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

Posts Tagged ‘dow jones’

One Industry That’s Holding Up the Rest

By for Profit Confidential

Resilient Industry the Reason the Market’s Still UpThe resilience of this stock market is uncanny. Just when transportation stocks, a leading market sector at any time, took a well-deserved break, components turned upward and are once again pushing record highs.

Union Pacific Corporation (UNP) is a benchmark stock in transportation. It’s up fivefold since the stock market low in 2009 and looks to have continued upward price momentum.

This is an exceptional performance for such a mature, old economy type of enterprise. The position has a forward price-to-earnings (P/E) ratio of approximately 17 with a current dividend yield of 1.8%.

Three weeks ago, Union Pacific increased its quarterly dividend 10% to $0.50 a share, payable October 1, 2014 to shareholders of record on August 29, 2014.

In three of its last five quarters, the company has increased its quarterly dividend at a double-digit rate and as much as anything else, this is responsible for its great stock market performance.

Union Pacific had an exceptionally good second quarter. Freight revenues grew 10%, driven by gains in freight volume and rising prices.

The company’s operating ratio, which is key in the railroad industry, hit an all-time quarterly record of 63.5%, and management bought back 8.3 million of its own shares during the quarter, spending $806 million.

It’s a very good time to be in the railroad business. Not only are the pure-play rail companies mostly doing well, but the railroad services sector is also experiencing great business conditions.

The Greenbrier Companies, Inc. (GBX) is a company we’ve looked at before. It has been a huge stock market success. (See “Why These Stocks Are a Leading Indicator of the Read More

Jumping on the Risk Bandwagon? Think Again

By for Profit Confidential

The stock market has an underlying strength to it, seemingly only to be undone by geopolitical events. Fed action always has the potential to shock the system. Negative economic news isn’t fazing this market. On the back of a pretty decent second quarter, many corporate outlooks predict another year of decent growth, particularly with earnings. While the stock market retrenched recently, positive days are still led by the Dow Jones Transportation Average, the Russell 2000 Index, and the NASDAQ components, which are traditionally positive for broader sentiment. Some speculative fervor has come back to two stock market sectors that are traditionally volatile—biotechnology stocks and restaurant stocks. But there really isn’t an underlying trend to latch onto. Jumping on the bandwagon of risky stocks seems unwise considering the stock market is at an all-time record-high. This is a market where equity investors have to be highly selective and wait for the right opportunities to present themselves, if you’re considering new positions at all. This can be in the form of a specific sector theme (like oil and gas, for example) or looking for good companies that have retrenched for their own specific reasons. In any case, with the stock market at a record high, it’s difficult to find value, and new positions become entirely reliant on market momentum, not necessarily individual corporate achievement. There are very few companies that I would consider now, but within the context of a long-term stock market portfolio, investors want their money to be put to work. In equities, I still think that portfolio safety is the name of the game. This is a market that hasn’t experienced a material price correction for five years. There have been retrenchments and price consolidations, but no reset, no revaluation that would make stock market investors with cash want to jump into a marketplace still beset with huge monetary stimulus and strong balance sheets—a marketplace still extremely favorable to equities. Companies for consideration at this time that fit into my earnings (and dividends) safety list include Microsoft Corporation (MSFT), PepsiCo, Inc. (PEP), Johnson & Johnson (JNJ), and 3M Company (MMM). There should be exposure to oil and gas in this short list, too. Previously, I liked Kinder Morgan Energy Partners, L.P. (KMP), but with news that this high-yielding limited partnership is being bought out by Kinder Morgan, Inc. (KMI), I’m looking for a solid new pick in this sector. (See “This Company’s $70.0-Billion Acquisition a Boon for Investors.”) A lot of investors are more risk-tolerant than these mature enterprises might present. But institutional investors are still skittish; they are still buying earnings safety in this stock market. Accordingly, dividend-paying blue chips remain highly correlated to the broader market and for the investment risk, given that this market could experience a 20% correction at any time for a multitude of reasons, new buyers of equities should consider stocks offering earnings and dividends safety. In the equity market—which is a secondary market with a pricing mechanism subject to fear, greed, and the herd mentality—capital preservation is a worthy investment goal. So far in this bull market, blue chips have performed exceedingly well relative to the rest of the stock market and they are still where institutional investors want to be.The stock market has an underlying strength to it, seemingly only to be undone by geopolitical events. Fed action always has the potential to shock the system. Negative economic news isn’t fazing this market.

