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

Posts Tagged ‘consumer spending’

The Economy: What Will Break the Camel’s Back This Year

By for Profit Confidential

Baltic Dry Index Collapses Again; Not a Good Sign for EconomyThe International Monetary Fund (IMF) has lowered its growth forecast for the global economy. It says the world economy will now grow by 3.6% in 2014 and 3.9% in 2015; it grew at three percent in 2013. (Source: International Monetary Fund, April 8, 2014.)

I see the IMF forecast on global growth as being far too optimistic. In fact, I think we’d be lucky to get three percent growth in the global economy this year. Key indicators I follow suggest demand in the global economy is close to outright collapsing.

Consider the chart below of the Baltic Dry Index (BDI). This index tracks the shipping prices of dry goods in the global economy. If it declines, it suggests global demand is declining. The BDI has plunged more than 48% since the beginning of the year, pointing to slow growth for the global economy ahead.

Battic Dry Index Chart Chart courtesy of www.StockCharts.com

Manufacturing is another indicator of demand in the global economy that we follow. If manufacturing activity increases, it means demand is increasing and that consumers are buying more. Sadly, global manufacturing is suggesting an economic slowdown is the most likely scenario ahead.

The JPMorgan Global Manufacturing Purchasing Managers Index declined to its lowest level in five months in March. (Source: Markit, April 1, 2014.)

Adding to the misery, most economic hubs are telling the same tale.

The eurozone is still in trouble; the European Central Bank is contemplating its own quantitative easing program as Italy just reported its highest unemployment rate ever recorded. China is pumping out weak economic data. Japan’s economic slowdown isn’t taking any break despite the central bank … Read More

Movie Tickets and New Homes: Why They Are Both in Trouble

By for Profit Confidential

The Untold Story of the Pinned-Down U.S. ConsumerIn 2013, consumer spending accounted for 67% of U.S. gross domestic product. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 2, 2014.) It’s plain and simple: economic growth cannot be achieved unless consumers are spending.

And unfortunately, higher prices and lower discretionary spending are putting the brakes on consumer spending here in 2014.

The Motion Picture Association of America says box office sales in the U.S. economy came in at $10.9 billion in 2013—up only one percent from 2012 and up just three percent from 2009. But here comes the kicker: the sales increase was due to higher ticket prices. The number of tickets sold for Hollywood movies in 2013 was down 1.5% from 2012 and six percent from 2009! (Source: Motion Picture Association of America, Inc., March 25, 2014.)

And the U.S. housing market is getting into trouble, too, as consumer spending pulls back. The chart below is of new-home sales in the U.S. economy from the spring of 2012 until now.

Houses Sold - New One Family ChartChart courtesy of www.StockCharts.com

You will quickly see from the chart that new-home sales in the U.S. economy peaked in late 2012/early 2013 and have come down since. Existing-home sales are also under stress and well below their post-Credit Crisis peak.

Why does the housing market matter? When homebuyers move into their new homes, they buy things like lawnmowers, appliances, furniture, and more. With home sales declining, it suggests consumer spending on these items will not be robust in 2014.

Dear reader, consumer spending patterns in the U.S. economy show troubling trends in the making. Sure, I talked today about how movie tickets … Read More

If You Think Our Stock Market Is Overpriced, Wait Until You See This

By for Profit Confidential

Why We Are Reaching a Stock Market TopThe stock market in France has been on a tear! Below, I present a chart of the French CAC 40 Index, the main stock market index in France.

Looking at the chart, we see the French stock market is trading at a five-year high. With such a strong stock market, one would expect France, the second-largest economy in the eurozone, to be doing well. But it’s the exact opposite!

As its stock market rallies, France’s economic slowdown is gaining steam. In January, the unemployment rate in France was unchanged; it has remained close to 11% for a year now. (Source: Eurostat, February 28, 2014.) Consumer spending in the French economy declined 2.1% in January after declining 0.1% in December. (Source: National Institute of Statistics and Economic Studies, February 28, 2014.) Other key indicators of the French economy are also pointing to an economic slowdown for the country.

CAC French CAC 40 Index (EOD) Chart

Chart courtesy of www.StockCharts.com

And France isn’t the only place in the eurozone still experiencing a severe economic slowdown. In January, the unemployment rate in Italy, the third-biggest nation in the eurozone, hit a record-high of 12.9%, compared to 11.8% a year ago.

