Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Budget Cuts

Much like a company or a household, to properly run a government, revenue must meet or exceed expenditures. When spending is more than the revenue obtained, there is a budget deficit. One way to reduce the deficit is through budget cuts. Budget cuts for the government can come in many forms, including reducing services and administration. Ultimately, budget cuts are needed to maintain a balance between spending and revenue.

Why Trillion-Dollar Annual Deficits May Only Go Away Temporarily

By for Profit Confidential

Annual DeficitsPoliticians and the mainstream will certainly love this…

Last week, Moody’s Investors Service changed its outlook on the U.S. national debt from negative to stable. (Source: Reuters, July 18, 2013.)

Despite the credit reporting agency’s “upgrade” on U.S. national debt, my opinion remains the same: the U.S. national debt has taken on a life of its own, growing like a bad cancer with no cure in sight.

Consider this:

In June of this year, the U.S. government registered a surplus of $117 billion after a budget deficit of $139 billion in May. On the surface that sounds great. But look a little closer, and we see that interest paid on the U.S. national debt for the month of June was $93.03 billion.

In the fiscal year so far (October 2012 to June 2013), the U.S. government has paid $345.26 billion as interest. For the full fiscal year (ending October 31, 2013), interest rate expense on the U.S. national debt is expected to reach $420.61 billion. (Source: Department of the Treasury, Financial Management Service, July 11, 2013.)

That’s almost half a trillion per year on interest payments only! And we must remember the Federal Reserve is keeping interest rates artificially low. If interest rates doubled (which is not a long-shot concept, considering that even if rates did double from here, they would still be below the 30-year average), the government interest rate payments could read $1.0 trillion a year!

Looking at the U.S. national debt as a percentage of our gross domestic product (GDP), it stood at 105.07% at the end of the first quarter of this year. (Source: Federal Reserve … Read More

Higher Taxes: Who Cares? Not the Rich

By for Profit Confidential

Higher TaxesThere’s a belief that the rich become richer because they are frugal and know how to save. The budget cuts and tax increases at the beginning of the year saw higher income taxes for those earning over $400,000 annually. President Obama had hoped to place higher taxes on those making over $250,000 annually but had to settle for $400,000 as a compromise.

With the higher taxes, there was widespread fear that the affluent would halt their spending, which would ultimately impact consumer spending in the retail sector and gross domestic product (GDP) growth.

Well, here we are, four months into the year with higher taxes, and it appears that the affluent have continued to spend in the retail sector. The Shullman Luxury and Affluence Monthly Pulse is an excellent metric, detailing the spending habits of the wealthy in the retail sector. The research focuses on the luxury consumer group who spends on luxury goods, comprising of those households with income levels in excess of $500,000. The “affluent” group is defined as those households where the income is between $250,000 and $499,000.

The Shullman research indicated that 55% of the luxury consumers polled said the advent of higher taxes has not impacted their spending pattern in the retail sector. Moreover, about 61% of the affluent group offered a similar response. (Source: Frank, R., “Wealthy Say Higher Taxes Don’t Hurt Spending,” CNBC, March 27, 2013.) According to the research, less than 25% of luxury consumers said they would change their spending pattern this year.

Given the findings, it appears the luxury brand stocks will continue to fare well in the retail sector…. Read More

Who Cares About America’s Financial Mess? Let’s Just Print More Money

By for Profit Confidential

Cares About America’s Financial MessMoney printing by the Federal Reserve will continue into the near future. And while it will help America avert a recession, the flow of easy money will be disastrous over the longer term.

The reality is that the current bull market and rebound in the housing sector that has made some people very rich is a by-product of the Federal Reserve, as the central bank has built this artificial economy in America that’s driven by the availability of cheap money. Recall the subprime mortgage crisis in 2008 was also driven largely by cheap money.

The problem is that the Federal Reserve had some tough decisions to make. Either let the country revert back to a possible recession or offer loose monetary policy to drive spending. Of course, the Federal Reserve only really had one choice.

