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

Posts Tagged ‘Bear Market Rally’

Has The Stock Market Reached Peak Optimism?

By for Profit Confidential

Stock Market Reached Peak OptimismOptimism towards key stock indices is increasing each day. The U.S. stock market “seems” to be a safe place, and it’s common to hear stock advisors suggesting we are going higher on key stock indices.

Key stock indices like the S&P 500 are making fresh highs. Google Inc. (NASDAQ/GOOG) has surged above the $1,000-per-share mark. Just take a look at the chart below.

Recently, we heard the “Godfather of Charts,” Ralph Acampora, turn bullish on the key stock indices as well. Not too long ago, he held a very bearish view on them. In August, his stance was that key stock indices like the Dow Jones Industrial Average would decline 20% to 12,000. (Source: Wall Street Journal, October 17, 2013.)

Hold on a second! This all looks too familiar!

Google Inc Chart

Chart courtesy of www.StockCharts.com

Whatever happened to what Sir John Templeton said about the bull run stock markets? If I remember correctly, it went something like this: “They are born when investors are most pessimistic, rise when they are skeptical, mature once optimism builds up, and come crashing down once there’s euphoria.”

It’s almost as if investors have forgotten everything that we saw with the stock market in 2007 and 2008—how it went crashing down after optimism surged.

And remember 1999? Investors were so bullish on the key stock indices that they were investing in companies that did not have any revenues or weren’t going to make money in the long run. After that euphoria, we saw it all come crashing down. Investors forgot one basic principle: when stocks keep reaching new highs; fundamentals really matter when it comes to … Read More

Why I Remain Pessimistic on This Stock Market

By for Profit Confidential

Remain Pessimistic on This Stock MarketThe third-quarter corporate earning season has begun. And as I have been predicting, earnings growth just isn’t there this quarter.

If companies in key stock indices are beating their earnings estimates, it’s because they are beating already lowered expected earnings. What’s the biggest problem with the corporate reports I’m seeing? Revenue growth is disappearing.

What we have seen so far:

International Business Machines Corporation (NYSE/IBM) reported third-quarter corporate earnings per share were up 11% from the same period a year ago, but revenues fell four percent from the third quarter of 2012. (Source: International Business Machines Corporation, October 16, 2013.)

The Goldman Sachs Group, Inc. (NYSE/GS) reported corporate earnings of $2.88 per share for the third quarter of 2013. In the same period of 2012, corporate earnings were $2.85 per share. And revenues plunged 22% from the second quarter! (Source: Goldman Sachs Group, Inc., October 17, 2013.)

What we have seen so far in respect to the earnings of big public companies isn’t anything impressive. In fact, it’s just more evidence pointing to key stock indices running on nothing but propped-up earnings due to stock buyback programs made largely possible by easy monetary policy.

Going forward, I just expect to hear about more companies struggling with revenue growth; thus, you can understand my skepticism on rising key stock indices. Every “party” comes to an end, and the gains we now see on the key stock indices could disappear very quickly. I believe caution and capital preservation are the best investment strategies right now as key stock indices run ahead of themselves.

The fundamentals: real rising corporate earnings and real rising … Read More

What’s Holding Me Back from Turning Positive on the Housing Market

By for Profit Confidential

Bear Market RallyHouse prices have gone up! Does this mean a recovery in the housing market is in? Don’t jump in quite yet, dear reader.

The collapse of the housing market that started in 2006 has taken its toll on the U.S economy. Nationally, U.S. home prices are still down 31% from where they were in 2006. Home prices will need to go up almost 45% for home prices to get back to where they were six years ago.

Private equity firms are on a spree of buying foreclosure homes. A company backed by The Blackstone Group L.P. (NYSE/BX), Colony Capital LLC, owns about 3,600 homes facing foreclosure. (Source: Wall Street Journal, September 11, 2012.).

Blackstone and other private equity firms such as Och-Ziff Capital Management and Oaktree Capital Group LLC have raised more than $8.0 billion to buy houses negatively affected by the housing market crash.

