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

Posts Tagged ‘economic news’

A Hot Sector of the Market I Feel Will Soon Be a Buy Again

By for Profit Confidential

Why Action in 3D-Printing Stocks Is Healthy for This MarketEverything in the stock market experiences its own cycle of enthusiasm among investors. And this is especially well illustrated among speculative issues.

There was a time only a few years ago when some of the hottest speculative stocks were in solar energy. Now this small equity universe is still trying to rebuild itself.

And in more recent history, 3D-printing companies experienced incredible capital gains, only to experience incredible capital losses in what is a commonality among the market’s most speculative stocks.

At the end of the day, high-flying positions are still real businesses that have to deal with managing their own business conditions and hype among institutional investors.

As an investor, you have to consider both realities—the growth an underlying business is experiencing and the enthusiasm the marketplace has for such an enterprise or sector.

Twelve months ago, 3D Systems Corporation (DDD) was trading at $44.00 a share. Then it appreciated to a high of $97.28, before spending most of this year retreating to the $50.00-per-share level.

It’s only recently that the position broke the $55.00-per-share barrier, still sporting a forward price-to-earnings ratio of approximately 46.

Fervor for speculative stocks definitely diminished at the beginning of this year, and it’s part of the cycle that equities perpetually experience.

At the beginning of 2013, the breakout was in large-cap blue chips. Institutional investors had just started buying these stocks, and they led the broader market higher.

Then the NASDAQ Composite began to improve and actually took the lead for a while. But even with the Federal Reserve onside, it didn’t take too long for big investors to just book some profits. … Read More

What Do This Quarter’s Mixed Earnings Results Mean?

By for Profit Confidential

Market May Be Entering a New Cycle—But Don't Buy Just Yet!Oracle Corporation (ORCL) announced a quarterly revenue gain of three percent, but Wall Street was looking for more and the company’s share price retreated on its earnings results.

If it weren’t for the Federal Reserve, we probably would be in a correction, if not a consolidation, which has been the broader market’s go-to trend when it should have retreated further.

It’s such a mixed bag out there both in terms of economic news and corporate reporting.

While I think dividend-paying blue chips have the advantage going into the second-quarter earnings season, if the Federal Reserve wasn’t so extremely sensitive to Wall Street, this market would probably be a lot lower.

Even the Fed’s recent language is assuaging. If this market had to operate on its own (with free market interest rates and liquidity), things would be a lot different.

But this isn’t the environment we live in. Economic history clearly supports the scenario that it doesn’t pay to fight the Fed and that Wall Street will move mountains when it has Fed certainty.

Lots of investors bemoan the quarterly earnings cycle or game, but I don’t. I want to know a public company’s up-to-date financial results as frequently as possible.

While earnings are managed, over time, a business can’t manufacture success unless it’s a fraud (which, sadly, does happen).

Big companies have the operational leverage and the cash to keep boosting their earnings per share. Oracle’s latest financial results were uninspiring, and while recognizing that this is a very mature business with growing competition in the cloud, the position advanced a material 10 points since last June—this seems so overdone…. 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

Why the Chinese Economic Slowdown Matters

By for Profit Confidential

Chinese Economy to See Black Swan Type EventUnderstanding the economic slowdown in the Chinese economy is very important because not only does it impact American companies doing business there, but what happens in the Chinese economy—now the second-largest economy in the world—affects the global economy.

While media outlets tell us the Chinese economy will grow by about seven percent this year (30% below the 10% the economy has been growing annually over the past few years), the statistics I see point to much slower growth.

In February, manufacturing activity in the Chinese economy contracted and hit an eight-month low. The final readings on the HSBC Purchasing Managers’ Index (PMI) for February showed manufacturing output and new orders declined for the first time since July of 2013. (Source: Markit, March 3, 2014.)

And there are other troubles. The shadow banking sector in the Chinese economy shows signs of deep stress, but we don’t know how much money is really on the line here. China keeps much of its real economic news to itself, but we do hear how firms that are involved in the sector are defaulting on their payments.