I have not mentioned Greece, Spain, and Portugal because they have been discussed in these pages many times before; as my readers are well aware, they are in a state of outright depression.

Just like how investors have bought into the U.S. stock market again in hopes of U.S. economic growth, the same thing has happened in the eurozone. Investors have put money into France’s stock market in hopes of that economy recovering—but it hasn’t. We are dealing with a … Read More

Important Message Retailers Are Sending Us About the Economy

By for Profit Confidential

Consumer Spending Hits Trouble TerritoryConsumer spending in the U.S. economy is highly correlated to consumer confidence. If consumers are worried about the economy, they pull back on their spending.

The Conference Board Consumer Confidence Index decreased by 1.63% in February from January. (Source: Conference Board, February 25, 2014.) And we see the corresponding pullback on consumer spending in weak U.S. retail sales.

Macy’s, Inc. (NYSE/M) reported a decline of 1.6% in revenue in its latest quarter—which includes the holiday season. For its just-completed fiscal year, company revenues were up by only 0.9%. (Source: Macy’s, Inc., February 25, 2014.)

Sears Holdings Corporation (NASDAQ/SHLD) reported a decline of 12.6% in revenues in its latest quarter. Yes, I know this company is having problems; but a drop in revenue of 12.6% for a retail giant like this—and during the holiday shopping season—is an indicator that consumer spending is very weak. (Source: Sears Holdings Corporation, February 27, 2014.)

Target Corporation (NYSE/TGT) reported revenues fell by 3.8% in its last fiscal quarter. (Source: Target Corporation, February 26, 2014.)

Best Buy Co., Inc. (NYSE/BBY) is in a very similar situation. The company reported a decline of more than three percent in revenues for its latest quarter. And for the 12 months ended February 1, 2014, Best Buy’s revenues fell 3.4%. (Source: Best Buy Co., Inc., February 27, 2014.)

The retailers I just mentioned are just a few of the many retailers that reported a decline in their revenues in the last quarter of 2013, which suggests consumer spending is in troubling territory.

My point is that those companies that are closest to consumer spending—the big American retailers—are giving us a … Read More

The Opportunity Coming to the Luxury Retail Stocks

By for Profit Confidential

The Pros and Cons I See in the Retail Sector Right NowWe all know how bad this winter has been so far. The harsh weather across the majority of the country has impacted jobs growth, commerce, housing, and consumer spending.

Of course, with the spring season on the horizon, we’ll soon see if the weak economic metrics mentioned were really an aberration due to the weather—or a sign of further slowing to come.

From what I can tell right now, we are definitely seeing some growth issues in the retail sector that have been attributed to the winter weather. The Home Depot, Inc. (NYSE/HD) reported a somewhat flat quarter, as did Lowes Companies, Inc. (NYSE/LOW). However, I understand why they’ve reported flat numbers—it’s winter; who wants to renovate or build when it’s so cold outside?

Bellwether Wal-Mart Stores, Inc. (NYSE/WMT) is also struggling to attract consumers to its doors. The global retailer delivered flat sales and earnings growth in its fiscal 2014; revenues grew a mere 1.6%, while earnings growth was not much better at an even two percent. Clearly, we are seeing some hesitancy in consumer spending and the retail sector.

The winter-related turmoil is not confined to just one area, though; it has impacted many retailers. However, the luxury side appears to be faring well, with excellent growth still at Michael Kors Holdings Limited (NYSE/KORS). This luxury retailer is providing staggering growth despite the sluggish retail sector. (Read “Stock Falling, but Rich Still Spending; My Top Luxury Stock Play.”) Clearly, the more affluent part of the masses continues to do very well, especially with the continued advance in the stock market, which has produced many new millionaires…. Read More

Stock Prices and U.S. GDP; Historic Relationship Turns Bearish

By for Profit Confidential

Historic Relationship Tur​ns BearishIn the first five weeks of this year, investors bought $22.0 billion worth of long-term stock mutual funds. (Source: Investment Company Institute, February 12, 2014.)

But as investors poured money into the stock market, hoping to ride the 2013 wave of higher stock prices, stocks did the opposite and went down. The Dow Jones Industrial Average is down three percent so far this year.

Looking at the bigger picture, corporate earnings and key stock indices valuations are still stretched. The S&P 500’s 12-month forward price-to-earnings (P/E) ratio stands at 15.1. This ratio is currently overvalued by roughly nine percent when compared to its 10-year average, and 15% compared to its five-year average. (Source: FactSet, February 14, 2014.)

