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

Posts Tagged ‘austerity measures’

All of a Sudden, 2013 Becomes Another Trillion-Dollar Deficit Year

By for Profit Confidential

2013 Becomes Another Trillion-Dollar Deficit YearIn its monthly statement of receipts and outlays for the month, the Treasury Department reported that the U.S. government incurred a budget deficit of $107 billion for the month of March 2013. (Source: Department of the Treasury, April 10, 2013.) This monthly budget deficit was a result of the government spending $293 billion while only taking in $186 billion in March.

Since October 1, 2012, the beginning of the government’s fiscal year, the government has spent $600 billion more than it has taken in. Hence, for the first five months of its current fiscal year, the budget deficit is already $600 billion.

We know the U.S. government has run a budget deficit of more than $1.0 trillion for each of the last four years. If the current pace of spending more than what is coming in continues in the current year, then 2013 will be another one-trillion-dollar budget deficit year.

A quote from President Herbert Hoover comes to mind when I see five years of trillion-dollar deficits. He said “Blessed are the young for they shall inherit the national debt.” (Source: Brainy Quote, last accessed April 11, 2013.)

As the U.S. government adds to its budget deficit, it has to borrow more to cover the expenses. This way, our national debt continues to increase daily. We are on pace to surpass $17.0 trillion in national debt this year. A $20.0-trillion national debt is not far away.

For fiscal 2014, President Obama has proposed a budget of $3.778 trillion. In this budget, there are increases in taxes and lower spending on government programs like social security. (Source: Wall Street JournalRead More

Flat Sales for Wal-Mart Warning Sign of Even Weaker Consumer Spending Ahead

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Flat Sales for Wal-Mart Warning Sign of Even WeakerThe Consumer Confidence Index tracked by the Conference Board plummeted 14% in March 2013 from the previous month. Of the respondents, 36.2% believed jobs are hard to get and only 9.4% thought there were enough jobs out there in the U.S. economy.

As consumer confidence goes the wrong way, I am seeing consumer spending edge downward. Consider core durable goods orders for February. New orders for manufactured durable goods excluding transportation declined 0.5%. (Source: U.S. Census Bureau, March 26, 2013.) Companies aren’t buying!

And inventories of manufactured durable goods have risen in 16 of the last 17 months—today, they stand at their highest level since 1992. Inventories for durable manufactured goods increased 0.4% in February, after a rise of 0.3% in January. What this tells us is that businesses are selling less.

Businesses may want to add to inventory in times of economic growth, but when consumer confidence is anemic, I doubt that is the case. It’s a chain reaction; if consumers think they will face troubles ahead, they hoard their cash. They shy away from buying, and companies sell less.

As consumer confidence falls, retailers often are the first to see consumer spending pull back. Take Wal-Mart Stores, Inc (NYSE/WMT), for example. Wal-Mart is expecting its same-store sales to be flat in its current quarter. (Source: Reuters, March 12, 2013.) Wal-Mart is considered a low-end retailer offering lower prices to consumers. Sales staying flat are nothing but a warning sign for even weaker consumer spending ahead.

As I have been continuously harping on about in these pages, consumer confidence isn’t present in the U.S. economy. It needs to make … Read More

“Cyprus Problem” a Clear Indicator of What Could Be Ahead for France, Italy, Spain

By for Profit Confidential

As mainstream economists continue to focus on the sovereignty of the smallest nation in the eurozone, Cyprus, my worries are focused on the four main economic hubs in the region.

Germany, the main economic hub in the eurozone, is hinting at an economic slowdown ahead, as the crisis in the region becomes more severe. The Ifo Business Climate Index for Germany edged lower in March. Businesses in the country are pessimistic about the current business environment and future business development. (Source: Ifo Institute for Economic Research, March 2013.)

The Flash Manufacturing Purchasing Managers’ Index (PMI) for March showed that Germany is experiencing the slowest growth this year. The Flash PMI dropped to a three-month low to 51 in March, compared to 53.3 in February. (Source: Markit, March 21, 2013.) A reading below 50 indicates contraction in the manufacturing sector.

Similarly, France, the second-biggest economic power in the eurozone, is facing an economic slowdown. The country is faced with high unemployment and an economy that is deteriorating.

