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

Bull Market

Lombardi Publishing Corporation was established in 1986 as an investment newsletter providing stock market analysis to its readers. Today, we publish 26 paid-for investment letters, most of which provide stock market direction and individual stock picking analysis.

Profit Confidential is our free daily e-letter that goes to all our Lombardi Financial customers and to any investor who wishes to opt-in to receive it. Written by Lombardi Financial editors who have been offering stock market guidance to Lombardi customers for years, Profit Confidential provides a macro-picture on where the stock market is headed.

We start by determining if we are in a bear market or a bull market; based on that analysis, we look at what sectors are hot and what sectors to avoid.

Profit Confidential famously warned its readers to bail from stocks in 2007 (the bull market was over, and a bear market was setting in), telling investors to jump back into the stock market in March of 2009 (a bear market rally began).

Michael Lombardi was one of the first to predict the U.S. economy would be in a recession by late 2007. On March 22, 2007, he warned, “Over the past few weeks, I’ve written about subprime lenders, and how their demise will hurt the U.S. housing market, the economy, and the stock market. There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fuelled the housing boom that peaked in 2005, has yet to arrive.”

At the same time Michael wrote that former Federal Reserve Chairman Alan Greenspan said, “The worst is over for the U.S. housing market, and there will be no economic spillover effects from the poor housing market.”

Michael also warned his readers, in advance, of the crash in the stock market in 2008. On November 29, 2007, Michael Lombardi predicted, “The Dow Jones Industrial Average, the S&P 500, and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market reality of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for America.”

The Dow Jones peaked at 14,279 in October 2007. A “sucker’s rally” developed in November 2007, which Michael quickly classified as a bear trap for his readers. One year later, the Dow Jones Industrial Average was at 8,726.

Profit Confidential turned bullish on stocks in March 2009 and rode the bear market rally from a Dow Jones Industrial Average of 6,440 on March 9, 2009 to 12,876 on May 2, 2011, a gain of 99%.

The two-year bull market rally is coming to an end. The start of a bear market doesn’t mean investors should run to the sidelines. In fact, the bear market will present investors with an unprecedented opportunity.

In 2013, Michael predicts that the devaluation of the U.S. dollar that started in early 2009 will accelerate as the U.S. economy deteriorates, that gold prices will continue to rise, and that the euro is done. Michael also predicts that inflation will be a big, big problem for the U.S.; probably for the rest of the decade. Finally, Michael believes that 2013 will be a poor year for stocks.

That doesn’t mean it will be a bad year for all stocks. Even in the deepest bear market, there are always some stocks going against the grain. Michael has ways investors can protect their holdings and even make money off the weak economy.

How the Markets Will Close Out 2014

By for Profit Confidential

Markets Will Close Out 2014Credit card companies are some of the best indicators in the global economy. Visa Inc. (V) just reported a pretty decent quarter. While earnings were down comparatively due to a one-time charge, adjusted earnings handily beat consensus.

The company’s fiscal fourth quarter came in solid, with growth of 10% on a constant dollar basis to $3.2 billion compared to the same quarter last year.

Recently, the company increased its quarterly dividend 20%, and a new $5.0-billion share repurchase program has now been authorized.

Management estimates that its upcoming fiscal 2015 will produce revenue growth in the low double-digits and diluted earnings-per-share (EPS) growth in the mid-teens, which is very solid.

Visa’s share price really hasn’t done anything for the last 12 months. But this is on the back of tremendous capital appreciation in 2012 and 2013.

This stock market certainly seems trendless as of late. Investors are taking in corporate earnings news, but not doing too much with it.

The earnings numbers from many large-caps and conglomerates are pretty solid. But this market is tired out and the near-term action seems muted.

September and October are often difficult months for stocks and it’s unclear as to why. But going by the earnings results we’re getting and the forecasts that corporations are providing, I think it’s reasonable to expect a good fourth quarter—barring any shocks.

The marketplace knows that the Federal Reserve is going to initiate a new upward cycle in interest rates. It also knows that the central bank has proven to be highly accommodative to equities in recent history and deflationary indicators will increase the duration of when rates … Read More

India Buying 450% More Gold?

By for Profit Confidential

How Can Gold Prices Possibly Go DownThe demand and supply situation for gold bullion, something I’ve often talked about in these pages, has taken a new course…one very favorable to gold bulls like me.

Gold buying in India is up 450% in the first nine months of 2014 compared to the first nine months of 2013. (Source: Government of India, October 14, 2014.) The jump in gold bullion buying in India is related to the easing of restrictions on gold imports into the country by the Indian government in 2014.

The buying of gold bullion in China continues to be strong. And world central banks are increasing their gold reserves, too.

In the chart below, I’ve compared the gold holdings of various central banks now compared to their gold reserves in 2011.

