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

Posts Tagged ‘Economic growth’

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

Stock Market Pricing-in a Recession?

By for Profit Confidential

U.S. Economy Close to Technical RecessionBy no surprise to me whatsoever, the government’s third and final estimate of first-quarter U.S. gross domestic product (GDP) came in at a negative annual pace of 2.9%. (Source: U.S. Bureau of Economic Analysis, June 25, 2014.) The U.S. economy’s growth rate in the first quarter of this year was the worst since 2009.

I’ve been writing since the fall of 2013 that the U.S. economy would see an economic slowdown in 2014. I have been one of the few economists warning of a recession in 2014. My calls are not to scare or create fear; rather, they are based on the government’s own data.

Not to boast, but it’s like the creators of the first-quarter U.S. GDP report have been reading Profit Confidential! Everything we have been warning about came out in this most recent GDP report.

I’ve been harping on about how the U.S. consumer was tapped out…and low and behold, consumer spending in the U.S. economy increased by only one percent in the first quarter of 2014. In the fourth quarter of 2013, consumer spending increased by 3.3%. The fifth year into the so-called economic “recovery” and consumers are pulling back on spending for the simple reason that they don’t have money to spend.

The poor have no money; the middle class has been wiped out. And the rich are far from spending enough to make up for the lack of spending by the poor and middle class.

But have no fear, dear reader; stocks are up. The stock market is telling us we have nothing to worry about? It seems so.

I, for one, … Read More

If You Learn One Thing This Year from Profit Confidential…

By for Profit Confidential

Living Off Mom & Dad Longer Than Ever BeforeDear reader, if you’ve learned one thing from reading these issues of Profit Confidential, I hope it is this: Don’t buy into the hype created by the rising stock market and the media that the U.S. economy is improving. The economic growth promised by the Federal Reserve and the politicians five years ago is still missing.

The majority of Americans are facing serious financial troubles. Their jobs don’t pay them well or enough. Those who are looking for better jobs can’t find them. Their salaries aren’t increasing, but inflation sure is rising. Many Americans can’t even afford to live in their homes!

And young Americans are in just as bad shape as retired Americans…

According to research by the University of Arizona, half of graduates, after they are out of college for two years, are relying on their parents or other family members for financial support. As per the study, graduates are postponing many of life’s goals, such as marriage, having children, or buying homes, because they can’t afford them. (Source: CNN Money, June 10, 2014.)

In times of economic growth, you have college graduates finding jobs easily. This isn’t happening. In fact, student debt in this country sits at $1.2 trillion, 85% of it guaranteed by the government and 11.5% of it 90-days-plus delinquent or in default. (Source: “$1 Trillion Student Loan Problems Keeps Getting Worse,” Forbes, February 21, 2014.)

But it’s not only college graduates in the U.S. economy who are suffering…

According to the “How Housing Matters Survey” by the John D. and Catherine T. MacArthur Foundation and Hart Research Associates, 52% of Americans have … Read More

What the Collapse in Lumber Prices Means for Stocks

By for Profit Confidential

Why Are Lumber Prices CollapsingHistorically, the direction of lumber prices has led the direction of the stock market.

If lumber prices are rising, it suggests demand for lumber is increasing, more homes are being built, more construction is happening, and the economy is improving. The opposite is also true. Weak demand for lumber is a sign of poor economic growth.

At the very core, the direction of lumber prices can be considered as a leading indicator of the S&P 500.

With that said, please take a look at the chart below. On the chart, you will see the S&P 500 in black and the lumber prices in green. You will note that whenever lumber prices went down, the S&P 500 followed and also moved lower with one exception: the present time.

S&P 500 large Cap Index Chart

Chart courtesy of www.StockCharts.com

Since March of this year, lumber prices have fallen sharply, suggesting business activity in the U.S. economy is slowing down. But the S&P 500 is moving in the opposite direction! Lumber prices are going down and the S&P 500 is moving up? That never happens. This disparity is a sign of great concern.

You can add the disparity in the direction of lumber prices compared to the direction of the S&P 500 index to the long and increasing list of historical indicators now pointing to a market that is overbought and overpriced. If you continue to own equities, be wary of the increasing risks of the stock market…. 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

Three Blue Chips Set to Drive Higher

By for Profit Confidential

The Real Driving Force Behind Existing Winning StocksDespite a difficult start to the year, countless positions recently turned higher, even among slow-growth names.