On the back of a pretty decent second quarter, many corporate outlooks predict another year of decent growth, particularly with earnings.

While the stock market retrenched recently, positive days are still led by the Dow Jones Transportation Average, the Russell 2000 Index, and the NASDAQ components, which are traditionally positive for broader sentiment.

Some speculative fervor has come back to two stock market sectors that are traditionally volatile—biotechnology stocks and restaurant stocks.

But there really isn’t an underlying trend to latch onto. Jumping on the bandwagon of risky stocks seems unwise considering the stock market is at an all-time record-high.

This is a market where equity investors have to be highly selective and wait for the right opportunities to present themselves, if you’re considering new positions at all.

This can be in the form of a specific sector theme (like oil and gas, for example) or looking for good companies that have retrenched for their own specific reasons.

In any case, with the stock market at a record high, it’s difficult to find value, and new positions become entirely reliant on market momentum, not necessarily individual corporate achievement.

There are very few companies that I would consider now, but within the context of a long-term stock market portfolio, investors want their money to be put to work.

In equities, I still think that portfolio safety is the name of the game. This is a market that … Read More

Where I’d Put My Money Now

By for Profit Confidential

Annual Supply of World Gold ShrinkingAs gold bullion prices declined last year, I said supply would contract as gold miners pulled back on exploration and closed mines that were not profitable at $1,200-an-ounce gold.

For the supply of gold bullion to increase, there needs to be more discoveries. Sadly, the opposite is happening. According to SNL Metals & Mining, gold discoveries have been trending downward. In the 1990s, there were 124 new gold discoveries totaling 1.1 billion ounces of gold bullion. But since 2000, only 605 million ounces of gold bullion in total has been discovered at just 93 discoveries. (Source: Kitco News, July 18, 2014.)

For there to be more gold discoveries, mining companies need to spend more on exploration and that just isn’t happening. In 2013, when gold prices plummeted, major mining companies pulled back on their spending. Furthermore, exploration companies that need funding found it very difficult to get money, so they also pulled back on finding gold.

But gold bullion discoveries aren’t just slowing; the time it takes to start production at a mine is increasing as well. Between 1996 and 2005, it took an average of 11 years to bring a discovery to production. Between 2006 and 2013, this has increased to 18 years. (Source: Ibid.)

With all of this (it being harder to find new gold bullion and it taking too long for production to start once gold is discovered), the supply of world gold bullion is shrinking.

And demand for gold bullion, well, it just keeps rising. Aside from investors buying gold coins and jewelry at near record levels (with India now easing its stiff tariffs on gold … Read More

Why a Full-Blown Market Correction Should Be Expected

By for Profit Confidential

Investors Can't Overlook to Succeed in This MarketThe monetary environment is still highly favorable to stocks and should continue to be so well into 2015. However, while this market can handle higher interest rates, stocks can only advance in a higher interest rate environment if gross domestic product (GDP) growth is there to back it up.

Because of the capital gains over the last few years and the across-the-board record-highs in many indices, investment risk in stocks is still high. Accordingly, it’s worthwhile reviewing your exposure to risk, particularly regarding any highflyers in your portfolio; they get hit the hardest when a shock happens.

Currently, geopolitical events between Ukraine and Russia have the potential to be the catalyst for a correction. It could happen at any time depending on what transpires.

The risk of stocks selling off on the Federal Reserve’s actions is diminishing. The marketplace is well informed about the central bank’s intentions and it’s quite clear that Fed Chair Janet Yellen doesn’t want to do anything to “surprise” Wall Street.

I still view this market as one where institutional investors want to own the safest names. The economic data just isn’t strong enough for traditional mutual funds and pensions to be speculating.

