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

Posts Tagged ‘corporate profits’

The Problem With Reality in 2014

By for Profit Confidential

U.S. Economy Halfway to a Recession AlreadyEarlier this month, Jeremy Siegal, a well-known “bull” on CNBC, took to the airwaves to predict the Dow Jones Industrial Average would go beyond 18,000 by the end of this year. Acknowledging overpriced valuations on the key stock indices are being ignored, he argued historical valuations should be taken with a grain of salt and nothing more. (Source: CNBC, July 2, 2014.)

Sadly, it’s not only Jeremy Siegal who has this point of view. Many other stock advisors who were previously bearish have thrown in the towel and turned bullish towards key stock indices—regardless of what the historical stock market valuation tools are saying.

We are getting to the point where today’s mentality about key stock indices—the sheer bullish belief stocks will only move higher—has surpassed the optimism that was prevalent in the stock market in 2007, before stocks crashed.

At the very core, when you pull away the stock buyback programs and the Fed’s tapering of the money supply and interest rates, there is one main factor that drives key stock indices higher or lower: corporate earnings. So, for key stock indices to continue to make new highs, corporate profits need to rise.

But there are two blatant threats to companies in the key stock indices and the profits they generate.

First, the U.S. economy is very, very weak. While we saw negative gross domestic product (GDP) growth in the first quarter of this year, the International Monetary Fund (IMF) just downgraded its U.S. economic projection. The IMF now expects the U.S. economy to grow by just 1.7% in 2014. (Source: International Monetary Fund, July 24, 2014.) One more … Read More

And They Say the Economy Is Getting Better?

By for Profit Confidential

Four Largest World Economies Slowdown ModeThe Chinese economy had been growing at about 10% a year, like clockwork, for years. Now, China is in the midst of an economic slowdown, with growth expected to come in this year at 30%–50% below China’s five-year average growth rate.

Why is China’s economy growing so slowly, and why does it matter to us here in North America?

Manufacturing, the key component of China’s economy, is quickly slowing. The HSBC Chinese Purchasing Managers’ Index (PMI) declined for the sixth consecutive month in April, registering at 48.1. Remember that any reading below 50 for the PMI suggests an outright contraction in the manufacturing sector. (Source: Markit, May 5, 2014.)

Japan isn’t faring any better; the third-biggest hub in the global economy is facing its own economic slowdown. The government and Japan’s central bank are trying to boost the economy by printing more and more money, but they are failing miserably. Japan’s gross domestic product (GDP) growth has been abysmal for years.

Germany is the only country in the eurozone showing some resilience. Other eurozone countries, like France, Italy, and Spain, are also facing an economic slowdown. Bad debt, tight lending requirements, and high unemployment remain the biggest problems in the common currency region; so big, the European Central Bank (ECB) wants to take the same course as the Federal Reserve and the Bank of Japan and start printing more paper money.

In the U.S., we, too, have a soft economy. The first quarter of 2014 proved to be terrible for corporate profits growth. And if the rest of the world is in an economic slowdown, I don’t know how … 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

Why I Fell Asleep Last Night During the State of the Union

By for Profit Confidential

The Borrower of Last ResortLast night started out like every other State of the Union address I’ve seen…

The President told us all the good stuff about the U.S. economy, like how American corporate profits are at a record high, how the stock market is at record highs, how millions of new jobs have been created since the Credit Crisis of 2008, how the housing market is turning around, and on and on.

Like a good old politician, Obama spun the facts to give the viewer the impression his Administration has done a great job at turning the U.S. economy around.

What Obama, who now has a very low 43% job approval rating (Source: CNN Breaking News alert, January 28, 2014.), didn’t say about the U.S. economy—and which no other politician likely would—is that:

None of his 2013 State of the Union “priorities” made it through Congress.

American corporations ended 2013 with the slowest earnings growth rate since 2009.

The stock market has become a Federal Reserve-induced bubble.

The majority of jobs created in the U.S. economy since the Credit Crisis have been in the low-paying sectors of the retail and service (restaurant) sectors.

A record 47.41 million Americans, or 23.05 million households, in the U.S. economy are using some form of food stamps (Source: United States Department of Agriculture, January 10, 2014.)

The number of first-time home buyers in the housing market is going the wrong way. In December, first-time home buyers accounted for a near-record low of only 27% of all the existing-home sales transactions. (Source: National Association of Realtors, January 23, 2014.)

Midway through the speech, I nodded off. I … Read More

Has the Stock Market Discounted Full Tapering by the Fed?

By for Profit Confidential

Stock Market Discounted Full Tapering by the FedWell, here we are with only a few days left for Ben Bernanke in his role as chairman of the Federal Reserve, which has also been aptly dubbed as America’s “money printing press.”