And the Chinese currency, the yuan, keeps declining in value compared to other major world currencies. The Wisdom Tree Chinese Yuan Strategy (NYSEArca/CYB) is an exchange-traded fund (ETF) that tracks the performance of Chinese money market instruments and the yuan compared to the U.S. dollar. Look at the chart below:

WisdomTree Dreyfus chinese Yuan fund ChartChart courtesy of www.StockCharts.com

Since the beginning of February, the Chinese yuan and Chinese money market instruments have been showing signs of severe stress, largely unnoticed by mainstream media and economists.

There is no doubt in my mind … Read More

Where to Find Value in an Overbought Market

By for Profit Confidential

What Stocks to Buy in an Overbought MarketMany smaller companies are now reporting their financial results, and very soon, it will be the lull between earnings seasons, when the only fuel the marketplace has to go on is monetary policy and economic news.

It wouldn’t surprise me at all if stocks took a break for the entire second quarter. Fourth-quarter financial results were decent, but they weren’t the kind of numbers that justify loading up on positions. Stocks seem to be about fully priced and there’s no real reason why they should go up near-term, especially considering last year’s performance.

The market had a tough time at the very beginning of the year but recovered strongly after the Federal Reserve provided certainty on monetary policy and the outlook for quantitative easing. There were some material corporate events in terms of new share buyback programs and select dividend increases, but most companies announce dividend news in the bottom half of the year; this is when we might see stocks generate further capital gains, if any.

Last year’s performance on the stock market was just so exceptional that stocks will be doing well if they close flat for this year.

Turning to blue chips for their corporate outlooks always yields useful information, even if an investor is not interested in the company’s shares. A lot of blue-chip stocks reported, in their fourth-quarter financial reports, that they expect high-single-digit sales growth in 2014 and high-single- to low-double-digit growth in earnings. This is pretty solid for mature, slow-growth enterprises, and it helps validate the market’s recent run as earnings per share catch up to share prices.

But if an investor was … Read More

Why a Serious Stock Market Correction is Overdue

By for Profit Confidential

Serious Stock Market Correction is OverdueThere is going to be considerable pressure on interest rates and the Federal Reserve very soon, and it’s very likely that we’re going to get some choppy trading action in stocks. The reason for this is, of course, positive economic news, which is increasing the likelihood of a decrease in monetary stimulus. As contradictory as it may seem, good economic news is actually bad news for stocks; that’s just the way the counterintuitive system of the stock market works—buy on rumor, sell on news. But what’s transpired recently goes more like buy on expectations, sell on hints of growth.

While economic recovery is inconsistent, regional, and industry-specific, there is considerable evidence from many corporations that business conditions are improving.

Conns, Inc. (CONN) is a Texas-based company selling appliances, electronics, furniture, and mattresses. The company’s share price has been soaring on genuine operational growth. On the day of its recent earnings report, the company’s shares jumped 15% to $67.00 a share. The stock was trading around $11.00 a share at the beginning of 2012.

According to the company, its fiscal third quarter of 2013 produced record financial results: quarterly revenues accelerated a whopping 51% to $311 million; its retail gross margin jumped 460 basis points to 40.1%; diluted earnings per share grew to $0.66, way up from earnings of $0.35 per diluted share last year; and company management said November retail sales jumped 49% comparatively, while same-store sales grew 32%.

The company said that its biggest comparative gain in sales was in appliances, with growth improving 96%, followed by home offices with sales growth of 77%, consumer electronics at 45% sales … Read More

The Day People Woke Up and Said, “I Need to Rush Out and Buy Stocks”

By for Profit Confidential

 key stock indicesCan you believe the mainstream headlines these days? I’m reading about the Dow Jones Industrial Average going to 19,000… I’m reading that stocks are rising because the amount of stocks for investors to buy has diminished…

It’s all rubbish!

The chart below of the Dow Jones Industrial Average breaking above 16,000 makes it look like people just woke up the morning of November 18 and said, “I need to rush out and buy stocks today!”

In my opinion, we are looking at the biggest bear market trap we’ve ever seen. The year 2008 is a distant memory. The notion of fear of “missing out” is back.