These private equity firms are buying foreclosure homes, because they can easily rent them—notice I didn’t say sell them—and earn higher return compared to other investments.

For a healthy housing market recovery, there must be individuals buying houses and living in them, not investors buying to rent properties out. Money at private equity firms flows to places where it gets the highest return. Buying cheap, foreclosed homes and renting them at a return higher than the cost to buy home makes big sense for private equity firms.

The effects of the home buying spree: demand by investors for foreclosure homes in Phoenix and Los Angeles has driven up the prices of homes to a point where it is not feasible for private equity firms … Read More

Clinton’s Speech Last Night & Food Stamps:
What They Have to Do with Each Other

By for Profit Confidential

Clinton’s Speech Last Night & Food StampsThe grim reality is that the U.S. economy will not be improving anytime soon. The statistics don’t lie—there is no economic growth, but there is growing evidence the U.S. is experiencing an economic slowdown.

One important indicator of economic growth includes the standard of living. As I have written recently, the American middle class is in jeopardy of disappearing, just like it has in most of Europe.

In June of this year, there were 46.7 million people in the U.S. on some form of food stamps. (Source: U.S. Department of Agriculture, August 30, 2012.) The number of people using food stamps has increased 3.3% over the course of the year. This means that almost 15% of the U.S. population is on food stamps!

Why are there so many Americans on food stamps? It’s simple. The unemployment rate is too high for economic growth to happen, food prices are going up, and millions of people can’t afford to pay their expenses. How can we experience economic growth when so many people can’t afford to fill the most basic needs?

Another reason for soaring food stamp usage: the majority of jobs created since the credit crisis hit are mainly in low-wage sectors—retail, food prep, laborers, freight workers, waiters and waitresses, office clerks, and customer service representatives. These jobs do not create economic growth; they just put food on the table.

There are still approximately 10 million jobs missing from the economy. (Source: NELP, August 31, 2012). What we are witnessing in the U.S. is a continued economic slowdown, as real economic growth would have resulted in across-the-board job creation.

While I … Read More

Add This to America’s Recession Laundry List

By for Profit Confidential

Add This to America’s Recession Laundry ListThere is calm before the storm looming in the U.S. that is called the “Fiscal Cliff”—a bigger issue than perceived by the majority of the American population.

A fiscal policy implemented during President Bush’s period in office, which included cuts in taxes and increased government spending, is set to expire at the of this year. That means higher taxes, cuts in government spending, and a reduced budget deficit.

On the bright side, the Fiscal Cliff will cut $100 billion in government spending on the U.S. military and other government programs. These cuts would see the annual U.S. budget deficit fall from seven percent of U.S. gross domestic product (GDP) to four percent of GDP. (Source: Wall Street Journal, August 22, 2012).

It’s a perfect scenario, because it enables the U.S. government to finally lower its budget deficit. Unfortunately, in this case, it is actually bad news for the economy.

Yes, the budget deficit will be reduced, but on August 22, a Congressional Budget Office (CBO) analysis showed that the Fiscal Cliff will cause a recession in the upcoming year, causing GDP to contract by 2.9% and unemployment to rise up to 9.1%.

Issue at hand: if government spending is cut and taxes go up, it will lower the budget deficit, but also march the economy right back into recession as the budget deficit decreases. (That’s what many economists are now saying. This economist says we’re headed back to recession, Fiscal Cliff or no Fiscal Cliff.)

The U.S. economy is already facing this long laundry list: recessions in Europe; a slowing economy in China; high domestic unemployment; record high … Read More

Beware: “Triple Top Reversal Pattern” Almost Complete

By for Profit Confidential

Beware: “Triple Top Reversal Pattern” Almost CompleteIn spite of weak corporate earnings within the S&P 500 list companies, the market continues to grind its way higher. However, this chart shows the S&P 500 could be forming what is referred to in technical analysis jargon as a “Triple Top Reversal Pattern.”

The below is a three-year chart of the S&P 500. Those blue circles to the right of the chart represent the rough equivalent high price points that the S&P 500 has reached since the beginning of the year; notice that the S&P 500 has reached this level three times.

