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

Posts Tagged ‘big banks’

Having Trouble Coming Up With Four Hundred Bucks

By for Profit Confidential

Economic Growth in 2014The burning question that’s facing economists like me today and that will only be answered in the future: did creating $3.0 trillion in new money out of thin air really make things better or worse for America?

My personal view, as expressed in these pages, is that the rich (the big banks and Wall Street) got richer from the “printing press” era, while the average American did not directly benefit from the Fed’s actions.

In fact, in America today, the spread in wealth between the rich and the poor has never been so great. As for the middle class, they are becoming extinct.

The “Report on the Economic Well-Being of U.S. Households in 2013,” recently published by the Federal Reserve, says 34% of Americans feel they are worse off today than they were five years ago, and 42% said they are holding back on the purchase of major or expensive items. (Source: Federal Reserve, August 7, 2014.)

But the data gets worse…

Of those Americans who had savings prior to the 2008 recession, 57% of them say they have used up some or all of their savings in order to combat the after-effects of the Great Recession.

Only 48% of Americans said that they would be able to cover a “hypothetical emergency expense” that costs $400.00 without selling something or borrowing money. Simply put, about half of Americans have less than $400.00 in emergency funds!

Meanwhile, 31% of Americans say they do not have any retirement savings or pension. Of those who are between the ages of 55 and 64, 24% of them expect to work as long as possible, … Read More

Dead-Cat Bounce Over for the Housing Market?

By for Profit Confidential

Momentum Housing Market Shows Clear Signs EasingI have been saying this for a while: You can’t have a housing recovery unless actual home buyers are involved.

We are very far away from seeing the housing market reach its 2005 highs…and as time passes, it becomes clearer that this generation may never see them again.

How can I say that?

What we have seen in the housing market since then, but mostly since 2012, in my opinion, is nothing more than a dead-cat bounce scenario—an increase in prices after a massive decline. The chart below shows how far off we are from the housing prices of 2005.

S&P Case - Shiller Home Price Chart Chart courtesy of www.StockCharts.com

One of the key indicators I follow in respect to the state of the housing market is mortgage originations. This data gives me an idea about demand for homes, as rising demand for mortgages means more people are buying homes. And as demand increases, prices should be increasing.

But the opposite is happening…

In the first quarter of 2014, mortgage originations at Citigroup Inc. (NYSE/C) declined 71% from the same period a year ago. The bank issued $5.2 billion in mortgages in the first quarter of 2014, compared to $8.3 billion in the previous quarter and $18.0 billion in the first quarter of 2013. (Source: Citigroup Inc. web site, last accessed April 14, 2014.)

Total mortgage origination volume at JPMorgan Chase & Co. (NYSE/JPM) declined by 68% in the first quarter of 2014 from the same period a year ago. At JPMorgan, in the first quarter of 2014, $17.0 billion worth of mortgages were issued, compared to $52.7 billion in the same period a year ago. … Read More

The Best Investment You Can Make in 2014?

By for Profit Confidential

What Happened Last Time Gold Had a Bad YearTo say the very least, 2013 was an interesting year for gold bullion. The precious metal’s price surprised gold bugs and declined 24%.

As 2013 progressed, we heard calls for the yellow metal to fall even lower in price. The stocks of gold producers were slammed. Equity research departments at big banks like The Goldman Sachs Group, Inc. (NYSE/GS) called gold bullion a slam-dunk sell (and the last time I checked, their opinion hasn’t changed).

In the midst of all this, a very important phenomenon was forgotten: gold bullion prices are no stranger to price declines. In the table below, I’ve compiled a list of every period since 1974 when gold prices fell more than 20% and what happened after the decline.

Year, % Drop in Gold Prices Year, % Increase After Drop
1974-1976 declined by 45.67% 1976-1980 increased by 705%
1980-1982 declined by 63.84% 1982-1983 increased by 71.8%
1983-1985 declined by 45.17% 1985-1987 increased by 76.7%
1987-2001 declined by 48.88% 2001-2008 increased by 291.38%
Mar. 2008-Nov. 2008 declined by 28.8% Nov. 2008-2011 increased by 169.56%

Data source: www.StockCharts.com, last accessed February 6, 2014.

The table above illustrates that the bigger the decline in gold bullion prices, the greater the ensuing rebound.

