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

Posts Tagged ‘economic slowdown’

The Problem With Reality in 2014

By for Profit Confidential

U.S. Economy Halfway to a Recession AlreadyEarlier this month, Jeremy Siegal, a well-known “bull” on CNBC, took to the airwaves to predict the Dow Jones Industrial Average would go beyond 18,000 by the end of this year. Acknowledging overpriced valuations on the key stock indices are being ignored, he argued historical valuations should be taken with a grain of salt and nothing more. (Source: CNBC, July 2, 2014.)

Sadly, it’s not only Jeremy Siegal who has this point of view. Many other stock advisors who were previously bearish have thrown in the towel and turned bullish towards key stock indices—regardless of what the historical stock market valuation tools are saying.

We are getting to the point where today’s mentality about key stock indices—the sheer bullish belief stocks will only move higher—has surpassed the optimism that was prevalent in the stock market in 2007, before stocks crashed.

At the very core, when you pull away the stock buyback programs and the Fed’s tapering of the money supply and interest rates, there is one main factor that drives key stock indices higher or lower: corporate earnings. So, for key stock indices to continue to make new highs, corporate profits need to rise.

But there are two blatant threats to companies in the key stock indices and the profits they generate.

First, the U.S. economy is very, very weak. While we saw negative gross domestic product (GDP) growth in the first quarter of this year, the International Monetary Fund (IMF) just downgraded its U.S. economic projection. The IMF now expects the U.S. economy to grow by just 1.7% in 2014. (Source: International Monetary Fund, July 24, 2014.) One more … 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

The Only Sector I See with a Ten-to-One Return Potential

By for Profit Confidential

Shattering the Myth Behind Interest Rates and GoldWe are hearing more and more about interest rates getting ready to rise. The Federal Reserve itself has said it expects the federal funds rate to increase to 1.5% by the end of next year and to 2.25% by the end of 2016.

Before the Fed came out with its forecast, I was writing about how the Fed will have no choice but to raise interest rates because inflation is rising too quickly.

And I have been reading what clueless reporters and analysts are writing about how gold bullion prices don’t perform well in a high interest rates environment. I want to set the record straight for my readers.

Shattering the myth about the high interest rates, today’s rates are still very low compared to the historical average. In the chart below, you will see the changes in the Federal Reserve’s federal funds rate since 1980.

Effective Federal Funds Rate Chart

Chart courtesy of www.StockCharts.com

Over the past five years, the benchmark interest rate set by the Federal Reserve has all but collapsed to zero. Moving rates to 2.25% by 2016 will have a significant impact on the economy. But at 2.25%, over the long-term, it’s still a very low rate. Prior to the financial crisis of 2008 and 2009, the federal funds rate stood above five percent.

Bringing it back to gold bullion, if you are old like me and remember the early 1980s when interests were very high, you will also remember gold bullion was trading at a then-record high of more than $800.00 an ounce, or about $2,500 in 2014 dollars.

The higher interest rates went then, the higher gold bullion went. … Read More

Next Stop for the Paper Money Printing Press…

By for Profit Confidential

Eurozone's Economic Troubles Far From OverWhen we asked our readers what they enjoy reading the most on Profit Confidential, less than 10% of them said they like to read about the eurozone. We understand it’s not a topic of interest with the majority of our readers, but I can’t stress enough that what’s happening in the eurozone right now is very critical to the U.S. economy.

American-based companies have massive operations in the eurozone and generate significant portions of their sales from the region. American companies are already struggling to post revenue gains in 2014. If the economic slowdown in the eurozone continues, American companies’ revenues will be pressured further, and that means lower corporate earnings.

While giving its 2014 outlook during it first-quarter earnings release, Caterpillar Inc. (NYSE/CAT) said, “The Eurozone economy is recovering but is far from healthy. The ongoing decline in business lending, slowing inflation and recent strengthening in the euro are all concerns. The unwillingness of the ECB to take more aggressive actions risks leaving the economy struggling for years. Continued weak growth would make it difficult for businesses to maintain existing operations, let alone make new investments.” (Source: “Caterpillar Reports Higher First-Quarter Profit Per Share and Raises its 2014 Profit Outlook,” Caterpillar Inc. web site, April 24, 2014.)

