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

Posts Tagged ‘consumer confidence’

Why Are Car Sales Down So Much?

By for Profit Confidential

Soft Auto Sales Just the Beginning of a Poorer 2014All of a sudden, auto sales are declining…

Auto sales in the U.S. economy declined to an annual rate of 15.4 million units in December. In November, this number stood at 16.41 million units—a decline of more than six percent. (Source: Motor Intelligence, January 3, 2014.) Analysts were caught off guard by the decline in December auto sales; they were expecting an increase!

I see the decline in auto sales as being directly related to rising interest rates. And it’s not going to get any better.

For years now (since the Credit Crisis), auto sales have been increasing due to low interest rates. It’s very similar to what happened to the housing market prior to 2007. More and more people went on a house-buying spree when the mortgage rates were at record lows. When mortgage rates started to increase in 2007, the already-inflated housing market got hit hard. The same thing is happening to auto sales now.

Interest rates are rising again. Look at the chart below of the bellwether 10-year U.S. Treasury. Since November, the yield on the 10-year U.S. Treasury has gone up roughly 20%. The higher interest rates go, the weaker auto sales will get. (And we can already see the impact on the auto stocks. The stocks of America’s major car makers are off five percent from their 2013 peak, but key stock indices are near their peaks.)

10 Year Treasury Note Yield Chart

Chart courtesy of www.StockCharts.com

Rising interest rates will have the biggest impact on auto loans given to subprime borrowers (those who have a lower credit standing).

My readers should note that the delinquency rates on auto loans … Read More

U.S. Treasuries Hit 3%; Marks End of Stock Rally?

By for Profit Confidential

Another Five Stock Market Warning Signs to Add to the ListWhile 2013 will go down as the banner year for the S&P 500 and other key stock indices no one expected, the number of warning signs about this overpriced and overbought stock market has only increased. And my readers need to know about them…

Trading volume, which is the number of shares traded, fell in 2013. The chart below (bottom portion of the chart) shows trading volume on the S&P 500 was the lowest in 2013 since 2006 (circled area). Trading volume on the S&P 500 in 2013 was 573.4 billion—14.4% lower compared to 2012, when it was 670.1 billion. How does a stock market rise when there is less demand for stocks?

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Next, the yield on the bellwether 10-year U.S. Treasury surpassed three percent last week—its highest level since July 26, 2011. The yield on the 10-year U.S. Treasury is now higher than the yield on the 10-year government bonds issued by Canada, Germany, the Netherlands, Switzerland, Japan, and even France!

Why is this so important? The rising yield for the 10-year U.S. Treasury makes stocks less attractive (why buy the Dow Jones Industrial Average with a dividend yield of only 2.09% when investors can get a guaranteed government yield of 3.02%) and housing more vulnerable (the standard 30-year U.S. mortgage is closing in on an interest rate of five percent—the last time it hit that rate was back in January of 2010).

But unlike July of 2011, when the 10-year U.S. Treasury was last yielding three percent, interest rates are not expected to decline, but to continue rising. The Federal Reserve has started pulling … Read More

What Bernanke Cemented for Wall Street Yesterday

By for Profit Confidential

Why This Next Stock Market Bust Is Going to Be a DoozySomething very interesting happened yesterday.

The Federal Reserve said it would start “tapering” its quantitative easing program by $10.0 billion a month. In other words, the Fed will now print $75.0 trillion a month in new money instead of $85.0 trillion a month.

Firstly, the whole concept of the central bank printing money out of thin air never made sense to me because the money isn’t backed by anything. The Federal Reserve says that starting in January, it will print 11% less in new money. In 2014, instead of printing more than $1.0 trillion in new money, it will print (or “create,” if you prefer) $900 billion in new money.

But—and there is always a but—the Federal Reserve, through Bernanke’s press conference following yesterday’s meeting of the Federal Reserve governors, said it would adjust the amount of money it creates based on how the economy is faring. I take this to mean that if the economy slows again, the Federal Reserve could, and likely will, start printing even more money than it currently does.

And there is the question of the $4.0 trillion in new money the Federal Reserve’s balance sheet says it has created. How does the Fed get rid of the $4.0 trillion? I don’t think it can. I don’t think the Federal Reserve will find anyone out there who can take the $4.0 trillion, mostly in bonds, off its hands.

What really threw me for a loop yesterday was that when the Federal Reserve said it would start printing $10.0 billion less in new money each month, the Dow Jones Industrial Average rallied 300 points. Yes, we … Read More

If Money Printing Failed in Japan, Why Would It Work in the U.S.?

By for Profit Confidential

Why Is the Japanese Economy Starting to Tank AgainWhat the Federal Reserve is doing in the U.S.—its effort to get the economy going via its money printing program—has already been tried by the second-largest economy in the world: Japan.

