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The Problem With Reality in 2014

U.S. Economy Halfway to a Recession AlreadyEarlier this month, Jeremy Siegal, a well-known “bull” on CNBC, took to the airwaves to predict the Dow Jones Industrial Average would go beyond 18,000 by the end of this year. Acknowledging overpriced valuations on the key stock indices are being ignored, he argued historical valuations should be taken with a grain of salt and nothing more. (Source: CNBC, July 2, 2014.)

Sadly, it’s not only Jeremy Siegal who has this point of view. Many other stock advisors who were previously bearish have thrown in the towel and turned bullish towards key stock indices—regardless of what the historical stock market valuation tools are saying.

We are getting to the point where today’s mentality about key stock indices—the sheer bullish belief stocks will only move higher—has surpassed the optimism that was prevalent in the stock market in 2007, before stocks crashed.

At the very core, when you pull away the stock buyback programs and the Fed’s tapering of the money supply and interest rates, there is one main factor that drives key stock indices higher or lower: corporate earnings. So, for key stock indices to continue to make new highs, corporate profits need to rise.

But there are two blatant threats … Read More


How Many Warnings Can You Give?

Why Stocks Will Not End 2014 WellI’ve been writing in these pages for most of 2014 on how the stock market has become one huge bubble. On my short list:

The economy is weak. The U.S. experienced negative growth in the first quarter of 2014. If the same thing happens in the second quarter (we’ll soon know), we will be in a recession again. Revenue growth at big companies is almost non-existent.

Insiders at public companies are selling stocks (in the companies they work for) at a record pace.

The amount of money investors have borrowed to buy stocks is at a record high (a negative for the stock market).

The VIX “Fear” index, which measures the amount of fear investors have about stocks declining, is near a record low (another negative for the stock market).

Bullishness among stock advisors, as measured by Investors Intelligence, is near a record high (again, a negative for the stock market).

The Federal Reserve has issued its economic outlook, and it says interest rates will be much higher at the end of 2015 than they are today and that they will continue moving upward in 2016.

The Federal Reserve has said it will be out of the money printing … Read More


Investors Forgot Everything That Happened Just a Few Years Ago?

The Economy and the Stock MarketThere are two important charts I want my readers to see this morning.

The first is a chart that is an indirect measure of demand in the global economy. Right now, the Baltic Dry Index (BDI) sits at its lowest level of the year. Since the beginning of 2014, the BDI has fallen 60%.

The BDI measures the cost of moving major raw materials by sea in the global economy. The thinking is that the lower the cost to move goods by ship, the lesser the amount of goods to move (a strict demand/supply price situation).

BAtic Dry Index (EOD) INDX Chart Chart courtesy of www.StockCharts.com

What’s happening with the steep drop in the BDI can be seen in a corresponding slowdown in the global economy.

Germany, the fourth-biggest economy in the world, saw its industrial production decline by 1.8% in May after falling 0.3% in April. (Source: Destatis, July 7, 2014.)

Great Britain, the sixth-biggest market in the global economy, saw its production decline 0.7% in May, while its manufacturing decreased 1.3%. (Source: Office for National Statistics, July 8, 2014.)

France, the fifth-biggest economy, reports no gross domestic product (GDP) growth in the country in the first quarter of 2014. (Source: MarketWatch, July 8, … Read More


Taking It Too Far Again…

Why Interest Rates Will Rise Faster and Sooner Than Most ThinkWhat led to the 2008/2009 stock market and real estate crash and subsequent Great Recession can be attributed to one factor: the sharp rise in interest rates that preceded that period.

In May of 2004, the federal funds rate, the bellwether rate upon which all interest rates in the U.S. are based, was one percent. The Federal Reserve, sensing the economy was getting overheated, started raising interest rates quickly. Three years later, by May 2007, the federal funds rate was 5.3%.

Any way you look at it, the 430% rise in interest rates over a three-year period killed stocks, real estate, and the economy.

My studies show the Federal Reserve has historically taken things too far when setting its monetary policy. It raised interest rates far too quickly in the 2004–2007 period. And I believe it dropped rates far too fast since 2009 and has kept them low (if you call zero “low”) for far too long.

In the same way investors suffered in 2008–2009 as the Fed moved to quickly raise rates, I believe we will soon suffer as the Fed is forced to quickly raise interest rates once more while the economy overheats.

It’s all very simple. The … Read More


What Investors Need to Know About the Current Market Cycle

What These Large-Caps Are Revealing About the Current Stock Market CycleIf there ever was an equity security epitomizing the notion that the stock market is a leading indicator, Caterpillar Inc. (CAT) would fit the bill.

This manufacturer is in slow-growth mode, but it’s been going up on the stock market as institutional investors bet on a global resurgence for the demand of construction and other heavy equipment and engines.

And the betting’s been pretty fierce. Caterpillar was priced at $90.00 a share at the beginning of the year. Now, it’s $110.00, which is a substantial move for such a mature large-cap. (See “Rising Earnings Estimates the New Catalyst for Stocks?”)

The stock actually offers a pretty decent dividend. It’s currently around 2.6%.

While sales and earnings in its upcoming quarter (due out July 24, 2014) are expected to be very flat, Street analysts are putting their focus on 2015. Sales and earnings estimates for next year are accelerating, and it’s fuel for institutional investors with money to invest.