E. I. du Pont de Nemours and Company (DD) is a company currently trading around 14 times its forward earnings, offering a 2.6% dividend yield. The stock just broke out of a three-month price consolidation.

This is the way the equity market has been trading since the March 2009 low. No big corrections, just consolidations of various durations. It’s a good reminder of just how powerful monetary policy can be (right or wrong) and that a company’s shares price is a relative valuation or bet on the future.

Du Pont has appreciated approximately 23% over the last 12 months, and this doesn’t include dividends paid. Year-to-date, the return is just less than seven percent.

The company’s sales in the first quarter of 2014 were down slightly compared to the same quarter of 2013 and earnings were cut in half.

The company experienced one percent lower volume, one percent lower selling prices, and a one percent adverse currency impact, comparatively. Yet the stock just keeps ticking higher. This time last year, the position was trading around $55.00 a share; now it’s $70.00.

One research firm recently increased its earnings estimate on the company for all of 2014, but like so many other blue chips, it’s the expectation that sales growth will accelerate in 2015, and this is seemingly the bet by investors.

Du Pont didn’t have a good first quarter, and its top operating division—agriculture—actually produced a six-percent drop in segment sales compared to the first quarter of 2013.

Two key themes seem to be … Read More

The Six-Year Boom in Part-Time Work

By for Profit Confidential

The Six-Year Boom in Part-Time WorkOne week ago today, the Bureau of Labor Statistics reported 288,000 jobs were added to the U.S. jobs market in April. The unemployment rate fell to 6.3% from 6.7 % in March. (Source: Bureau of Labor Statistics, May 2, 2014.) Even the most optimistic of economists weren’t expecting a jobs creation number this big.

But it’s just the same old story…

When you look closer at the details of the jobs market, the employment picture actually looks terrible.

First and most important, the number of long-term unemployed in the U.S. economy remains very high. As of April, individuals who were out of work for more than six months made up 35% of all unemployed in the jobs market. The longer they are out of work, the harder it will become for them to find another job.

The number of part-time workers in the U.S. jobs market continues to increase. More part-time employees essentially means less personal earnings and, eventually, less consumption.

In April, there were 7.46 million Americans who were working part-time—up from 7.18 million in February and 7.41 million in March. These workers are working part-time because they can’t find full-time work.

Back in early 2008, the number of part-time workers in the U.S. economy was below five million. (Source: Federal Reserve Bank of St. Louis web site, last accessed May 2, 2014.) Yes, we’ve created close to 2.5 million part-time jobs since the Great Recession—that’s the majority of all jobs created since 2008.

Adding to the misery, low-wage employment in the U.S. jobs market continues to soar. In April, more than 30% of the jobs to be had … Read More

Today’s Stock Market: A Mirage That Distracts from Reality?

By for Profit Confidential

2014 Economic Growth Myth DebunkedTo assess an economy’s health and its direction, you have to look at how the general public is doing. You must ask if their standard of living is improving. Are they optimistic about their future prospects?

As it stands, the average American Joe is suffering, and he’s making a solid case against economic growth, despite what we are hearing from the politicians and swayed government statistics.

According to a poll by Gallup about Americans’ top financial worries, 59% are worried about not having enough money for retirement. Breaking down the data, of those between the ages of 50 and 64 years old, 68% said they were moderately or very worried about not having enough money for retirement. (Source: Gallup, April 22, 2014.) That’s two-thirds of all baby boomers saying they are worried about not having enough money for retirement.

The reason Americans are worried about retirement is that they are saving less.

In March of this year, the annual personal savings rate in the U.S. was 3.8% (this is money saved as a percentage of income after taxes). This was the lowest savings rate since January of 2013, and prior to that, a savings rate that low was last seen back in August of 2008. (Source: Federal Reserve Bank of St. Louis web site, last accessed May 1, 2014.)

One would expect the savings rate to increase in a period of economic growth…but that’s just not happening in 2014, so you really have to question if there is economic growth in the system.

Another indicator that tells us economic growth is just a myth for the U.S. economy is … Read More

Market Dynamics Changing; Where’s the Upside for Investors?

By for Profit Confidential

Why Beating the Street Isn’t as Good as Real ValueBeing financial reporting season, it’s important to discern between results that beat Wall Street consensus and real economic growth.

