One of the signs of a bear market is when there is little or no reaction to what would ordinarily be good news. Although Eurozone industrial production rose a better-than-expected 0.6% in May, European stock markets continue to sell-off on Thursday in the ongoing global equity sell-off. While good news is good news, this may be an example where investors would do well to listen to the companies and ignore the government officials and analysts.
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A Recovery in Industrial Production ... Sort of
Industrial production in the Eurozone showed a surprising 0.6% sequential improvement in May, helping to reverse some of the 1.1% decline seen in April. Unfortunately, this is not an especially "clean" number, due to the influence of holidays. Moreover, looking at the numbers on a longer-term basis shows that industrial production in Europe is still on track for a 2 to 3% decline for the full year.
Energy output was down 2.3% in May, while consumer goods saw a reasonable rebound. Unfortunately, machinery (a key export for countries like Germany) was down slightly, while motor vehicle production was up.
SEE: 5 Other Countries Affected By A Troubled Europe
Companies Are Getting More and More Conservative
The problem with any economic data is that it tends to come in well after the fact, and it is subject to various statistical anomalies and influences. For example, U.S. inflation data has been relatively calm as reported, but companies across the spectrum have seen a real and meaningful increase in their cost of production.
With that in mind, I think it makes more sense to listen to what industrial companies are actually saying. It wasn't too long ago that Siemens (NYSE:SI) was publicly acknowledging that full-year guidance was going to be difficult to achieve and that conditions were not getting any better in Europe, while China and other emerging markets seemed to be getting worse.
SEE: According To Siemens, An Industrial Rebound May Not Be Around The Corner
More recently, Cummins (NYSE:CMI) revised its guidance down to a point where management no longer sees much prospect for revenue growth in 2012. Given that Cummins' engines and components go into a wide range of on-the-road and off-road vehicles, that's a pretty grim sign for the outlook on heavy vehicle production.
But that's not all. Steel companies like Nucor (NYSE:NUE) and ArcelorMittal (NYSE:MT) aren't facing the same sort of inventory overhangs that crushed performance years ago, but demand has been pretty soft and numbers are coming down across the sector as the companies can't make price increases stick. Similarly, coal stocks are reeling as global demand for thermal and metallurgical coal has failed to firm up.
SEE: Back To The Future With ArcelorMittal
Still Room for Pain
Looking at the sell-side numbers for many major global industrial companies (names such as Caterpillar (NYSE:CAT), ABB (NYSE:ABB), GE (NYSE:GE) and Siemens), it looks like more pain could be in store. Said differently, I think the sell-side is still too committed to a vision of a second-half recovery that is looking less and less likely (or at least less robust). That, in turn, means more potential for earnings misses and negative revisions, none of which will be good for valuations or stock performance.
The Bottom Line
If there's good news, it's that the markets seem to be ahead of the governments and analysts, as is so often the case. This recent downturn in the global equity markets would seem to reflect growing pessimism in the viability or vitality of a second-half recovery, as well as increasing risks that ongoing austerity measures will make a bad situation worse. With all of that in mind then, investors should get busy with their due diligence with an eye toward finding good long-term positions on sale later in the fall of this year.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.