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

Central Banks

Central banks are institutions that manage a nation’s currency, money supply, and interest rates. Central banks also oversee a nation’s banking system and are the lenders of last resort in a time of crisis. Central banks are normally a separate body from the political establishment. The goal of central banks is to create stability and low inflation in the system.

What’s Up Three Times More Than Stocks So Far This Year?

By for Profit Confidential

Where Gold Will Trade in the Second Half of 2014Investors who bought gold bullion in early 2014 know it was a great decision. The precious metal has increased 10.2% in price between January and June, while the Dow Jones Industrial Average climbed by just three percent.

So far, so good—and as expected.

Going forward, it will not be surprising to me to see the precious metal outperform the stock market in the second half of the year as well.

Why will this happen?

As demand for gold bullion continues to rise and as supply declines (the exact situation we have today), gold bullion prices will have no option but to rise.

In the table below, I have plotted the production of gold bullion at U.S. mines for the first three months of the year compared to the first three months of 2013. Production at U.S. gold mines is declining month after month.

Production at U.S. Gold Mines, 1Q2013 vs. 1Q2014

Month 2013 Output (in Kg) 2014 Output (in Kg) % Change Year-over-Year
January 18600 18,500 -0.54%
February 17,300 17,100 -1.16%
March 18,700 18,200 -2.67%
Total 54,600 53,800 -1.47%

Data source: U.S. Geological Survey web site, last accessed July 1, 2014

While the chart above only details U.S. gold mining production, gold bullion production across the global economy is declining. Last year, as the yellow metal witnessed a massive sell-off in price, gold mining companies cut back on their exploration and capital expenditures budgets. This is now catching up and derailing production. And I see the situation for supply only getting worse.

Meanwhile, demand for gold bullion keeps rising.

We continue to see significant demand for the precious metal—and not … Read More

This Is Odd…

By for Profit Confidential

Demand for Stocks Outweighs Supply at This PointOne of the oddest things to happen with the stock market since it has recovered is that the number of shares trading hands each day has slowly disappeared.

In the table that I have created for you below, I list the trading volume for the S&P 500 for each June since 2009 and the percentage change in volume from the previous June.

Trading volume on the S&P 500 has dropped 60% since 2009!

Trading Volume, S&P 500, June of Each Year, 2009 – 2014

Year Volume (Shares Traded Per Month) Year-Over-Year % Change
June 2009 93,147,496,448
June 2010 91,971,043,328 -1.3%
June 2011 63,674,499,072 -30.8%
June 2012 59,703,365,632 -6.2%
June 2013 51,560,980,480 -13.6%
June 2014 38,765,629,440 -24.8%

Data source: www.StockCharts.com, last accessed July 1, 2014

What’s happening here? How can the stock market rise year after year if trading volume is down?

It’s very simple, but I’ll explain this new phenomenon in a moment. First, look at the chart of the S&P 500 below. Pay close attention to the volume at the bottom of the chart. As volume on the S&P 500 collapsed, the price of the index rose.

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Volume is collapsing because the number of shares companies have outstanding is being reduced at an accelerated rate. For example, in the first quarter of 2014, S&P 500 companies purchased $154.5 billion worth of their shares back (stock buyback programs). Over the trailing 12 months, S&P 500 companies purchased more than half-a-trillion-dollars worth of their own shares—$535.2 billion to be exact. (Source: FactSet, June 18, 2014.)

Add to the shrinking number of shares outstanding the fact that central … Read More

Guess Who Is Pushing the Stock Market Higher Now

By for Profit Confidential

So That's Why Stocks Have Been Moving Higher…When I look at the stock market, I ask who in their right mind would buy stocks?

While key stock market indices creep higher, the fundamentals suggest the complete opposite. But despite valuations being stretched, insiders selling, corporate revenue growth being non-existent, and the U.S. economy contracting in the first quarter of this year, the S&P 500 is up seven percent since the beginning of 2014, the Dow Jones Industrial Average is getting closer to the 17,000 level, and the NASDAQ is back above 4,000.