This isn’t the only indicator that says key stock indices have gotten too far ahead of themselves. In the chart below, I have plotted U.S. gross domestic product (GDP) against the S&P 500.

S&P 500 Large Cap Index ChartChart courtesy of www.StockCharts.com

The chart clearly shows a direct relationship between GDP and the S&P 500. When U.S. GDP increases, the S&P 500 follows in the same direction, and vice versa. When we look at the 2008–2009 period (which I’ve circled in the chart above), we see that when GDP plunged, the S&P 500 followed in the same direction.

Going into 2014, we saw production in the U.S. economy decline; consumer spending is pulling back, unemployment is still an issue, and the global economy is slowing. U.S. GDP is far from growing at the rate it did after the Credit Crisis. Take another look at the chart above. In 2011, you’ll see U.S. GDP was very strong; but after … Read More

These Two Indicators Say U.S. GDP is Already Declining in 2014

By for Profit Confidential

2014 Worst Growth Year for World Economies Since 2009In 2013, the U.S. economy, as measured by gross domestic product (GDP), rose at an average rate of 1.9% compared to 2.8% in 2012. And as it stands, GDP may slow further in 2014.

What makes me think this?

In January, U.S. industrial production declined by 0.3% from the previous month. This was the first decline in production since August of 2013. Production of automotive products in the U.S. economy declined by 5.15%, and appliances, furniture, and carpeting production declined by 0.6% in the month. (Source: Federal Reserve, February 14, 2014.)

And factories in the U.S. economy just aren’t as busy as they used to be. The capacity utilization rate, a measure of companies using their potential production, was 78.5% in January. The average rate between 1979 and 2013 has been 80.1%. While a difference of two percent in factory utilization isn’t a big number, because overhead is often fixed in factories, a two-percent decline in production is a big deal.

Then there’s the inventory problem; inventories in the U.S. economy continue to increase. In December, inventories at manufacturers increased by another 0.5% to $1.7 trillion. From December 2012, they have increased by 4.4%. (Source: U.S. Census Bureau, February 14, 2014.)

We have a situation in the U.S. economy today where factories are working at lower capacity than they have historically, while business inventories are rising—two bad omens for the economy; hence, you can see why I’m concerned about economic growth in 2014.

It’s a domino effect…

Inventories increasing suggest consumer demand is stalling. Examples of consumer spending declining in the U.S. economy are many. As I have … Read More

Ten Million People Left Out of Employment Statistics?

By for Profit Confidential

Three Reasons Why This Will Be a Bad Year for StocksAs I have been pointing out to my readers, the “official” unemployment numbers issued by the government are misleading because they do not include people who have given up looking for work and those people with part-time jobs who want full-time work.

In January, there were 3.6 million individuals in the U.S. economy who were long-term unemployed—out of work for more than six months. (Source: Bureau of Labor Statistics, February 7, 2014.)

Those who are working part-time in the U.S. economy because they can’t find full-time work stood at 7.3 million people in January.

Add these two numbers into the equation and the real unemployment rate, often called the underemployment rate, is over 12%. Meanwhile, the official unemployment rate from the Bureau of Labor Statistics sits at 6.6%—that’s the number you will hear politicians most often quote.

But if there’s a group of policymakers that looks past the “official” unemployment numbers, it’s the Federal Reserve.

At her speech before the Committee on Financial Services, U.S. House of Representatives in Washington, D.C. last week, Fed Chief Janet Yellen said, “Those out of a job for more than six months continue to make up an unusually large fraction of the unemployed, and the number of people who are working part time but would prefer a full-time job remains very high. These observations underscore the importance of considering more than the unemployment rate when evaluating the condition of the U.S. labor market.” (Source: “Semiannual Monetary Policy Report to the Congress,” Federal Reserve, February 11, 2014.)

Like all economists, Yellen knows that when an individual has a part-time job then their income isn’t as … Read More

Investment Opportunities in Depressed Chinese Stocks

By for Profit Confidential

Where to Find New Investment Opportunities in the Emerging MarketsThe Securities and Exchange Commission (SEC) is currently shutting down numerous Chinese shell companies trading on U.S. exchanges, such as the over-the-counter market and the highly speculative Pink Sheets stock exchange.

