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

Posts Tagged ‘economic slowdown’

The Economy: What Will Break the Camel’s Back This Year

By for Profit Confidential

Baltic Dry Index Collapses Again; Not a Good Sign for EconomyThe International Monetary Fund (IMF) has lowered its growth forecast for the global economy. It says the world economy will now grow by 3.6% in 2014 and 3.9% in 2015; it grew at three percent in 2013. (Source: International Monetary Fund, April 8, 2014.)

I see the IMF forecast on global growth as being far too optimistic. In fact, I think we’d be lucky to get three percent growth in the global economy this year. Key indicators I follow suggest demand in the global economy is close to outright collapsing.

Consider the chart below of the Baltic Dry Index (BDI). This index tracks the shipping prices of dry goods in the global economy. If it declines, it suggests global demand is declining. The BDI has plunged more than 48% since the beginning of the year, pointing to slow growth for the global economy ahead.

Battic Dry Index Chart Chart courtesy of www.StockCharts.com

Manufacturing is another indicator of demand in the global economy that we follow. If manufacturing activity increases, it means demand is increasing and that consumers are buying more. Sadly, global manufacturing is suggesting an economic slowdown is the most likely scenario ahead.

The JPMorgan Global Manufacturing Purchasing Managers Index declined to its lowest level in five months in March. (Source: Markit, April 1, 2014.)

Adding to the misery, most economic hubs are telling the same tale.

The eurozone is still in trouble; the European Central Bank is contemplating its own quantitative easing program as Italy just reported its highest unemployment rate ever recorded. China is pumping out weak economic data. Japan’s economic slowdown isn’t taking any break despite the central bank … Read More

Why Is the U.S. Dollar Collapsing in Value All of a Sudden?

By for Profit Confidential

Whey the Fed May Need to Reverse its Decision to Cut Back on Money PrintingWhen news first broke from the Federal Reserve that it would slow down the pace of its quantitative easing program, the consensus was that the U.S. dollar would start to rise in value as the Fed would be printing fewer new dollars and actually eliminating all new paper money printing by the end of 2014.

But the opposite has happened.

Below, I present the chart of the U.S. Dollar Index, an index that compares the value of the dollar to other major world currencies.

US Dollar Index - Cash Settle (EOD) Ice ChartChart courtesy of www.StockCharts.com

As the chart clearly shows, the dollar started on a strong downtrend in July of 2013. When I look at the dollar compared to individual currencies like the euro and British pound, the picture looks even worse.

The common belief since the Credit Crisis of 2008: when there’s uncertainty, investors run towards the safety of the U.S. dollar. But something started to happen in mid-2013. Despite China’s economic slowdown, despite the situation with Russia and Ukraine, and with the Federal Reserve cutting back substantially on its money printing program, one would think the U.S. dollar would rally in value—but the opposite is happening.

Two reasons why the greenback is falling in value so fast:

First, world central banks have been slowly selling the U.S. dollars they keep in their reserves, as the percentage of world central banks that use the dollar as their reserve currency has fallen from more than 70% in the year 2000 to just over 60% today.

Secondly, with the Japanese and Chinese reducing the amount of U.S. Treasuries they buy and with the Federal Reserve reducing the paper … Read More

What the Collapse in Copper Prices Means for Investors

By for Profit Confidential

Why Are Copper Prices CollapsingAlmost daily, there’s a new piece of information coming out about the Chinese economy that suggests economic conditions there are worsening. We see China’s manufacturing sector is contracting and there’s a credit crunch in the making.

The Wall Street Journal ran a story last Friday on the state of the Chinese economy and its rapid decline in growth. It cited Premier Li Keqlang’s warning to investors that China was “likely to see some corporate defaults in debts.” (Source: “China Reports Broad Economic Slowdown,” Wall Street Journal, March 14, 2014.)

The economic slowdown in the Chinese economy is another reason why the U.S. economy will slow down in 2014.

Too often investors forget that China is one of our major trading partners and a significant number of American companies operate in China. If the economic slowdown in the Chinese economy gains strength, then those American companies selling goods to China and those operating there will see their profits shrink.

As the Chinese economy boomed over the past 10 years, the prices of copper and other base metals needed in the building of the country’s infrastructure skyrocketed. Now, with an economic slowdown looming in the air for the Chinese economy, base metal prices, especially copper prices, are sliding lower.

