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

Monetary Stimulus

Monetary policy is the mechanism through which the supply of money is controlled by monetary authorities. Monetary stimulus is the attempt by the monetary authority to manipulate money supply and generate growth. This can come in the form of lower interest rates, as well by lowering the reserve ration. The reserve ratio is the amount of assets that banks need to have on deposit with a central bank.

Jumping on the Risk Bandwagon? Think Again

By for Profit Confidential

The stock market has an underlying strength to it, seemingly only to be undone by geopolitical events. Fed action always has the potential to shock the system. Negative economic news isn’t fazing this market. On the back of a pretty decent second quarter, many corporate outlooks predict another year of decent growth, particularly with earnings. While the stock market retrenched recently, positive days are still led by the Dow Jones Transportation Average, the Russell 2000 Index, and the NASDAQ components, which are traditionally positive for broader sentiment. Some speculative fervor has come back to two stock market sectors that are traditionally volatile—biotechnology stocks and restaurant stocks. But there really isn’t an underlying trend to latch onto. Jumping on the bandwagon of risky stocks seems unwise considering the stock market is at an all-time record-high. This is a market where equity investors have to be highly selective and wait for the right opportunities to present themselves, if you’re considering new positions at all. This can be in the form of a specific sector theme (like oil and gas, for example) or looking for good companies that have retrenched for their own specific reasons. In any case, with the stock market at a record high, it’s difficult to find value, and new positions become entirely reliant on market momentum, not necessarily individual corporate achievement. There are very few companies that I would consider now, but within the context of a long-term stock market portfolio, investors want their money to be put to work. In equities, I still think that portfolio safety is the name of the game. This is a market that hasn’t experienced a material price correction for five years. There have been retrenchments and price consolidations, but no reset, no revaluation that would make stock market investors with cash want to jump into a marketplace still beset with huge monetary stimulus and strong balance sheets—a marketplace still extremely favorable to equities. Companies for consideration at this time that fit into my earnings (and dividends) safety list include Microsoft Corporation (MSFT), PepsiCo, Inc. (PEP), Johnson & Johnson (JNJ), and 3M Company (MMM). There should be exposure to oil and gas in this short list, too. Previously, I liked Kinder Morgan Energy Partners, L.P. (KMP), but with news that this high-yielding limited partnership is being bought out by Kinder Morgan, Inc. (KMI), I’m looking for a solid new pick in this sector. (See “This Company’s $70.0-Billion Acquisition a Boon for Investors.”) A lot of investors are more risk-tolerant than these mature enterprises might present. But institutional investors are still skittish; they are still buying earnings safety in this stock market. Accordingly, dividend-paying blue chips remain highly correlated to the broader market and for the investment risk, given that this market could experience a 20% correction at any time for a multitude of reasons, new buyers of equities should consider stocks offering earnings and dividends safety. In the equity market—which is a secondary market with a pricing mechanism subject to fear, greed, and the herd mentality—capital preservation is a worthy investment goal. So far in this bull market, blue chips have performed exceedingly well relative to the rest of the stock market and they are still where institutional investors want to be.The stock market has an underlying strength to it, seemingly only to be undone by geopolitical events. Fed action always has the potential to shock the system. Negative economic news isn’t fazing this market.

On the back of a pretty decent second quarter, many corporate outlooks predict another year of decent growth, particularly with earnings.

While the stock market retrenched recently, positive days are still led by the Dow Jones Transportation Average, the Russell 2000 Index, and the NASDAQ components, which are traditionally positive for broader sentiment.

Some speculative fervor has come back to two stock market sectors that are traditionally volatile—biotechnology stocks and restaurant stocks.

But there really isn’t an underlying trend to latch onto. Jumping on the bandwagon of risky stocks seems unwise considering the stock market is at an all-time record-high.

This is a market where equity investors have to be highly selective and wait for the right opportunities to present themselves, if you’re considering new positions at all.

This can be in the form of a specific sector theme (like oil and gas, for example) or looking for good companies that have retrenched for their own specific reasons.

In any case, with the stock market at a record high, it’s difficult to find value, and new positions become entirely reliant on market momentum, not necessarily individual corporate achievement.

There are very few companies that I would consider now, but within the context of a long-term stock market portfolio, investors want their money to be put to work.

In equities, I still think that portfolio safety is the name of the game. This is a market that … Read More

Why a Full-Blown Market Correction Should Be Expected

By for Profit Confidential

Investors Can't Overlook to Succeed in This MarketThe monetary environment is still highly favorable to stocks and should continue to be so well into 2015. However, while this market can handle higher interest rates, stocks can only advance in a higher interest rate environment if gross domestic product (GDP) growth is there to back it up.

Because of the capital gains over the last few years and the across-the-board record-highs in many indices, investment risk in stocks is still high. Accordingly, it’s worthwhile reviewing your exposure to risk, particularly regarding any highflyers in your portfolio; they get hit the hardest when a shock happens.

Currently, geopolitical events between Ukraine and Russia have the potential to be the catalyst for a correction. It could happen at any time depending on what transpires.

