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

Posts Tagged ‘debt crisis’

How Troubles in the Eurozone Will Eventually Affect Your Investments

By for Profit Confidential

I can’t say this often enough: the eurozone debt crisis is here to stay for a long time. The key stock indices might have given investors false hope, but we are still standing at square one of any economic recovery.

Greece, which was at the epicenter of the eurozone debt crisis, may be required to issue Treasury bills to stay solvent. The country has to convince the International Monetary Fund (IMF) and its eurozone peers that it has made the changes required by the bailout conditions it agreed to. If it fails to do so, Greece will not receive any aid from its eurozone partners for the next three months. (Source: MNI Deutche Borse Group, July 3, 2013.)

But Greece has actually failed to follow through on two conditions set by its creditors: cutting 12,500 jobs from the government sector and reducing a small but significant fiscal gap.

And Greece is hardly the only troublesome nation when it comes to the eurozone debt crisis. Look at Portugal—problems are emerging in that eurozone nation as both its finance minister and its foreign minister recently resigned. There are fears that the Portuguese government might collapse and put the 78-billion-euro bailout it received in 2011 in jeopardy. (Source: Reuters, July 3, 2013.) Those fears have caused the key stock index in Portugal to plummet and bond yields to soar.

And it doesn’t end here. The third-biggest economic hub in the eurozone, Italy, is facing troubles of its own. Antonio Guglielmi, an analyst at the second-biggest bank in the country, Mediobanca, in a confidential report to clients wrote, “The Italian macro situation has not … Read More

What the Worst Jobs Report of the Year Means to You

By for Profit Confidential

jobs marketOn the surface, today’s jobs market report looks good…

195,000 jobs were created in the U.S. economy during the month of June, with the “official” unemployment rate for the month sitting at 7.6%, unchanged from May. (Source: Bureau of Labor Statistics, July 5, 2013.)

But look a little closer and this jobs market report is a catastrophe…

Look at the underemployment rate, which includes people who have given up looking for work in the jobs market and those who are working part-time because they can’t get full-time work—based on this number, the picture looks drastically different. In June, the underemployment rate rose from 13.8% to 14.3%—the highest level since February! That means that one out of every seven Americans who want to work can’t get a job. (And the politicians keep telling me the economy is improving?)

And if that wasn’t bad enough…

Most of the jobs created in June were part-time jobs; the number of people working part-time in the U.S. jobs market rose by 322,000 to 8.2 million. These people aren’t working part-time because they want to—it’s because they can’t find full-time work.

And there’s still more…

Of the jobs created in June, 60% were in low-paying positions: 75,000 jobs were created in the leisure and hospitality sector, and 37,000 jobs were created in the retail sector! Low-paying jobs do not create economic growth.

The numbers don’t lie. The jobs market report today loudly screams, “Not a lot has changed in the U.S. economy.” Let’s get real, politicians; the way the government creates the unemployment rate is misleading. Millions of Americans are resorting to food stamps for one … Read More

Germany to Pull Back on ECB’s “Whatever It Takes” Position?

By for Profit Confidential

I can’t stress this enough: troubles in the eurozone are far from over.

First and most important, the strongest nations in the eurozone are experiencing an economic slowdown now too. As I have written before, France and Germany are seeing diminishing demand.

Finland, one of the financially strongest nations in the eurozone, fell into a recession in the first quarter of this year. Why? Exports from Finland are declining due to economic slowdown in the eurozone area, unemployment is increasing, and the government has introduced spending cuts. (Source: Wall Street Journal, June 5, 2013.)

The European Central Bank (ECB) expects the eurozone economy to shrink by 0.6% this year, lower than its previous estimate of 0.5%. In the first quarter of 2013, the eurozone experienced its sixth consecutive economic slowdown. (Source: Associated Press, June 6, 2013.)

Regardless of what you hear or don’t hear in the popular media, don’t believe for a second that the economic slowdown in the eurozone is going away anytime soon. The region is struggling with extreme levels of unemployment—the highest ever just recorded in April.

Some countries in the eurozone such as Ireland, Greece, and Portugal have now reached debt-to-income ratios (what the government spends compared to what the government brings in) above 300%. (Source: The Guardian, June 9, 2013.)