This is why the Dow Jones Industrial Average and other large-cap dividend paying stocks are so well positioned. They offer great prospects for increasing quarterly income, some capital gain potential (still), and downside protection compared to the rest of the market.

Of course, all stocks are risky. An equity security is priced in a secondary market where fear, greed, emotions, and a herd mentality are part of the daily pricing mechanism.

Accordingly, anything … Read More

With Stocks Still Near Their Highs, What Should Your Priority Be?

By for Profit Confidential

One Key Index Close to Breaking This MarketThe Dow Jones Transportation Average is close to breaking its 50-day simple moving average. This, in itself, is not the end of the world; it did so most recently in April and recovered nicely.

But it is worth keeping an eye on, especially because the stock market is looking so tired right now.

Earnings are still streaming in and are generally okay. But there’s diminishing momentum. If the broader market opens up on positive news, on many days, it’s not able to sustain the gains. This is indicative of a stock market due for a break.

Summer action is typically slower, and while a 10% stock market correction would make it easier to put new money to work, the investing guide should be corporate outlooks—and they are pretty good going into 2015.

With Federal Reserve certainty, which includes diminishing quantitative easing and a very low interest rate environment going into 2015, the stock market is well informed regarding monetary policy.

Balance sheets remain in excellent condition, especially among blue chips, and the NASDAQ Composite is maintaining its leadership relative to the other benchmarks, which resumed about one year ago.

While the stock market has definitely earned a meaningful break, it very well could turn out to be another positive year with high single-digit returns, not including dividends. This is on the back of an exceptionally good year in 2013—a breakout year from what I view as the previous long-run cycle, that being a 12-year recovery period for the stock market.

But with this fundamental backdrop, I still view investment risk as being high and that quality is something that equity … Read More

The Question Everyone Is Asking This Morning

By for Profit Confidential

Stocks Turn Negative for 2014; Likely to Get WorseYesterday, the Dow Jones Industrial Average fell 317 points, while the NASDAQ Composite Index fell 93 points—respective losses of about two percent per index. This morning, stock market futures are down again.

As a reader of Profit Confidential, this “rout” we are now in should come as no surprise. I have been writing for months how overpriced the stock market has become, how the stock market has become one big bubble thanks to the easy money policies of the Federal Reserve, and how the bubble would burst.

Yesterday, those who have been riding the stock market’s coattails higher and higher got the first taste of what is being called a “correction” by the mainstream media. But like I just said, to me, this is a stock market bubble that is bursting—very different than a correction. For months, historically proven stock market indicators (many of which I have written about in these pages) have been flashing red…but very few investors paid any attention to them.

The Dow Jones is now down for 2014. Yes, seven months into the year and big-cap stocks have gone nowhere. So far in 2014, investors would have done better owning gold and silver or U.S. Treasuries.

I have been predicting this will be a down year for the stock market and I’m keeping with that forecast. After five consecutive positive years for the stock market, the bounce from the 2008 market low of 6,440 on the Dow Jones could finally be over.

Dear reader, as elementary as it sounds, interest rates are the catalyst for all this.

After falling for 30 years, a time in … Read More

Why It’s Time to Cull Your Stocks

By for Profit Confidential

Still Buying Stocks StopGood numbers are one thing, but stocks did go up in advance of what’s turning out to be a fairly decent earnings season.

It’s not unreasonable at all to expect the market to take a solid break, perhaps for the next two to three months. Of course, predicting corrections and/or consolidations among stocks is a difficult endeavor in an era of extreme monetary stimulus. The Federal Reserve is slowly chipping it away, but it remains very committed to helping capital markets, especially as the economic data continues to be pretty soft.

Stocks are still looking stretched and this market is tired. A 10% to 20% correction would be a healthy development for the longer-run trend. Stocks need a catalyst for this to happen. It could come out of nowhere, and I’m reluctant to be a buyer with so many positions trading at record-highs.

Johnson Controls, Inc. (JCI), a large U.S. auto parts manufacturer, had a modestly positive third fiscal quarter with sales growing three percent to $10.8 billion due to more sales in China.