Investors are pouring billions into stocks…

Dow Jones Industrial Average Chart

Chart courtesy of www.StockCharts.com

According to the Investment Company Institute, long-term U.S. equity mutual funds had a net inflow of $5.4 billion for the week ended November 6. In the prior week, which ended on October 30, investors bought $4.2 billion worth of long-term U.S. equity mutual funds. (Source: Investment Company Institute, November 13, 2013.)

As investors are pouring back into stocks, the fundamentals that drive the key stock indices are dissipating. Each day, we hear weak economic news, which suggests key stock indices are moving beyond reality. And the disparity between the performance of key stock indices and the most basic fundamentals continues to grow.

Corporate earnings of companies in key stock indices are very weak. The corporate earnings “surprise” rate (this is the rate that shows how much higher or lower corporate earnings were registered) came in at 1.8% in the third quarter—far below the four-year average of 6.5%.

S&P 500 companies posted an increase in … Read More

Regardless of Change in Monetary Policy, I’m Still a Big Fan of These Types of Stocks

By for Profit Confidential

Regardless of Change in Monetary PolicyEverything in capital markets is basically on hold until there is certainty regarding monetary policy and the prospects of a reduction in quantitative easing (QE).

The stock market reaction to the Federal Reserve’s last monetary policy statement wasn’t good, and there was seemingly a misinterpretation by institutional investors as to what the central bank’s actual intentions were for reducing QE. But stocks recovered, and the equity market remains resilient.

Over the last several months, equities actually sold off on good news. This is the market’s counterintuitive reasoning: better economic news increases the likelihood that monetary policy will be tightened, so investors sell off.

But the economic news I’m reading lately isn’t that robust. In fact many key statistics are coming in well below Wall Street consensus.

But capital markets aren’t as interested; it’s all about monetary policy and then the upcoming earnings season—certainty from the Fed first, then certainty from corporations.

I repeat my view that there isn’t a lot of new action to take, particularly in equities. The stock market is right at its high; it hasn’t really had a meaningful correction in ages and is very much due for a break.

In terms of portfolio strategy, I’m still a big fan of dividend-paying blue chips, peppered with a few aggressive positions. The healthiest part of the stock market remains well-capitalized large corporations that have more cash than they know what to do with. The prospects for increasing dividends in 2014 are robust. (See “Why I Like This Blue Chip So Much [55th Dividend Increase Just Announced].”)

In terms of monetary policy, we know that short-term interest … Read More

Two Important Factors Now Working Against Stocks

By for Profit Confidential

stock marketGeopolitical events are overtaking the stock market’s near-term trading action, which was all about speculation over the Federal Reserve and what Chairman Ben Bernanke will do regarding quantitative easing.

Based on what transpires in Syria, the equity market is ripe for more declines; realistically, the stock market has been extremely lofty this year, considering the economic news and the prospects of reduced monetary stimulus.

Confirming the overly positive disposition of the stock market has been the performance of the NASDAQ Composite Index, which previously lagged behind the Dow Jones Industrial Average until it recently confirmed the market’s uptrend.

Over the last 12 months, the Russell 2000 index has been the strongest of the main stock market indices. This is a classic secular bull market indicator, but everything’s been turning downward this week.

Obviously, geopolitical events skew the certainty the capital markets crave. Second-quarter earnings season was underwhelming, with the exception of balance sheets, which continue to be top-notch for most Dow Jones components.

Looking at the equity market constructively, many of its leading blue chips were very strong until the beginning of August. Then speculation about the potential reduction in quantitative easing and monetary stimulus, in general, took the froth out of some of these leading positions, including Johnson & Johnson (JNJ) and PepsiCo, Inc. (PEP).

I repeat my view that there is very little action to take in this market, particularly as it pertains to long-term blue-chip investors. The stock market has come off a very large uptrend in a short period of time, and it’s been due for a full-blown, material correction for a number of months … Read More

Why Corporate Earnings Are Taking a Back Seat to the Fed

By for Profit Confidential

blue chipsThe second-quarter earnings season is considered over, but there are still a number of companies reporting. And the same trend continues—the numbers are anemic.

Making the case for a rising stock market in the face of little sales growth and earnings results that are basically just meeting expectations is difficult. The stock market’s performance for the last few years has been very much due to the monetary expansion, followed by a slight improvement in general business conditions.