We have heard the head of the ECB say that the central bank will do “whatever it takes” to save the eurozone. But Germany is challenging this notion. The President of Germany’s central bank is expected to testify in front of the court and say it is illegal to bail out bankrupt eurozone … Read More

Number of S&P 500 Companies Reporting Negative Guidance a Red Flag

By for Profit Confidential

 Food Stamp Usage RisingStandard & Poor’s, the credit rating agency, believes the likelihood of the U.S. credit rating being downgraded in the near term is less than 33% (one in three) and it has decided to keep its credit rating on the U.S. economy at AA+, slightly lower than the best investment grade. (Source: Standards & Poor’s, June 10, 2013.)

This may be good news to the politicians who continue to believe there is an economic recovery in the U.S. economy, but it’s not enough to convince me.

In March, 47.7 million Americans, or 23.1 million households, were on some form of food stamps in the U.S. economy. (Source: United States Department of Agriculture, June 7, 2013.) This is more than 15% of the U.S. population.

And instead of people moving away from the government’s help, as would be the case during economic growth and a recovery, dependence on the government is actually increasing. Food stamp use in the U.S. economy was lower at 44.5 million in March of 2011.

Economic growth in the U.S. economy means job creation and consumers increasing spending—we have the exact opposite today.

After 2009, we had a sense of economic growth in the U.S. economy as demand in the global economy meant many multinational American companies were able to sell their goods for a profit outside the U.S. But as the global economy struggles now, it’s a different story.

For the second quarter of 2013, 116 companies in the S&P 500 have provided corporate earnings guidance; 93 of them have provided negative guidance. The ratio of companies providing negative guidance compared to companies providing positive guidance has … Read More

Next Tiny Country in the Eurozone to Bust

By for Profit Confidential

Eurozone to BustWhile cutting the growth outlook of the global economy, Chief Economist of the International Monetary Fund (IMF) Olivier Blanchard said yesterday, “…the main challenge is very much in Europe.” (Source: “IMF Cuts Global Growth Outlook as Europe Demand Urged,” Bloomberg, April 16, 2013.)

Blanchard showed further concerns regarding the economic slowdown in the eurozone, saying, “Europe should do everything it can to strengthen private demand. What this means is aggressive monetary policy and what this means is getting the financial system stronger…” (Source: Ibid.) In other words, print more paper money.

Greece, Spain, Italy, and Portugal are facing a staggering economic slowdown and are dragging the stronger eurozone nations down with them. The countries that were supposedly “immune” to the debt crisis in the region are now feeling the pressures.

Germany, the strongest nation in the eurozone and the fourth-largest economy in the world, is having troubles; demand is falling. German car sales plummeted 13% in the first quarter of 2013. (Source: Financial Times, April 17, 2013.) The Bundesbank, Germany’s central bank, expects the country’s gross domestic product (GDP) to increase by only 0.5% in 2013. (Source: MNI News, April 16, 2013.) But being so early in the year, this 0.5% GDP growth can easily turn into a 0.5% contraction, considering the problems in the eurozone.

As I have been writing since the beginning of 2012, the economic slowdown in the eurozone will spread to other parts of the world, rather than it being contained.

The events in Cyprus sent a significant amount of fear into the global economy. And the crisis there still isn’t over. The … Read More

Student Loan Default Rate Hits a Scary 11%

By for Profit Confidential

Student Loan Default RateAnother crisis looming in the air…

Student debt is going to be the next big hurdle to deal with in the U.S.’s economic recovery. Total student loan debt currently stands very close to $1.0 trillion and defaults on these loans are increasing at an alarming rate, placing more pressure on economic growth.

In the third quarter of 2012, student loans delinquent over 90 days stood at an alarming 11%. (Source: Federal Reserve Bank of New York, November 2012.)

I expect this delinquency rate and default rate to rise. It’s not rocket science: there is no economic recovery or real economic growth. Americans are still suffering. The more they suffer, the more they fall back on their loan payments. Thus, how can students get a break?

Here is what the U.S. secretary of Education Arne Duncan said about the looming student debt crisis: “We continue to be concerned about the default rates and want to ensure that all borrowers have the tools to manage their debt. In addition to helping borrowers, we will also hold schools accountable for ensuring their students are not saddled with unmanageable student loan debt.” (Source: U.S. Department of Education, “Press Release: First Official Three-year Student Loan Default Rates Published,” September 28, 2012.)

