David McAlvany to Moneynews: US Stocks Poised for Hefty Correction

Sunday, 28 Oct 2012 02:20 PM

By Forrest Jones and John Bachman

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U.S. stocks are due for a correction if companies continue to cut earnings outlooks, said David McAlvany, CEO of the McAlvany Financial Group.

Many market observers weren’t expecting a healthy third quarter in the first place, and many earnings results hitting the wire these days are disappointing.

More troubling, however, is that companies that slashed 2012 earnings outlooks are back at it again.

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Caterpillar, the world's largest maker of construction equipment, met expectations, though the company cut earnings forecasts for the second time this year.

Editor's Note: 5 Signs Stock Market Will Collapse in 2013

Caterpillar’s third-quarter net income hit $1.7 billion, compared with $1.14 billion a year earlier.

Third-quarter revenue rose 5 percent on year to $16.45 billion.

Given that Caterpillar’s business reflects the health of the country — when the economy grows it needs more heavy machinery to help build real estate, develop infrastructure and mine for commodities — cuts to outlooks signals a correction could in the making.

“A bellwether like Caterpillar is a great example. They came in meeting their expected numbers, but their forward-looking comments were all negative,” McAlvany told Newsmax TV in an exclusive interview.

“Investors want to see positive traction. Investors want to know that the worst is behind them.”

Stock prices have risen this year, namely due to Federal Reserve stimulus measures.

The Federal Reserve recently announced it plans to spend $40 billion a month buying mortgage-backed securities from banks to pump liquidity into the financial system in a way that pushes down interest rates to spur recovery, a monetary policy measure known as quantitative easing.

Side effects to such a policy tool — branded by many as printing money out of thin air — include a weaker dollar, rising stock and commodity prices and mounting inflationary pressures.

Most stock-market gains stem from past quantitative-easing measures that pumped a combined $2.3 trillion in inflation-fueling liquidity into the economy on top of other stimulus tools.

Editor's Note: 5 Signs Stock Market Will Collapse in 2013

Poor earnings outlooks, however, might mean the end of the rally.

“I think it is time for a correction because frankly what we have seen through the summer months was a series of bad earnings expectations reported for this particular quarter and frankly some non-supportive economic news. In spite of that we saw the stock market continue to march higher,” McAlvany said.

Like past busts throughout the 20th century, stock prices have been moving up on very low volume, while most economic indicators, ranging from quarterly growth rates to monthly jobs reports, have pointed to an economy in tepid recovery.

“What that says to me as a money manager is that we are in a very frail territory, and it doesn’t take much to see a crack and that crack widen very quickly,” McAlvany said.

“If something were to turn sentiment, whether it was a geopolitical event or just a particularly bad earnings report for one of the golden lovelies — if it were an Apple, if it were a Google, the darlings of Wall Street today — that could send shares down across the board.”

So what would the correction look like?

“There is probably a cap at 14,000 on the Dow, and I think at the low side you could see 11,500 initially with 10,000 on a worst-case scenario,” according to McAlvany.

Gold, meanwhile, will continue to rise, thanks to loose monetary policies around the world, as the Fed isn’t the only monetary authority stimulating its economy.

The Bank of England, the European Central Bank and the Bank of Japan have carried out similar measures of various degrees in intensity.

As a result, more and more central banks are stocking up on gold positions.

Gold traditionally serves as a hedge to weakening paper currencies, the dollar especially.

Editor's Note: 5 Signs Stock Market Will Collapse in 2013

Furthermore, despite complaints out of the United States that China keeps its currency, the yuan, artificially cheap to give it an unfair edge in the global trade arena, the country will eventually appreciate the unit as its economy goes from a maker of cheap goods for export to a wealthier nation that consumes more of what it produces.

That’s going to hike prices of goods Americans buy with made-in-China tags.

“What that means for the average American is what you used to be able to buy at Wal-Mart very inexpensively is going to be increasing in price. Everything that we import from China will be increasing in price,” McAlvany said.

Combine that with a weaker dollar and greater demand for gold, and the world might be witnessing lasting change to the current currency system, which was born in the ashes of World War II at the Bretton Woods Conference. Bretton Woods created the modern monetary and financial framework that made the U.S. dollar the world’s reserve currency.

“The biggest concern for me does come back to a currency issue, but it is not a question of the Chinese manipulating the currency. I think what we are watching happen with central banks accumulating gold is something utterly revolutionary like 1968 to 1971, when there was a brief window of time where central banks around the world started to distrust the U.S. dollar and the post-Bretton Woods system,” McAlvany said.

“The fact that central banks are accumulating massive amounts of gold says that they are anticipating a major change in the international monetary regime, and I think that has the dollar side-lighted to some degree, moving out of the limelight. Still a very important currency, but not the sole monopoly in the world’s currency system,” he added.

“To me, that is the greatest concern. Dollar degradation as the world currency system changes, with a greater focus on gold stability and away from the U.S. dollar. That has major implications for the U.S. consumer.”

Editor's Note: 5 Signs Stock Market Will Collapse in 2013

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