Unfortunately, the easy monetary policy implemented by the Bank of Japan didn’t spur the Japanese economy. So why would it work for the U.S. economy?

One of the core purposes of easy monetary policy by the Federal Reserve was to improve lending so businesses would borrow money and grow (hopefully creating jobs) and consumers would borrow and spend (creating economic activity). All of this would lead to improved consumer confidence.

The Bank of Japan started a scheme to increase lending in Japan in 2010. It gave funds to its biggest banks to lend to companies. It set aside 21.5 trillion yen for this scheme; but sadly, only 8 trillion yen has been used. (Source: Reuters, October 17, 2013.) Easy money policies, and a program specially designed to give money to banks to lend out to companies, did not work in the Japanese economy.

And consumer confidence in the Japanese economy remains bleak. The index that tracks consumer confidence in the country stood at 41.9 in November. At the beginning of the year, it hovered near 45.0. A subset of consumer confidence, an index tracking consumers’ willingness to buy durable goods, stood at the lowest level of the year in November at 42.4 compared to 44.9 in January. (Source: Japan’s Cabinet Office, December 10, 2013.) The bottom line: after years of easy money policies and with a national debt-to-GDP multiple of 205%, there’s been no improvement in consumer confidence … Read More

Investors Borrowing Like Drunkards to Buy Stocks Again?

By for Profit Confidential

silver pricesThis morning we learned sales for this year’s Black Friday weekend declined for the first time since 2009. I have been warning my readers for months that falling consumer confidence would result in a pullback in consumer spending—and that’s exactly what’s happening this holiday shopping season.

According to the National Retail Federation, consumers spent an average of $407.02 from Thursday through Sunday, down about four percent from what they spent last year. (Source: National Retail Federation press release, December 1, 2013.)

The first decline in holiday spending since 2009 does not bode well for the economy, and as far as I’m concerned, it is an early indication of a weakening economy going into 2014.

But there is one place people are spending. In fact, you can say they’re spending so much here, they’re borrowing to buy more!

Investors have borrowed more money to buy stocks than at any other time in history!

The chart below shows the use of margin debt on the New York Stock Exchange (NYSE). It stands at the record-high level.

Margin Debt On New York Stock Exchange Chart

Yes, NYSE margin debt stands above the level it stood at just before the peak in stock prices in 2007 and much higher than it was when the Tech Boom bubble burst in the year 2000. The risk with margin debt is that it can turn a minor stock market sell-off into a major one for key stock indices as investor loans are called.

And while investors are borrowing like drunkards to buy stocks, earnings of companies that trade in key stock indices are anemic. In the third quarter of this year, the “surprise” rate for … Read More

Why the Blind Optimism Behind the Housing Recovery Won’t End Well

By for Profit Confidential

Housing RecoveryThe news headlines are saying the U.S. housing market is witnessing robust growth and flipping homes for profit is back.

While many are now saying there is growth in the U.S. housing market and that it will continue, I disagree with them, based on many different factors…all of which I want my readers to know about.

Yes, home prices have gone up, but that’s about it for positive developments. The housing market still suffers, and there are problems that need to be fixed before it sees a full-on recovery.

The delinquency rate on single-family residential mortgages in the U.S. remains staggeringly high. In the second quarter of this year, it was 9.41%. Yes, again; it has declined from its peak of 11.27% in the first quarter of 2010, but it’s still almost 140% higher than its historical average of 3.94%! (Source: Federal Reserve Bank of St. Louis web site, last accessed November 8, 2013.)

As I have been harping on about in these pages; institutional investors jumped into the U.S. housing market buying residential homes in bulk, and as a result, prices increased. But we didn’t see first-time home buyers run towards the housing market—an increase in first-time home buyers is essential for any economic recovery.

According to the National Association of Realtors, in September, first-time home buyers accounted for 28% of all existing home sales in the U.S. Meanwhile, investors were behind one-third of all existing home sales! (Source: National Association of Realtors, October 21, 2013.)

The “U.S. Economic and Housing Market Outlook” report issued in October by the Office of the Chief Economist at Freddie Mac said, “According … Read More

Consumer Confidence Trend Suggests Key Stock Indices Setting Up for Disappointment

By for Profit Confidential

Consumer confidence in the U.S. economy is falling fast. This phenomenon will bring key stock indices lower. But sadly, no one is really talking about this. “Buy, buy, and buy even more” is the theme among stock advisors. Optimism is increasing, and so is stock market risk.

The Thomson Reuters/University of Michigan Consumer Sentiment Index, a measure of consumer confidence in the U.S. economy, has fallen to a level not seen since December of 2011. This gauge of consumer confidence fell to 72.0 in November from 73.2 in October. (Source: Reuters, November 8, 2013.)