According to a recent survey by Fannie Mae, 20% of respondents believe their financial condition is going to get worse over the next 12 months—this is the highest percentage of people with this opinion since August 2011. In addition, 36% of the respondents reported a significant increase in their household expenses over the past 12 months. (Source: Fannie Mae, January 7, 2013.) Inflation? … Read More

What the Fiscal Cliff Deal Really Means for Investors

By for Profit Confidential

Fiscal Cliff Deal Really Means for InvestorsIn the end, after weeks of hearing about the fiscal cliff, it was over. Taxes on rich Americans went up, and spending was untouched. But guess what? It doesn’t matter…it makes no difference to America’s debt crisis!

Raising the tax on the rich (individuals making over $400,000 and couples making over $450,000 combined annually) and doing away with some tax loopholes only bring in another $60.0 billion a year to the government. (Source: New York Times, January 1, 2013.)

While $60.0 billion sounds like a big number, it is a paltry amount when compared to four consecutive years of trillion-dollar-plus annual deficits. The $60.0 billion puts a very small dent into the government debt crisis problem. Our analysis shows that a half-percent increase in the interest rate the government pays on its debt would cost it more than $60.0 billion!

What we needed to bring the debt crisis in check were cuts to government spending. That didn’t happen. That “can” was just pushed down the road once again into “debt crisis infinity.”

So what does this really mean to you, dear reader?

It means more of the same. The path of creating a welfare state out of America continues. In 1965, the national debt was equal to 38% of gross domestic product (GDP). Today, our national debt is close to 100% of GDP. (Source: Congressional Budget Office, last accessed January 3, 2013.) For this novice economist, the majority of our debt has been put on by the Obama Administration. Since Obama came into power, the national debt has increased about 60%; hence, the often-mentioned debt crisis that America … Read More

Technology and Financials—Exactly What the Stock Market Needs to Test Its Five-Year High

By for Profit Confidential

What the Stock Market Needs to Test Its Five-Year HighIt won’t take much for this stock market to rally, even though the outlook for corporate earnings is flat and risks like the sovereign debt crisis in Europe are unsolved. The fact is that the stock market in the near term is only looking for one thing: certainty.

With extremely accommodative monetary policy, the interest rate cycle favors equities. But while the stock market has proven it can basically hold up with the prospect of flat earnings, it can’t survive declining earnings (or revenues). Really, the stock market just wants certainty regarding the fiscal cliff in the near term. Then we’re into fourth-quarter earnings season, which will be the real news.

One of the first technology stocks to report next week, ahead of fourth-quarter earnings season, is Oracle Corporation (NASDAQ/ORCL). This company is a good benchmark for enterprise-level technology spending. In its last earnings report, the first fiscal quarter of 2013, the company’s Generally Accepted Accounting Principles (GAAP) earnings grew 11% to $2.0 billion, but revenues disappointed, falling two percent over the comparable quarter to $8.2 billion. On the stock market, Oracle’s share price sold off after its earnings news but has since recovered in an otherwise trendless stock market. Oracle’s stock chart is featured below:

 Chart courtesy of www.StockCharts.com

Oracle is actually trading close to its 52-week high, and with a price-to-earnings (P/E) ratio around 16, the stock is not expensively priced. Near-term quarterly earnings estimates have been reduced on the company, but are actually going up for fiscal 2014.

One technology stock that’s really struggling these days is Hewlett-Packard Company (NYSE/HPQ). Three years ago, the stock was … Read More

Poor Italy Can’t Get a Break: Another Change of Government at Hand?

By for Profit Confidential

This morning there’s news that Italy’s Prime Minister Mario Monti could be out and former Prime Minister Silvio Berlusconi back in, clouding the future of the eurozone’s third largest economy. With politics at play in many troubled eurozone countries, and as I have been harping on in these pages; the eurozone sovereign debt crisis is far from over and it will be a very long time before we see any economic growth in the region—continued recessions are more likely.

In the U.S., after the financial crisis hit, the idea was to expand the money supply aggressively and force lending so citizens could consume more goods and services, causing a return to economic growth. Similar steps were followed in the eurozone, but to a much lesser degree, as Germany opposes outright money printing.

While not at the pace of the Federal Reserve multi-quantitative easing programs, the European Central Bank (ECB) did manage to pump cash into the financial system and lower interest rates. Since October of 2008, ECB’s official interest rate in the eurozone has fallen from 3.75% to the current 0.75%. (Source: European Central Bank, Accessed December 6, 2012.) And when the sovereign debt crisis was at its peak, banks in the eurozone region borrowed 1.3 trillion euros from the ECB. (Source: Wall Street Journal, December 4, 2012.)

