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

Equities Market

The equities market, a public market, is the listing of shares of a company on an exchange. These shares then are available to all investors interested in buying a piece of the company. The stock exchanges regulate the listing of company shares by ensuring that the companies report all of their audited financial records for prospective investors to access. Investors then buy and sell shares, determining the value of the company based on the financial results and future prospects of the firm. Investors include the retail client (general public), mutual funds, hedge funds, corporations and other large institutions such as pension funds.

How Peter Lynch Got It Right 20 Years Ago

By for Profit Confidential

How Peter Lynch Got It Right 20 Years AgoThere’s always strength in numbers.

The equities market is definitely due for a prolonged break, but one subsector I always follow is restaurant stocks. These are key benchmark stocks, and the performance of these stocks offers up an unscientific survey on consumer spending and sentiment.

So many restaurant stocks experienced a breakout at the beginning of the year. Then they took a break and re-accelerated again.

If there is more confidence in the economic landscape, consumers spend money on eating out or ordering in food.

Restaurant stocks are a group where you can make good money as a stock market speculator. Peter Lynch (the famous manager of the Magellan Fund) always advocated for this sector, telling investors to look here for opportunities. He wrote a chapter on it in his book Beating the Street.

What Lynch advocated, and I agree with wholeheartedly, is that a successful restaurant company must have an experienced and capable management team, proper financing, and a deliberate and methodical approach to expanding the concept. He advocated that a company’s slow and steady business expansion is what wins the race at the end of the day.

The great thing about restaurant stocks is that they don’t have to have a brand-new concept to be successful.

Cracker Barrel Old Country Store, Inc. (NASDAQ/CBRL) is one of the many companies that have been hugely successful over the last few years.

Cracker Barrel has a price-to-earnings (P/E) ratio of approximately 18 and is yielding 2.3%. The position has doubled on the stock market since the fall of 2011.

The company’s revenues in its latest quarter grew 4.4% to $702.7 … Read More

Why Nikkei Sell-Off May Foreshadow Things to Come

By for Profit Confidential

Why Nikkei Sell-Off May Foreshadow Things to ComeThe one-day sell-off last week in Japan’s equities market with the benchmark Nikkei 225 plummeting more than seven percent in one day should not be ignored; in fact, the drop may be a harbinger of things to come. I don’t have a crystal ball, but my market sense is tingling.

The reality is that the sell-off in the equities market was not a surprise, given that the Nikkei has advanced 70% over the past six months. And this advance was driven largely by Prime Minister Shinzo Abe’s aggressive 10-year stimulus strategy to jumpstart the dormant Japanese economy.

Yet what was more concerning was the lack of a follow-through by the Nikkei equities market after the sell-off, as the index rallied a mere 0.9% the following day.

Nikkei equities market

Chart courtesy of www.StockCharts.com

The market’s fear is that if the selling continues on the Nikkei, this could drive down confidence in the equities market and trigger deeper losses on the horizon, including declines in domestic trading.

The Japanese equities market could easily go lower, given the advance so far.

For Prime Minister Abe, should the Japanese equities market reverse course and decline, the move would likely erode confidence in Japan and test Abe and the country’s resolve.

In my view, as I have discussed in these pages in my previous commentary on Japan (read “Japan Not Home-Free Despite Strong GDP”), the country’s aggressive fiscal and monetary policy is not a sure bet to get Japan out of its economic abyss.

In fact, the aggressive printing of money in Japan will create a bloated national debt level on the country’s balance sheet, which is … Read More

Is Gold’s Near-Death Crisis Over-Exaggerated? Concerns of a Market Meltdown May Not Be

By for Profit Confidential

Is Gold’s Near-Death Crisis Over-ExaggeratedCommodity prices have been heading lower on the charts.

In fact, it has been an awful few days for gold as prices plummeted, failing to hold $1,500 an ounce.

Prices dove right through support at $1,400 to $1,385.62 on Monday—the lowest level since 2011.