This is good and is something the SEC needs to continue to pursue and enforce, so domestic investors can regain some lost confidence towards Chinese stocks.

The American appetite for Chinese stocks has been picking up; albeit, it’s nowhere near where it was a few years ago when Chinese stocks were all the rage.

Yet if you think there’s little interest in Chinese stocks, take a look at some of the sizzling debuts of the few Chinese initial public offerings (IPOs) that listed in the U.S. last year.

There are now worries China may be set for a downside slide. I have been hearing how the Chinese economy was set to burst, especially regarding the real estate and financial sectors in China. So far this has yet to happen, but we are continuing to hear continued bearish comments towards China.

It’s true the Chinese economy is stalling and may find it difficult to get back to its former double-digit growth, but with gross domestic product (GDP) growth at 7.7% in 2013 and estimated to rise 8.2% this year, according to the Organisation for Economic Co-operation and Development (OECD), these are not bad numbers. By comparison, the U.S. economy is predicted to grow 2.9% in 2014, according to the OECD. (Read “OECD Predicts China #1 Economy by 2016; Consumer Spending to Soar.”)

A recent showing of contraction in Chinese manufacturing in January was used by the Chinese bears … Read More

What Happened on Yellen’s First Day on the Job

By for Profit Confidential

Why Stock Market Bulls Should Be WorriedFebruary 4 was a terrible day for key stock indices. The S&P 500 and the Dow Jones Industrial Average plummeted by more than two percent each and broke below important support levels.

That day was also Janet Yellen’s first day on the job as chief of the most important central bank in the world.

Was Wall Street giving Yellen a message? Was that message, “Think twice before pulling back on money printing”?

While the severity of the sell-off in the stock market in January and into February of this year has caught many by surprise, to us, it was one more of those “I told you so” moments. And it should have been of no surprise to our readers at all, since we’ve been “singing the blues” of an overpriced and overbought market for months.

Here are four important points my readers need to know about the stock market:

Looking at the bottom of the chart below, you will clearly see an increase in stock market trading volume. As the stock market went down in January and into February, volume increased. When volume rises sharply during a stock market downturn, it means panic selling is setting in. February 4, 2014, was the highest volume day on the Dow Jones Industrial Average in about five months.

Dow Jones Industrial Average Chart

Chart courtesy of www.StockCharts.com

Secondly, the Dow Jones Industrial Average has fallen below its 200-day and 50-day moving averages, as I’ve circled in the chart above. This move is considered bearish among technical analysts and suggests stock market sentiment is turning negative very quickly.

Thirdly, insiders continue to aggressively dump the stocks of the companies … Read More

Why I’m So Cautious About 2014

By for Profit Confidential

170114_PC_lombardiDon’t for a second believe consumer spending in the U.S. economy is improving!

J. C. Penney Company, Inc. (NYSE/JCP) has announced it will be closing 33 stores in the U.S. economy. By doing this, the retailer will save about $65.0 million a year starting in 2014. 2,000 employees will be let go. (Source: J. C. Penney Company, Inc., January 15, 2014.)

Macy’s, Inc. (NYSE/M) is also closing stores.

Best Buy Co., Inc. (NYSE/ BBY) reported that for the nine-week period ended January 4, its comparable sales declined 0.8% from the same period a year ago. The CEO of the company, Hubert Joly, said, “…our holiday revenues were negatively impacted by a number of factors, including: (1) the aggressive promotional activity in the retail industry during the holiday period; (2) supply constraints for key products; (3) significant store traffic declines between “Power Week” and Christmas; and (4) a disappointing mobile phone market.” (Source: “Best Buy Announces Holiday Revenue Results,” Best Buy Co., Inc., January 16, 2014.)

Target Corporation (NYSE/TGT) is another retailer that’s been hurt by dismal consumer spending in the U.S. economy. The company expects a decline of 2.5% in its fourth-quarter comparable sales. Target has also lowered its corporate earnings guidance for the fourth quarter; it now expects to report earnings of between $1.20 and $1.30 per share. Previously, it stated its corporate earnings in the fourth quarter would be between $1.50 and $1.60 a share. The company also plans to close eight stores in the U.S. economy. (Source: Target Corporation, January 10, 2014.)