Italy, the third-largest producer in the eurozone, is caught in a downward spiral, with its troubles increasing on a daily basis. In January, retail trade in the country decreased 0.5% from December of 2012. Compared to January of 2012, the measure for sales at retail outlets fell three percent. (Source: Italian National Institute of Statistics, March 27, 2013.)

Finally, Spain, the fourth-biggest economy in the eurozone, hasn’t taken any rest from the economic slowdown since the debt crisis began. The central bank of Spain announced the country’s gross domestic product (GDP) will contract by 1.5% in 2013 and unemployment will rise above 27%. … Read More

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

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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

Don’t Be Fooled by the Dow’s Recent Record-Highs

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Don’t Be Fooled by the Dow’sI will be first to say that this is a difficult market to play, and it’s certainly full of stock market risk. On one hand, the Dow Jones Industrial Average eclipsed a new record last week when the blue chips index surged to an all-time new record high of 14,413, easily blowing away the previous mark of 14,164 achieved on October 9, 2007. But my trading sense is telling me that we may be close to a near-term top.

I’m not trying to scare you, but do you really think the Dow can advance 42% this year? I doubt it, unless you believe the Dow will reach 18,607 by the year’s end. This figure is based on an annualized return of 9.9% year-to-date. This alone indicates stock market risk.

In my view, the rally in the Dow has been overdone. After trading just above 8,000 a few years back prior to the most recent bull wave that resulted in the current record high, this only adds to the stock market risk.

While I like records, I wonder if the Dow deserves this one. While the big U.S. companies are faring better, the growth is nowhere close to what we saw prior to the Great Recession in 2008.

The reality is that the pumped-up stock market may have more to do with the excess liquidity that is being pumped into the monetary system by the Federal Reserve and central banks around the globe—which adds to the stock market risk. The low interest rates translate into low-yielding bonds, unless you’re willing to take the risk to invest in Spain, Italy, Portugal, … Read More

Following the Example: Eight Rounds of Money Printing Later, Japan Falls into Recession for the Fifth Time

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Japan Falls into Recession for the Fifth TimeLast Wednesday, as I was listening to Ben Bernanke during a press conference about the Fed’s recent money printing actions and future plans to spur the U.S. economy, I was wondering why we aren’t looking more at the Japanese economy and what happened in its lost decades. (It used to be called “lost decade.” It’s now been 20 years—hence, officially, it’s “lost decades” now.)

You see, what the Federal Reserve is doing to keep the U.S. economy going—aggressive growth of its balance sheet as a result of multiple rounds of quantitative easing—the Japanese have also done. The Bank of Japan flooded the Japanese economy with money—it has done eight rounds of quantitative easing and has been keeping interest rates artificially low for many years. With all of this, after 20 years, the Japanese economy still hasn’t found growth. (Source: Telegraph, September 2012.)

Quantitative easing hasn’t worked for Japan. According to revised numbers issued by the government, the Japanese economy contracted at the rate of 0.1% annually in the second quarter of 2012. (Source: Financial Times, December 10, 2012.) The Japanese economy is now back in recession, as it has again achieved negative growth in gross domestic product (GDP) for two consecutive quarters. In the third quarter of 2012, the Japanese economy contracted by 0.9%. (Source: International Business Times, December 9, 2012.)

This is the fifth time the Japanese economy is entering a recession in the last 20 years!

Not only is the Japanese economy going into another economic slowdown after a rigorous amount of money printing, but also the Japanese yen has fallen in value against other … Read More

Pension System Collapsing; Higher Taxes and Austerity Ahead

By for Profit Confidential

As debt-infested European countries are struggling with implementing austerity measures, American taxpayers should buckle up for a taste. The U.S. economy is on its way to austerity measures, but not by choice.

According to a study done by investment research firm Morningstar, Inc., 21 states in the U.S. economy have pension systems that are in poor financial condition or that are not fiscally sound. Among the states, Illinois, Kentucky, and Connecticut are the lowest-funded states—at 43.4%, 50.5%, and 53.4%, respectively. (Source: Morningstar, November 26, 2012.) As per Morningstar’s standards, a pension system must have a funded ratio of 70.0% or more in the U.S. economy to be considered financially sound, meaning it should have at least $0.70 for every dollar of liabilities.