The risk of stocks selling off on the Federal Reserve’s actions is diminishing. The marketplace is well informed about the central bank’s intentions and it’s quite clear that Fed Chair Janet Yellen doesn’t want to do anything to “surprise” Wall Street.

I still view this market as one where institutional investors want to own the safest names. The economic data just isn’t strong enough for traditional mutual funds and pensions to be speculating.

This is why the Dow Jones Industrial Average and other large-cap dividend paying stocks are so well positioned. They offer great prospects for increasing quarterly income, some capital gain potential (still), and downside protection compared to the rest of the market.

Of course, all stocks are risky. An equity security is priced in a secondary market where fear, greed, emotions, and a herd mentality are part of the daily pricing mechanism.

Accordingly, anything … Read More

Why It’s Time to Cull Your Stocks

By for Profit Confidential

Still Buying Stocks StopGood numbers are one thing, but stocks did go up in advance of what’s turning out to be a fairly decent earnings season.

It’s not unreasonable at all to expect the market to take a solid break, perhaps for the next two to three months. Of course, predicting corrections and/or consolidations among stocks is a difficult endeavor in an era of extreme monetary stimulus. The Federal Reserve is slowly chipping it away, but it remains very committed to helping capital markets, especially as the economic data continues to be pretty soft.

Stocks are still looking stretched and this market is tired. A 10% to 20% correction would be a healthy development for the longer-run trend. Stocks need a catalyst for this to happen. It could come out of nowhere, and I’m reluctant to be a buyer with so many positions trading at record-highs.

Johnson Controls, Inc. (JCI), a large U.S. auto parts manufacturer, had a modestly positive third fiscal quarter with sales growing three percent to $10.8 billion due to more sales in China.

The company had some one-time restructuring charges during the quarter. Earnings per share from continuing operations (excluding restructuring and one-time items) grew a hefty 17% to $0.84. Management confirmed its full-year guidance, which pleased the Street, but the position is breaking down a bit.

E. I. du Pont de Nemours and Company’s (DD) numbers were uninspiring and the company tried to keep investors interested with a four-percent increase to its quarterly dividend. The position’s starting to roll over and with agriculture being such an important part of the company’s business, changing preferences among farmers hurt its … Read More

How to Invest in a Market Constructed by Central Banks

By for Profit Confidential

How to Profit in a Fed-Built MarketThe resilience the stock market continues to have is a reflection of what continues to be extreme monetary stimulus. And while the stock market is a leading indicator and a bet on a future stream of earnings and economic activity, throughout history, the underlying goal of central banks has been price inflation.

Seemingly, the capitalist economic system is based on two basic underlying factors: property rights and price inflation. And in modern history, the latter, through central bank intervention, is the most important catalyst for the stock market.

In capital markets, long-run history is a very good guide and an important tool in helping to shape your market view. And most importantly, it’s very helpful in laying the groundwork for separating present-day conjecture from what has actually transpired before.

I’m reminded of J. Anthony Boeckh’s book titled The Great Reflation, which provides a non-political long-run analysis on the U.S. economy and its cycles.

It’s a historical breakdown of interest rates, inflation, and monetary and fiscal policies, and how they have affected the stock market. It is required reading for any serious long-term investor.

Written in 2010, the book breaks down financial crises and looks at the long-run effects of price inflation and the effects on capital markets. Boeckh offers some poignant analysis on all kinds of financial topics, and many of his observations have not only come to fruition, but they are also worth consideration.

Boeckh plainly states that the global financial system is flawed because of fiat paper money. And because we use paper money, price inflation exists and capital markets are subject to bubbles.

Add in a … Read More

Market Dynamics Changing; Where’s the Upside for Investors?

By for Profit Confidential

Why Beating the Street Isn’t as Good as Real ValueBeing financial reporting season, it’s important to discern between results that beat Wall Street consensus and real economic growth.

Abbott Laboratories (ABT) just announced better-than-expected first-quarter earnings, but they weren’t better than the comparable quarter of 2013. Operating earnings, earnings from continuing operations, and diluted earnings per share were all down significantly compared to the first quarter of 2013.

So, the illusion can definitely become real in hot markets. Investors are always better off ignoring headlines and going right to the financial statements. Managed earnings are just that—managed.

One company that just produced a very good quarter was The Charles Schwab Corporation (SCHW). The stock broker’s first-quarter sales grew 15% to $1.48 billion on strong growth in asset management and administration fees.

Net earnings leapt 58% to $326 million, or 60% to $0.60 in diluted earnings per share. Top-line growth and strong expense control were the reasons for the strong bottom-line growth.

There’s no real reason why Charles Schwab’s share price should keep on appreciating near-term. All the good news is priced into the shares. The company beat consensus earnings by $0.02 a share, while revenues were in line.

This reporting season, earnings are here to justify current share prices.

I’d be very wary of buying corporate good news now. Market jitters aren’t going away and all it takes is a small catalyst for institutional investors to pull the sell trigger again.

A meaningful correction or price consolidation would be a positive development for the longer-run trend and a good opportunity to consider adding to blue-chip positions.

A good deal of speculative fervor has come out of this market, but … Read More

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