According to technical analysis, a Triple Top Reversal forms over a period of three to six months. Any Triple Top Reversal that forms over a period of time greater than six months is said to be indicative of a major top.

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

As is evident by the above S&P 500 chart, this current Triple Top Reversal pattern has been forming for six months. In technical analysis terms, the other characteristics of a Triple Top Reversal pattern are that there must be a previous trend to reverse and overall average volume must be lower at the three tops.

From December 2011 to the first blue circle on the S&P 500 chart above, or March 2012, the S&P 500 has been in an uptrend or moving higher on a consistent basis. This satisfies the criteria of there being an uptrend to reverse, which means that if this Triple Top Reversal pattern plays out, a downtrend will follow.

The red line at the bottom of the chart running across the volume box indicates average volume. When volume … Read More

Inflation? Corn Prices Up 44%, Soybean
Prices Up 26% in Two Months!

By for Profit Confidential

InflationThe U.S. Midwest is in the midst of the most severe drought in 50 years. The brutal conditions are destroying corn, wheat, and soybean crops, sending the prices of many agricultural commodities rocketing higher—another knife cutting into consumer confidence and consumer spending.

Since June 1, corn prices are up 44% and soybean prices are up 26%. (Source: Wall Street Journal, July 25, 2012). Corn, soybeans and wheat go into many of the products that Americans buy every day and, as those prices rise, consumer confidence falls.

The other side effect of higher corn prices is due to the fact that ranchers use corn to feed their cattle, poultry and livestock. Since the cost of feeding their animals is increasing dramatically, farmers have begun slaughtering their livestock much earlier than usual. This will drive meat prices down temporarily, but, in a few months, less supply of livestock will eventually lead to higher meat prices, which will eventually dent consumer confidence.

Higher grain and meat prices will eventually “feed” into higher food prices at the grocery store and local restaurants in the coming months, which will again hurt consumer confidence and reduce consumer spending on other items.

Although difficult to gauge how much higher food prices will be next year, the Department of Agriculture is estimating that food prices will rise between three and four percent in 2013, at the very least, which will affect consumer confidence at least by that much.

Sure, food costs represent only 14% of the average American’s living expenses, which will result in only a minor hit to consumer confidence. But for lower-income Americans who are … 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

13 States Now Considering Gold and Silver as Money

By for Profit Confidential

Gold and Silver as MoneyWhen the governor of Utah signed a bill that made gold bullion and silver bullion legal tender in the state last March, he had no idea of the groundswell he was going to start.

The Utah Sound Money Act outright flies in the face of the fiat money system, which is the printed money used today; backed by nothing but the promises of politicians. While U.S. states cannot create their own currency under the Constitution, they are allowed to use gold bullion and silver bullion as legal tender. More and more states are now exercising that right.

Lawmakers in Utah, when they studied history, found that every single instance of money printing and massive increases in a country’s debt always led to the destruction of the currency and a depression among the citizens that lived through it.

They were concerned about the Fed’s money printing and massive government debt accumulation and thus signed into law the Utah Sound Money Act, which recognized gold bullion and silver bullion as currency. They felt that the U.S. dollar would continue to lose its value, while gold bullion and silver bullion would continue to maintain their value, because they are sound currencies with no debts attached to them.

The Utah law states that the gold bullion and silver bullion coins issued by the U.S. Mint can be used as payment with any merchant in the State of Utah for the purchase of all goods and services.

It is not practical for people to carry around heavy gold bullion or silver bullion coins, so the Utah Gold & Silver Depository was created. People can … Read More

Madness in Pennsylvania and One
More Bankruptcy in California

By for Profit Confidential

Bankruptcy in CaliforniaSan Bernardino, with a population of 209,000, has become the third California municipality to declare bankruptcy within the last few weeks.

The budget deficit that San Bernardino faced was $46.0 million and its money was gone, leaving the council little choice but to declare bankruptcy, especially in an economy that feels like a recession. The reason for the bankruptcy vote was that when the city council looked at its projected budget deficit in the next five years, it saw no way out. Besides that, they were staring at total government debt obligations of $243 million! (Source: L.A. Times, July 10, 2012.)

