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

Posts Tagged ‘economic recovery’

Nobel Prize Winner Confirms My Concerns of Stock Market Vulnerability

By for Profit Confidential

Federal ReserveIt’s hard to believe we are nearing the end of another year. It seems as though the move into 2013 was just yesterday. I was bullish at the start of the year, but I was not expecting the kind of stock market advances we have seen with the NASDAQ and Russell 2000 up more than 30% and the S&P 500 nearing that level with multiple record-highs.

Recently, I wrote about the need to ride the current market higher, as the signs point to more upside moves ahead. (Read “Why Stocks Likely to Head Higher into the New Year.”) But at the same time, I remain nervous about the vulnerability of the stock market.

The soft results from what was pumped up as a killer Black Friday failed to materialize, as sales on the Thanksgiving weekend fell 2.7% year-over-year, according to the National Retail Federation (NRF). The NRF did estimate sales during the next few weeks prior to Christmas could rise 3.9%, but while it may pan out, it will only do so because of heavy discounting to clear inventory.

What continues to linger on my mind is the fact that we have yet to see a correction of 10% or more during this four-year bull market, which began in March 2009. This makes me nervous.

Robert Shiller, who was one of three Americans who just won the 2013 Nobel prize for economics, believes there is a bubble in the U.S. stock market, especially given the run-up in stocks in spite of what has been a fragile economic recovery. (Source: Clinch, M., “Nobel Prize winner warns of US stock … Read More

Why the Blind Optimism Behind the Housing Recovery Won’t End Well

By for Profit Confidential

Housing RecoveryThe news headlines are saying the U.S. housing market is witnessing robust growth and flipping homes for profit is back.

While many are now saying there is growth in the U.S. housing market and that it will continue, I disagree with them, based on many different factors…all of which I want my readers to know about.

Yes, home prices have gone up, but that’s about it for positive developments. The housing market still suffers, and there are problems that need to be fixed before it sees a full-on recovery.

The delinquency rate on single-family residential mortgages in the U.S. remains staggeringly high. In the second quarter of this year, it was 9.41%. Yes, again; it has declined from its peak of 11.27% in the first quarter of 2010, but it’s still almost 140% higher than its historical average of 3.94%! (Source: Federal Reserve Bank of St. Louis web site, last accessed November 8, 2013.)

As I have been harping on about in these pages; institutional investors jumped into the U.S. housing market buying residential homes in bulk, and as a result, prices increased. But we didn’t see first-time home buyers run towards the housing market—an increase in first-time home buyers is essential for any economic recovery.

According to the National Association of Realtors, in September, first-time home buyers accounted for 28% of all existing home sales in the U.S. Meanwhile, investors were behind one-third of all existing home sales! (Source: National Association of Realtors, October 21, 2013.)

The “U.S. Economic and Housing Market Outlook” report issued in October by the Office of the Chief Economist at Freddie Mac said, “According … Read More

National Debt to Double from $17.0 trillion to $34.0 Trillion?

By for Profit Confidential

national debtCan it be true?

The U.S. Department of the Treasury has reported that for the federal government’s fiscal 2013 year, which ended on September 30, 2013, the U.S. government budget deficit was $680 billion—the smallest budget deficit in five years. (Source: Bureau of the Fiscal Service, October 30, 2013.)

Should this be taken as great news? No, it’s “smoke and mirrors,” as I will explain below. But the mainstream certainly thinks this year’s budge deficit, which came in below $1.0 trillion, is good news. They forget that no matter how you look at it, any budget deficit, no matter how small or large, is adding to a bigger problem at hand—our massive national debt.

Let’s face it: a budget deficit at the end of the day means the government spent more money than it received. Where does this extra money that the government spends come from? The answer is simple: it borrows. And as a result, the national debt rises.

Our national debt has increased significantly over the past few years. At the beginning of 2008, the U.S. national debt stood at $9.2 trillion. Today, it stands above $17.0 trillion. (Source: Treasury Direct web site, last accessed October 31, 2013.) This represents an increase of almost 85% in the national debt in the matter of a few years.

