Posts Tagged ‘credit crisis’
In 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.
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
As 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
As more and more public companies warn about weak fourth-quarter corporate earnings reports, quite a number of them are resorting to the use of words like “corporate restructuring” or “cost cutting.” At the very core, these cost-cutting measures mean reducing the number of employees working at these companies.
Let’s face the facts: companies on key stock indices are struggling to keep revenue and profits rising. The share buyback “thing” is getting old (after all, how much money do these companies have to throw at stock buybacks?), so to show better corporate earnings, reducing work forces is the easiest thing to do.
Wal-Mart Stores, Inc. (NYSE/WMT) says it plans to lay off 2,300 assistant managers and hourly employees at its Sam’s Club stores. (Source: CNBC, January 24, 2014.)
Abbott Laboratories (ABT) recently let go an unspecified number of employees at its Lake County headquarters. In the conference call to investors about its fourth-quarter corporate earnings, the CFO of the company simply said, “[the company] will take further actions to reduce out expenses… get our support structure at appropriate levels.” (Source: “Abbott Laboratories launches round of layoffs,” Chicago Tribune, January 28, 2014.)
And as I told you last week…
Intel Corporation (NASDAQ/INTC) said it will be reducing its workforce by 5,000 this year. Here’s what the company spokesman, Chris Kraeuter, had to say: “This is part of aligning our human resources to meet business needs.” (Source: “Intel to reduce global workforce by five percent in 2014,” Reuters, January 17, 2014.) Intel had flat fourth-quarter 2013 corporate earnings.
Hewlett-Packard Company (NYSE/HPQ), another major company in the key stock indices, is taking a … Read More
Last 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
When 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
All 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.)
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
Quietly, without much fanfare or news, the bellwether 10-year U.S. Treasury hit a yield of 2.9% this past Friday—double what it yielded in June of 2012. (Source: Treasury.gov, last accessed December 20, 2013.)
Yes, the Federal Reserve only slightly pulled back on its money printing program and interest rates are already spiking.
And the standard 30-year mortgage rate hit 4.52% last week, up from 3.35% in November of 2012. Mortgage rates have increased by about a third in one year’s time. (Source: Freddie Mac web site, last accessed December 18, 2013.)
In the statement issued by the Federal Reserve last week, it said, “Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.” (Source: Press Release, Federal Reserve, December 18, 2013.)
In other words, the Federal Reserve will continue to print $75.0 billion a month in new paper money as opposed to the $85.0 billion a month it used to print. If the Federal Reserve continues to print $75.0 billion a month through the year 2014, its balance sheet will grow by another $900 billion. Yes, by the end of 2014, we will be looking at a Federal Reserve balance sheet that shows close to $5.0 trillion in newly created money on it.
I’d like to end this year’s last editorial issue of Profit Confidential by communicating my most important message of the year.
All this printing of … Read More
Nearly 100 years ago, on December 23, 1913, the Federal Reserve was created. The central bank was created for many reasons, such as minimizing the impacts of panics, becoming a banker of last resort and “smoothing” economic cycles.
But along the way to keeping the monetary system stable, something happened: the value of money deteriorated.
What you could buy for $1.00 in 1913 costs $23.59 today. (Source: Bureau of Labor Statistics web site, last accessed December 11, 2013.) A simple calculation would show that prices have increased by 2,259% over the last 100 years.
Something else to ponder: there have been more erratic movements in inflation since the Federal Reserve was created than in the century prior to then, when the Fed didn’t exist! Since the Federal Reserve was born in 1913, there were 10 years when inflation in the U.S. economy came in at more than 10%. Between 1800 and 1912, there were only four years when inflation in the U.S. was greater than 10%. (Source: Federal Reserve Bank of Minneapolis web site, last accessed December 11, 2013.)
“What’s your point, Michael?”
The unprecedented amount of paper money the Fed has created (out of thin air) since the Credit Crisis of 2008 will come back to haunt us—that’s my fear.
The Federal Reserve’s balance sheet has grown to about $4.0 trillion. M2 money stock, that’s the supply of paper money in the U.S. economy, has gone up 27% since 2009. (Source: Federal Reserve Bank of St. Louis web site, last accessed December 11, 2013.)
