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

Consumer Confidence

Consumer confidence is an important economic indicator that measures how consumers are feeling at the present moment. Consumer confidence is important because most industrialized economies are reliant on the consumer to drive the economy. If consumer confidence is rising, that means people feel the future is most likely prosperous; if consumer confidence is falling, that means people are worried abut the future. However, like many economic indicators, consumer confidence can be a contrarian tool. This means that when consumer confidence is at its weakest, the economy might be at a turning point.

About That QE4…

By for Profit Confidential

Another Round of Money Printing Coming SoonIt’s widely expected that at the end of this month, the Federal Reserve will end its third round of quantitative easing (that began in September of 2012). This is QE3, where the Federal Reserve was printing $85.0 billion of new money every month and using it to buy U.S. Treasuries and mortgage-backed securities (MBS). In the beginning of 2014, the Fed started reducing the amount of money it was printing each month.

Is there another round of quantitative easing (more commonly known as QE) coming?

Here’s why I ask…

First, U.S. long-term bond yields are collapsing. Back in 2013, when the Federal Reserve hinted that it might move away from quantitative easing, we saw U.S. bond yields soar. Between May and December of 2013, yields on the U.S. 10-year notes almost doubled. But since then the unexpected happened.

10 Year Treasury Note Yield ChartChart courtesy of www.StockCharts.com

Since the beginning of 2014, the yields on the same bonds have plunged 30%. Despite the Federal Reserve telling us it expects to raise interest rates in 2015 and 2016 (what would be catastrophic for bonds), bond prices are rising… Odd, to say the least.

Second, I hear hints about QE4 from key members of the Federal Reserve. In an interview with Reuters, the president of the Federal Reserve Bank of San Francisco said, “If we really get a sustained, disinflationary forecast…then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider.” (Source: “Exclusive: Fed’s Williams downplays global risks, eyes U.S. inflation,” Reuters, October 14, 2014.)

In other words, if inflation in the U.S. economy doesn’t meet the … Read More

The Worst Kept Secret on Wall Street

By for Profit Confidential

Why Retail Stocks Will Get Hit the HardestIn the first quarter of 2014, Retail Metrics, a retail industry research firm, found U.S. retailers missed their corporate earnings estimates by the most since the year 2000!

As I have been writing, consumer spending only increases when consumer confidence is rising. Unfortunately, in the U.S. economy today, that confidence is plummeting.

Last month, the Thomson Reuters/University of Michigan’s consumer sentiment index declined three percent from a month earlier. It was 84.1 in April, and it declined to 81.8 in May. (Source: Reuters, May 16, 2014.)

But consumer confidence is just one leading indicator that suggests consumer spending will decline in the U.S. economy; the unemployment situation and wages suggest the same.

The worst kept secret on Wall Street is that the big U.S. retailers are in trouble. While stocks, in general, have held their own this year (up about one percent so far in 2014), the stock prices of retail stores have fallen sharply. The chart below is of the Dow Jones U.S. General Retailers Index. The chart clearly shows the stock price of big U.S. retailers are falling quickly, down more than seven percent in the first five months of this year.

Dow Jones US General Retailers Index ChartChart courtesy of www.StockCharts.com

The story that consumer spending suffered in the first quarter of this year because of bad weather doesn’t sit well with me—I simply don’t buy it. The U.S. economy contracted one percent in the first quarter of 2014, the first time our economy has experienced an “official” contraction since the first quarter of 2011 for the simple reason that consumers are tapped out; their incomes are not keeping up with inflation.

All … Read More

Why Are Car Sales Down So Much?

By for Profit Confidential

Soft Auto Sales Just the Beginning of a Poorer 2014All of a sudden, auto sales are declining…

Auto sales in the U.S. economy declined to an annual rate of 15.4 million units in December. In November, this number stood at 16.41 million units—a decline of more than six percent. (Source: Motor Intelligence, January 3, 2014.) Analysts were caught off guard by the decline in December auto sales; they were expecting an increase!