Abbott Laboratories (ABT) just announced better-than-expected first-quarter earnings, but they weren’t better than the comparable quarter of 2013. Operating earnings, earnings from continuing operations, and diluted earnings per share were all down significantly compared to the first quarter of 2013.

So, the illusion can definitely become real in hot markets. Investors are always better off ignoring headlines and going right to the financial statements. Managed earnings are just that—managed.

One company that just produced a very good quarter was The Charles Schwab Corporation (SCHW). The stock broker’s first-quarter sales grew 15% to $1.48 billion on strong growth in asset management and administration fees.

Net earnings leapt 58% to $326 million, or 60% to $0.60 in diluted earnings per share. Top-line growth and strong expense control were the reasons for the strong bottom-line growth.

There’s no real reason why Charles Schwab’s share price should keep on appreciating near-term. All the good news is priced into the shares. The company beat consensus earnings by $0.02 a share, while revenues were in line.

This reporting season, earnings are here to justify current share prices.

I’d be very wary of buying corporate good news now. Market jitters aren’t going away and all it takes is a small catalyst for institutional investors to pull the sell trigger again.

A meaningful correction or price consolidation would be a positive development for the longer-run trend and a good opportunity to consider adding to blue-chip positions.

A good deal of speculative fervor has come out of this market, … Read More

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

By for Profit Confidential

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

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

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

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

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

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

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

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

Why the Fed Will Have to Get Back into the Paper Money Printing Business Soon

By for Profit Confidential

U.S. Economic GrowthIn the early days of the 2008 financial crisis, the Federal Reserve said, “Job losses, declining equity and housing wealth and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.” (Source: Federal Reserve, March 18, 2008.) As a result of this, the central bank came up with the idea of printing paper money to stimulate the economy; thus, “quantitative easing” was born.

Five years later, the Federal Reserve’s balance sheet has grown to $4.2 trillion. We also saw the U.S. government increase spending to stimulate the U.S. economy after the Credit Crisis of 2008. The U.S. national debt skyrocketed from around $9.0 trillion back then to over $17.0 trillion today.

With all this money being created (by the Fed) and borrowed (by the government), the logical assumption is that there’s finally economic growth in the U.S. economy.

Wrong!

Paper money printing by the Federal Reserve and out-of-control spending by the government hasn’t really given much of a boost to the U.S. economy (aside from the stock market bubble it has created). Problems still persist. The amount of paper money that has been printed out of thin air is huge—an unprecedented event in American history.

Now that the Federal Reserve is putting the brakes on quantitative easing (it will print less money each month), will we see businesses pull back on capital spending? Of course we will. When money is tight, businesses pull back on research and development, expansion, and acquisitions.

Consider this: since December of last year to this past … Read More

36% of American Workers Have Savings of Less Than $1,000

By for Profit Confidential

Number of Part-Time Workers in U.S. Economy Doubles as Companies Keep Eye on CostsI have said it many times in these pages: economic growth in the U.S. economy can only occur when the general standard of living for the average American improves. Sadly, each day, we see more and more evidence suggesting the opposite.

Consider the results from the 2014 Retirement Confidence Survey by the Employee Benefit Research Institute. (Source: Employee Benefit Research Institute, March 2014.) This survey asks workers and retirees about how they feel about retirement, among many other things. Here are a few of the highlights:

  • 24% of workers in the U.S. economy are not at all confident about having enough money to retire comfortably. Only 18% believe they can retire comfortably, but almost all who said this are from households who earn a relatively higher income
  • 58% of the workers and 44% of the retirees in the U.S. economy say they are having problems with the amount of debt they hold
  • 36% of the workers say they have less than $1,000 in savings. This number has gone up significantly from 28% in 2013
  • The rising cost of living and day-to-day expenses are getting in the way of retirement. 53% of the workers are citing these expenses as the biggest reason they are not saving for retirement

I believe things will get worse for both retirees and workers by the end of this decade. Let me explain why…

Public companies are struggling to post earnings growth this year. At this point, the only way for them to show better corporate earnings is by reducing their expenses. While some have started to lay off employees, others are cutting retirement benefits.

Take … Read More

What the Breakout in the Gold-to-Copper Ratio Is Telling Us

By for Profit Confidential

Copper Flashing a Buy Signal for GoldCopper is considered an industrial metal, used in industries across the board. When copper prices fall, it’s usually an indicator of a slowdown in the global economy. On the contrary, gold bullion isn’t much of an industrial metal; rather, it is used as a hedge against uncertainty in the global economy.