While I agree with the Federal Reserve, with the economy now in recovery, you kind of have to wonder why the Federal Reserve continues to allow the flow of easy money; based on the central bank’s policy statement from its Federal Open Market Committee (FOMC) meeting last Wednesday, the cheap money will continue. The Federal Reserve will continue to buy $85.0 billion a month in bonds, adding to its debt in the process.

The Federal Reserve said it would maintain its interest rates at record-low levels until the country’s unemployment rate falls to 6.5% from the 7.7% in February. However, the Federal Reserve predicts this will not occur until sometime in 2015, so that’s another two years of easy money and the building up of massive debt. In reality, achieving an unemployment rate of 6.5% … Read More

Big Risk? Try This Strategy

By for Profit Confidential

Try This StrategyIn technical analysis, the chart tells a story. On Monday, the S&P 500 closed below 1,500 for the first time since February 4, driving fears of a multi-year topping, which I have discussed in the past. (Read “Alert: Bulls Should Be Careful Despite an Impressive January.”) The Dow Jones failed to hold above 14,000 for the third time over the past several weeks. With the decline, the NASDAQ, Dow Jones, S&P 500, and Russell 2000 are back in negative territory for February, with the final trading session taking place today. The trading is similar to what we saw in 2012 following a positive start, and 2012 turned out to be a year of caution, so you need a prudent investment strategy.

Currently, we have the sequestration budgetary cuts set to take effect tomorrow. The automatic $85.0 billion in annual budget cuts (the planned sequester will total $1.2 trillion over the next decade), could have a widespread impact on the country and the economy, including program cuts, job losses, and chaos. (Source: Cowan, R. and Lawder, D., “U.S. government won’t fall apart on “sequester” day of reckoning,” Reuters, February 20, 2013.)

Face it; the country’s money printing presses are stopping. The Federal Reserve suggested the possibility of needing to reduce or stop its $85.0 billion in monthly bond purchases. The Fed’s bond buying has added further liquidity into the economy to keep it going. This has also been the case with numerous central banks around the world. The problem is that the monetary easing has created an artificial economy that’s supported by the printing of money.

Then there’s the … Read More

Forget the Debt; There Are More Pressing Issues with the Eurozone

By for Profit Confidential

Forget the DebtWith all of the recent focus on the fiscal cliff and now earnings, traders appear to be forgetting the massive mess across the Atlantic in Europe and the eurozone. Remember Greece? The European debt crisis took Greece down with two separate bailouts. It was so dire for this beautiful country on the Mediterranean Sea that Greece actually needed a second bailout to pay the payments on its first emergency loan, or risk default!

The reality is that the eurozone financial crisis is still around—the market just pushed it aside for the election, the fiscal cliff, and now earnings. But be aware that the problem overseas is not going away. Consumer confidence in the eurozone came in at a muddled -26.5 in December, according to the European Commission. I’m not sure about you, but I believe this cannot be good.

The problem with the eurozone is not only the massive debt loans that have impacted Greece, Spain (read “Spain Is Delusional Believing Everything Is Okay.”), Ireland, Portugal, and Italy, but also the current recession and muted growth that will likely last into this year and perhaps into 2014.

At the same time, a major issue is the super-high unemployment rate encompassing Europe and the eurozone. In the eurozone, the unemployment rate was 11.8%, or about 18.8 million unemployed, in November, the highest number since the eurozone formed in 1999. (Source: “EU unemployment tops 26 million for 1st time,” Yahoo! Finance via Associated Press, January 8, 2013.)

Spain has about a quarter of its people out of work. Greece’s unemployment stands at 23.1%, while Portugal is at 15.7%, Ireland is … Read More

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Why Trillion-Dollar Annual Deficits May Only Go Away Temporarily

By for Profit Confidential

Annual DeficitsPoliticians and the mainstream will certainly love this…

Last week, Moody’s Investors Service changed its outlook on the U.S. national debt from negative to stable. (Source: Reuters, July 18, 2013.)

Despite the credit reporting agency’s “upgrade” on U.S. national debt, my opinion remains the same: the U.S. national debt has taken on a life of its own, growing like a bad cancer with no cure in sight.

