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Prospect of U.S. profit drop rises for investors

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NEW YORK (Reuters) – Investors are growing more fearful that U.S. companies’ profits could shrink this year following Apple’s warning of soft demand in China, coupled with mounting evidence of a drag from tariffs, a global slowdown and fading tailwinds from tax cuts.

FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., December 27, 2018. REUTERS/Eduardo Munoz

Profit-growth estimates for 2019 had already been eroding for months before widely held Apple Inc (AAPL.O) darkened the outlook further last week with the first cut to its sales forecast in more than 15 years.

Earnings this year were never going to rise as quickly as in 2018, when federal tax cuts fueled growth rates above 20 percent for S&P 500 .SPX companies for much of the year, according to Refinitiv’s IBES. For 2019, analysts now see profits growing by 6.8 percent, down sharply from an Oct. 1 estimate of 10.2 percent earnings growth.

Moreover, in the first half of 2019, profits are seen rising substantially more slowly than that pace, thanks largely to the rapid decline in forecasts for technology sector earnings, which should account for roughly a fifth of the index’s profits.

That has some investors watching for signs that U.S. stocks could slip into a profits recession, defined as at least two straight quarters of year-over-year earnings declines. The last of those occurred from July 2015 through June of 2016, which dovetailed with a broad run of stock market underperformance.

“You bet it’s on the radar,” said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, New York. “The Apple comments and where they’re headed – that’s going to cause estimates to come down even further.”

APPLE WARNING ‘GOES TO THE HEART’

Increased concern over the potential for an earnings recession comes at a turbulent time for stocks, with the S&P 500 registering its worst December performance since the Great Depression, only to rally more than 9 percent since hitting a 20-month low on Christmas Eve.

With the S&P 500 recently trading at 14 times expected earnings, down from a multiple of 18 a year ago, a key argument for market bulls is that stocks have become undervalued after the recent sell-off.

Apple’s news also highlights the potential impact of trade tensions between the two largest economies, the United States and China.

The warning from Apple “started to provide kind of a confirmation for the earnings recession folks out there,” said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana.

“Its impact goes beyond just its suppliers; it goes to the heart of investment psyche for a lot of folks,” he said.

Profit forecasts for technology companies have fallen more than for any sector other than energy, which has been buffeted by the collapse in oil prices.

S&P 500 tech .SPLRCT earnings are expected to decline year-over-year for the first three quarters of 2019, based on Refinitiv’s data, and deliver growth of just 2.6 percent this year, the lowest of any sector.

That is a big reversal from its long-standing role as a profit-growth leader. Tech, in the top three sectors ranked by profit growth in seven of the last eight quarters, is estimated to have delivered earnings per share growth of 23.2 percent in 2018.

To be sure, there are plenty of strategists who still say an earnings recession this year is unlikely, thanks to a relatively still solid U.S. economy. Friday’s jobs report helped support that view.

“Earnings recessions are exceptionally rare outside of an economic recession,” said Hans Olsen, chief investment officer of Fiduciary Trust Company in Boston. “I don’t think we are going to have another earnings recession, but it might feel like a recession.”

PROFIT RECESSION VS ECONOMIC RECESSION

Since 1968, as far back as Refinitiv’s data goes, the S&P 500 has had 10 earnings recessions, the longest spanning from the third quarter of 2007 to the third quarter of 2009. That roughly coincided with a financial crisis and the worst economic recession since the Great Depression.

While the last S&P 500 earnings recession occurred without an economic recession, that was an exception. Seven of the 10 profit recessions since 1968 have coincided with a formal economic recession.

(GRAPHIC: U.S. quarterly profit growth since 1968 – tmsnrt.rs/2H11rNA)

Financials, health care and other sectors could pick up some of the slack as tech earnings falter, some strategists say. This year’s estimates for those sectors have held up better than others, Refinitiv’s numbers show.

Adding to U.S. companies’ potential woes, a strengthening dollar could become an even bigger negative for many U.S. multinationals this year, strategists said.

