Canada. Here is a direct video link.

The new incoming government will struggle with same secular headwinds challenging Canada.

Bank of Canada’s lowers assessment of the Canadian economy as Justin Trudeau prepares to take office. Here is a direct video link.

On Sept. 3, 2015, VW admitted to U.S. and California regulators that it had not only been selling high-polluting cars but that it had deliberately outfitted them with “defeat devices” that sensed when an official emissions test was under way and temporarily trapped the worst of the exhaust—chemicals that contribute to smog and acid rain.

“Device,” actually, is something of a misnomer. The cheat is merely several lines of software code in the computer that controls a Volkswagen’s engine and exhaust systems. According to the U.S. Environmental Protection Agency, when the car detects a test—certain steering patterns; speed; barometric pressure; only two wheels spinning instead of four—it switches into a cleaner mode called “dyno calibration,” after the testing machines. The cars can run cleaner, but they can’t run cleaner without sacrificing fuel efficiency or some of the engine’s power.

See:  How Could Volkswagen’s top engineers not have known? for more on how the fraud was uncovered.  Here is a direct video link.

It is worthy to note that the Volkswagen Finance arm (vehicle loans and leases equaled 40% of VW’s asset base) played a critical role in enabling VW sales over the past few years. One might think then, that the company had a vested interest in making sure customers were able and willing to keep their vehicles and pay financing back over time. But that would be naive.  Why worry about getting paid on loans and leases when broker/dealers can help you package them up and dump collection risk onto gullible investors and pensions:

Volkswagen AG said 2.6 billion euros ($3 billion) of loans or leases for vehicles built with engines using emissions-cheating software were packaged into asset-backed securities.

The loans were found in 15 securitizations,  according to documents on the carmaker’s website. More than 61 percent of collateral backing a deal sold two years ago, known as Driver France One, were affected, as were more than 20 percent of loans packaged into a deal currently being marketed, the documents show.  See: Volkswagen scandal impacts $3 billion of securitized car loans.

The subprime mortgage model is still alive and well across many industries today.