I believe the national debt will double from here…from $17.0 trillion to $34.0 trillion.

Why am I so negative on the national debt? I’m skeptical because I don’t believe this year’s numbers present the real story on government spending. Let me explain…

In the fiscal 2013 year, the U.S. government paid … Read More

Is the Federal Reserve Playing With Fire?

By for Profit Confidential

The Federal Open Market Committee (FOMC) decided this week to keep quantitative easing and easy monetary policy going. The statement by the Federal Reserve said, “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.” (Source: Federal Reserve, October 30, 2013.)

I’m one of those economists who believes the longer this goes on, the more troubles we are going to see. Is the Federal Reserve playing with fire?

It’s been almost five years since the Federal Reserve introduced the idea of quantitative easing to the U.S. economy. The goal was to help spur the economy and to help the average Joe, who, at the end of the day, lost his job and his house.

Has that happened?

It’s very clear: quantitative easing and the easy monetary policy that the Federal Reserve has been implementing for some time haven’t really filtered down to the average American. But it is helping the big banks; we have seen their profits grow significantly since 2009, while the average consumer has seen his/her real wages decline. Those who are closing in on retirement are forced to stay longer in their career or rethink their options because their savings have either been depleted or haven’t grown enough.

And we are seeing consumer confidence slide lower. This is the exact opposite of what the quantitative easing was supposed to do. For the week ended October 27, the Bloomberg Consumer Comfort Index declined to the lowest … Read More

Consumer Confidence Falling; Here’s What to Expect Next

By for Profit Confidential

More evidence consumer confidence in the U.S. economy is plunging…

The monthly Bloomberg Consumer Comfort Index, a consumer confidence indicator that shows the expectations of Americans about the U.S. economy, plunged to its lowest level in October since November of 2011. The index stood at -31 in October, down from minus nine in September. (Source: Bloomberg, October 17, 2013.) This index ranges from +100 to -100 (very optimistic to very pessimistic).

At the very core, consumer confidence gives an idea about consumer spending in the U.S. economy. The better the consumer feels, the more they spend: it’s just that simple. If someone doesn’t have a job but has expenses that need to be paid, they will not go out and buy that new flashy car or the house with the greener grass. They are more likely to keep what they have, and cut back on their discretionary spending.

The extent of bleak consumer confidence doesn’t just end here. In these pages, I have been talking about how companies in key stock indices are showing dismal revenues, but one sector is showing the opposite trend—discount stores.

Consider the corporate earnings of Family Dollar Stores, Inc. (NYSE/FDO); the company’s profits increased 27.5% in the fourth quarter of its fiscal year 2013 (ended August 31). Sales at Family Dollar Stores increased 5.8% compared to the same quarter a year ago. (Source: Family Dollar Stores, Inc., October 9, 2013.)

If all the pieces of the puzzle come together as expected (bleak consumer confidence leading to even lower consumer spending), I would not be surprised to see the gross domestic product (GDP) of the U.S. … Read More

Finally, a Politician & a Central Bank Who Criticize Paper Money Printing

By for Profit Confidential

Politician & a Central Bank Who Criticize Paper Money PrintingThese days, central banks are on a very dangerous monetary policy path. Paper money printing has become the norm. Major central banks around the world are taking the same actions; they have learned the phrase “quantitative easing” well. Economy’s soft; no problem! We’ll just print more money so our currency falls in value and our exports rise! (If only it were that simple.)

Two central banks are at the forefront when it comes to implementing paper money printing: the U.S.’s Federal Reserve and the Bank of Japan. And it isn’t a secret how poorly these two nations are faring despite their quantitative easing efforts.

In these pages, I have been very critical of quantitative easing.

With that said, to date, I have only heard one senior financial politician and one central bank head criticize the use of quantitative easing.

Canada’s Finance Minister, Jim Flaherty, at a private dinner with his G20 equals this week, criticized the use of quantitative easing by the U.S. central bank. The following day, he said, “It’s not good public policy.” He said the U.S. should have never implemented quantitative easing, but “Now that they’ve done it, they should get out of it as quickly as they can.” (Source: “‘Not good public policy’: Flaherty appears at odds with BoC, G20 as he criticizes U.S. quantitative easing,” Financial Post, October 16, 2013.)

