The Other Cliff

 | Oct 22, 2012 | 3:49 PM EDT
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We talk a lot about the fiscal cliff these days, and we should because on conference call after call we are hearing CEOs say that uncertainty in Washington over the budget is casting a pall on their own businesses.

It would be horrific for earnings if we plunge over the fiscal cliff. Nevertheless, there is another cliff that's been revealed in this quarter and its one that should have been anticipated but hasn't been. Let's call it the earnings cliff.

Right now, many companies are seeing the slowdown in Europe and China first hand. Others are seeing some weakness in the U.S., although, by all means, the U.S. is the strongest of this trio.

Unlike the fiscal cliff, though, this cliff can have a bridge over it. Governments can combat the earnings cliff by stimulating their economies. Right now, you are seeing the U.S. holding up well because the Federal Reserve is making cheap money available for anyone who wants to buy a house or a car. That doesn't mean that those who want to get a loan will be able to. The banks are still running scared, and the paperwork to get the loans is simply stunning. It's almost as if the banks don't want to make the loans and are hiding behind the paperwork as a way to do so.

At least the Fed is trying, which is why the banks and the housing plays have been so strong throughout this selloff.

Europe? The governments there are not in bridge-building mode. They are still trying policies that widen the cliffs, inflicting tremendous austerity plans that are stunting growth and hurting earnings across the board. You are seeing it in our tech companies, which have made Europe a key part of their growth strategies, and that's turned out to be a terrible bet. It's a chief reason why many tech stocks, even after this huge decline, can't be owned.

Then there is china. Right now China's the battleground. We have some companies calling the bottom in China, saying that the government's bridging the earnings cliff by pumping money directly into the economy and starting infrastructure projects to bring the water and sewer plants up to snuff, many of which haven't been updated in a hundred years' time.

We heard this view from Alcoa (AA) the other day, as the CEO, Klaus Kleinfeld, has said that the Chinese government recognizes it was too harsh on the economy and is now in full economic blast mode. Caterpillar (CAT) was more circumspect on its conference call, but Joy Global (JOY) recently told me on Mad Money that China's bottomed already. Michael Sutherlin, the CEO, ought to know, as China's the biggest growth market for his huge mining machines.

The bridge over China's earnings cliff is a principal reason why the industrials rallied today. That and a health turn in many of the most basic commodities like iron ore, which may have bottomed just a few weeks ago, and the Baltic Freight rates, which stopped going down just last month because of Chinese import traffic.

I think if you are selling stocks, you must be mindful of which cliff you fear going over. If it is Europe, be my guest. There's nothing good happening there yet. The U.S? Because of Ben Bernanke's bravery, I am more worried about the fiscal, not the earnings cliff. China? Frankly, I grow more and more optimistic each day, and this day, despite the decline in our stocks, was no different.

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