The chart below shows how copper prices have declined significantly since the beginning of 2014.

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

How will lower copper prices affect North American investors? Those companies in the U.S. economy that deal with base metals, such as copper, will see their profitability decline; thus, their stock prices will decline.

On a macro scale, the sharp decline in copper … 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

If You Think Our Stock Market Is Overpriced, Wait Until You See This

By for Profit Confidential

Why We Are Reaching a Stock Market TopThe stock market in France has been on a tear! Below, I present a chart of the French CAC 40 Index, the main stock market index in France.

Looking at the chart, we see the French stock market is trading at a five-year high. With such a strong stock market, one would expect France, the second-largest economy in the eurozone, to be doing well. But it’s the exact opposite!

As its stock market rallies, France’s economic slowdown is gaining steam. In January, the unemployment rate in France was unchanged; it has remained close to 11% for a year now. (Source: Eurostat, February 28, 2014.) Consumer spending in the French economy declined 2.1% in January after declining 0.1% in December. (Source: National Institute of Statistics and Economic Studies, February 28, 2014.) Other key indicators of the French economy are also pointing to an economic slowdown for the country.

CAC French CAC 40 Index (EOD) Chart

Chart courtesy of www.StockCharts.com

And France isn’t the only place in the eurozone still experiencing a severe economic slowdown. In January, the unemployment rate in Italy, the third-biggest nation in the eurozone, hit a record-high of 12.9%, compared to 11.8% a year ago.

I have not mentioned Greece, Spain, and Portugal because they have been discussed in these pages many times before; as my readers are well aware, they are in a state of outright depression.

Just like how investors have bought into the U.S. stock market again in hopes of U.S. economic growth, the same thing has happened in the eurozone. Investors have put money into France’s stock market in hopes of that economy recovering—but it hasn’t. We are dealing with a … Read More

My Favorite Picks Among the “Coffee” Stocks

By for Profit Confidential

Buy Coffee Could Mean More Than a Couple Extra BucksHalfway around the world, a war has nearly surfaced in Ukraine. At home, there’s an ongoing conflict between the two main political parties on everything from the budget to foreign policy to how best to grow the economy. These conflicts easily make the headlines each day; however, one war that doesn’t make front-page news is the war brewing each morning when consumers grab that cup of java to get their day going.

Sometimes, the choice is a no-brainer but often, it could be dependent on the day at hand or what happens to be closest. Whatever the case may be, when you grab a cup of coffee on the go, you’re participating in the steaming hot competition for business in the coffee market—and it’s only likely to intensify.

The U.S. coffee market had long been shared between two major players. We have Starbucks Corporation (NASDAQ/SBUX) at the premium end, catering largely to the middle-class and upper incomes. For the everyday Joe, there’s “Dunkin’ Donuts,” operated by Dunkin’ Brands Group, Inc. (NASDAQ/DNKN), which also operates the “Baskin-Robbins” brand.

For me, it’s all about the taste and what I feel like drinking that particular day. If I really need a wakeup call, I tend to swing toward Starbucks; but on calmer days, I tend to gravitate towards the milder Dunkin’ Donuts coffee, especially if I also have a craving for a donut.

Yet the coffee market is about to get even more crowded with more decisions to make each morning. Upstart Canada-based Tim Hortons Inc. (NYSE/THI) is quickly becoming the third player in the U.S. coffee market as the chain is nearing … Read More

On the Way to Higher Stock Prices, Something Suddenly Happened

By for Profit Confidential

Stock Investors Lose Touch with RealityOn February 24, the S&P 500 broke to a new all-time high. There was panic buying as soon as the markets opened that day, as the chart below depicts.

Looking at this, I can’t help but ask if investors have completely lost touch with reality. It seems the fundamentals that drive stock prices higher—corporate earnings—have been ignored.

And as investors are driving key stock indices higher, the state of the global economy is becoming worrisome. This can’t be stressed enough: the U.S. economy isn’t immune to a disturbance in the global economy. But this isn’t all; if the global economy sees an economic slowdown, the companies on U.S. key stock indices suffer as well.