Since gold bullion prices fell in 2013, gold miners have pulled back on operations at mines where $1,200-an-ounce gold no longer justifies production. This has resulted in a reduction in the supply of newly mined gold.

And while the supply of gold bullion is under pressure, demand for the precious metal keeps increasing. In China, both consumers and the country’s central bank have become gold hoarders over … Read More

The Company I Like Among the “Out-of-Favor” Stocks

By for Profit Confidential

Top Stocks for Investing Against the HeardWhen it comes to love, we often hear the phrase, “Beauty is in the eye of the beholder.” Well, the same could be said for the stock market.

Many investors look for the companies that deliver consistent results and satisfy the number-crunchers on Wall Street. While I belong to that group, I also take alternative views and search for companies that are the so-called dogs of the stock market. However, as our theme suggests, choosing in the stock market based only on a company’s outer appearance doesn’t always produce the best outcome.

Think about it this way: Why always select the stocks that are in favor by the stock market? Often, you may be the last to the dance, so you end up chasing stocks that have already made major stock market moves—the upside is limited.

I like looking at distressed companies that are facing some hurdles but have enough upside potential to make these stocks a worthwhile trade in the stock market. These plays are often referred to as contrarian investments—companies that are out of favor but have enough potential to demand a closer look in the stock market. In this case, you are often buying a company at a low valuation and price, as the stock market has turned against them.

I like these contrarian situations, as the potential upside is significant if these companies can turn around their operations.

In the past, I have highlighted opportunities such as Groupon, Inc. (NASDAQ/GRPN) and Facebook, Inc. (NASDAQ/FB)—both of which made spectacular gains thereafter. (Read “Why Macy’s Is Such a ‘Good’ Retail Play.”)

Nokia Corporation (NYSE/NOK) was … Read More

If You Are in the Housing Market, You Need to Read This

By for Profit Confidential

Leading Indicator Flashes Red Warning Sign for HousingTo see where the U.S. housing market is headed, we really need to look at what real home buyers—those who are planning to stay in their home for the long term—are doing. Institutional investors, who came into the housing market in 2012 and bought massive amounts of homes, are speculators; they’ll quickly rush out of the housing market if they can get a profit or if they can get a better return on their money elsewhere.

Right now, real home buyers are not very active in the U.S. housing market, as they face challenges. In fact, it looks like the number of real home buyers in the housing market is declining.

Between January and December of 2013, the 30-year fixed mortgage rate tracked by Freddie Mac increased by 31%. The 30-year fixed mortgage rate stood at 3.41% in January, and it increased to 4.46% by December. (Source: Freddie Mac web site, last accessed January 15, 2014.) Higher interest costs are a real challenge for home buyers.

As we can see from the chart below, there was a sudden change in the direction of interest rates after the Federal Reserve hinted in the spring of 2013 that it would start to “taper” its quantitative easing (money printing) program. It is widely expected that the Fed will continue to taper throughout 2014 as it drastically pulls back on its massive money printing scheme.

30-Year T-Bond Yield Chart

Chart courtesy of www.StockCharts.com

Another challenge home buyers face is stagnant growth in their incomes. In 2013, average hourly earnings of production and nonsupervisory employees in the U.S. increased by only 1.85%—less than real inflation. (Source: Federal Reserve Bank … Read More

The Mother of All Bubbles?

By for Profit Confidential

real estate marketAs I often harp on about in these pages; economic growth occurs when the general standard of living in a country gets better. You can’t say an economy is improving when a significant portion of the population is suffering. You can’t claim there’s economic growth when the poverty rate is increasing. You can’t say the economy is improving when personal incomes and savings are declining.

Looking at this a little closer…

Food stamps usage in the U.S. economy has increased 68% since 2008, with 47.66 million people, or more than 15% of the entire U.S. population, now using food stamps. Going back to 2008, there were 28.22 million Americans using some form of food stamps then. (Source: United States Department of Agriculture, November 8, 2013.)

From 2000 to 2012, the poverty rate in the U.S. economy increased from 12.2% to 15.9%—a hike in the poverty rate of more than 30% in just 12 years. In 2000, there were 33.3 million Americans living in poverty; this number grew to 48.8 million people in 2012. (Source: United States Census Bureau, September 2013.)

