Stocks held hostage as S&P 500 CEOs plan to cut spending

Fed Purchases

Federal Open Market Committee participants on Dec. 12 lowered their forecasts for growth next year. They now see the economy expanding as little as 2.3 percent, compared with at least 2.5 percent in September. The average pace of growth for the decade through 2007 was 3 percent. The economic slowdown is prompting companies to curtail technology spending and pushing consumers to favor mobile devices over personal computers, eroding profitability at Intel Corp.

Chief Financial Officer Stacy J. Smith said in an Oct. 16 call with analysts that the Santa Clara, California-based company will reduce investment in the fourth quarter. Analysts estimate an 11 percent cut next year to $10 billion after a 7.6 percent rise in 2012. The stock has tumbled 15 percent this year.

Capital Budgets

“Semiconductors in general are seeing a lower-than-normal seasonal fourth quarter because we’re already feeling the fiscal cliff,” Doug Freedman, a San Francisco-based RBC Capital Markets analyst, said by phone on Dec. 13. “Capital budgets and people’s nervousness over the ability for macro growth to continue have already affected their spending patterns. Up and down the supply chain, we’re seeing cautionary behavior.”

Clay Jones, the CEO of Rockwell Collins, said in a phone interview on Nov. 7 that the aerospace supplier may cut about 6 percent of its workforce, or about 1,250 jobs, in part to prepare for lower military spending. Defense accounted for about 55 percent of Rockwell Collins’s revenue in the fiscal year ended in September. Shares are up 1.8 percent this year and 20 percent since hitting a low in June. Analysts estimate capital expenditures will decline 6.1 percent in 2013.

“We have no idea within the realm of 10 percent what the defense budget of the U.S. is going to be,” Jones said in an interview from Cedar Rapids, Iowa, on Nov. 7. “I am planning for the worst.”

Verizon Spending

Verizon, the second-largest U.S. phone company, said on Oct. 18 that spending for the first nine months of the year declined by more than $1 billion from the year-earlier period. Chief Financial Officer Francis Shammo said last month at a conference the number probably won’t rise in 2013.

Executives are delaying new contracts and investment decisions due to “the pending fiscal cliff, potential tax reform and other policy changes that may take place,” Shammo said in a call with analysts on Oct. 18 from New York.

The rate on dividends for high-income taxpayers may rise next year to 43.4 percent from 15 percent. More than 140 companies in the Russell 3000 Index, which represents about 98 percent of the U.S. equity market, have declared $18.7 billion worth of special dividends since Sept. 1, according to Bloomberg data. The payouts are more than three times the average market value of companies in the gauge, data show.

While distributions show corporate leaders are confident enough to pay out some of their cash, it also signals they’re not optimistic enough to invest in larger projects, according to Malcolm Polley, who manages $1.1 billion as chief investment officer at Stewart Capital Advisors LLC in Indiana, Pennsylvania.

“You have a lot of companies holding off spending,” Polley said in a Dec. 13 phone interview. “There’s a real risk that capex across the board declines in 2013.”

Bloomberg News

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