Other states, such as Arizona, are struggling to get their pension system in order, as well. In 2010, the state was short the $12.0 billion it needed to pay for its obligation. Fast-forwarding to 2011, the gap had grown and Arizona’s pension system needed $13.0 billion to cover its $48.0 billion pension obligation. (Source: Arizona Capitol Times, December 7, 2012.)

Kentucky’s pension system is following in the same footsteps. It needs $33.0 billion to overcome its unfunded liabilities. (Source: Courier Journal, December 11, 2012.)

My question: where will the states get the money to fund their pension systems? If you guessed the federal government, then you may be right. As the pension system deteriorates in the U.S. economy, I believe states will have no choice but to look at the federal government to bail them out.

Hence, you can see why I wouldn’t be surprised to … Read More

Get Ready for a Zero Return Stock Market in 2013

By for Profit Confidential

Zero Return Stock Market in 2013The stock market bounced back from an oversold position (although a week later than I thought it would), but there aren’t too many reasons why it should go upward. For the most part, earnings growth is expected to be flat in the fourth quarter. The eurozone is in recession, and Germany expects next year to be tough. And there is the prospect of new austerity measures in both Europe and the U.S. So, other than the highest-yielding stocks, there isn’t a lot of reason to be a buyer in this market.

Some corporations increased their dividends this year, but I would say more are choosing to buy back their own shares instead, and this is troublesome. This means that investment capital is not being reinvested in a new plant, equipment, or employees, and shareholders aren’t really getting ahead. It’s kind of like a corporation implementing its own austerity measures, while trying to keep shareholders happy. A lot of corporations are using this environment of artificially low interest rates to borrow money from the bond market, and then use it to repurchase their own shares on the stock market, which is not a good long-term strategy.

So while I’m not bearish on the stock market, I’m realistic. The interest rate cycle does favor equities at this time, but it’s a pretty good bet that interest rates aren’t going to go down any further. I’d be very reticent to be a buyer in this market, not just for the reasons mentioned above; but also because investment risk for stocks is very high. (See “Warning: QE3 Rally Is Now Over.”)

Austerity … Read More

The Society We Are Becoming; the Increasing Dependence on Government Handouts

By for Profit Confidential

Increasing DependenceSince the financial crisis started in 2008, the U.S. policies of the government and the Federal Reserve have simply acted to “kick the can” further down the road. More people have become dependent on government handouts over the past four years than ever before and a vast amount of “created” money has been pumped into the financial system.

The October 2012 unemployment rate in the U.S. economy was 7.9% compared to 10% in October of 2009. (Source: Bureau of Labor, November 6, 2012.) On the surface, it looks like the unemployment rate has declined, but in fact it’s only a speaking point for the politicians.

The labor market in the U.S. economy is far from running at its full potential. The labor force participation has been in a severe decline since the beginning of the financial crisis, falling to only 63.8% in October of 2012 compared to above 66% prior to the financial crisis. ( Source: Bureau of Labor, November 6, 2012.)

Americans are staying unemployed longer than normal. The average duration of unemployment from 1967 to October of 2012 has been about 8.2 weeks. If we shorten the timeframe to from the time the financial crisis struck the U.S. economy up to the end of October, the median unemployed period has been 19.6 weeks. (Source: Federal Reserve Bank of St. Louise, November 2, 2012.)

As people have stayed unemployed for a longer period of time, they have become more dependent on government. For example, the use of food stamps in the U.S. economy has increased 46% since the beginning of 2009 until July of 2012! In January of 2009, … Read More

Correction Among Stock Market Leaders Creates Good Opportunity

By for Profit Confidential

Correction Among Stock Market Leaders Creates Good OpportunityThe stock market has more downside over the near term, but it’s likely to hit a floor as soon as price-to-earnings (P/E) multiples are no longer excessive. In many ways, the current pullback is the selloff we didn’t get after the third round of quantitative easing (QE3) was announced. This is a market that’s fragile, and investors are worried about new austerity measures in the near future.

