Economics: HSBC Is on “Red Alert”
October 13, 2016
Global Banking Giant HSBC Headquartered In London Just Issued A “RED ALERT.”
Today’s chart shows the performance of the Dow Jones Industrial Average Index since the start of the year. This index tracks 30 huge U.S. companies like Wal-Mart (WMT) and Apple (AAPL).Leading banks in Europe in 2015, by total assets (in billion U.S. dollars)
- HSBC Holdings $2,571.71
- BNP Paribas $2,400.04
- Credit Agricole Group $1,911.27
- Deutsche Bank $1,901.37
After going more than a year without setting a new high, the Dow broke out to a record high in July. That was good news for U.S. stocks. But, as you can see, the Dow didn’t stay above its 2015 high for long. According to HSBC, that could be a very bad sign.
Business Insider reported this morning:
In a note to clients, Murray Gunn, the head of technical analysis for HSBC, said that he is now on “RED ALERT” for an imminent sell-off in stocks given the price action over the last few weeks.
In late September, Gunn said the stock market’s moves looked eerily similar to just before the 1987 stock market crash. Of note, Citi’s Tom Fitzpatrick also highlighted the market’s similarities to the 1987 crash just a few days ago. On September 30, Gunn said stocks were under an “orange alert” as they looked to him as if they had topped out.
And now, given the 200-point decline for the Dow on Tuesday, Gunn said that the drop is here.
“With the US stock market selling off aggressively on 11 October, we now issue a RED ALERT.”
In other words, the stage is set for another “Black Monday.” As you probably know, that was the darkest day in the history of the U.S. stock market. The Dow Jones Industrial Average plunged an incredible 22.6%.
According to Gunn and his team, the critical level for the Dow is now 17,992. For the S&P 500, it’s 2,116. If stocks dip below those levels, we could see a major selloff.
“As long as those levels remain intact, the bulls still have a slight hope,” said Gunn.
“But should those levels break and the markets close below (which now seems more likely), it would be a clear sign that the bears have taken over and are starting to feast. The possibility of a severe fall in the stock market is now very high.” Watch out.
Most investors aren’t prepared for this. They still own too many stocks. They haven’t set aside enough cash. And they certainly aren’t shorting any stocks.
Earnings season is when companies tell the world if profits grew or shrank during the previous quarter. A good earnings season can lift stocks. A bad one can drag stocks lower.
If you’ve been reading the Dispatch, you know Corporate America hasn’t had a good earnings season in nearly two years. Profits have fallen five straight quarters. That hasn’t happened since the 2008–2009 financial crisis.
Heading into the current earnings season, few investors had high hopes. According to research firm FactSet, analysts expect the S&P 500 to show a 2.1% decline in third-quarter profits. This would be the sixth straight quarter that earnings have fallen.
• Alcoa Inc. (AA) unofficially kicked off the third-quarter earnings season yesterday…
The aluminum giant whiffed on sales and earnings.
The company generated $5.21 billion in sales last quarter, which is about $10 million less than Wall Street expected. Profits came in at $0.32 per share, which was lower than the $0.35 earnings per share (EPS) analysts expected.
Yesterday, Alcoa’s stock plummeted 11.4% on the news. It was the stock’s worst day since 2011.
Many analysts consider Alcoa a bellwether for industrial demand. If its business is struggling, manufacturers, equipment makers, and supply companies should struggle, too.
• Fastenal (FAST) also reported poor quarterly results yesterday…
Fastenal is one of the largest distributors of nuts, bolts, and hand tools in the United States.
Like Alcoa, its business did far worse than analysts expected last quarter. The company’s third-quarter sales came in at $126.9 million last quarter, well short of the $136.5 million analysts projected. The company missed on earnings, too. It earned a profit of $0.44 per share last quarter versus the $0.47 EPS that Wall Street expected.
According to The Wall Street Journal, Fastenal’s business suffered due to a “slowdown in construction, and continuing economic uncertainty.” Fastenal’s stock fell 5.13% yesterday on the news.
• Several other major U.S. industrial companies have also warned of big problems…
On Friday, paint maker PPG Industries (PPG) said it expects to post its first quarterly loss since 2009. PPG Industries reports its third-quarter results next Thursday.
The company’s CEO blamed its ugly quarter on the weak global economy:
We continue to operate in a sluggish economic environment with no clear near-term catalyst for improving global GDP growth.
PPG’s stock plunged 9% on the news. It closed Friday at a seven-month low.
• Manufacturing giant Dover Corp. (DOV) also told investors to prepare for bad results…
On Monday, the company, which makes everything from gas pumps to refrigerators, cut its full-year profit expectations from $3.35–$3.45 to $3.00–$3.05. The company also said it expects to generate $100 million in sales this year, after it previously projected full-year sales of $110 million.
Like the head of PPG, Dover’s CEO says the weak global economy is hurting its business:
We also expect the macro global economy to remain soft, later cycle oil & gas exposed businesses to remain weak, and continued margin pressures in refrigeration & food equipment through the end of the year, as we work to streamline and improve our production systems.
You might not think this is anything to worry about. After all, major industrial firms like Caterpillar (CAT) have been warning about a stalling global economy for years…and all U.S. stocks have done is keep rising.
Why would this time be different?
• The U.S. stock market is becoming more fragile by the day…
To understand why, just look at the chart below. It compares the S&P 500 with the earnings per share (EPS) for companies in the S&P 500. You can see the S&P 500 has kept climbing even though earnings have been falling since 2014.
The weaker the “real” economy gets, the more earnings fall. And the more earnings fall, the more expensive stocks will become…unless they fall, too.
• Yesterday, the S&P 500 plunged 1.2% on the flood of weak earnings data…
It was one of the worst starts to an earnings season since the bull market in U.S. stocks began seven years ago. Bloomberg Markets reported yesterday:
U.S. stocks staged one of their worst starts to an earnings season since the bull market began.
The S&P 500 Index dropped 1.2 percent to 2,136.73, the fourth-biggest decline recorded since 2009 on the day after Alcoa Inc. reported results…
Time will tell if this is the start of something big or just a routine selloff. We encourage you to prepare either way.
You can start by getting out of expensive stocks. They’ll crash harder than cheap stocks if there’s a major selloff.
You should also avoid companies that will struggle to make money if the global economy runs into serious problems. We suggest you steer clear of retailers, airlines, restaurants, or any other company that depends on a strong U.S. consumer.
Between now and the election is extremely, extremely dangerous.”