As I have written before, a company can buy back its stock to prop up per-share earnings or cut expenses to improve the bottom line, but if revenue isn’t growing, there is a problem. In the first quarter of 2014, only 54% of S&P 500 companies were able to grow their revenue. (Source: FactSet, June 13, 2014.)

Going forward, things aren’t looking bright either. For the second quarter of 2014, 82 S&P 500 companies have already provided negative guidance for their corporate earnings. I expect this number to climb higher.

And consumer spending, the driver of the U.S. economy, is very weak, as evidenced by negative gross domestic product (GDP) in the U.S. economy in the first quarter of this year.

So if the overall environment is negative for the equities, who is buying stocks and pushing the stock market higher?

The answer (something I suspected some time ago): central banks are buying stocks.

A study done by the Official Monetary and Financial Institution Forum (OMFIF) called Global Public Investors 2014, states that central banks and public institutions around the world have gotten involved … Read More

How to Invest in a Market Constructed by Central Banks

By for Profit Confidential

How to Profit in a Fed-Built MarketThe resilience the stock market continues to have is a reflection of what continues to be extreme monetary stimulus. And while the stock market is a leading indicator and a bet on a future stream of earnings and economic activity, throughout history, the underlying goal of central banks has been price inflation.

Seemingly, the capitalist economic system is based on two basic underlying factors: property rights and price inflation. And in modern history, the latter, through central bank intervention, is the most important catalyst for the stock market.

In capital markets, long-run history is a very good guide and an important tool in helping to shape your market view. And most importantly, it’s very helpful in laying the groundwork for separating present-day conjecture from what has actually transpired before.

I’m reminded of J. Anthony Boeckh’s book titled The Great Reflation, which provides a non-political long-run analysis on the U.S. economy and its cycles.

It’s a historical breakdown of interest rates, inflation, and monetary and fiscal policies, and how they have affected the stock market. It is required reading for any serious long-term investor.

Written in 2010, the book breaks down financial crises and looks at the long-run effects of price inflation and the effects on capital markets. Boeckh offers some poignant analysis on all kinds of financial topics, and many of his observations have not only come to fruition, but they are also worth consideration.

Boeckh plainly states that the global financial system is flawed because of fiat paper money. And because we use paper money, price inflation exists and capital markets are subject to bubbles.

Add in … Read More

Dying for Gold? This Man Almost Did

By for Profit Confidential

Four Key Arguments for Owning GoldThe most compelling argument for owning gold bullion I have ever heard…

A 63-year-old businessman went to a doctor complaining he had swallowed a bottle cap in anger after he had a fight with his wife. After a three-hour surgery, the doctors found 14 ounces of gold bullion in the man’s stomach. The police and Customs were called, and the gold recovered was confiscated. (Source: “Gold bars removed from Indian man’s stomach,” BBC News, April 18, 2014.)

This is just one of the many ways smugglers are bringing gold bullion into India. In this particular case, this man was willing to die for gold!

You see, the Indian government has imposed rigorous duties on importing gold bullion into the country. As a result, imports of gold bullion between May of 2013 and November fell more than 88%. In May of 2013, 162,000 kilograms (kg) of gold bullion was imported into India, and by November 2013, it had declined to 19,300 kg. (Source: Ibid.) As the government imposed its high duties, smuggling of the precious metal into the country increased. And as I just told you, people are risking their lives to get the yellow metal into the country.

To recap what I have been writing about gold bullion:

  1. More and more central banks have been buying gold bullion to stabilize their reserves. For years, central banks sold their gold; now they are buying it back.
  2. The decline in gold prices has forced gold miners to cut exploration projects for the simple reason that they need to conserve cash. Less exploration means less supply down the road. Also, there has been
  3. Read More

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The Great Crash of 2014

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

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