The dollar index .DXY, which tracks the greenback against six major currencies, rose 1 percent during the fourth quarter and was up 4.4 percent year-over-year by the end of the quarter.

“People are just starting to talk about (dollar strength),” Fiduciary Trust’s Olsen said. Weaker oil prices will drag as well, he said, in a reversal of what occurred in 2018.

Top strategists at some big banks had been getting more pessimistic on earnings heading into the new year. Morgan Stanley in its outlook late last year said there was more than a 50 percent chance of a “modest earnings recession” in 2019.

Goldman Sachs strategists nodded to the weakening trend in a recent note: “We expect a sharp slowdown in profit growth in all regions this year, particularly in the U.S., coupled with significant downgrades to consensus expectations.”

Reporting by Caroline Valetkevitch; additional reporting by Chuck Mikolajczak; Editing by Dan Burns and Dan Grebler

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Future of Ottawa: Coffee with Francis Bueckert

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Francis Bueckert: When it comes to the current landscape of coffee-roasting companies and independent cafes in Ottawa, I think we are at a really interesting moment in time. There are more local roasters that are doing artisanal small-batch production—with more attention to the quality and origin of the beans.

With larger corporations such as Starbucks closing locations, it has opened a bit of space for local players to grow. We have been lucky to work with many folks in the coffee-roasting community, and we have found that there is a willingness to collaborate among different coffee roasters. For example, when Cloudforest started back in 2014, we were roasting our coffee at Happy Goat and it was the expertise of their head roaster Hans that helped me learn how to roast. Other companies such as Brown Bag Coffee have also lent a hand when we needed extra roasting capacity. There are others, such as Lulo, Mighty Valley Coffee, Bluebarn, The Artery, and Little Victories that are also part of the growing local coffee community. It’s small roasters like these who have shown me what a coffee community can look like, and that we can help to elevate each other, rather than being locked in competition.

If you care to make a prediction… What’s happening to the local café industry in 2021?

We believe that there is hope and that 2021 can be a big pivot year for small roasters and cafes.

This year will not be ideal from a business point of view. However, it could create a shift in people’s attitude toward where they get their coffee. We are holding out hope that people will support the roasters and cafes that are local to help them economically survive what is in all reality a very difficult time.

It all depends on where consumers decide to go this year. People are starting to recognize that supporting large corporations at this moment will be at the cost of the local roasters and cafes. There is the growing realization that a future where there is only Amazon, Walmart, and Starbucks would be pretty bleak. So we have an opportunity this year to support the kind of local businesses that we want to see thrive.

In your wildest dreams, what will the landscape for local coffee roasters and cafés look like in your lifetime?

In my wildest dreams, all of the coffee roasters and cafés would be locally owned and independent. They would all be focused on direct trade and artisanal coffee. Each different coffee roaster and café would know exactly where their coffee came from. Ideally, each company would be a partnership between the farmers who grow the beans and the people here selling them. There would be a focus on how to cooperate and collaborate with the farmers in the countries of origin to share the benefits around. We would all work together and share orders of cups, lids, and other packaging so that we could get better bulk pricing. In this way, we would make our local coffee community so efficient that the large corporate coffee companies wouldn’t even be able to compete.

We would also like to see people use coffee as a way to create social good. For example, we started Cloudforest as a way of helping support farmers in Ecuador who were taking a stand against large mining companies. This remote community stood up to protect their environment, so that they could have clean drinking water and soil for the next generation. They started an organic coffee cooperative to help show that there are other models of development, and we are doing our part year after year to help support their vision. They have a vision of development that does not include mass deforestation and contamination, and organic coffee is a key (among others) to show that another way forward is possible.

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Special events in the Ottawa Valley dominate annual OVTA tourism awards

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The Ottawa Valley Tourist Association hopes that its annual tourism awards will provide a little sunshine during what is a dark time for local tourism operators because of the pandemic.