The governor of the central bank of Canada, Stephen Poloz, has a similar take. He said, “[we] certainly agree that quantitative easing is one of the last things we want to be in a position to have to use.” (Source: Ibid.)

Finally, … Read More

How the Market’s Letting the Fed Get Away with Its “Wishy Washy” Policies

By for Profit Confidential

How the Market’s Letting the Fed Get Away with Its “Wishy Washy” PoliciesAnalysts and investors demand clarity when a company reports or offers up guidance. But when it comes to the Federal Reserve, investors and analysts don’t seem to demand the same level of clarity, even though the central bank has been what I would label “wishy washy” as far as its policies and what it offers up to the market.

The stock market is trading (and it has been for a while) on what the Federal Reserve says about its quantitative easing program, namely its monthly bond-buying strategy.

Yet the Federal Reserve appears to be saying one thing, only to contradict it with the next statement. This type of confusion and uncertainty is not what I want to hear. I want more certainty in order to formalize my trading and investment strategy. The cloudiness offered by the Federal Reserve doesn’t help.

Case in point: at last week’s Federal Open Market Committee (FOMC) meeting, Federal Reserve Chairman Ben Bernanke, to the surprise of nearly everyone both on Wall Street and Main Street, announced that the bank had decided against tapering, despite what I see as moderate growth in the economy. Yes, the country continues to slug along, but with the second-quarter gross domestic product (GDP) growth at 2.5% and with the Federal Reserve estimating the country will continue to expand at a rate above two percent this year and in 2014, the Federal Reserve should have begun to rein in some of its bond buying. Pundits were estimating a $10.0-billion cutback to start.

Well, even that small cut didn’t happen. Bernanke said the economy was still fragile, and the Fed didn’t … Read More

If the Economy Is Improving, Why Is This Happening?

By for Profit Confidential

Economy Is Improving, Why Is This HappeningWhile the media and politicians tell us we’re in an economic recovery…I keep writing about the slowdown we’re heading towards. How can I say that?

First, take out the stock buyback programs, and you’ll see that U.S. companies are seeing their earnings and revenues grow this year at their slowest pace since 2009. (More on that in today’s “Michael’s Personal Notes” column below.)

From a boring (but extremely important) economic point of view:

When a country experiences economic growth, industrial production of electricity and gas utilities pick up as factories and consumers use more electricity and other utilities. This is not happening in the U.S. economy. As a matter of fact, industrial production is contracting!

An index tracking industrial production of electric and gas utilities has declined almost eight percent since this past March. It stood at 103.76 then; in August, it stood at 95.62. (Source: Federal Reserve Bank of St. Louis web site, last accessed September 19, 2013.)

But it doesn’t end there.

Another key indicator of economic growth known as “capacity utilization” shows companies in the U.S. economy are operating below their historical norm. In August, the capacity utilization in the U.S. economy was 77.8%, three full percentage points below the historical average from 1972 to 2012. (Source: Federal Reserve, September 16, 2013.)

And we are seeing layoffs and discharges in the manufacturing sector accelerate in the U.S. economy. In March, there were 83,000 layoffs and discharges in manufacturing. In August, that number rose to 91,000—an increase of almost 10%. (Source: Federal Reserve Bank of St. Louis web site, last accessed September 19, 2013.)

When we look … Read More

My Favorite Stock in the Rising Chinese Travel Market

By for Profit Confidential

airline sectorThe airline sector has reorganized over the past few years, with mergers and route cuts that have resulted in an uptick in prices for passenger travel driven by increased capacity.

Yet with the rise in global wealth, we are seeing an associated rise in travel in the airline sector, especially in the emerging markets and China. (Read “Wealth, Lower Oil Prices, Increased Spending—Airline Stocks Headed Higher?”)

The plane builders, suppliers, and airlines are all faring better, and the future looks optimistic, given the rise in world income levels and the global economic recovery.