But when you listen to the mainstream media, they are saying the opposite of Caterpillar; they are saying the economic slowdown in the eurozone is over. I think they are completely wrong.

And the situation with “bad debt”—the reason the eurozone got into trouble in the first place—is getting worse, not better, as debt-infested countries like Spain and Italy are … Read More

And They Say the Economy Is Getting Better?

By for Profit Confidential

Four Largest World Economies Slowdown ModeThe Chinese economy had been growing at about 10% a year, like clockwork, for years. Now, China is in the midst of an economic slowdown, with growth expected to come in this year at 30%–50% below China’s five-year average growth rate.

Why is China’s economy growing so slowly, and why does it matter to us here in North America?

Manufacturing, the key component of China’s economy, is quickly slowing. The HSBC Chinese Purchasing Managers’ Index (PMI) declined for the sixth consecutive month in April, registering at 48.1. Remember that any reading below 50 for the PMI suggests an outright contraction in the manufacturing sector. (Source: Markit, May 5, 2014.)

Japan isn’t faring any better; the third-biggest hub in the global economy is facing its own economic slowdown. The government and Japan’s central bank are trying to boost the economy by printing more and more money, but they are failing miserably. Japan’s gross domestic product (GDP) growth has been abysmal for years.

Germany is the only country in the eurozone showing some resilience. Other eurozone countries, like France, Italy, and Spain, are also facing an economic slowdown. Bad debt, tight lending requirements, and high unemployment remain the biggest problems in the common currency region; so big, the European Central Bank (ECB) wants to take the same course as the Federal Reserve and the Bank of Japan and start printing more paper money.

In the U.S., we, too, have a soft economy. The first quarter of 2014 proved to be terrible for corporate profits growth. And if the rest of the world is in an economic slowdown, I don’t know how … 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

Proof the Incentive to Work Is Fading

By for Profit Confidential

U.S. Exports Plummet First Quarter 2014I keep hearing about the economy improving, but I keep asking, where? I ask because the facts continue to say otherwise.

The U.S. Bureau of Economic Analysis reports gross domestic product (GDP) came in at just 0.1% in the first quarter of 2014. To remind my readers, in the fourth quarter of 2013, U.S. GDP grew by 2.6%. (Source: U.S. Bureau of Economic Analysis, April 30, 2014.)

These GDP figures reaffirm what I have been saying for some time now: the U.S. economy is headed towards an economic slowdown, not growth.

All we need to do is look at our exports. Exports from the U.S. economy to the global economy collapsed in the first quarter of 2014, declining by 7.6%. That’s definitely not helping GDP.

The Baltic Dry Index (BDI), an indicator of how demand in the global economy looks, is in a sharp downtrend, as illustrated in the chart below.

Baltic Dry Index ChartChart courtesy of www.StockCharts.com

And consumer spending is facing headwinds. I can see this in the amount of inventory businesses are stockpiling. In the first quarter of this year, private business inventories rose by $87.4 billion after increasing by $111.7 billion in the fourth quarter of 2013. Businesses increasing inventories suggests customers are buying less, as each business’ inventory isn’t turning over; it’s stockpiling. GDP cannot grow without consumer spending.

Finally, last Friday, we heard the “good news” that the U.S. economy added 288,000 jobs in April—the biggest increase since January 2012. But the underemployment rate, which includes people who have given up looking for work and people who have part-time jobs but want full-time jobs, stands … Read More

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.

Month

Sales (Annual Rate)

% Change from Previous Month

August

5,330,000

-0.93%

September

5,260,000

-1.31%

October

5,130,000

-2.47%

November

4,830,000

-5.85%

December

4,870,000

0.83%

January

4,620,000

-5.13%

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

But weak home sales aren’t … Read More

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