Just back from 12 days in Italy. Say what you will about the Italian economy (it is a mess) or the bureaucracy (it's frightful — even renting a car is an odyssey), despite it all, nobody knows how to have a better time than the Italians.
How big a mess is it? Everyone — and I mean everyone — complained about the higher taxes they are paying under Prime Minister Mario Monti. To assuage the outrage, Monti last Friday announced that he would forego more taxes and instead cut government spending even more.
But the Italian government workers are on the verge of revolt. Today, Italy's national statistic agency — ISTAT — threatened to stop issuing statistics on the economy because it doesn't have the manpower to do it anymore.
"Spending cuts are putting ISTAT at risk. From January onwards we will not issue any statistics," ISTAT President Enrico Giovannini was quoted as saying.
By the way, 70 percent of the statistics that the agency gathers are not for the Italians — it's for the European Union.
As for Monti, there was universal support for him among the dozens of waitresses, barmen, cab drivers, tour operators, and everyday Italians I was able to speak with — but the support is not deep. "All we have seen under Monti is more taxes, nothing else," one despondent tour operator told me, who made it clear he supported Monti out of the lack of alternatives. But if the economy did not start improving soon, that support for Monti will fade fast.
Waiting in the wings is ... former Prime Minister Silvio Berlusconi. Yes, him.
You want a real crisis? The Italian wine industry is worried about the weather. Really worried. You think it's hot in New York? You think grain crops in the Midwest are under pressure from the drought? In central Italy last week, the temperatures were hovering around 40 degrees Celsius (about 100 degrees Fahrenheit), way too hot. On top of it, there's a prolonged dry spell; one Italian wine grower I visited (research, research), surveying acres of parched grapes on her hillside vineyard outside of Orvieto, told me the grape crop was in danger of ripening too early. That means too much sugar in the grapes, less acidity, making for a less balanced, less sellable wine.
That’s all they need: Wine sales in Italy are already down due to the poor economy, so sales of high-end wine to the U.S. and Asia is a high priority for Italian wine growers. But to do that, they need high-end product.
1) Everyone is talking about the slowdown in China. But the Hong Kong stock market really moved overnight (down 2 percent) when Chow Tai Fook, the world's largest jewelry retailer, reported same-store sales in Hong Kong and Macau declined 1 percent last quarter.
A decline in jewelry sales, where tourists from the mainland come regularly to shop? Wait a minute — the burgeoning middle class in China is expected to be interested in buying diamonds and luxury items in a straight line into — well, infinity, right? A decline is not in the playbook.
True, same store sales in mainland China were up 10 percent, but even that was light.
From Burberry to Cartier, retailers have talked of lower sales in China this week. But it's not just retailers, and it's not just China — it's Asia.
Levi’s CEO Chip Bergh said Tuesday: "...for the first time in two years our business in Asia declined." Cummins CEO Tom Linebarger also said on Tuesday: “China and India is not improving as we had previously expected.”
Srecond-quarter gross domestic product numbers are out for China tomorrow, and there's plenty of anxiety over that. Consensus is for a gain of 7.6 percent.
2) Global markets decline; the Bank of Japan refrained from expanding monetary stimulus, but look elsewhere — Brazil and South Korea cut rates — the Brazilians? Aren't they the ones perpetually worried about inflation? Not this time around: "The risk to the inflation outlook remain limited," the Brazilian central bank said.
Lower inflation looks to be affecting more than bank attitudes: Gold and gold stocks have been weak for days.
3) Earnings, earnings. I'll make this simple: The second quarter is expected to be the worst quarter of the year; it's the third and fourth quarters that worry me.
The expectations for the second quarter have been low from the get-go: There was only growth of 1.7 percent expected for the S&P 500 index. Pretty anemic. Right now expectations are for a decline of almost 2 percent. That is a very small change.
Here's the problem: The macro outlook has deteriorated, so companies will be particularly cautious on the third quarter. That's not good: third-quarter earnings were expected to be up 5.5 percent at the beginning of the second quarter, but the numbers have been steadily declining, today at 2.71 percent, and that is likely to come down and may even go negative.
The problem is that much of the earnings growth this year was supposed to be generated in the third quarter and particularly in the fourth quarter. Analysts are looking for earnings growth of about 14 percent for the fourth quarter, with much of the gain coming from improving bank earnings.
—By CNBC’s Bob Pisani
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