In 2008, the median household income in the U.S. economy was $53,644. In 2012, it was almost five percent lower at $51,017. (Source: Federal Reserve Bank of St. Louis web site, last accessed December 2, 2013.)

And because incomes have fallen and prices have risen, people have no choice but to save less.

Back in November of 2008, Americans saved an average of 6.1% of their disposable income, meaning they saved $6.10 for every $100.00 they earned after taxes. In August of this year, personal savings as a percentage of … Read More

The Race That Will Not End Well

By for Profit Confidential

central bank Central banks around the global economy are involved in a race that will not end well. Of course, I’m talking about the race to the bottom of currency devaluation, which is being achieved through the printing of more and more paper money backed by nothing.

Almost weekly, I hear news about different central banks in the global economy cranking up the speed of their printing presses; they are fixated on printing money because these central banks believe they can solve their economic problems by printing. They are wrong!

Our own Federal Reserve is creating $85.0 billion a month in money with the hopes of bringing economic growth to the U.S. economy. But this strategy is failing the masses in America. Those who have benefited the most from this exercise have been big banks, Wall Street, and the rich. The poor and middle-class are in a worse situation now than in 2007!

But it’s not just the Federal Reserve that’s printing massive amounts of new money. Other central banks are doing the same under a fancy phrase: “quantitative easing.”

In its most recent monetary policy statement, the Bank of Japan reiterated it’s take on printing. It said the central bank will continue to work towards increasing the monetary base in the country by 60 trillion to 70 trillion yen per annum. The central bank will buy Japanese government bonds, exchange-traded funds (ETFs), and real estate investment trusts with the freshly printed money. (Source: Bank of Japan, November 21, 2013.) (Yes, the Bank of Japan is buying securities that trade on the stock market. As our next American financial crisis approaches, I … Read More

National Debt to Double from $17.0 trillion to $34.0 Trillion?

By for Profit Confidential

national debtCan it be true?

The U.S. Department of the Treasury has reported that for the federal government’s fiscal 2013 year, which ended on September 30, 2013, the U.S. government budget deficit was $680 billion—the smallest budget deficit in five years. (Source: Bureau of the Fiscal Service, October 30, 2013.)

Should this be taken as great news? No, it’s “smoke and mirrors,” as I will explain below. But the mainstream certainly thinks this year’s budge deficit, which came in below $1.0 trillion, is good news. They forget that no matter how you look at it, any budget deficit, no matter how small or large, is adding to a bigger problem at hand—our massive national debt.

Let’s face it: a budget deficit at the end of the day means the government spent more money than it received. Where does this extra money that the government spends come from? The answer is simple: it borrows. And as a result, the national debt rises.

Our national debt has increased significantly over the past few years. At the beginning of 2008, the U.S. national debt stood at $9.2 trillion. Today, it stands above $17.0 trillion. (Source: Treasury Direct web site, last accessed October 31, 2013.) This represents an increase of almost 85% in the national debt in the matter of a few years.

I believe the national debt will double from here…from $17.0 trillion to $34.0 trillion.

Why am I so negative on the national debt? I’m skeptical because I don’t believe this year’s numbers present the real story on government spending. Let me explain…

In the fiscal 2013 year, the U.S. government paid … Read More

Is the Federal Reserve Playing With Fire?

By for Profit Confidential

The Federal Open Market Committee (FOMC) decided this week to keep quantitative easing and easy monetary policy going. The statement by the Federal Reserve said, “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.” (Source: Federal Reserve, October 30, 2013.)

I’m one of those economists who believes the longer this goes on, the more troubles we are going to see. Is the Federal Reserve playing with fire?

It’s been almost five years since the Federal Reserve introduced the idea of quantitative easing to the U.S. economy. The goal was to help spur the economy and to help the average Joe, who, at the end of the day, lost his job and his house.

Has that happened?

It’s very clear: quantitative easing and the easy monetary policy that the Federal Reserve has been implementing for some time haven’t really filtered down to the average American. But it is helping the big banks; we have seen their profits grow significantly since 2009, while the average consumer has seen his/her real wages decline. Those who are closing in on retirement are forced to stay longer in their career or rethink their options because their savings have either been depleted or haven’t grown enough.

And we are seeing consumer confidence slide lower. This is the exact opposite of what the quantitative easing was supposed to do. For the week ended October 27, the Bloomberg Consumer Comfort Index declined to the lowest … Read More

Big Banks Only Good for Dividends?