And through its “quantitative easing” program, the Federal Reserve continues to print $85.0 billion per … Read More
First, take out the stock buyback programs, and you’ll see that U.S. companies are seeing their earnings and revenues grow this year at their slowest pace since 2009. (More on that in today’s “Michael’s Personal Notes” column below.)
From a boring (but extremely important) economic point of view:
When a country experiences economic growth, industrial production of electricity and gas utilities pick up as factories and consumers use more electricity and other utilities. This is not happening in the U.S. economy. As a matter of fact, industrial production is contracting!
An index tracking industrial production of electric and gas utilities has declined almost eight percent since this past March. It stood at 103.76 then; in August, it stood at 95.62. (Source: Federal Reserve Bank of St. Louis web site, last accessed September 19, 2013.)
But it doesn’t end there.
Another key indicator of economic growth known as “capacity utilization” shows companies in the U.S. economy are operating below their historical norm. In August, the capacity utilization in the U.S. economy was 77.8%, three full percentage points below the historical average from 1972 to 2012. (Source: Federal Reserve, September 16, 2013.)
And we are seeing layoffs and discharges in the manufacturing sector accelerate in the U.S. economy. In March, there were 83,000 layoffs and discharges in manufacturing. In August, that number rose to 91,000—an increase of almost 10%. (Source: Federal Reserve Bank of St. Louis web site, last accessed September 19, 2013.)
When we look … Read More
The chart below of the Dow Jones Industrial Average depicts the precise moment when the Federal Reserve made its announcement last Wednesday that it was not planning to taper its quantitative easing at this time.
Chart courtesy of www.StockCharts.com
This is really troublesome. Key stock indices have become addicted to easy money and any news about more money printing just drives the market higher. This pattern has been going on since the Federal Reserve first promised it would rev up its printing presses back in 2008.
Unfortunately, as this continues, the fundamentals that are supposed to actually drive key stock indices higher—corporate earnings—are under major pressure. We have been seeing companies in key stock indices playing “tricks” to increase their corporate earnings per share (such as buying back their own stock), but these antics can’t go on forever.
Software giant Microsoft Corporation (NASDAQ/MSFT) has announced the company’s board of directors has approved a share buyback program worth $40.0 billion. (Source: Microsoft Corporation Investor Relations, September 17, 2013.)
CBS Corporation (NYSE/CBS) said it has increased the amount of its share buyback program to $6.0 billion. (Source: CBS Corporation Investor Relations, July 25, 2013.)
These two companies are only two of the many big-name companies in key stock indices that are rigorously buying back their shares. Other names, like Juniper Networks, Inc. (NYSE/JNPR) and Time Warner Cable Inc. (NYSE/TWC), are taking a similar approach.
As I have recently written, it’s not just corporate earnings growth that’s the problem—revenue growth is also lacking. Companies in key stock indices enjoyed double-digit (or close to it) earnings growth in 2009, 2010, and 2011, as they … Read More
The middle class in the U.S. economy is on the verge of collapse. Yes, I said collapse. That social class that once helped the U.S. economy grow and prosper is coming apart. Will the U.S. economy ever be the same without it or is this the new norm?
Here’s why it’s important to you.
The middle class helped the U.S. economy (following World War II and up until the credit crisis of 2008) by buying goods and services they needed or wanted. They bought cars, TV sets, furniture, appliances, clothing, computers, and flashy gadgets. In simple terms: they spent money.
The spending by the middle class resulted in American companies selling more, making more, and hiring more people to meet consumer demand. Businesses then took their profits and invested in new projects and built more factories. This is how cities like Detroit flourished.
But where does the middle class of the U.S. economy stand now?
Signs of trouble for the middle class of the U.S. economy actually started to surface at the start of the new century, but it wasn’t until the financial crisis when the middle class in the U.S. economy really started to deteriorate.
Today, the middle class is not buying or spending like it once did—and this is not by choice.
The collapse of the housing market in the U.S. economy has taken a devastating toll on the middle class in this country.