S&P 500 Large Cap Index ChartChart courtesy of www.StockCharts.com

One clear example of this, as it stands, is Caterpillar Inc. (NYSE/CAT), a giant industrial goods manufacturer and component of the S&P 500. The company reported that annual sales declined 16% in 2013. Caterpillar’s revenues were $55.65 billion compared to $65.87 billion. The company’s corporate earnings per share were down more than 32% in 2013. The reason for this: a challenging business environment in the global economy. (Source: Caterpillar Inc., January 27, 2014.)

The global economy is going to disappoint in 2014.

First in line is Asia. Look anywhere on that continent, and you will see economic slowdown looming in the air. China, the biggest economic hub in the region and the second-biggest in the global economy, is outright slowing down. In February, the manufacturing activity in the country dropped to a seven-month low. The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) registered at 48.3 in February compared to 49.5 in … Read More

Bad Weather to Blame for Consumer Spending Pullback? Numbers Argue Otherwise

By for Profit Confidential

Retail Sales All Slowing at the Same TimeMainstream stock advisors are blowing air…telling us the U.S. economy is stalling due to cold weather. They say the economic chill caused by the uncharacteristically cold weather this year is only temporary. I don’t believe this for a moment.

Sure, the weather had its impact. Consumers have been reluctant to go out and shop, and higher home heating bills might have them spending otherwise so far in 2014, but there’s more to the story.

While discussing existing-home sales for January, the chief economist at the National Association of Realtors said, “Disruptive and prolonged winter weather patterns across the country are impacting a wide range of economic activity, and housing is no exception.” Existing-home sales in the U.S. economy declined by 5.1% in January from the previous month. (Source: “Existing-Home Sales Drop in January While Prices Continue to Grow,” National Association of Realtors, February 21, 2014.)

The reality of the situation is that existing-home sales in the U.S. economy have actually been declining since August of last year. The annual rate of already built homes being sold in the U.S. economy was 5.33 million in August. In January, it was 4.62 million. (Source: Federal Reserve Bank of St. Louis web site, last accessed February 24, 2014.)

Below, I’ve prepared a table that shows the extent of the drop in existing-home sales in the U.S. economy.


Sales (Annual Rate)

% Change from Previous Month



















Source: Federal Reserve Bank of St. Louis web site, last accessed February 24, 2014.

But weak home sales aren’t … Read More

Stocks Off to the Worst Start for the Year Since 2005

By for Profit Confidential

Major Risks for Key Stock Indices in 2014The stock market has just put in its worst first-seven-days-of-the-year trading action since 2005, as concern over where key stock indices will head this year rises. Can the stellar year the stock market had in 2013 continue?

Among those who try to predict where key stock indices will go, Wall Street industry analysts believe that the S&P 500 will rise 4.8% this year, while market strategists believe the S&P 500 will see a decline of 2.3% this year. (Source: FactSet, January 6, 2013.) This tells me that even the professionals can’t figure out which way the market is headed.

On a valuation basis, key stock indices are reaching some dangerous levels. Based on the closing price of the S&P 500 on December 31, the forward 12-month price-to-earnings multiple (P/E) was 15.4. This is the highest forward P/E ratio since May of 2007…and we all know 2007 was the peak for the stock market for five years!

And optimism among stock advisors towards the key stock indices is getting into dangerous territory, too. The indicators I follow suggest the optimism towards key stock indices is at the same level as it was in 2007, while the number of those who are bearish (like me) is at a multi-decade low.

As we move into 2014, I am one of the very few left who are saying key stock indices are dangerously overbought and overpriced.

And if I turn to the economy, the situation looks worse. Four major global economies are in trouble:

In December, China’s manufacturing activity witnessed a shakedown. The HSBC China Manufacturing Purchasing Managers’ Index (PMI) declined to a three-month … Read More

The Catastrophe Called Collapsing Corporate Earnings Growth

By for Profit Confidential

89 of SP 500 Companies Issuing Negative Earnings GuidanceI keep telling you about my suspicion that the backbone of any stock market—corporate earnings growth—is disappearing. Now, we see it in the numbers…

Of the 106 companies in the S&P 500 that have issued corporate earnings guidance for the fourth quarter, an astounding 94 of them have issued negative guidance—that’s 89% of the companies issuing guidance, warning it will be negative, which is well above the five-year average rate of 63%. (Source: FactSet, December 13, 2013.)