The ECB wants lending to increase in the region. It wants banks, big or small, to loosen their purse strings and loan money out to business and consumers. Unfortunately, this hasn’t happened. According to the ECB, loans to the private sector in the eurozone fell 0.7% in October, continuing their decline … Read More

Auto Loans: Next Bubble to Burst?

By for Profit Confidential

Next Bubble to BurstAuto sales data just released for the month of November have caught my eye. Auto sales in the U.S. economy have increased to a level similar to the level in January 2008—15% in November 2012 from November of 2011. Car sales are now running at the annualized rate of 15.5 million vehicles. (Source: Associated Press, December 4, 2012.)

On the surface, sounds like great news for the U.S. economy. Consumers are spending money on vehicles again. For some it provides a good gauge of consumer spending in the U.S. economy, but for me these data are not good. Why? Because auto loans are out of control.

Outstanding auto loans in the U.S. economy sit at $768 billion and have been increasing for the last six consecutive quarters. In the third quarter of 2012, auto loans debt in the U.S. economy increased by $18.0 billion. (Source: Federal Reserve, November 27, 2012.)

The news of auto loans rising is welcome, especially for an economist like me who has often complained that banks are making credit difficult for consumers in the U.S. economy. But what is very troublesome is that the delinquency rate on those auto loans has risen significantly.

From the second quarter to the third quarter of 2012, 38 states in the U.S. economy have reported increases in their auto loan delinquency rate. Over all, we when take into account all the states, the delinquency rate on the auto loans increased 15.2% in the third quarter from the second quarter of 2012. (Source: TransUnion, November 27, 2012.)

Another reason to be worried: 32.8% of all new auto loans issued in the … Read More

Listen Carefully to What These Big U.S. Companies Are Saying

By for Profit Confidential

Listen Carefully to What These Big U.S. Companies Are SayingBuy stocks; buy, buy, and buy a little more—this is exactly what the stock market, currently controlled by a bear in sheep’s clothing, would like you to do. Signs of a stock market reversal are clear and should be taken seriously by my readers.

The S&P 500 is swimming in shark infested waters with no land in sight.

The stock market is closing its eyes to the fact that an increasing number of U.S. companies in the S&P 500 are becoming victims of the global economic slowdown. FedEx Corporation (NYSE/FDX), Intel Corporation (NASDAQ/INTC), International Business Machines Corporation (NYSE/IBM), and Norfolk Southern Corporation (NYSE/NSC) are just some of the companies that have already warned about their corporate earnings growth slowing, largely because of the global economic slowdown.

All investors should face the truth: the only reason the key stocks indices have gone up is money printing. The value of money goes down, and the prices of equities go up. However, as the global economic slowdown deepens, companies start making less money and their stock prices fall—even if more money is printed.

The warning signs about the reversal in the stock market’s direction are coming in at a fast rate. Dow theory is suggesting a reversal, corporate insiders are selling stock at a high rate, stock advisors are very bullish, corporate earnings are declining, and companies are warning about the economic slowdown affecting business—all in all, leading ingredients of a decline in the stock market.

In a recent development, Caterpillar Inc. (NYSE/CAT), the world’s biggest construction and mining equipment manufacturer, issued a warning about its corporate earnings outlook. The company believes … Read More

What My Real Estate Agent Showed Me Last Week

By for Profit Confidential

What My Real Estate Agent Showed Me Last WeekMy new friend, Bill, took me for a drive in North Miami Beach last Saturday. You see, Bill is a real estate agent and he’s trying to get me to buy 20 houses. These homes are in the $80,000 range, around 1,000 to 1,200 square feet. They need some work, some come with tenants, and most are being sold by banks that have foreclosed on them.

So, I asked: “How does it work, Bill?”

“It’s a no-brainer,” comes the reply. “Take this typical home. You pay $80,000 cash for it. The current occupant might be the original homeowner. You go to him and ask if he wants to stay and pay rent. Or the tenant might have been put in there by the bank’s property manager. Either way, you’ll get $1,200 a month. You just pay taxes and insurance, which equates to $300.00 a month.”

“Wow, Bill. That’s a return of 13.5% on my money.”

“That’s right, Michael,” says Bill. “Investors are lining up to buy these properties. The goal should be to get to 100 of them, and then we sell to a private equity firm.”

My question to Bill: “Why aren’t families buying these homes to live in?”

Bill says the occupants don’t have the money. They can’t come up with a down payment. They can’t qualify for a mortgage; “they don’t want the hassle of owning.”

“Can we go in lower than the asking price,” I ask Bill?