The notion that the stock market leads actual economic performance is very real. Just like there are cycles in the economy, the stock market itself is highly cyclical. And while every secular bull market occurs for different reasons, there are … Read More


Stock Market Pricing-in a Recession?

U.S. Economy Close to Technical RecessionBy no surprise to me whatsoever, the government’s third and final estimate of first-quarter U.S. gross domestic product (GDP) came in at a negative annual pace of 2.9%. (Source: U.S. Bureau of Economic Analysis, June 25, 2014.) The U.S. economy’s growth rate in the first quarter of this year was the worst since 2009.

I’ve been writing since the fall of 2013 that the U.S. economy would see an economic slowdown in 2014. I have been one of the few economists warning of a recession in 2014. My calls are not to scare or create fear; rather, they are based on the government’s own data.

Not to boast, but it’s like the creators of the first-quarter U.S. GDP report have been reading Profit Confidential! Everything we have been warning about came out in this most recent GDP report.

I’ve been harping on about how the U.S. consumer was tapped out…and low and behold, consumer spending in the U.S. economy increased by only one percent in the first quarter of 2014. In the fourth quarter of 2013, consumer spending increased by 3.3%. The fifth year into the so-called economic “recovery” and consumers are pulling back on spending for the … Read More


What Do This Quarter’s Mixed Earnings Results Mean?

Market May Be Entering a New Cycle—But Don't Buy Just Yet!Oracle Corporation (ORCL) announced a quarterly revenue gain of three percent, but Wall Street was looking for more and the company’s share price retreated on its earnings results.

If it weren’t for the Federal Reserve, we probably would be in a correction, if not a consolidation, which has been the broader market’s go-to trend when it should have retreated further.

It’s such a mixed bag out there both in terms of economic news and corporate reporting.

While I think dividend-paying blue chips have the advantage going into the second-quarter earnings season, if the Federal Reserve wasn’t so extremely sensitive to Wall Street, this market would probably be a lot lower.

Even the Fed’s recent language is assuaging. If this market had to operate on its own (with free market interest rates and liquidity), things would be a lot different.

But this isn’t the environment we live in. Economic history clearly supports the scenario that it doesn’t pay to fight the Fed and that Wall Street will move mountains when it has Fed certainty.

Lots of investors bemoan the quarterly earnings cycle or game, but I don’t. I want to know a public company’s up-to-date financial results as frequently as possible…. Read More


How to Create a Winning Portfolio in a Market at Its Highs

How to Build a Winning Portfolio in Four Simple StepsIt’s a difficult environment in which to be constructing new equity portfolios right now, mostly due to the very simple reason that the stock market is at an all-time record high and it’s likely that monetary policy will change soon.

But there is still a great deal of interest in equity securities and in a lot of cases, individuals require the income that they provide.

There are a lot of really good investment funds and money managers in the marketplace; but for those who wish to build and manage their own stock market portfolios, you want to approach the process methodically and with a great deal of care.

As a stockbroker, I learned a long time ago that financial products are typically sold not bought. Don’t let anyone sell you anything in this market—stocks are at all-time highs.

If you’re looking to the stock market to create a portfolio of companies, just remember that there is no rush to do so. Because of the financial crisis and subsequent recession, policy has been about the re-inflation of assets (mostly financial), and the stock market’s been going up based on the certainty that the Federal Reserve will be extremely accommodative.

Right or … Read More


Why We Are Closer to a Recession in 2014 Than You Think

U.S. Economy to Fall into a Recession This QuarterDon’t buy into the notion that there’s economic growth in America!

We’ve already seen U.S. gross domestic product (GDP) “unexpectedly” decline in the first quarter of 2014, and now there are signs of another contraction in the current quarter. (The technical definition of a recession is two negative quarters of GDP—we’re halfway there!)

As you know, consumer spending is the biggest part of our U.S. economy, accounting for about two-thirds of our GDP. And consumers are pulling back.

Consumer spending in the U.S. economy declined 0.26% in April from March. This was the first monthly decline since December of 2013. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 4, 2014.)

And while consumer spending is one indicator that suggests a recession may soon be coming into play in the U.S. economy, there’s also one very interesting phenomenon occurring that suggests the very same.

The Federal Reserve is serious about pulling back on its quantitative easing program. And in anticipation of the Fed pulling back on money printing (when it first indicated it would start tapering), the yields on bonds shot up.

But since 2014 began, and the Federal Reserve actually started to taper, the yield … Read More


Flight to Safety Rewarding These Top Stocks

Investors' Flight to Safety Putting These Stocks on TopMy dad is earning a few percentage points on his fixed-income yields. Fortunately for him, that’s sufficient to live on when combined with his monthly pension and savings. He has no mortgage and lives a pretty normal, but somewhat frugal life.

In fact, Dad has always favored the fixed-income market for his investments as he doesn’t like risk. But for many Americans, the need for an ample flow of income during your retirement is a necessity for surviving, especially if the Great Recession wiped out your 401(k).

With the 10-year bond yield languishing below three percent, it would be difficult to live on this income, unless you have sufficient bond holdings or other avenues of income, like my dad’s pension. Having a more frugal or cost-conscious lifestyle also helps for many in retirement.

Yet the one area that I feel has been extremely positive for investors over the past five years is the dividend paying stocks that provide far higher yields and preferred tax treatment versus bonds. My dad may not be open to dividend paying stocks, but it makes sense for many other investors.

In reality, the Dow Jones and dividend paying stocks have returned some impressive capital gains … Read More


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