And analysts continue to drop their expectations for corporate earnings growth for the fourth quarter. As of September 30, analysts expected fourth-quarter corporate earnings growth in the current quarter would be 9.5%. By last week, that rate had come down to 6.5%. (Source: Ibid.) I expect corporate earnings growth for the fourth quarter will continue to disappear.

So we have 2013 ending with the smallest increase in corporate earnings since 2009. How can 2014 be any better?

The risks that disappearing corporate earnings growth creates for the key stock indices continue to be ignored. And problems in the global economy are mounting, not improving, with each passing day.

Economic growth in China, the second-biggest economic hub in the global economy, is declining rapidly. The country is expected to post a growth rate this year that is “embarrassingly” low compared to China’s historical economic growth rate. Manufacturing activity in the country is rapidly declining. The HSBS Flash China Manufacturing Purchasing Managers’ Index (PMI) dropped to a three-month low in December. (Source: Markit, December 16, 2013.)

We are seeing an economic slowdown in the stronger eurozone nations like France. In December, manufacturing activity in this … Read More

What Happens to the Market When Stock Buyback Programs Stop

By for Profit Confidential

Stock Buyback ProgramsThe International Monetary Fund (IMF) expects the global economy to increase by 2.9% this year and 3.6% in 2014—forecasts which I believe are too optimistic. Why?

First of all, we have the Japanese economy, the third-biggest in the global economy, suffering an economic slowdown. Tertiary industry activity (activity in the service businesses) slowed in September from a month ago. (Source: Japan Ministry of Economy, Trade and Industry, November 12, 2013.)

Then there’s Germany, the fourth-biggest economy in the global economy. Once believed to be immune to the economic slowdown in the eurozone, seasonally adjusted manufacturing output in the country declined 0.8% in September from August. As of September, year-to-date manufacturing output in the German economy has increased only 1.2%—a much slower growth rate than in the same period of 2012. (Source: Destatis, November 8, 2013.)

Earlier this month, in a statement about its monetary policy decision, the central bank of Australia said, “In Australia, the economy has been growing a bit below trend over the past year and the unemployment rate has edged higher. This is likely to persist in the near term… Public spending is forecast to be quite weak.” (Source: “Statement by Glenn Stevens, Governor: Monetary Policy Decision,” Reserve Bank of Australia, November 5, 2013.)

To fight the economic slowdown in the country, the Reserve Bank of Australia is using easy monetary policy measures. The central bank has reduced its benchmark interest rate in the country by more than 40% since the beginning of 2012. The cash rate, the overnight money market interest rate, sits at 2.50% compared to 4.25% in early 2012. (Source: Reserve Bank of Australia … Read More

France to Create More Troubles for the Eurozone?

By for Profit Confidential

eurozoneMy take on the eurozone is that the smaller financially-troubled countries will eventually lead the bigger countries into a further economic slowdown and cause more problems for the eurozone. We can see this right now. While Germany, the biggest economic hub in the eurozone, has kept strong ground, France, the second-largest economy in the eurozone, has become a victim.

According to the National Institute of Statistics and Economic Studies, manufacturing output in France declined 1.1% in the third quarter from the second quarter of 2013, and dropped two percent on a year-over-year basis. Demand in the country is in the slumps; manufacturers of electrical and electronic equipment witnessed a decline of 1.9% in output, and manufacturers of food products and beverages saw their output plummet 2.3% year-over-year. (Source: National Institute of Statistics and Economic Studies, November 8, 2013.)

But the misery for the French economy doesn’t end with those bleak output figures. Standard & Poor’s (S&P), the credit rating agency, recently slashed the credit rating of France one notch lower. The statement from S&P: “We believe the French government’s reforms to taxation, as well as to product, services, and labor markets, will not substantially raise France’s medium-term growth prospects.” (Source: “S&P lowers France credit rating, cites slow reform pace,” Reuters, November 8, 2013.)

The French economy facing a further economic slowdown shouldn’t be overlooked by investors here in the U.S. economy. As I repeatedly say in these pages, the U.S. economy isn’t isolated from what happens elsewhere in the global economy.

Dear reader, the eurozone remaining in an economic slowdown (and it could actually get worse before it’s over) tells … Read More

Three Key Indicators Say U.S. Economy in Trouble

By for Profit Confidential

 budget deficitThe mainstream and politicians tell us the “wounds” of the financial crisis are over and the U.S. economy is in recovery mode. This simply isn’t true.