When you look at these two metals together, often referred to as the gold-to-copper ratio, they tell us something very important: the ratio of how many pounds of copper it takes to buy one ounce of gold bullion has long been an indicator of sentiment in the global economy.

If the gold-to-copper ratio is in a downtrend, it means investors are betting on the global economy to grow. In contrast, if it is increasing (if the number of pounds of copper it costs to buy an ounce of gold is rising), it tells us investors are concerned about protecting their wealth in a slowing global economy.

Below, you’ll find a chart of the gold-to-copper ratio.

GOLD - Spot (EOD) Copeer ChartChart courtesy of www.StockCharts.com

Looking at the chart above, it is clear something happened at the beginning of 2014. Investors became very worried. Since the beginning of the year, the gold-to-copper ratio has increased more than 28%—the steepest increase in more than two years.

And the weekly chart of copper prices looks terrible too:

Copper - Spot Proce (EOD) CME ChartChart courtesy of www.StockCharts.com

Copper prices have been trending downward since 2011. In 2013, these prices broke below their 200-day moving average and recently, they broke below a very critical support level at $3.00. While all of this was happening, on the chart, there was also a formation of a … Read More

U.S. Income Disparity Hits Highest Level Since 1920s Britain

By for Profit Confidential

How the Rich Have Gotten Richer in This EconomyIn today’s U.S. economy, we have a very small portion of the population earning most of the total income generated by the economy, while the majority of people suffer, as their incomes have failed to rise at the pace of the rich.

According to a study by the Paris School of Economics, the richest 0.1% of Americans takes home nine percent of the U.S. national income. The bottom 90%, which is pretty much everyone else, earns just 50% of the national income. (Source: MarketWatch, February 26, 2014.)

Income inequality in the U.S. economy is worse now than it was during the 1920s in Great Britain.

Aside from income inequality, the other big problem with the U.S. economy is that the majority of Americans simply don’t have liquid wealth. Liquid wealth is assets that can be quickly converted into cash if needed (a home is not considered liquid).

According to Phoenix Marketing International, 25% of U.S. households hold about 75% of the liquid wealth in the U.S. economy. (Source: Phoenix Marketing International, January 16, 2014.) The U.S. is becoming more and more like Europe, where there are the very wealthy and the very poor. The middle class, who should be the backbone of the American economy, well, they have all but disappeared.

Consider that in December of 2013, 22.7 million households in the U.S. economy used food stamps. Not long before then, in 2010, that number was 20.6 million households. (Source: U.S. Department of Agriculture, March 7, 2014.) And that’s after the U.S. government cut back on food stamps funding!

For economic growth, you need personal incomes rising at … Read More

This Blue Chip Keeps Bouncing Back

By for Profit Confidential

This One Stock Keeps Bouncing BackAmong blue chips, Johnson & Johnson (JNJ) remains one of the most attractive enterprises for long-term investors.

As a benchmark stock within the entire equity universe and a conglomerate itself of healthcare businesses, it’s reasonable to expect a stock like this to provide a normalized annual return of approximately 10% including dividends.

Johnson & Johnson isn’t typically down for long on the stock market, and most recently, the stock popped higher after dropping to $86.00 a share.

The position’s been toying with $95.00 a share, and this is a ceiling for the stock, according to its recent trading action over the last couple of quarters. If the broader market holds firm, $100.00 a share by year-end would be a fair and attainable price target.

While not robust, earnings have caught up to share prices for many blue chips and countless positions are not overpriced.

Johnson & Johnson has a trailing price-to-earnings (P/E) ratio of approximately 19.5 and a forward P/E ratio of around 15. Because of the company’s stellar long-term returns to shareholders, it’s kind of like a golden blue chip, as very few companies have been able to produce such decent and consistent operational growth in their businesses.

Johnson & Johnson’s long-term, split-adjusted stock chart is featured below:

JNJ Johnson & Johnson NYSE Chart

Chart courtesy of www.StockCharts.com

All blue chips, even those with increasing dividends, experience periods of non-performance, but often to a lesser degree than the broader market. While not offering robust growth, the stability of an enterprise like this company provides peace of mind, in addition to the high likelihood that dividends will increase in the future and that demand for … Read More

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