What is clear is that corporate balance sheets continue to be extremely healthy. However, the lack of investment in new plants, equipment, and employees remains a big problem. There is more certainty in the marketplace, but corporations just aren’t making much in the way of bold new investments.

Despite the mediocrity, there are still a number of blue chips whose earnings estimates are being increased by Wall Street. In a lot of the earnings results from blue chips over the last several quarters, sales increases have mostly been due to rising prices, not necessarily rising volumes. This is emblematic of the very slow growth environment the U.S. economy continues to experience, as well as the economic misnomer that price inflation is tame.

The velocity of money, which is the willingness of both corporations and individuals to spend cash, continues to be faint. Improving balance sheets is an excellent development for the long run, but cash hoarding means no growth near term. It’s a trend that’s likely to continue.

While not much of an advocate for buying in the stock market today, I do think that it’s wise for investors to stick with the … Read More

My Suggestion on Reducing Stress with This Stock Market

By for Profit Confidential

stock marketThe main stock market indices basically trend with each other, but in a bull market, leadership from the technology sector must be prevalent.

Stock market leadership since the beginning of the year has been all about the Dow Jones Transportation Average. Up until July, this was followed by the performance of the Dow Jones Industrial Average. Transportation stocks are still this year’s best-performing index among large-caps, but the NASDAQ Composite has finally broken out of its underperformance and is now strengthening relative to the other indices.

This action is very relevant in terms of the stock market’s willingness to be more speculative, and it’s a small, but significant confirmation of the current uptrend. This stock market is way ahead of Main Street fundamentals, but this isn’t an unusual situation by any means, according to history.

The Dow Jones Transportation Average took a significant breather in May and June, recovering strongly in July. From a purely technical perspective, this could be construed as the correction the rest of the stock market didn’t experience. Stock market leadership from transportation stocks is a powerful dynamic in the equity market; it’s unwise to bet against its trend. The chart for the index is featured below:

Transportation Average cha

Chart courtesy of www.StockCharts.com

So with the recent recovery in the transportation index and increased relative strength from the NASDAQ Composite, I’d say current action is very much a broadening of the stock market breakout since the beginning of the year.

And because of these dynamics, more upside could easily be ahead, save for a shock.

There certainly is a divergence of reality between the stock market’s bet on … Read More

Probability of Cyclical Recession Increases

By for Profit Confidential

Probability of Cyclical Recession IncreasesThis is a big week for capital markets, with the Federal Reserve meeting and July’s unemployment numbers to be released on Friday.

One thing that’s been clear with the stock market is that it has been staying lofty, mostly due to the expectation that the Fed will continue quantitative easing. But under this continued monetary stimulus, financial results are showing mediocrity.

And while capital markets are mostly influenced by Fed policy, the mediocrity in revenue and earnings cannot be ignored. Earnings are holding up because of cost containment and share buybacks. This is not a recipe for lasting financial health.

I look at capital markets constructively and through the lens of the investor. It’s all about the action and how institutional investors react to economic news.

While there’s been a significant stock market breakout this year, I’m thinking that the possibility of a cyclical recession is becoming more probable. Historically, the U.S. economy is due for one; expectations for economic growth are falling, and expectations regarding earnings are quietly being reduced by Wall Street for this year and next.

It just might be that the end of quantitative easing will coincide with a technical recession.

With this scenario, stock market investors can expect little in the way of further capital gains. The outlook for dividends remains strong as corporations are healthy and have huge cash positions. I remain very reticent about buying this market. Capital markets are due for a cyclical change.

Exploring the possibility of the next U.S. recession, it’s quite normal to experience two quarters of declining gross domestic product (GDP) growth in a secular bull market … Read More

Why Investor Sentiment Is Still Bullish in the Face of Lackluster Economic News

By for Profit Confidential

Economic NewsThe equity market continues to trade while hanging on the Federal Reserve’s every word. There continues to be buoyancy in investor sentiment, and it’s flying in the face of what can only be described as modest earnings results so far. And the fervor that institutional investors have to be buyers in this market remains unabated, thanks to the Fed’s policies.

