We had a great report from Oracle (ORCL) last night, I expect Research in Motion (RIMM) to be good, Nike (NKE) was great overseas, poor in the USA (what's new?), and the market can rally off these things but a company like UPS or FedEx intertwines through all parts of the economy. Some of the commentary in their earnings report are quite foreboding...
- Package courier FedEx Corp. reported Thursday its second-quarter profit fell 6 percent from a year ago, largely due to high fuel costs and a sluggish U.S. economy.
- The delivery company's growth overseas tempered the effects of the domestic economic slowdown and helped FedEx meet its lowered earnings expectations for the quarter. But it forecast profit for the current quarter that was below Wall Street estimates.
- The company lowered its expected earnings for the quarter last month to a range of $1.45 to $1.55, down from an earlier estimate of $1.60 to $1.75. Analysts surveyed by Thomson Financial expected earnings of $1.50 per share.
- "High fuel prices and weak U.S. economic growth year-over-year have impacted our business," said Frederick W. Smith, FedEx Corp. chairman, president and chief executive, in a statement.
- "We continue to benefit from solid international growth, which helps mitigate softness in U.S. industrial production. "
So we see these same trends over and over (Nike for example last night) - struggling US economy offset by strong growth overseas. This is why I have been and continue to have a hedge short on the Russell 2000 instead of S&P 500; Russell 2000 has far more smaller companies which are reliant on the USA and have little to no overseas exposure. So those stocks will suffer more since they have no help from overseas, as opposed to US multinationals.
With that said, at what point does overseas slowdown? The tail does not wag the dog... for long. Much of the world's growth is based on western world consumption, specifically good ole US of A. All these corporate profits by the multinationals are surviving by saying "well at least we have Asia growing". But what if Asia slows from 11-12% GDP growth to even 6%? Then where will profit growth come from? Just something to keep in mind. Right now even these multinationals are like sitting on stools with 1 leg missing. If another leg falls (international growth) you are going to be falling straight to the ground. Will make for a very interesting 2008...
Last point - when the transports/logistic companies are faced with higher fuel costs, they increase their surcharges to their corporate customers... (i.e. raise prices) i.e. inflation. Again, this is either eaten by corporations (meaning lower profit margins) or passed along to us peons (consumers) - so someone has to suffer. There is no escaping the "worldwide tax" that is energy inflation.
Thankfully our politicians are taking great steps to alleviate this such as continuining subsidies to oil companies and farmers who grow ethanol, and pushing out alternative energy incentives. Glad they are on our side! Woo hoo.
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