Consider this:

In June of this year, the U.S. government registered a surplus of $117 billion after a budget deficit of $139 billion in May. On the surface that sounds great. But look a little closer, and we see that interest paid on the U.S. national debt for the month of June was $93.03 billion.

In the fiscal year so far (October 2012 to June 2013), the U.S. government has paid $345.26 billion as interest. For the full fiscal year (ending October 31, 2013), interest rate expense on the U.S. national debt is expected to reach $420.61 billion. (Source: Department of the Treasury, Financial Management Service, July 11, 2013.)

That’s almost half a trillion per year on interest payments only! And we must remember the Federal Reserve is keeping interest rates artificially low. If interest rates doubled (which is not a long-shot concept, considering that even if rates did double from here, they would still be below the 30-year average), the government interest rate payments could read $1.0 trillion a year!

Looking at the U.S. national debt as a percentage of our gross domestic product (GDP), it stood at 105.07% at the end of the first quarter of this year. (Source: Federal Reserve … Read More

Higher Taxes: Who Cares? Not the Rich

By for Profit Confidential

Higher TaxesThere’s a belief that the rich become richer because they are frugal and know how to save. The budget cuts and tax increases at the beginning of the year saw higher income taxes for those earning over $400,000 annually. President Obama had hoped to place higher taxes on those making over $250,000 annually but had to settle for $400,000 as a compromise.

With the higher taxes, there was widespread fear that the affluent would halt their spending, which would ultimately impact consumer spending in the retail sector and gross domestic product (GDP) growth.

Well, here we are, four months into the year with higher taxes, and it appears that the affluent have continued to spend in the retail sector. The Shullman Luxury and Affluence Monthly Pulse is an excellent metric, detailing the spending habits of the wealthy in the retail sector. The research focuses on the luxury consumer group who spends on luxury goods, comprising of those households with income levels in excess of $500,000. The “affluent” group is defined as those households where the income is between $250,000 and $499,000.

The Shullman research indicated that 55% of the luxury consumers polled said the advent of higher taxes has not impacted their spending pattern in the retail sector. Moreover, about 61% of the affluent group offered a similar response. (Source: Frank, R., “Wealthy Say Higher Taxes Don’t Hurt Spending,” CNBC, March 27, 2013.) According to the research, less than 25% of luxury consumers said they would change their spending pattern this year.

Given the findings, it appears the luxury brand stocks will continue to fare well in the retail sector…. Read More

Who Cares About America’s Financial Mess? Let’s Just Print More Money

By for Profit Confidential

Cares About America’s Financial MessMoney printing by the Federal Reserve will continue into the near future. And while it will help America avert a recession, the flow of easy money will be disastrous over the longer term.

The reality is that the current bull market and rebound in the housing sector that has made some people very rich is a by-product of the Federal Reserve, as the central bank has built this artificial economy in America that’s driven by the availability of cheap money. Recall the subprime mortgage crisis in 2008 was also driven largely by cheap money.

The problem is that the Federal Reserve had some tough decisions to make. Either let the country revert back to a possible recession or offer loose monetary policy to drive spending. Of course, the Federal Reserve only really had one choice.

While I agree with the Federal Reserve, with the economy now in recovery, you kind of have to wonder why the Federal Reserve continues to allow the flow of easy money; based on the central bank’s policy statement from its Federal Open Market Committee (FOMC) meeting last Wednesday, the cheap money will continue. The Federal Reserve will continue to buy $85.0 billion a month in bonds, adding to its debt in the process.

The Federal Reserve said it would maintain its interest rates at record-low levels until the country’s unemployment rate falls to 6.5% from the 7.7% in February. However, the Federal Reserve predicts this will not occur until sometime in 2015, so that’s another two years of easy money and the building up of massive debt. In reality, achieving an unemployment rate of 6.5% … Read More

Big Risk? Try This Strategy

By for Profit Confidential

Try This StrategyIn technical analysis, the chart tells a story. On Monday, the S&P 500 closed below 1,500 for the first time since February 4, driving fears of a multi-year topping, which I have discussed in the past. (Read “Alert: Bulls Should Be Careful Despite an Impressive January.”) The Dow Jones failed to hold above 14,000 for the third time over the past several weeks. With the decline, the NASDAQ, Dow Jones, S&P 500, and Russell 2000 are back in negative territory for February, with the final trading session taking place today. The trading is similar to what we saw in 2012 following a positive start, and 2012 turned out to be a year of caution, so you need a prudent investment strategy.