The Ottawa Valley Tourism Awards are presented annually by the Ottawa Valley Tourist Association (OVTA) to individuals, businesses, and events that recognize the importance of working together for the growth of the local tourism industry, as well as offering exceptional visitor experiences.

“After a year that saw a lot of businesses in the hospitality and tourism industry being challenged like never before, the annual Ottawa Valley Tourism Awards represent a bit of light on the horizon” said Chris Hinsperger, co-owner of the Bonnechere Caves.

The Ottawa Valley Tourist Association’s (OVTA) Awards Committee co-chairpersons, Meghan James and Chris Hinsperger, said they were very pleased with the recent nominations received, especially in the Special Events category. Submissions were received for The Farm to Fork Dinner Series at the Whitewater Inn; Light up the Valley; The Eganville Curling Clubs’ Rock the Rings; The Ontario Festival of Small Halls ; The Bonnechere Caves On-line Underground Concert Series; The Opeongo Nordic Ski Clubs’ Ski Loppet; The Tour de Bonnechere — Ghost de Tour 2020; and The Bonnechere Caves Rock ‘n Roll Parking Lot Picnic.

“During a time when communities were challenged, it is nice to see that people still made an effort to get together and celebrate, albeit under certain conditions. It just shows the creativity and resiliency of our tourism Community here in the valley” said Meghan James, director of sales at the Pembroke Best Western.

There are three Award categories: The Marilyn Alexander Tourism Champion Award, The Business of Distinction and The Special Event of the Year.

Hinsperger, is excited about this year’s awards.

“During this pandemic the hospitality and tourism industry was the first to be hit, was the hardest hit and will be the last of our industries to fully recover. As Valley entrepreneurs we owe it to ourselves, to our businesses and to our communities to be an active part of that recovery. Our livelihood and economic recovery depends on our efforts. And we will get back to welcoming people from all over the world to share a little bit of the place we are privileged to call home. This awards process leaves myself and others fully optimistic about our positive outcomes.”

Award winners will be announced at the Ottawa Valley Tourist Association’s virtual annual general meeting on Monday, May 31.

The OVTA is the destination marketing organization for the Upper Ottawa Valley and proudly represents more than 200 tourism businesses, comprised of attractions and outfitters, accommodation, food, beverage and retail establishments, artists and galleries, municipalities, as well as media and industry suppliers. The OVTA is supported by the County of Renfrew, Renfrew County municipalities and the City of Pembroke.

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Future of Ottawa: Farming with Jeremy Colbeck

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Jeremy Colbeck: Well first, let’s talk about what we mean by farming. Although farms, and farming as an occupation, are in decline across Canada, they are still a major part of our rural landscape. That’s even more true for a strange city like Ottawa which includes a LOT of rural areas and whose urban boundary takes, what, three hours to cross? About 40 per cent of the rural land in Ottawa is farmland. Most of that farming is corn and soybean cash-crop, as well as some dairy and livestock farming. That’s mostly conventional farming (the kind that is profitable but not exactly where you take your kids on a Saturday).

There are also a lot of agri-tourism businesses in Ottawa, which give you that oh-so-good Saturday spot for family donkey-petting and apple-picking. And it’s totally understandable from a business perspective, but sometimes surprising to find out, that even though they grow some of the Christmas trees they sell, they might also be reselling some that come from much larger farms far away. The farmland around Ottawa is also inflated in price because of its proximity to the city, where it is in demand by would-be hobby farmers—folks who want to do some farming on their property in their spare time but make their money (to subsidize their small-scale farming habit) elsewhere. Unfortunately, many of these properties will have large mansions built on them, which will then make them completely unaffordable for the average farmer

There’s also a segment of small-to-medium-sized Ottawa farms that grow “premium” (artisanal, unique, extra-fresh, ecologically- or organically-grown etc…) products that they sell directly to local eaters via farmers’ markets or other direct marketing channels, including on-farm stores and farm stands. That’s where BeetBox fits in.

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