As the main stock market indices pull back, there are a number of market leaders that are now more attractively priced, and they are worth keeping an eye on. Alexion Pharmaceuticals, Inc. (NASDAQ/ALXN) is one of the market leaders among biotechnology stocks, while The TJX Companies, Inc. (NYSE/TJX) is one of the market leaders among retailers.

The TJX Companies operates many brand-name stores that you might be familiar with, including T.J Maxx, Marshalls, HomeGoods, Winners, and HomeSense. This company has been hugely successful both in its operations and on the stock market over the last couple of years, and it’s because economic times have been tough. Selling clothing and home goods at an attractive price point, The TJX Companies has been able to grow its business when other retailers, like J.C. Penney Company, Inc. (NYSE/JCP), have struggled. You can see the contrast in the companies’ stock charts featured below.

tjx stock market chart

Chart courtesy of www.StockCharts.com

stock market chart

Chart courtesy of www.StockCharts.com

The TJX Companies is one of a number of market leaders in this stock market, and it’s up about ten-fold since the beginning of 2000. The stock has been appreciating very consistently and has proven to reaccelerate after all its major price corrections. This is why … Read More

Listen Carefully to What These Big U.S. Companies Are Saying

By for Profit Confidential

Listen Carefully to What These Big U.S. Companies Are SayingBuy stocks; buy, buy, and buy a little more—this is exactly what the stock market, currently controlled by a bear in sheep’s clothing, would like you to do. Signs of a stock market reversal are clear and should be taken seriously by my readers.

The S&P 500 is swimming in shark infested waters with no land in sight.

The stock market is closing its eyes to the fact that an increasing number of U.S. companies in the S&P 500 are becoming victims of the global economic slowdown. FedEx Corporation (NYSE/FDX), Intel Corporation (NASDAQ/INTC), International Business Machines Corporation (NYSE/IBM), and Norfolk Southern Corporation (NYSE/NSC) are just some of the companies that have already warned about their corporate earnings growth slowing, largely because of the global economic slowdown.

All investors should face the truth: the only reason the key stocks indices have gone up is money printing. The value of money goes down, and the prices of equities go up. However, as the global economic slowdown deepens, companies start making less money and their stock prices fall—even if more money is printed.

The warning signs about the reversal in the stock market’s direction are coming in at a fast rate. Dow theory is suggesting a reversal, corporate insiders are selling stock at a high rate, stock advisors are very bullish, corporate earnings are declining, and companies are warning about the economic slowdown affecting business—all in all, leading ingredients of a decline in the stock market.

In a recent development, Caterpillar Inc. (NYSE/CAT), the world’s biggest construction and mining equipment manufacturer, issued a warning about its corporate earnings outlook. The company believes … Read More

Stock Market on the Verge of a New Trend

By for Profit Confidential

Stock Market on the Verge of a New TrendThe stock market is on the third leg of a repeating pattern that began about three years ago. The spectacular stock market decline that began in 2008 hit a bottom in March 2009, and then promptly recovered. July 2009 saw a significant recovery in share prices, followed by a rising trend that lasted until April 2010. The pattern then repeated itself the next year and looks to be in the process of repeating a third time.

This stock market action is evident in all the major indices, including the S&P 500 Index, the NASDAQ Composite, and the Dow Jones Industrials. In the 2009 and 2010 price trend, the Dow Jones Transportation Index led the Dow Jones Industrials. Its performance over the Dow Jones Industrials was more pronounced then. But not anymore; the Dow Jones Transportation Index is losing its leadership trend and this, combined with generally low trading volume, leads me to suspect that the stock market is in the process of topping out.

When will the top happen? That’s total guesswork and unanswerable. But there’s a lot of change coming in the world, both politically and financially. Sovereign debt in most of the world’s mature economies (including the U.S.) will have to be addressed in 2013. With higher interest rates, capital markets have already begun to force these economies to address their debt. And the coming austerity measures will put the brakes on growth, because for the most part, government spending is a big part of economic activity.

With this fundamental backdrop, it makes a difficult case for being bullish on the stock market, and perhaps this is … Read More

Should You Buy Apple Now?