Currently, we have the sequestration budgetary cuts set to take effect tomorrow. The automatic $85.0 billion in annual budget cuts (the planned sequester will total $1.2 trillion over the next decade), could have a widespread impact on the country and the economy, including program cuts, job losses, and chaos. (Source: Cowan, R. and Lawder, D., “U.S. government won’t fall apart on “sequester” day of reckoning,” Reuters, February 20, 2013.)

Face it; the country’s money printing presses are stopping. The Federal Reserve suggested the possibility of needing to reduce or stop its $85.0 billion in monthly bond purchases. The Fed’s bond buying has added further liquidity into the economy to keep it going. This has also been the case with numerous central banks around the world. The problem is that the monetary easing has created an artificial economy that’s supported by the printing of money.

Then there’s the … Read More

Forget the Debt; There Are More Pressing Issues with the Eurozone

By for Profit Confidential

Forget the DebtWith all of the recent focus on the fiscal cliff and now earnings, traders appear to be forgetting the massive mess across the Atlantic in Europe and the eurozone. Remember Greece? The European debt crisis took Greece down with two separate bailouts. It was so dire for this beautiful country on the Mediterranean Sea that Greece actually needed a second bailout to pay the payments on its first emergency loan, or risk default!

The reality is that the eurozone financial crisis is still around—the market just pushed it aside for the election, the fiscal cliff, and now earnings. But be aware that the problem overseas is not going away. Consumer confidence in the eurozone came in at a muddled -26.5 in December, according to the European Commission. I’m not sure about you, but I believe this cannot be good.

The problem with the eurozone is not only the massive debt loans that have impacted Greece, Spain (read “Spain Is Delusional Believing Everything Is Okay.”), Ireland, Portugal, and Italy, but also the current recession and muted growth that will likely last into this year and perhaps into 2014.

At the same time, a major issue is the super-high unemployment rate encompassing Europe and the eurozone. In the eurozone, the unemployment rate was 11.8%, or about 18.8 million unemployed, in November, the highest number since the eurozone formed in 1999. (Source: “EU unemployment tops 26 million for 1st time,” Yahoo! Finance via Associated Press, January 8, 2013.)

Spain has about a quarter of its people out of work. Greece’s unemployment stands at 23.1%, while Portugal is at 15.7%, Ireland is … Read More

Consumer Spending: What Could Spell Disaster for it this Season

By for Profit Confidential

Consumer SpendingThe fiscal cliff is causing a drag on the economy and, in particular, the desire of consumers to want to spend. The reality is that the budget cuts and tax increases will impact spending regardless of how the deal turns out, as taxes will rise.

The push to extend the Bush-era tax cuts to only those making below $250,000 appears to be a pipe dream of President Obama.

So far, after several failed attempts at a compromise, the Republican-controlled House is looking to push forth what they call “Plan B,” which extends the Bush-era tax cuts to those making less than $1.0 million. President Obama suggested he would veto Plan B, which would likely not get approval in the Democratic-controlled Senate. Obama has moved up the threshold for the tax cuts to $400,000, up from $250,000.

So while this deal-making goes back and forth, consumers are likely to be hesitant to spend in the retail sector. The headline retail sales reading rose 0.3% in November, which was below the Briefing.com 0.6% estimate, but up from -0.3% in October. The ex-auto reading was flat, lower than the Briefing.com 0.2% estimate. While the November retail sector numbers don’t translate into December, I’m sensing the uncertainty of the fiscal cliff will impact consumer spending during this key shopping season for the retail sector.

