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

Posts Tagged ‘Economic growth’

House Prices to Decline in 2015?

By for Profit Confidential

House Prices to Decline in 2015As we progress to the end of 2014, my skepticism towards the U.S. housing market increases. In fact, the fate of home prices in 2015 is in question.

I don’t expect an outright collapse of the housing market like the one we saw in 2007, but I see the momentum in housing prices that began in 2012 and picked up in 2013 dissipating for several reasons.

First, according to Fannie Mae’s August 2014 National Housing Survey, the number of Americans thinking “it’s a good time to buy a house now” has hit an all-time low!

The chief economist at Fannie Mae, Doug Duncan, explained it best when he said, “The deterioration in consumer attitudes about the current home buying environment reflects a shift away from record home purchase affordability without enough momentum in consumer personal financial sentiment to compensate for it. This year’s labor market strength has not translated into sufficient income gains to inspire confidence among consumers to purchase a home, even in the current favorable interest rate environment.” (Source: “Consumer Housing Sentiment Loses Momentum as Income Growth Remains Stagnant,” Fannie Mae, September 8, 2014.)

Secondly, while in 2012 and 2013 we saw a massive influx of financial investors enter the housing market—they bought entire city blocks and bid home prices higher—these investors are no longer as active in the housing market simply because all the “good deals” are gone.

Look at the red arrow I have drawn in the below chart of the S&P Case-Shiller Home Price Index.

S&P Case-Shiller Home Price Index Chart

Chart courtesy of www.StockCharts.com

In the chart, you see that since April (where the arrow appears), home prices in the … Read More

What the Worst Jobs Report of the Year Really Tells Us

By for Profit Confidential

What We Found Buried in August’s Jobs ReportA week ago today, the Bureau of Labor Statistics (BLS) released its jobs market report for the month of August. To say the very least, there was nothing in that report that says the labor market in the U.S. economy is back on its feet. In fact, the report painted a gruesome image of employment in this country.

In August, 142,000 jobs were added to the U.S. economy—the lowest monthly pace in 2014. And the jobs market numbers previously released for June and July were revised lower. (Source: Bureau of Labor Statistics, September 5, 2014.)

But this is just the tip of the iceberg.

Americans who have been out of work for more than six months continue to make up a significant portion of the total unemployed population—31.2% of all unemployed to be exact. Over the past few years, this number hasn’t really come down much.

What’s worse is that the labor force participation rate, that is the rate of those who are in the working-age population and are looking for work, stood at 62.8% in August. This is the lowest rate of labor force participation in the U.S. economy seen since the late 1970s! (Source: Federal Reserve Bank of St. Louis web site, last accessed September 5, 2014.)

Adding to the misery, and as I have reported many times in these pages, we are seeing more part-time jobs created than ever and job creation remains concentrated in the low-wage-paying sectors, like service and retail.

There’s another problem that doesn’t get much attention. Incomes in the U.S. economy are falling. According to a report by the Federal Reserve, median household … Read More

About That $38-Million Ferrari…

By for Profit Confidential

The Other Side of the Ferrari StoryA 1962 Ferrari 250 GTO Berlinetta has set a new record selling for $38.1 million at an auction in Pebble Beach, California. News of the sale was all over the Internet and made it into major newspapers like The New York Times, The Wall Street Journal, and the Los Angeles Times.

But it’s not just old, rare cars that are selling. The high-end luxury car market is also booming. For example, Maserati sold 6,573 cars this past July, compared to only 1,536 cars a year ago. (Source: Motor Intelligence web site, last accessed September 2, 2014.)

The markets for high-end real estate and high-end fashion goods are hot in the U.S. economy, too.

The mainstream is looking at the boom in various luxury markets and calling it economic growth. Truth be told, only a very small fraction of Americans can afford to live a lavish lifestyle and buy expensive cars, homes, and other gadgets.

The other side of the story—the story of the 99%-plus—usually goes untold.

What follows below is a picture (I personally took) of a sign posted in every grocery store I went into in a prominent town very close to New York City. The picture not only shows how the average American is struggling, but it also puts a big dent in the theory of economic growth in the U.S. economy.

We Accept WIC Check and Food Stamp
Americans are using food stamps and other government assistance programs like never before. The truth is that if the U.S. economy was witnessing economic growth, we wouldn’t have 46.25 million Americans and 22.5 million households using food stamps in the U.S. economy…. Read More

Why Are Oil Prices Collapsing?

By for Profit Confidential

Global Economy Just Getting WeakerOil plays a critical role in economic growth as oil is used in a variety of industries. In times of economic growth, oil prices rise. When the economy is soft, or getting soft, oil prices fall as demand for oil wanes.

Over the past two months, oil prices have collapsed for the simple reason that the global economy is getting weak.

The chart below shows the steep sell-off in oil prices that started in mid-June.

Light Crude Oil-Spot Price ChartChart courtesy of www.StockCharts.com

What’s interesting to note is that oil prices are falling at a time when we have numerous troubling events in the Middle East and Russia. In normal circumstances, these developments would have caused oil prices to soar.

One more chart I want to show you today (which continues to spell trouble ahead for the global economy) is the Baltic Dry Index (BDI). Since the beginning of the year, this indicator of global economic activity has been collapsing.

Baltic Dry Index ChartChart courtesy of www.StockCharts.com

Since January, the BDI has fallen 45%. The BDI is an indicator of trade in the global economy; the less trade in the world, the weaker the global economy.

Over the past few months, the chances of the global economy witnessing an economic slowdown have risen significantly.

As I have been writing, the eurozone is in very deep economic trouble again. Japan, the third-biggest hub in the global economy, is begging for growth. And the manufacturing and real estate sectors in the Chinese economy are slowing at a staggering rate.

The continued growth of the global economy is critical for the U.S. economy. In 2012, 46.6% of the S&P 500 … 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

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

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