This blog post originally appeared on RealMoney Silver on July 28 at 7:33 a.m. EDT.
A year ago, I commented that the companies I speak to were not hiring. (Subsequently, despite the consensus forecasts for improvement in jobs, the unemployment rate failed to improve.).
Today the consensus forecasts a smooth and self-sustaining recovery, of which I am also skeptical.
The earnings season has already uncovered ample evidence for concern.
is a good example of a short-cycle company that is experiencing weakening orders in the current soft patch.
Emerson is not an outlier, however, as
continue to indicate a weakening domestic recovery. There were other examples in the past week as well -- for instance, the disappointing guidance for organic growth at
Below is Emerson's cautious commentary on its second-quarter 2011 earnings call (out early on Wednesday):
Emerson order growth remained solid in the trailing three-month period, but we have seen a definite weakening of general business activity in June and July. U.S. and European economies have clearly slowed and entered a soft-patch and it remains unclear if they will improve much in the second half of the calendar year. Industrial-related businesses are still strong, but we expect them eventually to soften due to the generally poor economic environment (the negative budget discourse in Washington D.C. and ongoing European debt crisis) and weakening trends, as well as more challenging comparisons. Consumer and discretionary spending remain weak and any recovery in these end markets continues to be pushed out. Currency exchange rates positively impacted orders by approximately 7 percentage points.
I continue to believe that top-down strategists' corporate profits (and growth) forecasts are too optimistic, as it is important to recognize a tepid recovery slope is vulnerable to external policy and other shocks -- for instance, business and consumer confidence is currently being hurt by the budget rancor.
To be sure, some of the soft patch has been discounted in the recent market weakness.
Indeed, at current
levels, my view is that risk and reward is relatively neutral. An expected S&P range of 1250-1350 remains my baseline expectation.
But, for now, I would steer clear of most economically sensitive companies with a short-cycle mix that are levered to global industrial and economic recovery (Emerson, Danaher, 3M, etc.) until the extent of the current soft patch is more clear. Instead, I would begin looking at and favor some of the "broken" industry sectors (financials).
The smooth self-sustaining expectations of the bullish cabal remains in jeopardy, rendering multiple expansion less likely, as profit growth becomes less certain and more volatile.
My long-held baseline expectation for lumpy and inconsistent economic growth remains very much intact -- the market environment will be difficult for investment managers and corporate managers to navigate. That projected unevenness reduces my upside S&P target to levels that are well-below most strategists.
Doug Kass writes daily for
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At the time of publication, Kass and/or his funds were short DHR and GE, although holdings can change at any time.
Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.