Each day, it is becoming more evident that consumer spending, which makes up about two-thirds … Read More

Top Stocks for Investors in an Uncertain Retail Market

By for Profit Confidential

How to Profit from an Uncertain Retail MarketInvestors were happily greeted with a surprise on Tuesday after the reporting of better-than-expected retail sales numbers that suggest the consumer spending market may be alive and well after all.

In December, the headline retail sales reading jumped 0.2%, which was above the Briefing.com estimate calling for a flat result. Even after adjusting for the volatile auto sales, the core retail sales reading surged 0.7% compared to the 0.4% consensus estimate.

The results offer some encouragement for spending this year in the retail sector and were much needed, given the recent downward guidance from several retailers.

Now, don’t get too giddy and go out and buy retail stocks at random. It’s not that easy. Investing in retail stocks at this time requires careful thought and evaluation. But with the right investments, there’s some money to be made in the retail sector.

The National Retail Federation also reported some encouraging numbers for the retail sector. Excluding auto, gas station, and restaurant sales, retail sales advanced 3.8% in November and December.

Sounds good on the surface, but there may be some underlying issues surfacing in the retail sector. About 25 of the 29 retailers that issued earnings guidance, unfortunately, offered a negative outlook. (Source: O’Donnell, J., “Holiday sales paint mixed picture for retailers,” USA Today, January 14, 2014.)

The stats put forth are non-conducive to a rally in the retail sector and, in fact, represent a troubled retail climate that is facing lower income from middle-class consumers.

Even the discounted retail sector area is showing some weakness in growth. Family Dollar Stores, Inc. (NYSE/FDO) offered a soft tone in its outlook … Read More

1,500 Applicants for 50 Jobs? The Reality in America Today

By for Profit Confidential

Stock Market Finally Aligning Itself with Economic RealityIn New York last week, 1,500 people lined up for 50 apprenticeship positions as painters and decorators. These are union jobs, and only 500 applications are being accepted. Some hopefuls lined up in front of the District Council 9 office for days in extremely cold weather. If they are able to get the job, they will receive $17.20 an hour during the first year. After one year, they may get hired as a full-time employee. (Source: Eyewitness News, January 10, 2014.) This equates to about $37,000 per year considering one would work 40 hours a week.

Hold on a second: I thought the jobs market was strong in the U.S. economy? How come we are seeing such massive lines for a very small number of jobs?

What I just mentioned above is not an isolated event. I have reported other events like this in these pages before—a large number of people applying for very few jobs. It’s a fact that continues to be ignored: the U.S. jobs market remains bleak and the better-paying jobs are just not there.

In the entire year of 2013, the total non-farm payroll jobs market grew by 2.03 million jobs. But the majority of these positions were created in low-paying jobs.

Retail trade jobs in the U.S. economy increased by 358,400 last year—about 18% of all jobs created in 2013. The well-paying sectors of the jobs market, such as construction and manufacturing, didn’t see as much growth: construction jobs increased by 98,000 and manufacturing jobs in the U.S. economy increased by 63,000 in 2013. Together, the higher-paying jobs made up less than eight percent of … Read More

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

Fed’s Move to Taper the Right Choice for the Stock Market in 2014?

By for Profit Confidential

Any Money to Be Made in the Stock Market in 2014Federal Reserve Chairman Ben Bernanke did something that many on Wall Street including myself did not believe he had the inclination to do: he began the tapering process in his final meeting as the head of the most powerful central bank in the world.

The Federal Reserve will cut its bond buying by $10.0 billion each month, which I believe is a sensible move at this point, given the economic renewal and jobs market growth.

Markets surged to new record-highs for the S&P 500 and Dow Jones Industrial Average, as now there’s a sense that the ongoing uncertainty of when the Federal Reserve will begin to taper has finally been removed, and traders like certainty.

In addition, by reducing the stimulus by just less than 12%, the Federal Reserve can also gauge the market reaction and any negative impact tapering may have on the economy.

The intense buying following the announcement was based on the premise that the economy was moving along pretty well, and this could fuel consumer spending and gross domestic product (GDP) growth. The market was also pleased to hear that the record-low near-zero interest rates could remain, even if the unemployment rate fell below 6.5%.

With Christmas in a few days, it was nice that Bernanke graciously began to rein in the easy money flow. Now a plan has been put into place and the incoming Federal Reserve Chair Janet Yellen will continue it based on how the economy and jobs market progress.

In the meantime, the news also means potentially more stock market gains for investors—albeit, at a slower pace than this past year.

Bernanke … Read More

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