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

Municipal Bonds

Municipal bonds are bonds issued by an American county, city, publicly owned airport, seaport, school district, or utility. The bonds are issued to improve the said cities or counties, or are tied specifically to a project within a county or city. Therefore, the bonds are backed by the county, city, or specific project. One general aspect of municipal bonds that makes them attractive is that they provide income with great tax benefits. Usually, municipal bonds are completely exempt from federal taxes. Municipal bonds trade in the bond markets, much like most of the other major bonds in the U.S.

Another Flashing Red Light: Investments in Stocks by Households and Nonprofits Reach Record High

By for Profit Confidential

key stock indicesThe general consensus among stock advisors is that the key stock indices will continue to go higher. Each day, I hear about another “bear” throwing in the towel and turning bullish on key stock indices.

“Don’t fight the fed or the tape; just buy stocks, and you’ll do fine” has become the norm again. Sadly, this worries me a lot because the fundamentals that drive the key stock indices higher are becoming weaker with each passing day.

As an example, for the third quarter, the corporate earnings growth rate for the S&P 500 companies was only 2.9%. To some, this might sound great, but look at these three facts: 1) corporate earnings were up 2.9% in the third quarter, but the stock market is up about 13% from the beginning of the third quarter; 2) corporate earnings growth so far in 2013 is running at its slowest pace since 2009; and 3) only 52% of the S&P 500 companies were able to beat revenue estimates for the third quarter. (Source: FactSet, December 6, 2013.) This suggests corporate earnings aren’t really coming from companies selling more, but rather from stock buyback programs and cost-cutting.

Troubles for corporate earnings don’t just end there. Corporate earnings are expected to be weaker in the fourth quarter. So far, of the 103 companies in the S&P 500 that have issued corporate earnings guidance, 89% of them have issued negative guidance!

And aside from corporate earnings, there is another problem brewing for key stock indices…

The chart below shows the dollar amount of stocks owned by households and nonprofit organizations. At the end of the third … Read More

Detroit Bankruptcy Approval: A Green Light for More to Join?

By for Profit Confidential

Detroit, the “Motor City,” has been approved for bankruptcy. In making the ruling, Judge Steven W. Rhodes, who sits in the United States Bankruptcy Court for the Eastern District of Michigan, said, “This once proud and prosperous city can’t pay its debts.” He added, “It’s insolvent. It’s eligible for bankruptcy. But it also has an opportunity for a fresh start.” (Source: “Detroit Ruling on Bankruptcy Lifts Pension Protections,” New York Times, December 3, 2013.)

In his ruling, the judge also made it very clear that the pensions of city employees might be at stake. He said, “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy.” (Source: Ibid.)

Looking at what happened to Detroit, I question if we are going to see a spree of municipal bankruptcies in the U.S. economy.

You see, Detroit was a prime example of a city registering budget deficit after budget deficit, year after year. It borrowed to pay for its expenses. It came to a point where it had to tell its municipal bonds holders, “Sorry, we can’t pay you,” and its pensioners, “Sorry, your pensions are non-existent.”

After the housing bubble burst in 2007, cities across the U.S. economy started to register budget deficits as they continued to spend at the same pace despite the decline in property tax revenue.

As it stands, across the U.S. economy, there are a significant number of cities that are struggling to control their budget deficits. Mind you, it’s not just smaller counties that are struggling with this problem. Major cities in the U.S. economy, like Chicago, Los … Read More

Three Key Indicators Say U.S. Economy in Trouble

By for Profit Confidential

 budget deficitThe mainstream and politicians tell us the “wounds” of the financial crisis are over and the U.S. economy is in recovery mode. This simply isn’t true.

A few of the key indicators I follow to see where an economy stands are personal income, consumer demand, and businesses’ activity. All three of these indicators are telling me the U.S. economy is definitely going in the wrong direction.