The company had some one-time restructuring charges during the quarter. Earnings per share from continuing operations (excluding restructuring and one-time items) grew a hefty 17% to $0.84. Management confirmed its full-year guidance, which pleased the Street, but the position is breaking down a bit.

E. I. du Pont de Nemours and Company’s (DD) numbers were uninspiring and the company tried to keep investors interested with a four-percent increase to its quarterly dividend. The position’s starting to roll over and with agriculture being such an important part of the company’s business, changing preferences among farmers hurt its … Read More

How Many Warnings Can You Give?

By for Profit Confidential

Why Stocks Will Not End 2014 WellI’ve been writing in these pages for most of 2014 on how the stock market has become one huge bubble. On my short list:

The economy is weak. The U.S. experienced negative growth in the first quarter of 2014. If the same thing happens in the second quarter (we’ll soon know), we will be in a recession again. Revenue growth at big companies is almost non-existent.

Insiders at public companies are selling stocks (in the companies they work for) at a record pace.

The amount of money investors have borrowed to buy stocks is at a record high (a negative for the stock market).

The VIX “Fear” index, which measures the amount of fear investors have about stocks declining, is near a record low (another negative for the stock market).

Bullishness among stock advisors, as measured by Investors Intelligence, is near a record high (again, a negative for the stock market).

The Federal Reserve has issued its economic outlook, and it says interest rates will be much higher at the end of 2015 than they are today and that they will continue moving upward in 2016.

The Federal Reserve has said it will be out of the money printing business by the end of this year. (Who will buy all those T-bills the U.S. government has to issue to keep in business?)

And yesterday, in an unprecedented statement, Janet Yellen, during her usual semi-annual testimony to Congress, said the valuations of tech stocks are “high relative to historical norms.”

How many warnings can you give investors?

Well, the warnings don’t seem to matter. The Dow Jones Industrial Average has … Read More

Your Top Priority When Investing in a Record-High Market

By for Profit Confidential

What to Prioritize with Stocks at an All-time HighStocks are going to gyrate around second-quarter earnings, but that’s exactly what this market needs—the corporate bottom line and expectations for the rest of the year.

With so many stocks trading at their all-time record-highs, I view investment risk in equities as being high at this time.

This is actually a tough environment in which to be an investor looking for new positions. There’s not a lot of value around and good businesses have already been bid.

It’s been years now since the stock market was first in need of a material price correction, and the next one will probably come out of nowhere.

It could be a shock from the Federal Reserve, but the central bank has been extremely delicate in how it effects and communicates monetary policy. More likely, stocks will be vulnerable to an unforeseen shock like a geopolitical event or a big derivative trade gone bad.

The risks are out there and stocks are long overdue for a reckoning.

With this in mind, I’m still a fan of the market’s existing winners, especially dividend-paying blue chips. In the absence of a shock, I think they’ll just keep pushing new highs going right into 2015.

3M Company (MMM) is an enterprise worth following and owning as a long-term, income-seeking investor.

The company’s earnings are material and offer good market intelligence, even if you aren’t interested in owning the stock.

The position has tripled in value on the stock market since the beginning of 2009, while also paying some great dividends.

The stock is still strong in the current environment, and the company represents exactly the kind of … Read More

What Investors Need to Know About the Current Market Cycle

By for Profit Confidential

What These Large-Caps Are Revealing About the Current Stock Market CycleIf there ever was an equity security epitomizing the notion that the stock market is a leading indicator, Caterpillar Inc. (CAT) would fit the bill.

This manufacturer is in slow-growth mode, but it’s been going up on the stock market as institutional investors bet on a global resurgence for the demand of construction and other heavy equipment and engines.

And the betting’s been pretty fierce. Caterpillar was priced at $90.00 a share at the beginning of the year. Now, it’s $110.00, which is a substantial move for such a mature large-cap. (See “Rising Earnings Estimates the New Catalyst for Stocks?”)

The stock actually offers a pretty decent dividend. It’s currently around 2.6%.

While sales and earnings in its upcoming quarter (due out July 24, 2014) are expected to be very flat, Street analysts are putting their focus on 2015. Sales and earnings estimates for next year are accelerating, and it’s fuel for institutional investors with money to invest.

