Of all the different elements of the economy, the direction of interest rates is most important. That’s why, as the editors of Profit Confidential, we expend a considerable amount of our time analyzing and providing guidance on interest rates. We believe that the unprecedented debt the U.S. has accumulated will eventually result in foreign investors demanding a better return on U.S. Treasuries. Too many U.S. dollars in circulation will also eventually force interest rates to rise.
Economics 101 suggests inflationary pressure builds during periods of low interest rates. The demand usually increases when people both borrow and consume more. As the price of goods and services is directly correlated with demand, it increases—resulting in inflation.
To tackle inflationary pressures, central banks increase interest rates. Why? Because once they increase interest rates, it is supposed to do the opposite of lowering the rates—forcing people to save and cut back on discretionary spending.
Following a 30-year down-cycle of interest rates in the U.S., we are on the cusp of a new 30-year up-cycle in interest rates; a move that could cripple the government and the economy. This is mainly because the government has added too much debt to its balance sheet, and the Federal Reserve has printed significant sums of money.
After phenomenal amounts of bailouts were doled out, followed by non-stop government spending, the U.S. national debt rose 76.2%—from $9.2 trillion in 2008, to $16.3 trillion in 2012. (Source: TreasuryDirect, last accessed November 27, 2012.)
It gets worse. The current administration said it would keep the budget deficit below $1.0 trillion. It hasn’t. For fiscal 2012, the federal budget deficit was $1.1 trillion, slightly below the $1.3 trillion deficit recorded in 2011. (Source: U.S. Department of the Treasury, October 12, 2012.) What’s more, 2012 marked the fourth consecutive year in which the U.S. government experienced an annual deficit above $1.0 trillion. As a percentage of gross domestic product (GDP), the U.S. government’s budget deficit for the year 2012 stands at seven percent.
Along with skyrocketing government debt, the Federal Reserve has printed $3.0 trillion. Where did the $3.0 trillion come from? It’s not backed by gold. It was simply created out of thin air. And, the presses continue to print an additional $85.0 billion a month!
Looking at an even bigger picture, between January 2000 and September 2012, the amount of U.S. money in circulation (the “M1 money supply”) has increased 112%, or $1.25 trillion. That’s a lot of money printing.
Similarly, the “M2 money supply,” which includes the M1 money supply plus savings deposits, balances in money market mutual funds, and deposits, has increased 118%. M2 is a better measure of actual money supply. Since the beginning of 2000, M2 money supply has increased more than $5.4 trillion. (Source: Federal Reserve, October 11, 2012.) Again, the printing presses have been in overdrive.
Now think of it this way; as more money is created and more debt is added to the federal government’s balance sheet, U.S. economic viability becomes questionable. What does this mean? The interest rate at which the government is currently able to borrow is being kept artificially low. With the government adding more debt and the inflationary pressure building—something has to be done.
Now that the Dow Jones Industrial Average has fallen 1,035 points (six percent) from its mid-September peak, the question investors are asking is “how far will she go?” For small-cap investors, the drama is greater, as the Russell 2000 Index has fallen 12.5% from its July peak.
Since 2009, every market pullback presented investors with an opportunity to get back into stocks at discounted prices. Even some editors here at Lombardi Publishing Corporation see the recent pullback in stocks as an opportunity.
But what happens if it is different this time? How about if stocks just keep falling?
If you have been a long-term follower of my column, you know I have been adamant about an economic slowdown in the global economy.
And let’s face it: the American stock markets have been addicted to the easy money policies of the Federal Reserve, namely money printing and record-low interest rates. But that is all coming to an end now. The Fed will be out of the money printing business soon and it has warned us on several occasions that interest rates will need to rise.
The International Monetary Fund (IMF) is now (or should I say, is finally) warning about an economic slowdown in the global economy. In its most recent global growth forecast, the IMF said, “With weaker-than-expected global growth for the first half of 2014 and increased downside risks, the projected pickup in growth may again fail to materialize or fall short of expectation.” The IMF also said the global economy may never see the kind of expansion it experienced prior to the financial crisis. (Source: “IMF says economic … Read More
One large-cap that always reports early is Costco Wholesale Corporation (COST). The company’s numbers came in solid.