A few of the key indicators I follow to see where an economy stands are personal income, consumer demand, and businesses’ activity. All three of these indicators are telling me the U.S. economy is definitely going in the wrong direction.

First of all, the income gap in the U.S. economy continues to grow. The top earners make more, while the lowest income earners make less. According to the Wage Statistic from Social Security, in 2012, 23 million of the lowest wage earners earned a total of $47.0 billion in the U.S. economy. But those who earned $10.0 million or more annually in the year 2012 earned $64.3 billion! Here comes the kicker: there were only 2,915 wage earners in this category in the U.S. economy last year. (Source: Social Security, November 5, 2013.) Yes, you read that right. Less than 3,000 people cumulatively made more than 23 million people.

The bottom line: while Wall Street and big business has boomed again, the average working American family is struggling under an after-inflation personal income that is lower than it was in 2009—four years ago. In 1999, real median household income (that’s adjusted for inflation) in the U.S. economy was $56,030. By 2012, that number was $51,017. (Source: “Real Median Household Income in the United States,” U.S. Department of Commerce, September 18, 2013.)

Next, American consumers are pulling back on their spending—something that’s not supposed to happen when an economy is recovering.

One indicator of consumer … Read More

Stock Advisors Saying Buy Eurozone Stocks; Here’s Why It’s a Bad Idea

By for Profit Confidential

There have been many instances when the adage “buy when there’s blood on the street” has turned out to be the best investment strategy. March of 2009 was one great example of this—there were not a lot of stock advisors saying buy stock back then as panic had set in. In the midst of this panic, the greatest buying opportunity was born.

These days, I hear stock advisors saying companies operating in the eurozone are a good buy. The words I hear thrown around are “good value” and “cheap.” My opinion on the eurozone stocks is very different. I feel the worst is yet to come for many companies operating in the weaker eurozone countries, especially the Italian banks.

I’m sticking to my original belief that the euro region is still in outright trouble and that the economic slowdown the region is experiencing could continue for a long time.

Yes, there is speculation the euro region is slowly getting out of its economic slowdown, but that opinion is not backed by the statistics—the numbers are telling a different story.

The unemployment picture in the area is not improving! In September, there were 19.47 million people unemployed in the eurozone. The unemployment rate remained at 12.2% in September, unchanged from August. (Source: Eurostat, October 31, 2013.)

What’s worrisome is the fact that the biggest economic hubs in the eurozone are seeing their unemployment rate increase. In France, the second-biggest economy in the region, the unemployment rate has risen seven percent from the same period a year ago. In September, the jobless rate in France stood at 11.1% compared to 10.4% in … Read More

Why Silver Prices Could Easily Double from Here

By for Profit Confidential

Silver Prices Could Easily Double In the first 10 months of this year, the U.S. Mint sold 39.2 million ounces of silver in coins. In the same period last year, the Mint only sold 28.94 million ounces of silver in coins. A general negativity by investors surrounding silver this year has not stopped people from buying silver coins. In fact, demand is up 35% so far in 2013. (Source: U.S. Mint web site, last accessed November 1, 2013.)

Meanwhile, if I look at the chart of the gold-to-silver ratio—which shows how much silver is needed to buy one ounce of gold bullion—silver prices look undervalued. (I’ve posted the chart for my readers below.)

gold spot price silver

Chart courtesy of www.StockCharts.com

At present, it would take 60 ounces of silver to buy one ounce of gold bullion. The 200-year historical average is 37 ounces of silver to buy one ounce of gold bullion. (Source: Market Watch, July 19, 2013.) If we go back to the historical average, and we eventually will, silver prices would have to rise to $35.00 an ounce given the current price of gold bullion.

And if we look at the “natural gold-to-silver ratio,” that’s the amount of silver in the earth’s crust compared to gold, then the ratio is 17 to one. Yes, in that case silver would have to increase in price to $77.00 an ounce!

The more realistic picture, dear reader, is for silver to go back to its record high reached in April 2011 of $48.70 an once—that’s more than twice the current price of silver.

Since silver prices fell this spring, silver producers don’t have much incentive to explore … Read More

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