In July, international passenger traffic jumped 5.1% year-over-year, according to the International Air Transport Association. (Source: “Solid Demand Growth Continues in July – Asia Weakens as Europe Gains Strength,” International Air Transport Association web site, September 3, 2013, last accessed September 10, 2013.)

The report noted that the top domestic growth was found in China (+10.7% in July) and Russia (+11.7%). Other key areas for growth included India (+6.0%) and Japan (+5.7%). Meanwhile, travel in the U.S. domestic travel market was comparatively muted at 1.5%.

In China, the increase in domestic travel will translate into higher demand for lodging, which I feel will continue to be a growth area in the Chinese market. In addition, the country has become one of the top travel destinations in the world for both business and personal travel.

And this means rising demand for accommodations from the value hotels to the luxury. Having stayed at a popular Chinese hotel chain when I was in China, I can say the quality of the accommodations was first rate. Yet with over … Read More

My Two Favorite Discount Retail Stocks

By for Profit Confidential

My Two Favorite Discount Retail StocksConsumers always shop for bargains and lower prices regardless of the economy. In fact, after going through the recession, consumers are probably stuck in the mind-frame of looking for the best deals when shopping. I know I prefer to buy goods on discounts and rarely for the original ticket price.

If you have been following my column, you know how I favor discount stocks in the retail sector.

Wal-Mart Stores, Inc. (NYSE/WMT) remains the “Best of Breed” in the discount retail sector, but the company is currently facing some growth issues, as are many other stocks in the retail sector. (Read “How Red Flags in the Retail Sector Are Threatening U.S. GDP Growth.”)

What I continue to like in the retail sector are the dollar stores. While these retailers are now selling goods at a price above a dollar, what I like is the move by some companies to broaden their product offerings to include foods, such as perishables. Look at what Wal-Mart has been doing with its move into nearly everything you can imagine, taking advantage of its massive consumer shopping base.

One of my favorite dollar store stocks is Dollar General Corporation (NYSE/DG). This company has a market cap of $18.0 billion, so it’s not small; however, it is tiny in comparison to the $239-billion market cap of Wal-Mart or the $49.0-billion market cap of Costco Wholesale Corporation (NASDAQ/COST).

I initially spotted Dollar General in 2011 when the stock was trading in the $20.00 range. Since then, and with the propensity to look for value, the stock has had an excellent run, as reflected on … Read More

What Key Emerging Markets Are Saying About the Global Economy Now

By for Profit Confidential

emerging marketsIf everything is so fine with the economic recovery in both America and the global economy, then why are the emerging markets failing to rebound? It seems somewhat odd how the global economy could be fine when its key trading partners in the emerging markets are not.

You all know how much I like the emerging markets longer-term. (Read “Think Global for the Best Investment Opportunities.”) However, the short- to mid-term is another story, as there’s clearly some stalling.

The HSBC Emerging Markets Index (EMI) declined to a contractionary 49.4 reading in July, versus an expansionary 50.6 in June. This was the first contraction reading since 2009.

The HSBC reading is also a red flag to the stock market that, as I have been saying in recent commentaries, is showing some cracks in its foundation.

If the U.S., Europe, and China are fine, then the emerging markets should be too—but they’re not fine, so you should be wary of this. A pickup in the emerging markets is needed to get the ball rolling on economic growth.

As shown on the iShares MSCI Emerging Markets (NYSEArca/EEM) exchange-traded fund (ETF), the emerging markets have been under some duress since peaking in May, based on my technical analysis.

 the iShares MSCI Emerging

Chart courtesy of www.StockCharts.com

Here’s what’s happening at this juncture:

GDP growth in China has stalled, holding above seven percent. The manufacturing sector may be contracting, that is if you believe the HSBC estimate over the official estimate from Beijing, which says manufacturing is expanding.

Then you have the dismal state of affairs in the eurozone and Europe. Six of the 17 eurozone … Read More

The Corner We Have Been Forced Into

By for Profit Confidential

010813_PC_lombardiBoy, has the Federal Reserve ever created a monster with its monetary policy of creating $85.0 billion a month in new money out of thin air!