Costco hit a wall not too long ago and was hard pressed to produce growth. But the company’s latest quarter beat the Street with considerable sales strength in the month of September.
In its most recent quarter, there was considerable growth in the company’s cash position and shareholders’ equity improved significantly.
For the 16 weeks ended August 31, 2014, Costco’s total sales grew nine percent to $35.5 billion, which is an impressive performance in retail. Of these total sales, membership fees (which are total gravy) grew 7.3% to $768 million.
Comparative store sales in the most recent quarter grew six percent in the U.S. market and the same internationally. If it weren’t for weaker gasoline prices and the stronger U.S. dollar, international comparative store sales would have improved by eight percent.
Earnings in the company’s fiscal fourth quarter grew to $687 million, or $1.58 per diluted share, representing a 13% gain on a per share basis compared to the same quarter last year.
Costco has been consistently ticking higher on the stock market since this time in 2010. The position hit a high in late 2013, then retreated commensurately with its financial growth. It’s only in the last couple of months that the company’s stock has reaccelerated.
For a new price trend, the stock needs to convincingly break out above $130.00 a share, which I think is probable.
The company’s latest quarter was very good and a reflection of solid management execution.
On the day that Costco reported, the Federal Reserve released the … Read More
More good numbers are coming down the earnings pipeline, and if the broader stock market is going to take a well-deserved rest, corporate results are a positive indicator going into 2015.
Global Payments Inc. (GPN) is a very good business in terms of its financial growth. The Atlanta-based company is one of the world’s largest processors of credit and debit card payments and business is growing by the double-digits.
The company’s first fiscal quarter of 2015 (ended August 31, 2014) produced total sales of $705 million for a comparable quarterly gain of 12%. GAAP diluted earnings grew 26% to $1.10 per share or 18% to $84.4 million.
Management increased its fiscal 2015 full-year sales estimate to between $2.74 and $2.79 billion, representing comparative growth of between seven and nine percent. Plus, the company expects margin expansion going forward, which will go right to earnings.
Global Payments has been in a prolonged consolidation on the stock market and finally broke out of this trend about this time last year. Given the company’s solid fiscal first quarter, further price appreciation from this position is likely.
Also announcing better-than-expected numbers was McCormick & Company (MKC). The iconic spice and condiment manufacturer is often cited as a more risk-averse stock for income-seeking investors.
This business is very mature and no one expects it to grow by double-digits. But the company just experienced very good growth in its bottom-line and the stock jumped on the news.
McCormick’s third-quarter sales grew three percent to $1.04 billion. The company’s Chinese operations produced 15% comparative growth in the most recent quarter.
Higher operating income and a lower tax … Read More
According to the Investment Company Institute, assets in institutional money market funds increased $17.19 billion to $1.69 trillion for the week ended on September 24, 2014. This was the biggest weekly increase in these money market funds in the last five months. (Source: Investment Company Institute web site, last accessed October 1, 2014.)
This is critical: when institutional investors sense the risk of a stock market sell-off in key stock indices, they tend to move their assets into highly liquid money market funds.
The sudden rush of institutional money into money market funds correlates with the National Association of Active Investment Mangers (NAAIM) Exposure Index below. It shows a clear decline in the amount of stocks active investment managers are holding in their portfolios.
Chart courtesy of www.StockCharts.com
Since late 2014, we’ve seen investment managers reducing their exposure to key stock indices. While they were fully invested in early 2014, we see investment managers are only 59.76% invested in stocks right now. Is it just an anomaly they are selling stocks when money market funds are seeing an influx of cash? I hardly think so.
Finally, let’s look at small-cap stocks, as they are facing severe scrutiny. Key stock indices like the Russell 2000 that track the performance of small-caps are plunging. The Russell 2000 is now down more than 10% since it made new highs in March of 2014. This small-cap index has now broken down below its long-term uptrend, as illustrated in the chart below.
Chart courtesy of www.StockCharts.com
(Let’s remember that the trend is your friend—until it’s broken.)
Dear reader, all of this should be nothing new … Read More
With 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
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