We are in the heart of the holiday shopping season. I’m sure the retail sector is anxiously praying for consumers to spend. (Want to know which retailers I like? Read “From Discount to Big Box: Some Retailers to Watch.”)

A strong shopping season will also go a … Read More

And So It Begins: Boeing Announces Cuts to Defense Division

By for Profit Confidential

Boeing Announces Cuts to Defense DivisionThere were two hurdles investors and business people were worried about. The first was the presidential election; the second was the fiscal cliff. While the presidential election has concluded, the ensuing gridlock that will now become a reality has many investors and business leaders worried that no definitive steps will be taken to help secure America’s future in the short term.

The earnings outlook appears bleak for many industries, and budget cuts are now becoming closer to a reality. While there were optimists hoping that one party would be in charge of both the White House and the House of Representatives, this split means a greater risk of not being able to compromise and come up with a deal to stop the harsh budget cuts set to be enacted in 2013.

The earnings outlook has been poor this financial reporting season, with a high level of earnings warnings. With President Obama stating that he’s in favor of higher dividend taxes, higher capital gains taxes, and greater regulation and increased costs associated with running a business, and with the inability of the Democrats to work with the Republicans in eliminating massive budget cuts, many investors are worried and are selling stocks ahead of these headwinds.

The Boeing Company (NYSE/BA) has just announced what I think will be a common theme—more budget cuts. Boeing stated that in its defense division, the firm will cut 30% of management jobs from its 2010 levels. The company will also be closing facilities in California and eliminating several business units to meet its goal for massive budget cuts. (Source: “Boeing announces defense division restructuring,” Reuters, November … Read More

Scranton Property Taxes to Rise by 33% to
Meet Pension Obligations: Is Your City Next?

By for Profit Confidential

Scranton PropertyWhat was once considered a basic, untouchable right is now on the chopping block: the public pension plan.

I have been writing about the massive budget deficits that municipalities and states have been dealing with, the largest contributor to those budget deficits being the public pension plans.

Many states and municipalities have cut pension plan benefits for new workers, but what were once considered the legal and embedded rights of current retirees and public workers have been torn down.

In both San Diego and San Jose, California, residents have voted overwhelmingly—close to 70% in both cities—to cut the pension benefits of current public workers. (Source: New York Times, June 6, 2012). The residents weighed the budget cuts when factoring public workers retiring after 30 years of service with 90% of their salaries—which is almost unheard of in the private sector—versus having basic services cut and libraries unopened because of the massive budget deficits.

Residents of San Diego and San Jose chose to implement budget cuts on what they perceived as very generous pensions for public workers in order to reduce the budget deficits.

Previous court cases have sided with public workers, but now these measures voted on by the residents themselves will be tested in court. Unions in both San Diego and San Jose will file motions to prevent these budget cuts to pensions in the name of meeting budget deficits. The other cities and states desperate to close their budget deficits are awaiting the rulings with keen interest.

The State of Illinois has the nation’s largest budget deficit and unfunded pension liability of all U.S. states. It is … Read More

Serious Financial Troubles at U.S. Municipal Level Mount

By for Profit Confidential

Serious Financial Troubles at U.S.Indianapolis, Indiana, home to the Indianapolis 500, this year played host to the Super Bowl. With a population of close to 840,000, it is the 12th largest city in the U.S.

Indianapolis is presently searching its budget deficit to find money to pay for its electricity bill for March. Just two months into 2012, Indianapolis faces a budget deficit of $75.0 million!

Around $15.0 million of that budget deficit is being blamed on public safety, and the police stations are incensed that they may have to lay off people, because they say they will have a hard time managing jailed criminals.

The biggest problem concerning Indianapolis’ budget deficit is the hole in its pension fund, to meet all of the payments for retirees. This budget deficit issue is being brought to the state level.

Speaking of states, Pennsylvania is enacting budget cuts to meet its budget deficit. These deficits are spreading like cancer throughout many of the municipalities and states in the U.S.