With that said, please take a look at the chart below of consumer confidence as plotted with the University of Michigan Consumer Sentiment Index in red and the S&P 500 in green. Pay close attention to the circled areas.

University of Michigan Consumer Sentiment chart

Chart courtesy of www.StockCharts.com

Generally, the chart above shows consumer confidence and key stock indices have had a direct relationship since 2001. In fact, at times, consumer confidence acts as a leading indicator of where key stock indices will head.

But since the beginning of this year, this relationship has gone the wrong way! As consumer confidence fell, key stock indices continued to march to new record highs! Just add the divergence between consumer confidence and the key stock indices to my long list of why this stock market shouldn’t be going up.

Consumer confidence predicts where consumer spending will go. If consumers in the U.S. economy are pessimistic about their future, it is very likely they will pull back on their spending. As a result, companies sell less, produce less, and earn lower profits—which eventually results … 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

Trouble Putting Food on Table for 17.6 Million American Households?

By for Profit Confidential

Trouble Putting Food on Table for 17.6 Million American HouseholdsI harp on about this over and over again: economic growth is when the average consumer is optimistic about their future; they are spending money, they know they will have a job tomorrow, and they are saving. In the U.S., we are seeing the opposite of all this.

In fact, consumer confidence in the U.S. continues to plummet; the Conference Board Consumer Confidence Index, an indicator of consumer spending, plunged more than 11% in October from September. (Source: Conference Board, October 29, 2013.)

But the misery doesn’t just end there for consumers in the U.S. economy. They are struggling to even buy the most basic of needs—food.

According to a recent study by the United States Department of Agriculture (USDA), in 2012, 17.6 million households in the U.S. economy were “food insecure”—they had difficulty bringing food to the table due to a shortage of resources. (Source: United States Department of Agriculture, September 2013.)

And as a result of so many Americans having trouble putting food on the table, it is costing taxpayers significantly. According to the U.S. Senate Budget Committee, over the last five years, the U.S. government has spent $3.7 trillion on 80 different poverty and welfare programs. The amount of money spent on these programs was five-times greater than combined spending on NASA, education, and all federal transportation projects over the time period. (Source: U.S. Senate Budget Committee, October 23, 2013.)

When I look at all these statistics showing how Americans are suffering, talk of economic growth or economic recovery just doesn’t sit well with me. I tend to focus on facts, rather than the noise. The noise … Read More

New Retirement Trend: One-Third of Americans Need to Work Until 80

By for Profit Confidential

281013_PC_lombardiAccording to the just-released annual Wells Fargo & Company Middle Class Retirement Study, about 60% of middle-class Americans say that getting monthly bills paid is their top concern. This number stood at 52% in the 2012 study. (Source: Wells Fargo & Company, October 23, 2013.)

But there are more depressing results of the survey…

34% of middle-class Americans say that they will work until they are 80 years old, because they will not have enough money saved up for retirement! In 2012, the number of respondents with a similar opinion stood at 30%; and in 2011, this number was at 25%. While the U.S. economy is supposed to be in recovery mode, the trend shows more Americans will need to work after retirement.

Based on the results of the study, the Wells Fargo Institutional Retirement and Trust issued a statement saying, “We do this survey every year and for the past three years, the struggle to pay bills is a growing concern and the prospect of saving for retirement looks dim, particularly for those in their prime saving years.” (Source: Ibid.) No kidding.

While the stock market has more than doubled since 2009, while real estate prices are rising again, while Washington and the mainstream are telling us the U.S. economy is improving, Americans are becoming more “doom-and-gloomish.” According to the results of the CNN/ORC International poll released late last week, only 29% of Americans say that economic conditions are good right now—the lowest level of the year. (Source: CNN Breaking News Text, October 22, 2013.)

The chart below of the University of Michigan Consumer Sentiment Index is very important. … Read More

Consumer Confidence Falling; Here’s What to Expect Next

By for Profit Confidential

More evidence consumer confidence in the U.S. economy is plunging…

The monthly Bloomberg Consumer Comfort Index, a consumer confidence indicator that shows the expectations of Americans about the U.S. economy, plunged to its lowest level in October since November of 2011. The index stood at -31 in October, down from minus nine in September. (Source: Bloomberg, October 17, 2013.) This index ranges from +100 to -100 (very optimistic to very pessimistic).

At the very core, consumer confidence gives an idea about consumer spending in the U.S. economy. The better the consumer feels, the more they spend: it’s just that simple. If someone doesn’t have a job but has expenses that need to be paid, they will not go out and buy that new flashy car or the house with the greener grass. They are more likely to keep what they have, and cut back on their discretionary spending.

The extent of bleak consumer confidence doesn’t just end here. In these pages, I have been talking about how companies in key stock indices are showing dismal revenues, but one sector is showing the opposite trend—discount stores.