“No way,” says Bill. “We’ll need to go $1,000 to $3,000 over the asking price, because there will be a line-up of investors bidding on each home.”

There you … Read More

Spain’s Risky Game of Pretending it
Doesn’t Need its Neighbor’s Money

By for Profit Confidential

Originally, to save its collapsing economy, the Spanish government decided it would access the credit markets itself. But as interest rates on Spanish government debt skyrocketed, Spain realized it needed the help of its eurozone neighbors and the European Central Bank (ECB) to stay afloat.

Spain then moved on to create a “bad bank”—a government-owned bank that would purchase all the bad assets currently held by country’s banks with proceeds from a eurozone bailout fund.

But now the Spanish government has flip-flopped on its position about accepting any bailout funds from eurozone countries to avert the debt crisis it faces. The Spanish government now wants to avoid any bailout from the eurozone countries. (Source: The Guardian, September 11, 2012.)

The main reason for this change of heart: the Spanish government believes that it has reformed its financial system too many times already and doing any more reforms would further weaken its economy.

The ECB is insisting it will only intervene to help Spain once the country has accepted “strict conditionality” of the eurozone, which means more austerity measures. (Source: BBC News, September 11, 2012.)

It is interesting to see the situation unfold here. The Spanish government is facing a debt crisis like no other. The Spanish economy has the ingredients mixing for all sorts of trouble, including higher skyrocketing unemployment and a housing bust.

From the looks of it, the Spanish government does not want to look needy to the eurozone, so it isn’t forced to accept bailout terms similar to Greece’s. The ECB and other eurozone countries are calling for stricter controls over Spain’s financial system and … Read More

We Can’t Ignore It: America’s Going Broke

By for Profit Confidential

We Can’t Ignore It: America’s Going BrokeThe U.S. national debt just surpassed the $16.0-trillion level and is accelerating with each passing minute. The problem is that with the U.S. economy slugging away and an unemployment rate of 8.3%, there are also less tax revenues to collect, which will ultimately impact the government’s balance of tax revenues and spending.

Ironically, while the U.S. is advising the eurozone countries to deal with their own European debt crisis (read “Global Economies Waving a Red Flag”), there is a growing and significant debt issue at home, but no one seems to want to discuss this.

I’m sure the pre-election talks will focus on the debt problem.

Spain has a national debt of around 712 billion euros, about US$892 billion or about US$19,391 per citizen. The European Central Bank’s (ECB) bond-purchasing program will help in the short term, but there needs to be a longer-term solution to deal with the financial crisis.

But while the economic situations in Spain, Italy, Greece, Portugal, and Ireland look bad, everyone seems to be somehow ignoring the massive $16.0 trillion of national debt in the U.S. That’s $50,921 per citizen, or more than double the debt of the Spaniards. The U.S. national debt is mounting and not going away anytime soon. Worst of all, it’s growing at an alarming rate every minute. The only plus here is the country’s low bond yields. If the U.S. had to pay out the high yields Spain does, the U.S. would be broke and facing a credit crisis.

This national debt will take decades to pay off or even get it to more manageable levels.

The reality … Read More

The Three Most Likely Outcomes of the Eurozone Crisis

By for Profit Confidential

Eurozone CrisisThe focus this past weekend was squarely on the Greek elections and whether the vote was one which would precipitate the exit of Greece from the European Union.

The focus instead should have been on the fact that Greece will run out of money very soon and hence will require another bailout from the European Union.

In the first quarter of 2012, the Greek unemployment rate hit 22.6%. As the unemployment rate now approaches that of Spain, it is very important to note how fast this situation is deteriorating. This same time last year, the unemployment rate in Greece was 16.1% (source: ECB)!

Youth unemployment has gone from 42% in Greece last year to an incredible 52.7% in the first quarter of 2012!

Due to the financial crisis, tourists are staying away from Greece. The country reported that tourism fell over 15% in the first quarter when compared to last year (source: Irish Time, June 14, 2012).

It doesn’t matter which coalition party governs Greece; all parties have said they want to renegotiate the terms of the country’s bailout and its austerity measures with the European Union.

With the Greek economy continuing to contract at a rapid rate due to the financial crisis, revenues to the government are falling faster than the government can make its bond payments.

This means Greece is going to need more money from the European Union. In the meantime, no one knows how the European Union will structure the supposed 100-billion-euro bailout for Spain.

Now that more lenient bailout deals are currently being proposed for both Greece and Spain, Ireland and Portugal—which had … Read More

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