Three-Year Change in Gold Reserves of Five Countries

Country Gold Holdings in October 2011 (in tonnes) Gold Holdings in October 2014 (in tonnes) % Change
Russia 841.1 1112.5 +32.27%
Turkey 116.1 511.7 +340.74%
Kazakhstan 67.3 181.9 +170.28%
Korea 39.4 104.4 +164.97%
The Philippines 147.8 194.4 +31.53%

Data source: World Gold Council web site, last accessed October 23, 2014

Mind you, the central banks mentioned in the table above are just a few of the many that have posted a significant increase in their gold bullion reserves. Unfortunately, many countries (like China) do not regularly release data on their gold purchases.

Meanwhile, the supply side of the gold bullion equation is bleak.

As I wrote in 2013 when gold bullion prices got whacked, the lower gold prices go, the more mines taken off-stream as gold mining companies close operations where production costs come in at … Read More

What the Fear Index Is Telling Us About Stocks Now

By for Profit Confidential

Why This Stock Market Rout Is Here to StayOver the past few months, I warned my readers the stock market had become a risky place to be. While I also suggested euphoria could bring the market higher than most thought possible—to the point of irrationality—the bubble has now burst. Key stock indices are falling and fear among investors is rising quickly.

Please look at the chart below of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). This index is often referred to as the “fear index” for key stock indices. If this index rises, it means investors fear a market sell-off. If it declines, investors are complacent and not worried about the stock market falling.

Volatility Index Chart

Chart courtesy of www.StockCharts.com

In just the last 18 trading days (between September 19 and October 15), the VIX has jumped 122% and now stands at the highest level since mid-2012. It has also moved way beyond its 50-day and 200-day moving averages, which shows strength and momentum to the upside from a technical perspective.

Sadly, the VIX isn’t the only indicator telling us that investors don’t want to be in the stock market. Below you’ll find the NAAIM Exposure Index chart, a measure of equity exposure of active money managers (the so-called smart money).

NAAM Exposuer Index Chart

Chart courtesy of www.StockCharts.com

Active money managers continue to reduce their exposure to equities as key stock indices fall. On September 2, 82% of their collective portfolios were exposed to the stock market. Now, it’s only 33%. This represents a decline of 60% in their equity market exposure.

On the fundamental front, the stock market is constrained as well. Each day, we are seeing deteriorating economic data … Read More

The Stocks to Watch as Small-Caps Stall

By for Profit Confidential

Stocks to Watch as Small-Caps StallDespite the choppy trading action before the end of the third quarter, a lot of the market’s best stocks are still ticking higher. And the positive trading action remains especially prevalent with large-caps and dividend-paying blue chips.

Big investors want earnings reliability and dividend income in a slow-growth environment. It’s a trend that began with the stock market’s breakout at the beginning of 2013 and it still has legs right into next year.

The Walt Disney Company (DIS) is a dividend-paying blue chip that I continue to like. With solid operating momentum (sales and earnings) in both media assets and theme parks, this stock has been consistently ticking higher since October of 2011.

It remains a great holding with solid prospects for more capital gains near-term. This stock is a perfect example of what institutional investors are buying—revenue and earnings growth combined with some income and reliability in regards to its outlook.

Another dividend-paying blue chip that just broke through to new record highs is PepsiCo, Inc. (PEP). This mature enterprise has been consistently bid by investors since February.

Still yielding almost three percent, the company’s food and snacks business is expected to keep its earnings momentum in the upcoming quarter. Management increased its quarterly dividends substantially this year and investors have been buying the story.

On any major price retrenchments, I do believe these two companies make for attractive long-term holdings.

Previously, we considered these two companies with the addition of NIKE, Inc. (NKE), Johnson & Johnson (JNJ), V.F. Corporation (VFC), Microsoft Corporation (MSFT), Kinder Morgan, Inc. (KMI), and 3M Company (MMM). (See “Eight Stocks to Beat the Street.”)… Read More

Why the Old School Dow Theory Still Applies

By for Profit Confidential

The Most Important Stocks to FollowGetting a sense of where stocks are going to go in the year ahead is always difficult with the major indices at their all-time highs.

The fundamental backdrop is still very favorable for equities. While the Federal Reserve has put off raising interest rates for the near future, the cost of capital, especially for corporations, remains extremely low. And corporate balance sheets remain in excellent condition with strong cash positions and good prospects for rising dividends going forward.

The stock market recovered extremely well from the financial crisis and subsequent crash in 2008/2009. But it wasn’t until early 2013 that I saw the beginning of a new cycle for stocks, or a bull market as it were.

Until then, I viewed the market’s performance purely as a recovery period from the previous cycle, which was the technology bubble.

Many of the technology stocks have only now recovered to their previous highs set in 1999 and 2000. The recovery cycle took a long time to play out and the catalyst for its breakout was, not surprisingly, the Federal Reserve.

Stocks can move significantly higher in a rising interest rate environment, but only from a low base, which is what we have now. And within the context of a new market cycle or bull market, the economy can experience a full-blown recession and stocks can experience meaningful corrections.

The two most important catalysts for the equity market near-term are what corporations actually report about their businesses and the Federal Reserve’s actions.

The surprising weakness in oil prices should be evident in corporate financial results (especially in the fourth quarter). Old economy industries … Read More

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