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

Consumer Spending

When consumers receive an income, those funds can go into savings or spending. Consumer spending is the measurement of funds dispersed (not in savings) and that can go into goods and services that consumers deem warranted. This can include durable goods, such as washing machines, and non-durable goods, such as food. As the U.S. economy is comprised of over 70% consumer spending, this is a very important piece of economic data.

Why Wal-Mart’s Sales Downgrade Should Worry Investors

By for Profit Confidential

Why Wal-Mart's Sales DowngradeOn November 30, Switzerland’s citizens will cast a very critical vote.

Through a referendum, they will vote for or against the Swiss National Bank increasing its gold bullion reserves to 20%, the central bank halting the selling of gold, and the storing of gold bullion in the country. (Source: Kitco News, September 30, 2014.)

If the results are in favor of the referendum, it will mean Switzerland’s central bank will be forced to buy a significant amount of gold bullion.

According to the most recent data from the World Gold Council, Switzerland has 1,040 tonnes of gold bullion in its reserves, equal to only 7.8% of its total reserves. (Source: “World Official Gold Holdings,” World Gold Council web site, last accessed October 16, 2014.) To bring its gold bullion holdings to 20% of total reserves, the central bank of Switzerland will have to buy 1,600 more tonnes of gold, or about 60% of all global mine output this year. Will the gold market be able to handle this kind of demand shock? I highly doubt it.

And if the central bank of Switzerland stops selling gold, a significant amount of gold will come off the market.

Finally, the vote on gold being stored in the country is just another example of the increasing appetite for the precious metal. We saw this phenomenon happen in Germany not too long ago when the country asked the U.S. for its gold back (the U.S. was “storing” it), but Germany was told it would have to wait seven years to get it.

The big picture: Since 2009, central banks around the world have bought … Read More

Feel Like You Are Missing Out?

By for Profit Confidential

Stock Market Correction Very HighIf you follow the financial news, it feels like the stock market is moving higher and higher…a situation in which investors often feel they are missing out.

But the reality of the situation is very different. So far this year, almost eight full months in, the Dow Jones Industrial Average is up only three percent.

Would you buy stocks with the Dow Jones trading at 17,100, near a record-high price-to-earnings (P/E) multiple and a record-low dividend yield? I wouldn’t. Hence, the question changes from “Am I missing out?” to “Is it worth the risk?”

On Monday, the chief market strategist at BMO Capital Markets said, “Longer term we are in the camp that believes U.S. equities are the place to be. They are the most stable asset in the world.” (Source: “Bull market will charge higher for 15 more years says strategist,” Yahoo! Finance, August 18, 2014.)

The belief that “stocks are the place to be” has gone mainstream now. And that’s very dangerous.

The reality of the situation: (1) stocks are trading at very high historical levels when measured by the P/E multiple and dividend yield; (2) the Fed is stopping its money printing program; (3) investors are pulling money out of the stock market; (4) consumer spending is tumbling; (5) stock advisors have remained too bullish for too long; and (6) the chances of a 20% stock market correction are very high.

According to the Investment Company Institute (ICI), between April and June, mutual funds that invest in U.S. stock markets witnessed net withdrawals of $19.1 billion. While July’s monthly figures are not updated just yet, looking at … Read More

Two Important Economic Signals to Share with My Readers This Morning

By for Profit Confidential

U.S. Consumer Confidence CollapsingA good gauge for me on how consumers in the U.S. economy are faring has always been the statistics coming out of Wal-Mart.

Wal-Mart Stores Inc. (NYSE/WMT) reported its operating income in its second quarter (ended July 31, 2014) declined by 2.4%. Its subsidiary, Sam’s Club (wholesale store), saw its operating income, after taking out fuel, decline by 10.2%. (Source: Wal-Mart Stores Inc., August 14, 2014.)

For its entire 2015 fiscal year, Wal-Mart now expects to earn in the range of $4.90 to $5.15 per share compared to its previous estimate of $5.10 to $5.45 per share.

The performance of Wal-Mart is very important to economists like me because the massive reach of Wal-Mart is a good indicator of consumer spending. Wal-Mart is the biggest private employer in the world, with a staff of approximately two million, and the largest retailer in the world. More than one hundred million people visit a Wal-Mart store weekly.

So when Wal-Mart comes out with soft earnings, it gives me a reason to be concerned about the direction of consumer spending. But that’s not the only thing I’m worried about in respect to the economy.

According to FactSet, of those major public retailers that have reported their second-quarter same-store sales, 46.8% of them have reported sales below estimates.

Retail sales are stagnant for the simple fact that consumer spending is getting very soft here in the fifth year of the so-called economic “recovery.”

Below is a chart of the widely followed University of Michigan Consumer Sentiment Index.

University of Michigan Consumer Sentiment Chart

Chart courtesy of www.StockCharts.com

As you can see, consumer sentiment has tumbled to its lowest level in … Read More

Why China Catches My Eye as a Top Opportunity Right Now

By for Profit Confidential

My Top Three Foreign Investment OpportunitiesA few years ago, investors couldn’t get enough of Chinese stocks. This led to numerous frauds committed by crooks in China that has since tarnished the reputation and reliability of all Chinese companies, whether they’re legitimate or not, despite their operating in one of the top growth areas in the world.

While I’m not focused on Chinese stocks at this moment due to better trading opportunities in the domestic stock market, I monitor the country and remain convinced it’s still a key place to have some risk capital invested in. When the broader market understands this, I would expect renewed buying in Chinese stocks sometime in the future.

My view is that the country’s current leadership under President Xi Jinping, who assumed power in March 2013, has a vision to create a country of consumers, just like the United States; albeit, I doubt it will come close to what we see here with consumer spending driving 70% of gross domestic product (GDP) growth. In China, consumer spending drives about 30% of GDP so there’s work to do. In the second quarter, retail sales continued at a double-digit growth of 12.4% year-over-year.

The objective to cut the country’s dependence on exports and foreign investment makes sense. With a potential market in excess of one billion people, it’s the right move.

China may not be in the spotlight for investors now, but you cannot ignore the country. With the recent years of underperformance, I see great longer-term upside in Chinese stocks.

The Chinese economy is growing at well below the double-digit growth of the past, but comparatively, the growth is far superior … Read More

Stock Market Pricing-in a Recession?

By for Profit Confidential

U.S. Economy Close to Technical RecessionBy no surprise to me whatsoever, the government’s third and final estimate of first-quarter U.S. gross domestic product (GDP) came in at a negative annual pace of 2.9%. (Source: U.S. Bureau of Economic Analysis, June 25, 2014.) The U.S. economy’s growth rate in the first quarter of this year was the worst since 2009.

I’ve been writing since the fall of 2013 that the U.S. economy would see an economic slowdown in 2014. I have been one of the few economists warning of a recession in 2014. My calls are not to scare or create fear; rather, they are based on the government’s own data.

Not to boast, but it’s like the creators of the first-quarter U.S. GDP report have been reading Profit Confidential! Everything we have been warning about came out in this most recent GDP report.

I’ve been harping on about how the U.S. consumer was tapped out…and low and behold, consumer spending in the U.S. economy increased by only one percent in the first quarter of 2014. In the fourth quarter of 2013, consumer spending increased by 3.3%. The fifth year into the so-called economic “recovery” and consumers are pulling back on spending for the simple reason that they don’t have money to spend.

The poor have no money; the middle class has been wiped out. And the rich are far from spending enough to make up for the lack of spending by the poor and middle class.

But have no fear, dear reader; stocks are up. The stock market is telling us we have nothing to worry about? It seems so.

I, for one, will … Read More

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