First of all, the income gap in the U.S. economy continues to grow. The top earners make more, while the lowest income earners make less. According to the Wage Statistic from Social Security, in 2012, 23 million of the lowest wage earners earned a total of $47.0 billion in the U.S. economy. But those who earned $10.0 million or more annually in the year 2012 earned $64.3 billion! Here comes the kicker: there were only 2,915 wage earners in this category in the U.S. economy last year. (Source: Social Security, November 5, 2013.) Yes, you read that right. Less than 3,000 people cumulatively made more than 23 million people.

The bottom line: while Wall Street and big business has boomed again, the average working American family is struggling under an after-inflation personal income that is lower than it was in 2009—four years ago. In 1999, real median household income (that’s adjusted for inflation) in the U.S. economy was $56,030. By 2012, that number was $51,017. (Source: “Real Median Household Income in the United States,” U.S. Department of Commerce, September 18, 2013.)

Next, American consumers are pulling back on their spending—something that’s not supposed to happen when an economy is recovering.

One indicator of consumer … Read More

Municipal Debt Crisis Far from Over

By for Profit Confidential

We have seen cities like Detroit and others in California tell their municipal bonds investors, “Sorry, we can’t pay you.” The reason behind this? Their budget deficit was out of control, they reached the breaking point, and they filed for bankruptcy.

But the troubles of municipalities and cities aren’t behind us. In fact, they are marching forward with full force. And it’s not just rural cities and counties that are struggling to fix their budget deficit; major ones are doing the exact same thing. And truth be told, they are failing at it.

Take Fresno, California, for example. In the fiscal year 2014—which began on July 1, 2013 and ends on June 30, 2014—Fresno, one of the largest cities in California, will register a budget deficit of $6.0 million. If the city is unable to reduce its budget deficit in the fiscal year 2014, then its budget deficit can grow to as much as $32.2 million in the next five years. (Source: “FY 2014 Adopted Budget,” City of Fresno, California, May 29, 2013.)

And Fresno has worked very hard to keep its budget deficit under control. In the last four years, the city has decreased its workforce by 1,200 employees (25% of the city’s workforce), reduced or completely eliminated the maintenance and replacement of equipment, and now relies on volunteers for parks maintenance, community centers, and for different functions in the police department. The city has also reduced the number of employees working in public safety. One would assume that after this many cuts, the budget deficit would be controlled; but that’s certainly not the case for Fresno, California.

While … Read More

Hundred-Thousand Investors Told “Sorry, We Can’t Pay You” Just the Beginning?

By for Profit Confidential

municipal bondsMajor cities across the U.S. economy are struggling. Yes, we saw great cities like Detroit go bankrupt. But don’t for a second believe it’s all over. The reality is we will have more situations like Detroit.

Take the City of Los Angeles, for example. In his budget proposal to the city council, the mayor of the city, Antonio Villaraigosa, said Los Angeles will have a budget deficit of $216 million in the current fiscal year. (Source: City of Los Angeles, April 20, 2013.)

But Los Angeles isn’t the only problem city in California. When I look at San Francisco, it shows even more trouble for the municipal bonds market. The city’s controller says the budget deficit will increase from $283 million last year to $829 million by fiscal 2015/2016. (Source: City of San Francisco, Office of the Controller web site, last accessed September 16, 2013.)

Minneapolis, Minnesota was downgraded by Moody’s Investors Service recently. This puts the city’s $679 million worth of general obligation municipal bonds on the line. (Source: Moody’s Investors Service, July 29, 2013.) A couple of the reasons for the downgrade by Moody’s were that property values in the city have declined and it has a pension liability of 4.3 times the operating revenue it received in fiscal 2012!

Risks are growing in the municipal bonds market. Let’s not forget: in Detroit, over 100,000 municipal bond investors were told, “Sorry, we can’t pay you.”

What we are seeing with U.S. cities sinking in debt should alarm us, but just like other crisis situations, like auto loans and student debt, no one wants to talk about it.

Municipal … Read More

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