There’s been a positive take on economic news lately, even if the data is below consensus. There has also been some decent news from individual companies that can be thought of as Main-Street gauges on the U.S. economy.

Costco Wholesale Corporation (COST) reported a solid eight-percent gain in total sales—six percent on a comparable sales basis—for the five weeks ended July 7, including fuel and foreign exchange.

Investor sentiment is strong enough among large investors to continue buying in this equity market, so long as there is stability from the Federal Reserve and earnings results meet consensus.

It is a peculiar environment not to have had a meaningful retrenchment in the equity market. While the Street (and I) totally expected a healthy correction in share prices after the January breakout, it didn’t happen.

The market did have a small pullback on wavering investor sentiment, but I think the equity market overreacted and misinterpreted the Federal Reserve’s statement regarding quantitative easing. Recent minutes from the central bank meeting made note of this.

Investor sentiment among individual investors still seems very reluctant. There have been new cash inflows dedicated to stocks, but a lot of investors are wary of buying in an equity market that is trading right around its all-time high…. Read More

How Big Institutional Investors Will React to This Quarter’s Weak Earnings Results

By for Profit Confidential

How Big Institutional Investors Will React to This Quarter’s Weak Earnings ResultsOne company that I use as a benchmark stock in manufacturing is Fastenal Company (FAST). The Street is looking for just a 6.5% gain in quarterly revenues and a three-penny improvement in comparable earnings. The company reports today.

Many corporations have reported similar guidance. Among many investors, there is little expectation in the way of revenue growth and even less in terms of earnings growth.

In an unscientific read of countless forecasts, Wall Street seems to be lumping the bulk of corporate profits into 2014. This year is still very much a recovery year in terms of the bottom line. It’s all about getting back to pre-recession levels.

As a publicly traded company, I find Fastenal to be expensively priced given its growth prospects. With a trailing price-to-earnings ratio of approximately 31 and a forward (2014) price-to-earnings ratio of approximately 25, this company isn’t cheap.

Alcoa Inc. (AA), another benchmark, reported numbers that were a little better than the first quarter. To me, Alcoa is not as much of an important benchmark as it used to be, but the company is still viewed by the Street as an important barometer of manufacturing.

The company slightly beat consensus by reporting sales of $5.85 billion and adjusted earnings per share that beat by a penny at $0.07. But what was truly notable about Alcoa’s numbers was the resilience the company saw in key markets, particularly in aerospace applications.

Over the last month or so, forward-looking earnings estimates for Alcoa have come down across the board. But that may change.

In terms of sales, the company has been treading water since 2011. And … Read More

Corporate Earnings Weakness Should Send You to These Equities

By for Profit Confidential

Corporate Earnings Weakness Should Send You to These EquitiesAfter the stock market closes today, benchmark stock Alcoa Inc. (AA) is set to report. Expected consensus-adjusted earnings are $0.06 a share, with revenues averaging $5.86 billion. That’s about flat with the comparable quarter.

Like many other benchmarks, Alcoa’s position has been drifting lower lately on slowing economic news, especially from China.

Also reporting is WD-40 Company (WDFC)—you probably have more than one of this company’s products in your garage. This dividend-paying lubricant company has been doing very well on the stock market since 2010 as investors sought earnings safety and yield. Earnings are expected to be flat with the comparable quarter on only a slight gain in revenues.

There isn’t a lot of double-digit growth out there, especially with large-cap, multinational corporations. So when the numbers get close, the stock market chases the positions. Johnson & Johnson (JNJ) is the perfect example of this.

I have to say that the stock market is holding itself together very well, considering the lack of earnings growth over the last several quarters. The system is very much a leading indicator—or perhaps, a leading gambler—on the prospect of earnings.

Institutional investors are still buying in this market and, at the same time, there have been plenty of withdrawals from the bond market. The stock market can still move higher from its current level if corporations provide an outlook of either earnings growth or stability, peppered with the expectation of improving revenues.

Companies are naturally very reluctant to make bold predictions regarding operations, since they want to avoid missing expectations. Instead, earnings forecasting is very much a game between corporations and the stock market…. Read More

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