I’ve been documenting, dear reader, how new employee pension plans in many distressed municipalities are being severely slashed in order to meet budget deficits. These same municipalities are raising taxes, and cutting benefits for current retirees and those employees already in the system, while advising the latter that their retirement plans will have to be changed, because the age they are eligible for retirement is now going up due to budget cuts.

Pennsylvania has attempted to enact all of the above except, until this point, raising the retirement age for current employees. With the retiree-to-employee ratio at a staggering 6-to-1, other budget cuts will have to be … Read More

Hope in Housing? Our Indicators
Say Prices Still Crashing

By for Profit Confidential

 economic recoverySure, you can listen to the analysts and economists who tell us the U.S. housing market is getting better. But you can’t fight the reality of the numbers…

The U.S. S&P/Case-Shiller Home Price Index dropped four percent in the fourth quarter of 2011 compared to the fourth quarter of 2010. This basically tells us that house prices fell another four percent last year.

Although the index showed signs in the middle of 2011 of stabilization, it proceeded to drop again towards the end of 2011. Worse, momentum in the index is to the downside, a sign of weak consumer confidence.

Seventeen of the 20 cities in the S&P/Case-Shiller Index followed posted declines in home prices for at least three consecutive months. This shows that the numbers are weak in general across all of the U.S., as consumer confidence in housing is meager at best.

Home prices have now reached levels that were last seen in late 2002!

As I’ve been writing all along, if the U.S. housing sector doesn’t recover, the economy can’t recover. The S&P/Case-Shiller numbers reflect a consumer that is not experiencing real purchasing power or enough consumer confidence to buy a home. This is not a sign of an economic recovery.

Speaking of consumer confidence and economic recovery, new orders for U.S. durable goods—goods purchased by companies that are expected to last at least three years—fell by four percent in January when compared to December of 2011 (source: Census Bureau); the biggest decline is since January of 2009—when we were deep into the heart of this recession.

If we crunch the U.S. durable goods number … Read More

Another U.S. City on Brink of Bankruptcy

By for Profit Confidential

Another U.S. city on the brink of bankruptcy…

Stockton, California, a farming town near San Francisco with a population of 292,000, is meeting with creditors and labor unions this week to discuss how it can avert filing for bankruptcy due to its massive budget deficit.

In an attempt to avert bankruptcy, the city laid off almost 200 city employees, including a quarter of its police force. With the numbers not adding up, and facing a budget deficit of $2.00 million in 2012, the city was forced to ask creditors and the labor unions to sit down and discuss budget cuts in order to reduce the budget deficit for this year.

See if this sounds familiar dear reader. Before the recession—during the good times—the city took on a large amount of debt, expecting that continued growth going forward would pay for it; no budget deficits in sight. Well, now that revenues are down drastically, this debt has the city in a stranglehold.

Stockton’s city council is aiming to reduce the current budget deficit by $15.0 million, which would include defaulting on debt payments on the municipality’s bonds along with other budget cuts. That is just scratching the surface on the city’s terrible financial situation.

Stockton has unfunded liabilities—mostly made up of pensions and health insurance—of $450 million. Although high, it was more manageable when the city took in revenues of over $203 million. For 2012, the city is hoping that revenues will exceed $160 million! That is quite the budget deficit!

During the good times, the average home price in Stockton was $431,000, which helped increase city revenues and keep … Read More

Unpleasant Forced State Budget Cuts

By for Profit Confidential

California Governor Jerry Brown and his Democratic government made financial projections for California’s current fiscal year, which began July 1, 2011. Only three months into the current fiscal year, tax revenue for California has fallen $705 million. The risk?

The Great Crash of 2014

A stock market crash bigger than what happened in 2008 and early 2009 is headed our way.

In fact, we are predicting this crash will be even more devastating than the 1929 crash…

…the ramifications of which will hit the economy and Americans deeper than anything we’ve ever seen.

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We correctly predicted the crash in the stock market of 2008 and early 2009.

And in March of 2009, we started telling our readers to jump into small caps. The Russell 2000 gained about 175% from when we made that call in 2009 to today.

Many investors will find our next prediction hard to believe until they see all the proof we have to back it up.

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