If we had any hopes about the corporate earnings of big-cap companies improving, those hopes are close to being thrown out the window now. The most basic calculation of profit includes two factors: sales and costs. If costs increase, then corporate earnings suffer. If sales decrease, corporate earnings suffer again. At this point, we know that third-quarter corporate earnings at big-cap companies were hit by softened revenues due to slowing demand from their customers and the uncertainty of the global economy. Now big companies face another issue that could take their corporate earnings even lower. Import prices in the U.S. economy have been increasing for three consecutive months. In October, there was an increase of 0.5%. September and August witnessed an increase of 1.1% and 1.2%, respectively. (Source: Bureau of Labor Statistics, November 9, 2012.) The average import-price increase per month since 1990 has been 0.2%. August, September and October 2012 all showed that import prices increased by much more than the average. These price increases mean that corporate earnings of big-cap companies that rely on imports are going to suffer. Third-quarter profits were blamed on slowing demand, but I believe fourth-quarter corporate earnings will also be pressured due to rising prices. The main culprit for all these increases is the falling U.S. dollar, as it significantly affects commodities prices. But I’m not going to discuss that much. All I have to say is: look at the chart below of the U.S. Dollar Index. The Index has sunk more than three percent from the beginning of August to now. In the same period, import prices have increased 2.8%. Chart courtesy of www.StockCharts.com Big-cap companies go around the world to shop for their supplies to make goods…to bring down their costs and increase their corporate earnings. With the falling U.S. dollar, their buying power is lower. Previously, big-cap companies were able to force these price increases onto their costumers, but that will also cause the prices of goods to rise. To defend their pockets, big-cap companies will buy less or move toward substitutes, as slowing sales and increasing costs will put pressure on corporate earnings. Keeping all this in mind, the falling corporate earnings of big-cap companies will cause the stock markets to go lower. It’s that simple. I don’t see any real recovery in the economy anytime soon, and the prevailing economic condition could last for a long time. Instead of economic growth, inflation caused by rising prices is more likely. Michael’s Personal Notes : I was recently talking to a friend of mine who considers himself a gold bear, somewhat of a rarity amongst my contemporaries. He believes gold prices are in a bubble and ... Read More