I see the decline in auto sales as being directly related to rising interest rates. And it’s not going to get any better.

For years now (since the Credit Crisis), auto sales have been increasing due to low interest rates. It’s very similar to what happened to the housing market prior to 2007. More and more people went on a house-buying spree when the mortgage rates were at record lows. When mortgage rates started to increase in 2007, the already-inflated housing market got hit hard. The same thing is happening to auto sales now.

Interest rates are rising again. Look at the chart below of the bellwether 10-year U.S. Treasury. Since November, the yield on the 10-year U.S. Treasury has gone up roughly 20%. The higher interest rates go, the weaker auto sales will get. (And we can already see the impact on the auto stocks. The stocks of America’s major car makers are off five percent from their 2013 peak, but key stock indices are near their peaks.)

10 Year Treasury Note Yield Chart

Chart courtesy of www.StockCharts.com

Rising interest rates will have the biggest impact on auto loans given to subprime borrowers (those who have a lower credit standing).

My readers should note that the delinquency rates on auto loans … Read More

U.S. Treasuries Hit 3%; Marks End of Stock Rally?

By for Profit Confidential

Another Five Stock Market Warning Signs to Add to the ListWhile 2013 will go down as the banner year for the S&P 500 and other key stock indices no one expected, the number of warning signs about this overpriced and overbought stock market has only increased. And my readers need to know about them…

Trading volume, which is the number of shares traded, fell in 2013. The chart below (bottom portion of the chart) shows trading volume on the S&P 500 was the lowest in 2013 since 2006 (circled area). Trading volume on the S&P 500 in 2013 was 573.4 billion—14.4% lower compared to 2012, when it was 670.1 billion. How does a stock market rise when there is less demand for stocks?

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Next, the yield on the bellwether 10-year U.S. Treasury surpassed three percent last week—its highest level since July 26, 2011. The yield on the 10-year U.S. Treasury is now higher than the yield on the 10-year government bonds issued by Canada, Germany, the Netherlands, Switzerland, Japan, and even France!

Why is this so important? The rising yield for the 10-year U.S. Treasury makes stocks less attractive (why buy the Dow Jones Industrial Average with a dividend yield of only 2.09% when investors can get a guaranteed government yield of 3.02%) and housing more vulnerable (the standard 30-year U.S. mortgage is closing in on an interest rate of five percent—the last time it hit that rate was back in January of 2010).

But unlike July of 2011, when the 10-year U.S. Treasury was last yielding three percent, interest rates are not expected to decline, but to continue rising. The Federal Reserve has started pulling … Read More

What Bernanke Cemented for Wall Street Yesterday

By for Profit Confidential

Why This Next Stock Market Bust Is Going to Be a DoozySomething very interesting happened yesterday.

The Federal Reserve said it would start “tapering” its quantitative easing program by $10.0 billion a month. In other words, the Fed will now print $75.0 trillion a month in new money instead of $85.0 trillion a month.

Firstly, the whole concept of the central bank printing money out of thin air never made sense to me because the money isn’t backed by anything. The Federal Reserve says that starting in January, it will print 11% less in new money. In 2014, instead of printing more than $1.0 trillion in new money, it will print (or “create,” if you prefer) $900 billion in new money.

But—and there is always a but—the Federal Reserve, through Bernanke’s press conference following yesterday’s meeting of the Federal Reserve governors, said it would adjust the amount of money it creates based on how the economy is faring. I take this to mean that if the economy slows again, the Federal Reserve could, and likely will, start printing even more money than it currently does.

And there is the question of the $4.0 trillion in new money the Federal Reserve’s balance sheet says it has created. How does the Fed get rid of the $4.0 trillion? I don’t think it can. I don’t think the Federal Reserve will find anyone out there who can take the $4.0 trillion, mostly in bonds, off its hands.

What really threw me for a loop yesterday was that when the Federal Reserve said it would start printing $10.0 billion less in new money each month, the Dow Jones Industrial Average rallied 300 points. Yes, we … Read More

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