The shiny yellow ore is in a bear market. Down 27% from its magical peak of $1,920 in September 2011, it has been nothing but turmoil for investors in the yellow metal.

As I said in a recent commentary, I have lost confidence in the metal as a safe haven investment at this point. I’m not even sure I would enter on the current weakness.

The price chart says “sell.” Follow the trend, and you may be able to squeeze out some profits on an oversold bounce trade; but extending the trend forward, things don’t look good for gold.

Now we will need to see if the precious metal can hold $1,400.

As we move lower, there are now concerns of a meltdown in the gold sector, especially if prices continue to trend lower toward the $1,200 level.

Goldman Sachs, which recently turned bearish and advised shorting the metal, is fearful of gold prices dropping to the $1,200-an-ounce level—as this level also represents the cash cost to produce gold at this point. (Source; Cosgrave, J., “The Scary Number for Gold Investors: $1200,” CNBC, April 15, 2013.)

The $1,200-an-ounce cost of production is clearly an issue, especially for the smaller mining companies that are not as cost-effective or able to survive a cash crunch, compared to the mid- to large-tier producers, like Newmont Mining Corporation (NYSE/NEM). (Read … Read More

Rising Resistance to the Fed’s Easy Money: Time to Scale Back Bond Purchases?

By for Profit Confidential

Time to Scale Back Bond PurchasesThe equities market continues to edge higher, with no apparent evidence of a pending letdown by investors despite the multiyear topping action in the S&P 500.

Once again, I say the rise and support of the stock market is clearly driven by the Federal Reserve’s loose monetary policy. This has been the story behind the upward move in the current bull market. It’s true the domestic and global economies have improved since the Great Recession in 2008, but in my view, it’s nowhere near the level to which we should see the market rise.

The problem that lies ahead is not only the inflated market and a sense of vulnerability as investors let their guard down, but the demand for goods and services could result in higher prices due to the excess in demand over supply. (The rich sure like the easy money. [Read “Higher Taxes: Who Cares? Not the Rich.”]) The end result could be inflation surfacing down the road, and we all know that means higher interest rates.

So while Federal Reserve Chairman Ben Bernanke continues to buy $85.0 billion in bonds each month to drive down longer-term interest rates, enough is enough.

Witness that we are seeing more market watchers and Fed members coming out and expressing the need for the Federal Reserve to at least begin scaling back its bond purchases. The problem is that the Federal Reserve has already said it will not move on interest rates until the country’s unemployment rate falls to 6.5%, and this will not happen for a few years.

In an interview with CNBC, James Bullard, the president of the … Read More

Investors Down-Shift Risk, Search for Safety Ongoing Theme for 2013

By for Profit Confidential

Search for Safety Ongoing Theme for 2013If the first-quarter earnings season turns out to be as bad as the experts expect, then it may be time to look for safety. That means lightening up the load on high-risk stocks and shifting your focus to companies that you know will be around 50 years from now.

The search for safety appears to be the ongoing theme this year, especially within the blue chip stocks that make up the Dow Jones Industrial Average. The index is up 11.2%, ahead of the broader S&P 500, along with the NASDAQ and Russell 2000.

Small-cap stocks, which have been sizzling on the chart, have been underperforming in the recent weeks, as investors shift to the safety of blue chips and large-cap stocks.

The chart below shows the recent superior performance of the Dow Jones versus the NASDAQ, shown by the blue line, and the Russell 2000, the green line.

$INDU Dow Jones Industrial Average stock chart

Chart courtesy of www.StockCharts.com

After the first week of April, blue chips have fared the best, down just 0.09% as of April 5, which is much better than the decline of 2.94% and 1.96%, respectively, in the Russell 2000 and NASDAQ. As the market risk rises—and I feel it is—I expect to see more money flow from higher-risk investments to lower-risk ventures, such as the blue chips.

The move to Dow blue chips is even more popular, given the dividends available on many of these stocks, which is attractive compared to historically low yields available with bonds.

When you are earning less than one percent on short-term bonds, the choice to look at dividend stocks and the equities market is easy.

The … Read More

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