The City of San Bernardino reduced its government workforce by 20% and was able to cut wages marginally, which led to savings of $10.0 million for 2012. However, this was not enough to meet the gaping budget deficit.

In what has become a common theme—and what will most likely take down many more cities and states—the city council in San Bernardino noted the relentless rise in pension costs and high union government worker salaries as the main culprits for the ever-expanding budget deficit. This was combined with the fact that tax revenues have declined since the recession, with one of the main culprits being the falling value of home prices, which further exacerbated the budget deficit.

As the recession-type environment continues to claim more municipal and city victims, the mayor of Scranton, Pennsylvania, is attempting another approach. The city’s budget deficit is so large that, in order to continue to make payments, the city needed a loan of $16.0 million.

The market refused to provide Scranton with … Read More

Deteriorating June U.S. Job Numbers Point to Recession

By for Profit Confidential

Deteriorating June U.S. Job Numbers

For June, the U.S. created 80,000 new jobs, well below economists’ forecasts of 100,000. The unemployment rate remained steady at 8.2%. (Source: U.S. Bureau of Labor Statistics, July 6, 2012.)

When looking within the U.S. job numbers for June, of the 80,000 new jobs created, 25,000 were in temporary work and 9,000 were in wholesale trade. This means at least 42% of the job numbers are in low-paying sectors of the economy.

The jobs numbers had no help from the government sector, which lost another 4,000 jobs in the month of June.

Many of the job numbers created over the last year were in low-paying sectors of the economy; year-over-year average hourly earnings were up only two percent. When inflation is taken into consideration, this two-percent gain is completely wiped out.

Here are some important facts you should be aware of, dear reader:

In the first quarter of 2012, the job numbers for the U.S. economy went up by an average of 226,000 per month.

For the second quarter of 2012, the job numbers gained an average of only 75,000 per month.

Today’s job numbers report is proof that U.S. employment is on a downward trajectory, which points to an economic slowdown. This will eventually lead to a recession later this year or in early 2013, as pressure from the recession in Europe and the economic slowdown in China yields its full negative impact on the U.S. economy.

U6, as reported by the Bureau of Labor Statistics, is a broader measure of the unemployment rate, because it takes into account discouraged people who are still looking for work, as well … Read More

Largest U.S. City So Far to Declare Bankruptcy

By for Profit Confidential

Largest U.S. CityBuried under a huge budget deficit with pension obligations it had no way of honoring, Stockton, California could not reach a deal with its creditors and so will be forced to declare bankruptcy within days.

The mayor of Stockton, Ann Johnston, felt she had no choice. Before reaching this point, the city cut all of its public services and employees by an average of 40%! Unfortunately, despite these cuts, the creditors and the city couldn’t come to an agreement on the budget deficit shortfall.

Now a bankruptcy court must decide whose pension/health care/other benefits get cut in order for the city to meet its budget deficit. These proceedings will drag on for years and will cost the city millions of dollars. A much smaller city, Vallejo, California, took three years to emerge from bankruptcy.

Now it will be up to a bankruptcy judge to decide if retiree medical benefits will be cut, and to what extent, to meet the budget deficit. Will pensioners survive cuts as the city tries to meet the budget deficit?

The financial crisis of 2008 that caused housing prices to collapse left Stockton’s tax revenue base decimated, leading to mounting budget deficits. The unemployment rate is currently 15.4% for the city and, according to RealtyTrac, one in 195 homes is in foreclosure, which ranks it fifth-highest among all cities in the U.S.

With this backdrop, it is no wonder that Stockton has an enormous budget deficit and is traveling down the bankruptcy road. Before the financial crisis, municipal bankruptcies were almost unheard of during the last four decades.

In 2010, there were six municipal bankruptcies; in … Read More

Stock Market’s Current P/E Valuation a Fallacy

By for Profit Confidential

Stock Market’s Current P/E ValuationSome believe the stock market is trading at a low price/earnings (P/E) multiple, meaning stocks are historically cheap.