While the media and politicians keep telling us the housing market has turned the corner and is healthy again, the delinquency rate … Read More
This is a story of how the big banks pulled gold prices from under our feet, but why their plan for the stock market won’t pan out…
When gold bullion prices went into semi-crash mode in late spring of this year, some stories written by financial analysts suggest big banks colluding together to bring gold bullion prices crashing down. If you remember, The Goldman Sachs Group, Inc. (NYSE/GS) came out with a report saying gold bullion prices would go down…and magically, they did!
At about the same time Goldman Sachs gave a “sell” recommendation on gold bullion, JPMorgan Chase & Co. (NYSE/JPM) was selling gold bullion on the paper market. The plunge in gold bullion prices started in April—but JPMorgan was selling gold since the beginning of the year. From January to April, the big bank’s house account had a net short position of 14,749 100-ounce COMEX gold contracts—or about 1.47 million ounces of gold bullion. (Source: “Year to Date Delivery Notices,” CME Clearing, August 19, 2013.)
I’ll be the first to admit it: the gold bullion price takedown that started in April sure looks and smells fishy.
Once the sell-off in gold bullion began, no one cared about demand or supply (the reason why gold bullion prices increase or decline). The fundamentals were thrown out the window. Irrationality and emotions took over, and investors ran for the exit.
Gold bullion prices have started to climb back up. They are above $1,300 an ounce and marching towards the next big level at $1,400.
The gold “play” is over for the big banks; they’re onto something else—the stock market.
The … Read More
Sad to say, this is exactly what the U.S. economy is experiencing right now.
Industrial production in the U.S. economy is anemic. For the month of July, industrial production in the U.S. economy remained unchanged; in June, it saw a menial increase of 0.2%; in May, it was flat; and in April, industrial production declined 0.4%. (Source: Federal Reserve, August 15, 2013.)
Last month, the production of consumer goods in the U.S. economy declined by 0.5%.
Moving onto the jobs market in the U.S. economy, while politicians certainly do a good job at making it sound like the employment picture is improving, the majority of jobs created since the Great Recession have been in low-wage-paying sectors.
Corporate profits, as has been very well documented in these pages, are dismal. Companies in the U.S. economy have found ways to boost their earnings through artificial means, like stock buyback programs, and are cutting costs by reducing their labor force. Sure, these maneuvers make earnings temporarily look better; but when you look at their sales, companies in the U.S. economy are not selling more.
As for the standard of living in the U.S. economy, consumers are struggling. Just look at the numbers: In the first quarter of 2013, there were 309,920 consumer bankruptcies in the U.S. economy. In the second quarter, the number increased to 380,020. This is an increase of 23% within just one quarter. (Source: Federal Reserve Bank of New York, August 2013.)… Read More
Last week, Moody’s Investors Service changed its outlook on the U.S. national debt from negative to stable. (Source: Reuters, July 18, 2013.)
Despite the credit reporting agency’s “upgrade” on U.S. national debt, my opinion remains the same: the U.S. national debt has taken on a life of its own, growing like a bad cancer with no cure in sight.
In June of this year, the U.S. government registered a surplus of $117 billion after a budget deficit of $139 billion in May. On the surface that sounds great. But look a little closer, and we see that interest paid on the U.S. national debt for the month of June was $93.03 billion.
In the fiscal year so far (October 2012 to June 2013), the U.S. government has paid $345.26 billion as interest. For the full fiscal year (ending October 31, 2013), interest rate expense on the U.S. national debt is expected to reach $420.61 billion. (Source: Department of the Treasury, Financial Management Service, July 11, 2013.)
That’s almost half a trillion per year on interest payments only! And we must remember the Federal Reserve is keeping interest rates artificially low. If interest rates doubled (which is not a long-shot concept, considering that even if rates did double from here, they would still be below the 30-year average), the government interest rate payments could read $1.0 trillion a year!
Looking at the U.S. national debt as a percentage of our gross domestic product (GDP), it stood at 105.07% at the end of the first quarter of this year. (Source: Federal Reserve … Read More
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