In his final meeting as the head of the most powerful central bank in the world, all eyes will be on Bernanke and whether he decides to initiate his second tranche by further reducing the Federal Reserve’s bond buying at the Federal Open Market Committee (FOMC) meeting that ends today.

It’s really anyone’s guess if the Federal Reserve Chairman will taper. Bernanke may want to continue to slowly taper to show market participants that he understands the economy is faring better now, lessening the need for easy money from the Federal Reserve.

Of course, Bernanke could also hold off on any further tapering due to the weak jobs creation numbers from December; albeit, the reading was likely an aberration that was due to the harsh winter conditions in the month.

Whatever he decides, my feeling is that the stock market is fine with the Federal Reserve’s tapering process as long as the reduction is steady and gradual. The market wants to see the economy and corporate profits/revenues grow, which is ultimately the bottom line for investors.

Should the Federal Reserve not decide to taper further today, it would add some support to the stock market and could drive stocks to another rally. It would also help add some support to the emerging markets, which have been under extreme pressure due to Bernanke’s first move to taper.

If the Federal Reserve does further taper its bond buying, … 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

How You Can Beat the Higher Taxes Coming Up

By for Profit Confidential

Beat the Higher Taxes Coming UpAs the realization that the political structure in America is steering far more leftward sets in, businesses and investors are beginning to fear the substantial increase in dividend and capital gains taxes. Many investors have been searching for dividend yield to sustain income due to the absence of adequate bond yields. This area of income generation, dividend yield, will most likely be hit extremely hard with the increase in tax rates. While corporate profits are at massive levels in absolute terms, the problem will be in delivering these gains to shareholders.

In lieu of raising the regular dividend yield, many corporations are looking to pay out their corporate profits in special, one-time dividend payments. The reason being that firms are looking to disperse corporate profits before the tax rates hit. If they were to simply raise the dividend yield, once the tax rates are increased, investors would lose a substantial amount of money to the government. By getting ahead of the dividend yield tax-rate hike with a special one-time payment, firms are able to disperse corporate profits using an advantageous method for investors.

wynn stock market chart

Chart courtesy of www.StockCharts.com

We’re already seeing this from several firms, such as Wynn Resorts, Limited (NASDAQ/WYNN). While Wynn Resorts has paid out a special dividend over the last few years, I think part of the impetus to do so this year is to take advantage of the current lower tax rates on the dividend yield. The one-time $5.00 payment will be dispersed on December 21 to shareholders of record on November 23. (Source: “Wynn Resorts Rises After Declaring $5 a Share Dividend,” Bloomberg, November 2, 2012.)… Read More

What Just Happened at Yahoo! That You Should Know About

By for Profit Confidential

Yahoo! That You Should Know AboutMarissa Mayer, the new CEO of Yahoo! Inc. (NASDAQ/YHOO), recently spoke about her plans for the future of the company. As we all know, technology stocks in this sector are constantly evolving. At one time, Yahoo! was a giant among technology stocks; those days have long since passed. Growth in corporate profits has been evasive for the firm, and Mayer took this opportunity to voice her opinion on where the company should be heading.

Mayer comes from Google Inc. (NASDAQ/GOOG) with an engineering background. She helped build the Google brand and, ultimately, drive corporate profits. While her success at Google is laudable, the long-term problems at Yahoo! still exist. To begin with, she’s announced a dramatically redesigned homepage. She believes that this, along with changes to the search and e-mail functions, will help attract more viewers to Yahoo! and, ultimately, raise corporate profits.

Her plan includes a greater focus on its mobile platform. All technology stocks and their investors are spending a lot of time scrutinizing mobile platforms. This segment will be a crucial push for the next leg of higher corporate profits. The number of smartphone users is growing, and this segment will be critical to the success of technology stocks over the next decade. Technology stocks that can’t convert users into corporate profits will most likely see their shares languish.

Mayer also spent some time discussing the need to attract talent. I’ve lamented on this topic before; once technology stocks start to fall behind, the best talent starts to leave. As innovation is the key driver for corporate profits growth in this industry, technology stocks need to be … Read More

A Chilling Indicator of What’s Ahead for the Economy

By for Profit Confidential

A Chilling Indicator of What’s Ahead for the EconomyEarlier this year, I introduced a popular key indicator—the Baltic Dry Index—that measures the shipping rates of transporting bulk dry commodities worldwide.

It is considered a key indicator because it gauges the demand of the basic raw material inputs that go into every factor of finished goods, building materials, and food.

This key indicator registers a high number when economies are strong because of strong demand for all commodities like zinc, iron ore, iron, steel, etc. In an economic slowdown, demand falls, and so do rates.

