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

China

China is the country with the largest population in the world at over 1.3 billion people. The land covers approximately 3.7 million square miles. The country is governed as a communist country, although they have developed a quasi-capitalist sector for business. China has the second largest gross domestic product (GDP) at approximately $7.0 trillion; behind the U.S. at $15.0 trillion and ahead of Japan at $5.8 trillion. The leaders opened up the centrally planned economy in the late 1970s and early 1980s to allow economic growth through trade, which has allowed China to grow at an unprecedented rate for a country its size. From 2001 to 2011, China grew at an annualized rate of 10.5%.

The Nine-Month Check-Up

By for Profit Confidential

Nine-Month Check-UpWith nine months behind us this year, today we look at how two popular forms of investment have done in 2014 and where I think they are headed for the remainder of the year.

Starting with stocks, the Dow Jones Industrial Average closed yesterday up 2.8% for the year. Given the risk of the stock market, 2.8% is no big gain. I wrote at the beginning of 2014 that the return on stocks would not be worth the risk this year. I was on the money. When we look at the broad market, the Russell 2000 Index is down 5.4% for the year.

Going forward, as you know as a reader of Profit Confidential, I see stocks as risky. Plain and simple, stocks are overpriced in an environment where the Federal Reserve is putting the brakes on paper money printing and is warning that interest rates are going higher.

On a typical day, I see the Dow Jones up 100 points; the next day, it’s down 100 points. This is happening in an environment where trading volume has collapsed. I wouldn’t be surprised to see October deliver us a nasty stock market crash.

Moving to gold (and this is very interesting), gold is flat for the year in U.S. dollars. But if we look at gold in Japanese yen, gold is up 4.6% for 2014. If we look at gold in Canadian dollars, bullion is up 4.6% as well this year. And if we measure gold in euros, we find gold bullion prices are up 10.4% in 2014.

What explains this?

Yesterday, the U.S. dollar hit another six-year high … Read More

A Rational Look at Gold

By for Profit Confidential

Rational Look at GoldThe fundamentals that drive gold prices higher are in full force and improving. Central banks are buying more of the precious metal (to add to their reserves), while countries that are known to be big consumers of gold bullion post increased demand.

According to the India Bullion & Jewellers’ Association, India’s monthly gold bullion imports are expected to rise by as much as 50% in the coming few months—in the range of 70 tonnes to 75 tonnes per month compared to an average of 50 tonnes to 60 tonnes now. (Source: Reuters, September 18, 2014.) This is mainly due to the festival/wedding season fast approaching in India.

If India continues to import 70 tonnes of gold bullion each month, then the total imports just to India will be 31% of all world gold mine production (based on 2,700 tons in annual mine production).

India used to be the biggest importer of gold bullion until China took over as the biggest importer of the precious metal two years ago. And demand for gold in China remains strong as well.

But while demand for the precious metal is rising, production is declining.

In the first five months of 2014, U.S. mine production was 85,400 kilograms (kg), down four percent from the 89,200 kg of gold bullion produced in the first five months of 2013. (Source: U.S. Geological Survey, last accessed September 22, 2014.) As I have written before, lower gold prices have caused gold companies to close mines where production made sense at $1,600 an ounce gold, but not at $1,200 an ounce gold.

While I won’t delve into all the talk … Read More

My Top Five Picks in the Booming Airline Sector

By for Profit Confidential

My Top Five Picks in the Booming Airline SectorThe Boeing Company (NYSE/BA) is going to space and its stock price is following. The top company in the airline sector just won a joint $6.8-billion contract along with SpaceX to build “space taxis” to ferry NASA astronauts to and from the International Space Station.

For Boeing, it’s just more evidence of why it is the “Best of Breed” in the airline sector and a valid component in anyone’s long-term core holdings.