By for Profit Confidential

Big Banks Only Good for DividendsBack in early August, I turned negative on the big banks and suggested that a bearish double-top was forming on the Bank Index chart. At that time, the Bank Index was trading at just over 65, as you can see on the chart below. (Read “Four Important Stock Charts Showing Warning Signs.”)

In early October, the Bank Index fell to around 61 (as indicated by the lowest shaded oval in the chart below). The index held and has since rallied back above the upper resistance, suggesting that it could be set for a breakout back up to its July highs. However, my feeling is that the easy money in the big banks has been made and going forward, the big banks are now dividend plays.

Bank Index Chart

Chart courtesy of www.StockCharts.com

Investment guru Warren Buffett continues to like the big banks. I don’t blame him, as Buffett has made more than $5.0 billion in paper profits on his initial $5.7 billion investment in the ailing Bank of America Corporation (NYSE/BAC; dividend yield 0.30%), when the sector was in disarray following the Lehman Brothers collapse.

 So far in the third-quarter earnings season, the big banks have largely delivered decent results.

Bank of America reported earnings of $0.20 per diluted share on year-over-year revenue growth of 5.3% to $21.7 billion, beating the Thomson Financial consensus earnings-per-share (EPS) estimate by $0.02.

JPMorgan Chase & Co. (NYSE/JPM; dividend yield 2.90%) reported a loss of $380 million, or $0.17 per diluted share, but this included a massive $9.15-billion pre-tax charge for legal and government fees. The adjusted earnings of $1.42 per diluted share handily beat … Read More

Perfect Opportunity for Investors to Liquidate Some Positions?

By for Profit Confidential

Perfect Opportunity for InvestorsWhat the heck is with this stock market? The ability of the stock market to hold and avert a major correction over the past two weeks and then follow this with an upward move on the charts is a surprise—at least in my view it is, as it clearly shows the bullish bias controlling this stock market.

The NASDAQ and Russell 2000 are at new recent highs as the desire for growth by investors continues, which has largely been the story this year.

The S&P 500 is within striking range of its September record high.

The focus on the debt ceiling is important but also way overdone, in my opinion, given that we are in the midst of the third-quarter earnings season and, well, it has been subpar early on.

Yes, it’s still early in the earnings season, but I expect more subpar results. Of course, what I expect doesn’t matter—momentum and speculation are what drive this stock market.

So far, about six percent of S&P 500 companies have reported, and a dismal 55% of these companies have beaten estimates. That’s just not good. The results are also well below the historical average at just over 60%, and to make matters worse, the results were compared to estimates that were already lowered by Wall Street. Revenue growth is also lackluster, as I expected, which is not what we should be seeing with an upward-trending stock market.

The big banks reported decent results, but much of the easy money in this stock market sector has been made. The retail sector, which I view as critical due to its impact on … Read More

More Evidence Pointing to Manipulation in Gold Market?

By for Profit Confidential

gold bullionWhile I avidly follow the actions of central banks to see where the gold bullion prices may be headed next, when I look at them today, their actions are speaking louder than words.

Central banks have pretty much stopped selling gold bullion, which is very important. In 1999, a number of central banks in Europe formed an alliance and agreed that they would not sell more than 400 tonnes of gold bullion per year. The agreement was called the Central Bank Gold Agreement (CBGA). In 2004, the CBGA was renewed again; this time the limit was 500 tonnes. Once again, it was renewed for another five years in 2009, and the limit is back to the sale of no more than 400 tonnes of gold bullion per year.

The chart below shows how much gold bullion the central banks in Europe sold in each period of the CBGA. (Source: World Gold Council web site, last accessed October 11, 2013.)

Years

Sales in Tonnes

CBGA 1

1999-2004

2000

CBGA 2

2004- 2009

1884

CBGA 3*

2009-2014

200.3

* Sales are until 2013.

Notice anything different? The central banks in Europe have put the brakes on their sales of gold bullion. In fact, from September 27, 2012 to September 26, 2013, these central banks only sold 5.1 tonnes of gold bullion! This is hands down the lowest amount sold since the agreement started in 1999.