Due to the economic slowdown, in January of this year, this key indicator reached a 25-year low. Since then, the index has just continued to fall, and remains near its low. Since 2008, this key indictor has plunged 90%!

Here is the three-year chart, which is further evidence of a global economic slowdown:


bdi stock market ticker chart

Chart courtesy of www.StockCharts.com

During the economic boom—back in 2006-2007—the orders were flooding into the shipbuilders for new container ships to pick up and deliver all of these raw materials. The premise was that the boom was only going to continue.

After the financial crisis of 2008, the orders for new containers could not be cancelled, resulting in a glut of ships sitting empty or delivering goods for literally pennies…sometimes at a loss.

One of the last remnants of Britain’s industrial revolution, Stephenson Clarke Shipping, just went bankrupt after almost 300 years in business. (Source: The Telegraph, August 13, 2012.)

The company stated that while it was able to weather previous economic slowdowns, it found this current economic slowdown to be one of the worst in its … Read More

Dow Jones Transportation Index Signals Trouble Ahead

By for Profit Confidential

Dow Jones Transportation IndexIt is summertime, and you expect the trading action in the stock market to be subdued, but there’s a big divergence taking place, and it isn’t good. The Dow Jones Transportation Index is not confirming the primary trend of the Dow Jones Industrials or the S&P 500 Index. The divergence started in mid-July and follows a stock market with lackluster trading volume and poor breadth.

The Dow Jones Transportation Index reflects current fundamentals, more so than the other stock market averages, which have been going up on the hope for new action from the Federal Reserve. This is why I think the stock market is in the process of topping out. Unless we get a big boost inU.S. economic news or new monetary stimulus from the Fed, I don’t see how the stock market can advance further.

Since the beginning of June, the Dow Jones Industrials, the NASDAQ Composite, and the S&P 500 Index have all done well, albeit on low trading volume. But the divergence with the Dow Jones Transportation Index really bothers me, because many of the large-cap companies that make up the Dow Jones Transportation Index have been excellent stock market leaders for some time now. (See “The Top Stocks Making Money in This Market Right Now.”) If the divergence continues, this will be a bad technical signal.

With the Dow Jones Industrials over 13,000 and the S&P 500 Index at 1,400, I’d have to say that the stock market is fairly but fully valued. Corporate earnings have been exceptionally good, considering all the turmoil in the global economy, and it is difficult to see … Read More

Stock Market Trading Action Signals Breakout Coming

By for Profit Confidential

Stock Market Trading ActionEver since the beginning of June, when the stock market came out of its correction, there has been seesaw-trading action with three meaningful peaks and valleys in the S&P 500 Index. We’re now working on the fourth, and who knows where it will lead.

Expectations for corporate profits continue to come down, and any positive investor sentiment is likely due to the lingering hope for additional monetary stimulus from the Federal Reserve. It really is a wacky stock market these days, because there is no certainty. Stock market investors don’t have any reasonable expectation of what their holdings might do, and therefore, investment risk remains very high.

The only thing that’s reasonable for equity investors to feel certain about is the outlook for dividends. Corporations continue to hoard cash, because they too feel the uncertainty in their operations. So why invest in new plant equipment or employees when the global picture is so cloudy? And even if dividend payments aren’t going up, there is so much cash on corporate balance sheets that most large-cap companies are assured of continued dividend rates through the worst of recessions.

Because expectations for corporate profits are falling, so are expectations for increased dividends. Even though corporations can afford it, we’re likely to see fewer companies raising their dividends to shareholders, particularly if general economic growth remains weak. You know you’re in tough times when the stock market goes up after second-quarter economic growth is reported at 1.5% on an annualized basis.

Dividends have been a stock market investor’s best friend for the last decade, and if you think the U.S. economy will toy … Read More

Corporate Profits Meeting Expectations— Stock Market Action Positive

By for Profit Confidential

Corporate Profits Meeting ExpectationsThe stock market is ticking higher in the face of continued weak economic news, and it’s mostly due to the good corporate profits we’re getting. For the most part, we’re so far seeing good corporate profits, because expectations were already reduced. Some companies are slightly reducing their outlooks for the rest of this year, but the declining visibility is modest. Corporations are being extremely conservative with their forecasts and rightly so. It makes it easier not to disappoint.

Corporate profits are mostly expected to be flat compared to last year. This makes dividend income all the more important. If you look at a number of blue chip, dividend paying stocks in this stock market, you’ll notice that many of them are actually trading right at their 52-week highs. While expectations for corporate profits continue to be very modest, institutional investors keep buying the dividends. It’s the only way to beat the inflation rate and the probability that the stock market will return little, if any, capital gains going forward.

