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

Deficit

If someone were to spend more than they earn, that difference is called the deficit. The deficit has been a problem for many nations, as politicians have repeatedly spent more money than they are pulling in from revenue. Running a deficit is tolerable if it is temporary and is closely followed by a surplus that paid off the accumulated debt. The problem arises if a government continually runs a deficit, which then causes the overall debt to increase.

America: A Mirror Image of Japan 15 Years Later?

By for Profit Confidential

A Mirror Image of JapanWe need to learn from this example…

Similar to the U.S. economy, only years earlier, the Japanese economy also burst following a boom in real estate prices. To help revive its economy, the Bank of Japan brought interest rates to near zero in 1999 and has done several rounds of quantitative easing since. The central bank of Japan has increased its balance sheet to 166 trillion yen. (Source: Wall Street Journal, March 21, 2013.)

But all this monetary stimulus—interest rates near zero for years and lots of money printing—has helped the Japanese economy. In fact, global exports from the Japanese economy fell 2.9% in February 2013 from February 2012. This is important because it shows how the Japanese economy is struggling even after implementing unheard of monetary policy intended to bring economic growth to the country—similar to what the Federal Reserve is doing now in the U.S.

February marked the eighth consecutive month of slowing exports and an increasing trade deficit (more imports than exports) for Japan—the biggest streak of trade deficits since 1980. (Source: Bloomberg, March 21, 2013.)

Japan’s national debt to gross domestic product (GDP) stands at about 204% of GDP—this shows you just how easy monetary policy has been in Japan.

The Japanese economy should be looked upon as a good example for the Federal Reserve to see how its monetary policy will play out in the U.S. economy.

What has this done for the Japanese economy with all its paper money printing? Not much, to say the least. Since 1998, wages in the Japanese economy are down seven percent, property prices are down 51%, and … Read More

Beware Municipal Bond Investors: Storm Ahead

By for Profit Confidential

Municipal bonds investors might be headed towards a storm, which may cause significant damage to their portfolios. Cities within the U.S. economy are in distress—they are struggling to keep their spending in order to not increase their budget deficit.

Detroit, one of the biggest cities in the U.S. economy, was handed an emergency manager by the state to take care of the city’s budget deficit. The city is running a deficit of $327 million and has $14.0 billion in long-term obligations—mainly municipal bonds backed by the city’s water and sewer systems. (Source: “Snyder Says Detroit Needs Emergency Manager to End Fiscal Crisis,” Bloomberg, March 1, 2013, last accessed March 21, 2013.)

Michigan’s Governor, Rick Snyder, explained the city’s situation, saying, “it’s a sad day, a day I wish never happened, but it’s a day of promise.” (Source: Ibid.)

If the state didn’t intervene, then Detroit would have been the largest municipal bankruptcy in the U.S. economy—leaving municipal bonds investors in misery. In November 2011, Jefferson County, Alabama was the largest municipal bankruptcy in the U.S., involving more than $3.1 billion in municipal bonds.

Municipal bonds investors have enjoyed tax advantages in the U.S. economy, but if there is a downturn in these types of bonds, then the benefits will quickly disappear.

What’s ahead for municipal bonds investors looks even more troublesome. Williston, North Dakota’s municipal bonds were downgraded by Standard and Poor’s from “A-” to “BBB+.” (Source: KFYR-TV, February 28, 2013.) The municipal bonds credit rating went from being in the upper investment grade to almost the non-investment grade.

Moody’s Investor Services has downgraded 11 municipalities in the U.S. from … Read More

U.S. Debt-to-GDP Ratio This Year to Surpass Greece’s 2009 “Danger” Level

By for Profit Confidential

U.S. Debt-to-GDP RatioThe U.S. Department of the Treasury reported that the U.S. government incurred a deficit of $204 billion for the month of February 2013. So far, we are into the first five months of the government’s fiscal year (started October 1, 2012), and the U.S. government fiscal deficit has already grown by $494 billion. (Source: U.S. Department of the Treasury, March 13, 2013.)