The P/E multiple takes the current market price per share of a company or index and divides it by the corporate earnings per share of that company/index.

Historically, P/E multiples between 0 and 10 are considered undervalued, indicating a good time to invest. When the range is 10-17, the companies/indices are considered fair value; 18-25 is overvalued; with anything above 25 considered a bubble (the S&P 500 was way above 25 during the tech bubble).

The one-year forward-looking P/E multiple for the S&P 500 is currently 12.75, which is clearly fairly valued, but bordering on the undervalued. (Source: Wall Street Journal, June 18, 2012.)

That may be so, but that means the “E” or corporate earnings part of the P/E equation must grow in a global economy that is slowing.

I’ve written in these pages about how corporations, once the financial crisis hit, reduced the number of employees that they had (their costs), which helped support corporate earnings and the stock market.

Now that American corporations have cut expenses to the bone, the only way corporate earnings can grow is if revenue grows. This is evidenced by U.S. productivity numbers: they continued to grow in 2009-2011 as corporations cut staff and so produced more with less—they were more productive. This translated into higher U.S. productivity numbers and higher corporate earnings.

But, in 2012, U.S. productivity has gone negative. This means corporations have reached their limit to how operationally efficient they can be (they can’t cut expenses more without affecting their capability … Read More

Why the “Only Way Out” Offered Won’t Work This Time

By for Profit Confidential

monetary policySince the financial crisis hit in 2008, central banks around the world have enacted unprecedented expansive monetary policy that has been extreme and unusual. (In simple terms, they’ve printed money like never before.)

The hope was that by lowering interest rates to record lows and printing money, economic growth would be kick-started and get back on track to the levels seen before the crisis.

Three years later, central banks are left with the same hope. But central banks now have fewer monetary policy options, since interest rates in many countries, including the U.S., are close to zero.

Last week, China cut interest rates for the first time in three years, as economic growth in that country has fallen to the point where talks of a hard landing are gaining momentum. The People’s Bank of China is hoping this monetary policy response will stop the slide and move economic growth back to levels that recently made the country the envy of the world.

India just cut its interest rates for the first time in three years, as it used this same monetary policy (lowering interest rates) to counteract slowing economic growth. Last week, Australia also cut its interest rates.

Europe and the U.S. would attempt to follow this monetary policy of cutting interest rates, but their rates are almost zero.

As of late, the heads of two of the largest central banks in the world (the Fed and the ECB) have pointed to the fact that it is up to the politicians to enact policy to spur economic growth. The monetary policy of cutting interest rates is not working.

How have … Read More

May U.S. Jobs Numbers; Proof
Real Trouble Just Beginning

By for Profit Confidential

job numbersYou’ve heard the news…

Economists (except for this one) were looking for 150,000 jobs to be created in the U.S. in May, which would have reflected moderate economic growth. Instead, only 69,000 jobs were created in the month of May (source: Bureau of Labor Statistics)—a huge job numbers miss

Worse still, April’s original 115,000 new job numbers were revised lower to just 77,000 jobs created!

The unemployment rate moved up slightly from 8.1% to 8.2%. Many industries reported weak job numbers for May, including the government sector, which I’ve been warning will continue to drag the job numbers lower. Governments in the U.S. laid off another 13,000 employees in the month of May. (In these pages, I have written extensively about job losses at the state level; see: Deeper Cuts Are on Tap for U.S. Municipalities in Distress.)

A close look at the job numbers report for May paints a picture of more of the same; more low-paying jobs created, while higher-paying jobs disappear. For example, higher-paying specialty trade contractor jobs declined by 18,000, while civil engineers lost 11,000 jobs.

Not promising for wage growth and consumer spending when the job numbers are so weak.

U6, often referred to as the “underemployment rate,” as reported by the Bureau of Labor Statistics, is a broader measure of the unemployment rate, because it takes into account discouraged people who have given up looking for work, as well as those working part-time who want full-time work. The U6 unemployment rate rose to 14.8% in May from April’s 14.5%.

An underemployment rate of 14.8% is very high and definitely not reflective of an … Read More

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