Consumer confidence is anemic in the U.S. economy as Americans are being financially “squeezed.” Consumer confidence, which is missing in this so-called economic recovery, leads to higher consumer spending, which makes up two-thirds of gross domestic product (GDP) in the U.S. economy.

Two days ago, we got news the Conference Board Consumer Confidence Index declined to 80.3 in July, down about 2.2% from June. (Source: The Conference Board, July 30, 2013.) This is nowhere close to the consumer confidence levels we saw prior to the financial crisis in the U.S. economy.

The survey of consumer confidence in July showed 35.5% of respondents are claiming jobs are difficult to get.

But that isn’t all…

We are told the housing market is improving, but few mention that millions of Americans are living in homes they purchased with positive equity that now have negative equity—their home prices are lower than the mortgage they borrowed on them. The number stood at 9.7 million homes with negative equity at the end of the first quarter. (Source: CoreLogic, June 12, 2013.) This phenomenon breeds consumer discouragement, not consumer confidence.

All of this is not a surprise to me; I have been saying it all along. Consumer confidence cannot improve because the Federal Reserve is buying $85.0 billion a month of U.S. Treasuries and mortgage-back securities—none of which helps the “little guy.”

Look at Japan, a country that has become famously known for its monetary policy and quantitative easing. One would … Read More

Why You Shouldn’t Be Worried About Surging Oil Prices

By for Profit Confidential

Oil PricesI just filled my gas-guzzling SUV that only uses premium gasoline; trust me when I say it wasn’t pleasant. And I know I will need to visit the gas station again in just a few days.

I accept that, but what I don’t understand is the surging increase in oil prices. Oil is now more than $106.00 a barrel.

I realize we have the uncertainties in Egypt after the ousting of the country’s former leader Mohammed Morsi by the army. Of course, while Egypt is not a major oil producer, the Suez Canal does run through it. And a huge amount of Middle Eastern oil is carried through the canal to the Mediterranean Sea from the Red Sea.

At the current price for oil, the technical picture continues to point to gains in the near term. But I would look at an upside move in oil prices as an opportunity to sell if you currently have oil exposure. Oil is not in a sustainable upward move or bull market.

But the commodity is still advised for traders. I would expect a return to normalcy in the near future, with oil prices retrenching back to less than $100.00 a barrel.

The chart of the West Texas Intermediate crude (WTIC) oil prices below shows the overextension from the previous sideways channel, with $98.00 on the top end. I doubt the breakout will hold as the underlying fundamentals are not supporting a situation of a demand-supply imbalance.

WTIC Light Crude Oil- Spot Price (EOD) CME

Chart courtesy of www.StockCharts.com

The U.S. economic recovery is ongoing, but it’s also showing signs of stalling. U.S. companies are struggling to grow revenues and … Read More

How to Make Sense of This Mixed-Up Market

By for Profit Confidential

Home PricesThe current market action will soon turn to selling. I’ve come to that conclusion because what the current stock market is doing is really not normal, and a correction will certainly come.

I’m not saying the end is near. In fact, I feel there are more gains to come, but the ride will likely be bumpy and riddled with risk.

When I objectively evaluate the market, I see many stocks, even those that have horrible fundamentals, rising to levels that just don’t make any sense to me.

I’m actually perplexed. The higher market trading has proven to be much more sustainable than I thought it would be at the end of the first quarter. You can thank the Federal Reserve for a boost in your 401(k).

The new records set last Wednesday by the S&P 500 and the Dow Jones Industrial Average were really not warranted. Or at least not yet, unless the economic recovery picks up and corporate America delivers strong revenue and earnings growth and not the diluted results that have kept Wall Street happy.

Because of the Street’s reduced expectations, I would expect companies to report some blow-away quarters. We will see for sure when the earnings parade picks up starting this week. Don’t just settle for an inline or slightly better-than-expected quarter. If there’s any real growth, you’ll see much more.

And then there’s the housing sector, which will be in the limelight tomorrow when the housing starts and building permits readings for June are released. We saw some stalling in the housing sector in May, so it will be interesting to see if the … Read More

How Troubles in the Eurozone Will Eventually Affect Your Investments

By for Profit Confidential

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

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

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

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

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

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