The notion that the stock market leads actual economic performance is very real. Just like there are cycles in the economy, the stock market itself is highly cyclical. And while every secular bull market occurs for different reasons, there are commonalities in the price action.

Caterpillar’s share price is going up on the expectation that its sales and earnings (on a global basis) will accelerate next year.

Transportation stocks, as evidenced by the Dow Jones Transportation Average, are the classic bull market leaders.

Transportation, whether it’s trucking, railroads, airlines, or package delivery services, is as good a call on general economic activity as any. The Dow Jones Transportation Average was … Read More

The Downside to Dow 20,0000

By for Profit Confidential

Where the Stock Market Could Head NextWith the Dow Jones hitting 17,000 being pretty likely in the not-too-distant future, from there, it’s only another 18% or so until the Dow hits 20,000, which is pretty incredible.

These numbers seemed so unrealistic just a few years ago but now, it’s not too farfetched. The most amazing thing to me is that stocks still haven’t experienced a material price correction since the financial crisis.

Stocks aren’t necessarily stretched in terms of valuation, especially with corporate earnings outlooks holding up for this year and going into 2015. What is stretched is investor determination with a market at its high.

Johnson & Johnson (JNJ) is a great company and a worthy long-term investment (see “Three Blue Chips Set to Drive Higher”), but it’s tough to buy stocks at all-time record-highs. In Johnson & Johnson’s case, the position’s up almost 20 points since the beginning of February, and this is on top of a previous 20-point gain in 2013.

One of these days, stocks are going to get walloped. But there’s got to be some sort of catalyst for it to happen.

The Federal Reserve can be a catalyst if it decides to suddenly change its outlook for interest rate certainty. The catalyst could also be a geopolitical event or something that comes out of nowhere, like a big derivatives trade gone bad.

In any event, there will have to be a shock that is perceived to have a lasting effect on capital markets.

In the lull between earnings seasons, which we’re currently experiencing, stocks reaccelerated on the back of very modest economic news and that in itself is … Read More

A Stock Market Break? These Indices Say No

By for Profit Confidential

These Turning Indices Show How Stocks Can Go HigherThe great monetary expansion is still alive and well and the effect on equity securities continues to be profound.

But what I find striking about the stock market’s continued advancement is that it’s blue chips that are pushing through to new record highs.

Speculative fervor in several sectors has diminished, but hasn’t completely disappeared. But it’s the big brand-name companies—a lot of which pay dividends—that just keep on trucking as institutional investors buy earnings safety and outlook reliability, and are betting on revenue and earnings acceleration going into 2015.

Union Pacific Corporation (UNP), a benchmark railroad stock, just hit another new record high on the stock market, breaking through the $100.00-per-share level. It was $35.00 a share this time in 2010.

And this from an old-economy, industrial enterprise that is probably not on many investors’ wish lists.

Amazon.com, Inc. (AMZN) broke down considerably at the beginning of the year when it was trading around $400.00 a share. It recently broke $300.00 a share, but has bounced back significantly and the position looks to be fighting hard.

And this is one of the speculative stocks on which investors booked their profits. This stock is on the comeback trail and so are Cisco Systems, Inc. (CSCO), The Priceline Group Inc. (PCLN), Oracle Corporation (ORCL), Apple Inc. (AAPL), and Google Inc. (GOOG).

The stock market has been digesting continued mediocrity in domestic economic data and slightly more positive numbers from China. Institutional investors are buying. I think that, in the absence of some kind of shock or new catalyst, the stock market can slowly keep grinding higher. It could very well turn … Read More

Why Stocks Won’t Break Until This Indicator Does

By for Profit Confidential

The One Indicator Keeping This Market AliveThe Dow Jones Transportation Average keeps powering ahead, and the rest of the stock market is very close behind it.

The strong performance of this index is confirmation of further Dow theory gains. The Dow Jones Industrial Average has been fighting its way higher since May 20.

Some of the performances of transportation stocks have been truly spectacular and very much a reflection of a bull market.