Consider the corporate earnings of Family Dollar Stores, Inc. (NYSE/FDO); the company’s profits increased 27.5% in the fourth quarter of its fiscal year 2013 (ended August 31). Sales at Family Dollar Stores increased 5.8% compared to the same quarter a year ago. (Source: Family Dollar Stores, Inc., October 9, 2013.)

If all the pieces of the puzzle come together as expected (bleak consumer confidence leading to even lower consumer spending), I would not be surprised to see the gross domestic product (GDP) of the U.S. … Read More

Finally, a Politician & a Central Bank Who Criticize Paper Money Printing

By for Profit Confidential

Politician & a Central Bank Who Criticize Paper Money PrintingThese days, central banks are on a very dangerous monetary policy path. Paper money printing has become the norm. Major central banks around the world are taking the same actions; they have learned the phrase “quantitative easing” well. Economy’s soft; no problem! We’ll just print more money so our currency falls in value and our exports rise! (If only it were that simple.)

Two central banks are at the forefront when it comes to implementing paper money printing: the U.S.’s Federal Reserve and the Bank of Japan. And it isn’t a secret how poorly these two nations are faring despite their quantitative easing efforts.

In these pages, I have been very critical of quantitative easing.

With that said, to date, I have only heard one senior financial politician and one central bank head criticize the use of quantitative easing.

Canada’s Finance Minister, Jim Flaherty, at a private dinner with his G20 equals this week, criticized the use of quantitative easing by the U.S. central bank. The following day, he said, “It’s not good public policy.” He said the U.S. should have never implemented quantitative easing, but “Now that they’ve done it, they should get out of it as quickly as they can.” (Source: “‘Not good public policy’: Flaherty appears at odds with BoC, G20 as he criticizes U.S. quantitative easing,” Financial Post, October 16, 2013.)

The governor of the central bank of Canada, Stephen Poloz, has a similar take. He said, “[we] certainly agree that quantitative easing is one of the last things we want to be in a position to have to use.” (Source: Ibid.)

Finally, … Read More

Consumer Confidence Falls to Lowest Level Since December 2011

By for Profit Confidential

No one wants to hear this…

The most basic factor of economic growth in this country, consumer spending, is flashing a warning sign about the U.S. economy.

According to Gallup, weekly U.S. economic confidence for the week of September 30 to October 6 plummeted the most since the Lehman Brothers’ fall in 2008. The index suggests consumer confidence is down significantly since mid-September, and it now stands at the lowest level since December of 2011. (Source: Gallup, October 8, 2013.)

Unfortunately, Gallup’s confidence index is not the only indicator suggesting consumer spending is plummeting. The Thomson Reuter/University of Michigan’s preliminary consumer sentiment index for October declined to 75.2 from 77.5 in September—the lowest figure since January of this year. (Source: Reuters, October 11, 2013.)

And companies that are dependent on consumer spending are seeing a downtick in sales. Take The Gap, Inc. (NYSE/GAP), for example. The company reported a decline of three percent in same store sales for the month of September. In the same period a year ago, the company’s same store sales were up three percent! (Source: The Gap, Inc., October 10, 2013.)

I’m not shocked at all when I see statistics that show consumer spending is getting weaker and weaker. In fact, I have been writing about this issue for a while. Consumer spending in the U.S. economy is in jeopardy—all the indicators are suggesting we have more chances of seeing it decline than seeing a robust move to the upside.

And that brings me to the essence of today’s message: Retailers in the U.S. economy are not going to have a robust holiday season. Even … Read More

Has the Stock Market Gone Mad?

By for Profit Confidential

Has the Stock Market Gone MadThe stock market…a place where rationality has been thrown out the door in favor of trading for immediate profits…profits based on what the government and Federal Reserve are planning to do next. It’s no longer a place for average investors to make money, as the fundamentals that drive key stock indices higher don’t really matter anymore. The notion has become “If it’s good news, buy! And if it’s bad news, then buy even more!”

We have been witnessing this phenomenon on key stock indices for a while now, and from my experience, such erratic behavior by the stock market usually comes at the end of a long up or down cycle.

Congress had decided to “kick the can” of U.S. debt down the road a little longer. When news broke last Thursday that they were planning to increase the U.S. debt limit for a few weeks and then come back to debate it, key stock indices had the best day of the year. Look at the circled area in the chart below:

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Hold on a minute!

Why did the S&P 500 jump so much on the Republicans saying they would put in a temporary new U.S. debt ceiling instead of debating it? Isn’t increasing the U.S. debt load bad? After all, we are the biggest debtor in the global economy.

Dear reader, this is the new norm on key stock indices. The bad news, meaning we will have higher U.S. debt, is taken as good news by key stock indices. And assets that should be increasing in value are actually being punished. Case in point: gold … Read More

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