The U.S. government has been running a deficit of over $1.0 trillion in each of the past four years. For 2013, the Congressional Budget Office (CBO) expects the deficit to be $845 billion—which is less than a trillion-dollar budget. (Source: The Hill, February 5, 2013.)

(But if I pro-rate the $494 billion the government has already tagged on this year, a rate of $99.0 billion a month, I get another $1.0-trillion deficit year.)

Sadly, while many are taking “less” deficit as good news, our national debt is still growing. Remember: when the government doesn’t have money to spend, it must borrow. The budget deficit for this year is going to see the U.S. national debt increase to well above $17.0 trillion.

In February, the U.S. government paid interest of $16.8 billion on the debt it has borrowed through issuing bonds. Since the beginning of the fiscal year, it has incurred interest expenses of $168.4 billion.

I don’t think the mainstream realizes that the more the government adds to the national debt through budget deficits, the more interest payments it will have to make. This year it expects to pay almost half a trillion dollars in interest. This amount will rise as the national debt increases and interest … Read More

Stock Market Overpriced by 50%?

By for Profit Confidential

Stock Market OverpricedAs the key stock indices approach highs not seen since just before the financial crisis, the underlying fundamentals are screaming “watch out.” The stock market could be edging higher on nothing but false optimism and greed.

The most basic reason for any stock market rally, corporate earnings, is missing from the equation. The bellwether stocks are flashing warning signals. Just as one example, United Parcel Service, Inc (NYSE/UPS) reported lower-than-expected corporate earnings for the fourth quarter of 2012. For the first quarter of 2013, the company expects to earn less than originally anticipated. (Source: Associated Press, January 31, 2013.)

Looking at corporate earnings expectations from a broader viewpoint, they are declining as the key stock indices inch higher. The corporate earnings growth rate for S&P 500 companies in the first quarter of this year was forecast at 5.1% in September of 2012. In December, the forecast declined to a corporate earnings growth of 2.4%. Now, according to FactSet, the corporate earnings growth rate for the first quarter of 2013 stands at -0.04%. (Source: FactSet, February 15, 2013.)

As I have documented in these pages, companies on key stock indices are showing better corporate earnings by cutting costs and buying back shares, as opposed to increasing revenues. In the fourth quarter of 2012, employee compensation (wages) only accounted for 54.7% of U.S. gross domestic product (GDP)—the lowest level since 1955. (Source: Wall Street Journal, February 11, 2013.)

Key stock indices are becoming significantly overpriced. The value of the U.S. stock market stands at about 133% of GDP. The average for the past 60 years has been around 82%. By this … Read More

From Motor City to Fresno, Credit Ratings Being Slashed

By for Profit Confidential

The Congressional Budget Office (CBO) expects the U.S. federal government to have a lower budget deficit this year than those of the previous four years—finally getting the annual deficit under $1.0 trillion (although, not by much). But I am skeptical when it comes to the CBO estimates, as financial conditions at the more local level paint anything but a rosy picture.

Our country has already faced one credit rating downgrade and chances are another one is in the making. Why? Cities across the U.S. are in deep trouble, as their massive deficits continue to increase.

Take Detroit, for example. The city is on the verge of bankruptcy again due to the severe downturn in the local economy and the city’s annual deficit. Detroit’s residents are fleeing the city, with the population down 30% since 1990. (Source: Reuters, January 28, 2013.)

Troubles in California persist. Multiple cities in the state have already filed for bankruptcy; others may also follow suit. Fresno, the fifth-largest city in the state, is in financial stress. Fresno’s credit rating has already been downgraded by Moody’s. The credit rating agency notes that the city already has a high deficit, high payrolls, and other fixed costs in the background of a deteriorating economy. (Source: The Sacramento Bee, February 11, 2013.)

Sadly, this doesn’t just end here. Moody’s downgraded 11 municipalities in the U.S. from stable to negative—and all these cities had a credit rating of “AAA” prior to the downgrade. (Source: Barron’s, February 6, 2013.)

It would be good to finally see the federal government get its annual deficit under $1.0 trillion, but issues with cities … Read More

« Older Entries

This is an entirely free service. No credit card required.

We hate spam as much as you do.
Check out our privacy policy.