I expect the U.S. economy will toy with a technical recession next year. I also expect that returns from the main stock market averages will be low, but that corporate profits will hold up well. One or two more years of difficulty will set the stage for the next business cycle to begin.

Intel Corporation (NASDAQ/INTC) slightly beat the Street for the second quarter, but revised its third-quarter outlook for corporate profits downward. The company warned that business conditions in the U.S. and particularly Europe are getting worse. This is no surprise, and due to its fair valuation, this is likely … Read More

New CEO at Yahoo!: Will This Move the Stock?

By for Profit Confidential

New CEO at YahooYahoo! Inc. (NASDAQ/YHOO), one of the former leading technology stocks, has been plagued with a stock price that just hasn’t moved for quite a long time, as opposed to several other technology stocks that have had significant price appreciation. Not only have corporate profits been evasive for the firm, but there’s also been a scandal recently. Former CEO Scott Thompson had been discovered to have allegedly lied on his resume about having a bachelor’s degree in computer science. This mistake forced him out; Marissa Mayer has just been named as CEO.

A well-known name among technology stocks, Mayer comes from Google Inc. (NASDAQ/GOOG). With an engineering background, she helped build the Google brand and ultimately drive corporate profits. While her success at Google is laudable, the long-term problems at Yahoo! still exist. It will be quite interesting to see if her skills are transferable to more problematic technology stocks such as Yahoo!, which has had issues in generating corporate profits for quite an extended period of time.

This hasn’t been the only change, as the landscape for technology stocks continues to evolve. Yahoo!’s North American division is essentially trading for nothing. Most of the value of Yahoo! USA is built on cash and its stake in Alibaba and Yahoo! Japan. Yahoo! has entered an agreement that will see up to half of its stake in Alibaba sold for $7.1 billion. After taxes, Yahoo! expects to net approximately $4.2 billion and $800 million in preferred Alibaba stock.

Even after this deal and the announcement of a new CEO, the stock has not moved substantially, stuck in a range. This … Read More

U.K. Money Printing Machine to Start up Again

By for Profit Confidential

Big banks in the U.K. jumped on the news that the U.K. central bank would provide billions of pounds of new money to the big banks should Europe’s financial crisis take a turn for the worse.

Too bad the rest of the citizens can’t be in line for some freshly printed money…

There is no question that the U.K. central bank, much like Ben Bernanke here in the U.S., is concerned that, should big banks in southern Europe collapse, then it could cause a credit freeze in the U.K. and the U.S.—lending would especially dry up at the big banks.

The reason the U.K. central bank announced this step is that it does not want a “Lehman crisis” moment on its hands and wants to assure the markets that the U.K. central bank is ready to step in.

This is simply more money printing. Should such conditions visit U.S. shores, Ben Bernanke will perform the same actions here to help the big banks, as he alluded to in his latest testimonies.

The other initiative the U.K. revealed was its “funding for lending” program. Basically, the U.K. central bank will take any questionable loan from the big banks (or other lenders, for that matter) in exchange for cash.

The catch is this cash will only be offered if the big banks and other lenders funnel this money directly into consumer and/or business loans.

The U.K. central bank believes this program is so attractive for big banks that it could inject another 80 billion pounds into the economy.

The only problem with this theory is that the U.K. economy is in a … Read More

U.S. Corporations: Not the Healthy Bunch We Think

By for Profit Confidential

central bankAmongst everyone from the average American to the politicians campaigning in November’s election, one of the ideas often discussed (to get the U.S. economy going) is how to convince corporations to invest the record amounts of cash they have in the bank.

Yes, corporations are holding record amounts of cash from their corporate profits.

But few are talking about the record amount of corporate debt they’re holding on their balance sheets.

U.S. corporations need to take advantage of record-low interest rates to borrow money to roll their old corporate debt over into new corporate debt at very low interest rates. This is simply wise money management.

However, since corporations are not investing in new capital projects to stimulate the economy, what is the need to create all this new corporate debt?

As of March 2012, U.S. corporations held a record $8.1 trillion in debt! This is a 6.6% increase over the same period last year (source: Federal Reserve).

As corporations mysteriously continue to pile on more corporate debt than needed, their cash amount from corporate profits is actually dwindling.

The same Federal Reserve report showed that, at the end of March 2012, corporations were holding record cash of $1.74 trillion from corporate profits. That works out to $4.65 of debt for every $1.00 of cash held.

When the credit crisis hit in 2008, corporations set aside large cash piles right up until 2009. That growth in cash from corporate profits started diminishing in 2010 and continued to fall off in 2011 and right into early 2012 (source: Wall Street Journal, June 7, 2012).

One of the reasons corporations … Read More

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