SpaceX, or Space Exploration Technologies Corporation, is a project of Elon Musk’s, the man who is also the brains behind the creation and success of Tesla Motors, Inc. (NASDAQ/TSLA). Musk apparently wants to eventually offer space travel for commercial use, so this deal from NASA is moving him in the right direction.

The airline sector is hot and will continue to expand as the wealth creation around the world grows, especially in the emerging markets, such as China, Asia, and India. When income levels rise, people want to travel, and this has clearly been reflected in the superlative demand for airplanes out of China. Boeing believes China is the top aviation growth area worldwide.

The International Air Transport Association (IATA) estimates that North America will continue to be the largest airline sector market with profits of about $8.6 billion this year. The Asia-Pacific airline sector is predicted to be the second biggest with about $3.7 billion in earnings this year. Europe comes in third with an estimated $3.1 billion. (Source: “Industry on Track for Second Year of Improving Profits – Rising Fuel Costs Largely Offset by Increased Demand,” International Air Transport Association web site, March 12, 2014.)

And … Read More

Should You Buy Into the U.S. Dollar Rally?

By for Profit Confidential

U.S. Dollar: The Best of the WorstSince May, when it was near an all-time low, the U.S. dollar has rallied. Compared to other major currencies of the world, the greenback is up five percent since July, as the chart below illustrates.

The question: should investors get into this U.S. dollar rally?

Dear reader, the U.S. dollar is not moving higher because the fundamentals of the U.S. economy are getting better. It’s moving higher because other parts of the global economy are doing worse than the U.S.

The eurozone economy is so weak that the European Central Bank has lowered interest rates again, pushing the value of the euro lower. In the United Kingdom, Scotland is looking for independence. The crisis between Russia and Ukraine continues without resolution. New troubles are brewing in the Middle East. China reported yesterday it would start pumping money into its largest banks.

US Dollar Index Chart

Chart courtesy of www.StockCharts.com

Right now, with the majority of major world central banks either printing more of their paper money or bringing interest rates even lower, the U.S. is the best of the worst.

But I believe the rally in the U.S. dollar will be short-lived.

Central banks are trying to move away from the U.S. dollar as their reserve currency. At one point, trade in the global economy was dominated by the U.S. dollar. This is changing, slowly but surely.

Consider just one of many recent examples; the Chinese and Argentinian central banks will be doing an $11.0-billion currency swap operation. This will allow Argentina to increase its reserves and pay for Chinese imports in yuan—the deal was signed in July. (Source: Reuters, September 7, 2014.)

Putting … Read More

Another Warning Sign: Stocks Hit Highs on Collapsing Volume

By for Profit Confidential

The Only Bear Left StandingSo the S&P 500 has touched the 2,000 mark.

Will the S&P 500 continue to march to new highs?

Well, my opinion towards the stock market hasn’t changed. I remain skeptical for a variety of reasons, many of which I have shared with my readers over the past few months.

But I have a new concern about the stock market, something that hasn’t been touched on by analysts: trading volume is collapsing.

Please look at the table below. It shows the performance of the S&P 500 and its change in trading volume.

Year Performance Change in Volume
2012 11.73% - 17.58%
2013 14.50% - 24.91%
2014 8.40% - 44%*

*Until August 25, 2014

Data source: StockCharts.com, last accessed August 25, 2014

Key stock indices like the S&P 500 (it is the same story for the Dow Jones) are rising as volumes are declining, suggesting buyers’ participation in the stock market advance is very low. For a healthy stock market rally, any technical analyst will tell you that you need rising volume, not declining volume.

It’s Economics 101: rising demand pushes prices higher. In the case of the S&P 500, we have declining demand (low trading volume) and rising prices. Something doesn’t make sense here.

Looking at the economic data, it further suggests key stock indices are stretched. We continue to see the factors that are supposed to drive the U.S. economy to deteriorate.

Just look at the housing market. The number of new homes sold continues to decline. In January, the annual rate of new-home sales in the U.S. was 457,000 units. By July, it was down more than 10% … Read More

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