By for Profit Confidential

Should You Buy Apple Now?With the recent corporate earnings release from Apple Inc. (NASDAQ/AAPL), many investors are unsure how best to trade the stock. Before we get to that, let’s take a closer look at the corporate earnings the firm posted. The common thread in the disappointing corporate earnings release from Apple is that it appears customers are postponing purchases, awaiting new products to be released in the fall. Frankly, this is to be expected; I’ve talked to plenty of people who are holding off buying an “iPhone” until the new one comes out.

Another reason for the disappointment in Apple’s corporate earnings was a weakening of the global economy, including China. While China negatively impacted corporate earnings this quarter, international growth will be a key driver for the next several years. Only a small number of Apple stores are outside of developed nations like America. This then provides a huge opportunity over the next decade to continue expanding in the retail space. However, the economic turbulence engulfing the world will have a significant impact on the company’s corporate earnings and margins over the short term.

 Apple Inc Chart

Stock chart courtesy of www.StockCharts.com

While that’s a brief glance at Apple’s corporate earnings, from a technical analysis point of view, the stock is in a dangerous area. While, following the corporate earnings release, many fund managers have stated that they are interested in buying shares, the proof is in the pudding, as the saying goes. Technical analysis will help us understand if money is actually being funneled into the stock. A break of the upward sloping line is a significant move, as it appears the stock will … Read More

Proposed Bailout Money Not Enough: Credit Crisis in Spain Deteriorates

By for Profit Confidential

 

In two days this week, the Spanish stock market fell a staggering 12%. Why?

The Bank of Spain confirmed this week what everyone already knew: that gross domestic product (GDP) contracted at a 0.4% rate in the first quarter of 2012. And although the numbers are not available for the second quarter, we know the recession worsened from the first quarter. Estimates show that GDP contracted by 1.0% in the second quarter for Spain, with more austerity measures to come.

This contraction is forcing home prices to fall further in Spain. As I’ve been detailing, dear reader, the Spanish banks are saddled with mortgage debt. That debt continues to lose value, because home prices continue to fall, further exacerbating the credit crisis.

Home prices in Spain have fallen 30% since 2008, but they have fallen another 12.8% just in the first quarter of 2012!

Since GDP growth in Spain contracted by more in the second quarter, we can assume with certainty that home prices continued to fall, making debt at the Spanish banks worth that much less, inflaming the credit crisis.

This is why the 100 billion euros in bailout money for Spain is not going to be enough to cover the bad mortgage-backed securities. The market knows this, which is why the credit crisis has reignited.

To add to the problem, Spain’s regions—equivalent to states here in the U.S.—are asking for 15 billion euros in bailout money from the Bank of Spain, because they have run out of funds.

We complain here in the U.S. about the “fiscal cliff” at the end of the year, which will … Read More

Revenue Growth Collapses at Big American Companies

By for Profit Confidential

Revenue Growth CollapsesAs I have been warning in these pages, corporate revenue growth within the global economic slowdown is going to be very hard to come by for the remainder of 2012.

So far, about 25% of all S&P 500 companies have reported their corporate earnings for the second quarter. Sales have risen among these firms at the slowest rate since 2009. (Source: Financial Times, July 22, 2012.)

This has forced stock market analysts to now cut third-quarter revenue growth projections by 1.0%—1.5%, which is in the territory of recession! So how is it that the S&P 500 stock market index is able to remain steady despite the bad news?

One of the largest S&P 500 companies, International Business Machines Corporation (NYSE/IBM), better known as IBM, reported corporate earnings that beat expectations for the second quarter. IBM also raised its corporate earnings guidance for 2012.

IBM is a great company and its ability to transition to a software firm has proven to be the right strategy; rewarding shareholders many times over. But the way the company will be able to increase its corporate earnings in 2012 is by cutting jobs, not by revenue growth.

IBM warned that it sees technology spending by companies around the world slowing. Other S&P 500 companies have warned of the same global environment of slowing technology spending, including the likes of Oracle Corporation (NASDAQ/ORCL), Cisco Systems, Inc. (NASDAQ/CSCO), and Hewlett-Packard Company (NYSE/HPQ).

When the statistics are finally compiled by Standard and Poor’s (S&P) on second-quarter corporate earnings by S&P 500 companies, IBM will be counted as a success; as having beat corporate earnings estimates and having … Read More

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