Alaska Air Group, Inc. (ALK) just bounced off $100.00 a share. It was $50.00 a share late June last year.

Union Pacific Corporation (UNP), which has been one of my favorite benchmark stocks for gauging industrial economic activity and the stock market, is right around $200.00 a share. (See “Buybacks, Dividends, Stock Splits: Business Is Getting Better for This Must-Watch Stock.”)

It was $150.00 a year ago, which is a very good capital gain for such a mature large-cap enterprise.

And Southwest Airlines Co. (LUV) just hit an all-time record-high, about double what it was trading at this time last year.

The Dow Jones Transportation Average is old economy, but it is a very meaningful gauge for the rest of the stock market. I advise all investors to follow the index on a frequent basis. The broader market is highly unlikely to break down without a commensurate move in transportation stocks.

The NASDAQ Composite and Russell 2000 can certainly be more volatile, but generally speaking, so long as the Dow Jones Transportation Average is holding up, so will the rest of the market.

Since the financial crisis, big corporations have been very unwilling to invest in new operations. But in what … Read More

The Worst Kept Secret on Wall Street

By for Profit Confidential

Why Retail Stocks Will Get Hit the HardestIn the first quarter of 2014, Retail Metrics, a retail industry research firm, found U.S. retailers missed their corporate earnings estimates by the most since the year 2000!

As I have been writing, consumer spending only increases when consumer confidence is rising. Unfortunately, in the U.S. economy today, that confidence is plummeting.

Last month, the Thomson Reuters/University of Michigan’s consumer sentiment index declined three percent from a month earlier. It was 84.1 in April, and it declined to 81.8 in May. (Source: Reuters, May 16, 2014.)

But consumer confidence is just one leading indicator that suggests consumer spending will decline in the U.S. economy; the unemployment situation and wages suggest the same.

The worst kept secret on Wall Street is that the big U.S. retailers are in trouble. While stocks, in general, have held their own this year (up about one percent so far in 2014), the stock prices of retail stores have fallen sharply. The chart below is of the Dow Jones U.S. General Retailers Index. The chart clearly shows the stock price of big U.S. retailers are falling quickly, down more than seven percent in the first five months of this year.

Dow Jones US General Retailers Index ChartChart courtesy of www.StockCharts.com

The story that consumer spending suffered in the first quarter of this year because of bad weather doesn’t sit well with me—I simply don’t buy it. The U.S. economy contracted one percent in the first quarter of 2014, the first time our economy has experienced an “official” contraction since the first quarter of 2011 for the simple reason that consumers are tapped out; their incomes are not keeping up with inflation.

All … Read More

The Only Place to Put New Money in Today’s Economy

By for Profit Confidential

Invest New Money During a Stock Market's HighA lot of stocks are rolling over, breaking their 50- and 200-day simple moving averages (MAs). This is a tired market that could very well consolidate or correct right into the fourth quarter.

And the economic data has been softer, as well. Throw in geopolitical tensions with Russia and we have the makings of a material price retrenchment.

There’s still resilience, however, in some of the most important stock market indices. Stocks composing the Dow Jones Transportation Average are holding up extremely well, especially compared to the Russell 2000, the NASDAQ Biotechnology index, and the NASDAQ Composite index itself.

While the main market indices are mostly flat on the year, I don’t think investors can expect any capital gains until perhaps the fourth quarter.

From my perspective, relative price strength in the Dow Jones industrials, transportation stocks, and most of the S&P 500 index means that the longer-run uptrend remains intact.

With speculative fervor still coming out of initial public offerings (IPOs) and select biotechnology stocks, this action is an indicator of a tired market that’s long in the tooth, as investors are clearly less willing to speculate on those stocks that don’t offer income or relative safety in their earnings.

Risk aversion won’t kill a secular bull market. But it does mean that risk-capital opportunities are a lot less plentiful. Currently, among speculative stocks, one of the only sectors still experiencing decent price action is oil and gas drilling and exploration.

This is still a market that I think favors existing winners—blue chips, in particular. (See “Top Stocks for the Coming Correction.”)

These are the stocks to … Read More

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