When it comes to stocks, if owners of a stock aren’t selling and there’s a significant number of buyers who want to buy, the price of the stock usually goes up as the simple rule of economics … Read More

My Bet: New Fed Chief Loves Printing Presses More Than the Last Guy

By for Profit Confidential

corporate earningsCompanies in key stock indices have started to report their corporate earnings for the third quarter of this year. Not surprising, they are weak and show signs of stress.

According to FactSet, up until October 4, 90 companies in key stock indices like the S&P 500 issued negative guidance about their third-quarter corporate earnings per share. This is the highest number of companies posting negative guidance since the research company started to track earnings guidance back in 2006. (Source: “Earnings Insight,” FactSet, October 4, 2013.)

The corporate earnings growth rate for the S&P 500 is expected to be about three percent in the third quarter, and just like the last quarter, once again, a significant portion of the boost in earnings will come from the financial sector. If you take the financial sector’s corporate earnings out of the equation, earnings growth rates drop down to about 1.7%. Take away all the stock buyback programs public companies have conducted this year, and the earnings growth picture gets really ugly.

I think the smart money is sensing companies are struggling to grow, so they are starting to pull money out of the market.

According to the Investment Company Institute, for the week ended September 25, the long-term U.S. stock mutual funds had a net outflow of $3.8 billion in capital. Similarly, for the week ended October 2, the net outflow continued and increased to $4.12 billion. (Source: Investment Company Institute, October 9, 2013.)

Key stock indices like the S&P 500, Dow Jones Industrial Average, and the NASDAQ have shed some gains recently; they are much lower than their all-time highs posted just … Read More

Beware of the Bear Dressed Up as a Bull

By for Profit Confidential

Income is the largest factor when it comes to determining changes in the consumer spending. Unfortunately, personal income is declining in the U.S. economy—not a good indicator; no matter how anyone tries to spin it.

In the first eight months of 2012, the average change in real personal disposable income (income adjusted for price change) in the U.S. economy was 0.11%. In the first eight months of this year, real personal disposable income has actually contracted by 0.4%. (Source: Federal Reserve Bank of St. Louis web site, last accessed October 4, 2013.)

As real disposable income pulls back, we are seeing the effects of slow consumer spending starting to emerge.

Total light vehicle sales by the automakers in the U.S. economy declined 4.2% in September compared to the same period a year ago. Passenger car sales declined 5.6% in the month. Automakers like General Motors Company (NYSE/GM) saw their total car sales fall 17.1% in September from the same period in 2012. (Source: Autodata, October 1, 2013.)

Another indicator of slowing consumer spending, crude oil inventories are increasing. For the week ended September 27, the Energy Information Administration reported that there was a build-up of 363.7 million barrels of crude oil in the U.S. economy. The agency reiterated these inventory levels are “toward the upper range for this time of the year.” (Source: Energy Information Administration, October 2, 2013.) When there’s less consumer spending, or companies are producing less, then fewer barrels of crude oil are used.

And worst of all, 19 companies in the consumer discretionary sector of the S&P 500 have issued negative guidance about their corporate … Read More

The Phenomenon That Will Force Central Banks to Buy Gold

By for Profit Confidential

gold bullion prices Gold bullion isn’t getting much respect these days…and that’s perfectly fine with me.

The Goldman Sachs Group, Inc. (NYSE/GS) says the precious metal has a risk of going below $1,000. Bank of America Merrill Lynch cut its forecast for the yellow metal as well. Its forecast says gold bullion prices in 2014 will be around $1,294 an ounce. (Source: Market Watch, September 27, 2013.) Other big banks have similar opinions.

While the big banks were proven right back in April and June when they said gold bullion prices would decline (and much had been written on that “forced” price decline), I don’t think their predictions will come true this time.

At the very core, gold bullion is a store of value, and it protects against uncertainty and currency fluctuation.

As readers of Profit Confidential know, I believe central banks will ultimately be the biggest buyers of gold bullion, and they will ultimately be responsible for higher prices.

Long-term, history has proven when there’s too much money in circulation, the value of paper money goes down and the hard asset prices go up. This economic cycle will be no different.

In fact, at his point in history, central banks in the global economy are printing paper money in overdrive mode, and they presently don’t seem worried about any consequences. Our own central bank is printing, the European Central Bank is printing, and the Swiss National Bank said it will print an unlimited amount of paper money if that’s what’s needed to keep its currency value low.

And while developed nations are printing, money printing in emerging markets is out of … Read More

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