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

Posts Tagged ‘Europe’

How to Profit from the Crimea Conflict

By for Profit Confidential

What the Crimea Tensions Mean for U.S. InvestorsThe eurozone and Europe are showing progress in finally getting out of their dismal multiyear double-dip recession; however, the uncertainties and hostilities unfolding in the Crimea region of Ukraine, which are threatening to escalate, could put a damper on the economic renewal in Europe.

With the recent vote in Crimea, whether legal or not, Russia has quickly passed a resolution and signed a treaty to annex Crimea to the Kremlin. The current buildup of Russian troops inside Crimea is a big concern, especially if a military conformation breaks out.

We are already seeing rising economic sanctions against Russia from the United States and countries in Europe. This is worrisome, as it could easily derail the economic renewal in Europe at this most critical time, stalling the region’s growth due to the major trading between Russia and Europe. A big impact could be the staggered flow of oil from Russia into Europe, which currently accounts for about 40% of the oil imports from Russia.

While I don’t think Russia will immediately cut the oil flow into Europe, as Russia also needs the oil revenues, I do expect Europe will look for alternative oil sources if the sanctions increase and tighten against Russia. If this were to occur, it could really hurt the country’s oil companies and the Russian economy overall.

Moreover, there’s also the retaliation from Russia, which would likely have an impact on Europe and potentially the global economy. The crisis comes at a critical time, as the eurozone is looking at gross domestic product (GDP) growth of 0.5% in the first quarter—a three-year high.

It’s clear something bigger may … Read More

How Gold Has Caught Me by Surprise

By for Profit Confidential

How Tensions in Crimea Are Changing My Gold Investment StrategyI must admit that I’ve been somewhat caught off guard by the strong rally in gold so far in 2014. The yellow ore has been on a nice upward push towards the $1,400-an-ounce level; it could even take out this level and head towards some tough resistance around $1,425–$1,450.

While the rally appears to be holding, I still only view the yellow precious metal as a trade, and not a buy-and-hold for investors at this time. I would be selling into further weakness if you are holding gold or any related stocks.

What I think is driving the upward move in gold prices is the associated cautious moves in the stock market and the geopolitical tensions triggered by the situation in Crimea. If stocks can regain their enthusiasm, I would expect a retrenchment in the precious metal as money is shifted out. (Read why I feel stocks are heading higher in “Why I Believe the S&P 500 Could Easily Reach 2,000 in the Upcoming Months.”)

My past contention was that gold was a trading opportunity. Back in late 2013, I saw a bearish “head and shoulders” formation on the chart, after which prices fell towards support at $1,200. The oversold nature was supportive of a bounce on the charts, but the gains so far this year have been much more than I would have expected, largely due to the uneasiness in equities so far.

The precious metal could see more buying should the tense situation in Ukraine and Crimea escalate following the vote on Sunday that could lead to Crimea separating and joining Russia. While there has yet … Read More

U.S. Income Disparity Hits Highest Level Since 1920s Britain

By for Profit Confidential

How the Rich Have Gotten Richer in This EconomyIn today’s U.S. economy, we have a very small portion of the population earning most of the total income generated by the economy, while the majority of people suffer, as their incomes have failed to rise at the pace of the rich.

According to a study by the Paris School of Economics, the richest 0.1% of Americans takes home nine percent of the U.S. national income. The bottom 90%, which is pretty much everyone else, earns just 50% of the national income. (Source: MarketWatch, February 26, 2014.)

Income inequality in the U.S. economy is worse now than it was during the 1920s in Great Britain.

Aside from income inequality, the other big problem with the U.S. economy is that the majority of Americans simply don’t have liquid wealth. Liquid wealth is assets that can be quickly converted into cash if needed (a home is not considered liquid).

According to Phoenix Marketing International, 25% of U.S. households hold about 75% of the liquid wealth in the U.S. economy. (Source: Phoenix Marketing International, January 16, 2014.) The U.S. is becoming more and more like Europe, where there are the very wealthy and the very poor. The middle class, who should be the backbone of the American economy, well, they have all but disappeared.

Consider that in December of 2013, 22.7 million households in the U.S. economy used food stamps. Not long before then, in 2010, that number was 20.6 million households. (Source: U.S. Department of Agriculture, March 7, 2014.) And that’s after the U.S. government cut back on food stamps funding!

For economic growth, you need personal incomes rising at … Read More

Upside for Oil Appears Limited, but Investments in Oil Markets Aren’t

By for Profit Confidential

Why I Believe the Upside for Oil Is LimitedOil prices have rallied back to the $100.00-per-barrel level on some near-term supply and inventory concerns.

While the upside move is rewarding the buyers of oil stocks, I don’t think oil prices are set for an extended rally.

The chart of the West Texas Intermediate (WTI) crude oil shows oil prices bouncing higher after the formation of a bullish double bottom, based on my technical analysis. And while oil prices can head higher on the chart, I just don’t see any moves being sustainable.

Light Crude Oil ChartChart courtesy of www.StockCharts.com

The catalyst for higher oil prices has more to do with tight inventories driven by a rise in demand. The inventory of oil contracted by 1.5 million barrels per day in October to December 2013, according to the International Energy Agency (IEA). The IEA suggests the demand for oil will rise by 50,000 barrels per day to 1.3 million barrels in 2014. (Source: Johnson, C. and Sheppard, D., “Robust demand tightening oil market, IEA says,” Reuters, February 13, 2014.) If this estimate pans out, oil prices could edge higher and hold above $100.00, but I doubt the move will last that long.

Now, if China jumps out of its sluggish growth (read “Investment Opportunities in Depressed Chinese Stocks”) and Europe can drive its economic renewal, then we could see brighter prospects for oil prices.

On the supply side, America is relying less on the Organization of the Petroleum Exporting Countries (OPEC) and foreign oil as American oil companies continue to squeeze more oil out of the ground, specifically shale oil.

There may even be a time down the road when … Read More

Stock Falling, but Rich Still Spending; My Top Luxury Stock Play

By for Profit Confidential

Why This Luxury Retailer Is Simply the BestThe stock market is in turmoil and looking for help from buyers. While some are calling for investors to run to the exits, I look at weakness and market chaos as a buying opportunity.

It’s simply unrealistic to think that all stocks deserve to fall during a market adjustment like what we are seeing at this time. There are good companies out there that will stage a strong rally when the tide in the stock market turns.

In the retail sector, we saw a gasp of air from troubled J. C. Penney Company, Inc. (NYSE/JCP), as the former retail sector and Wall Street darling struggles to stay afloat. With about $2.0 billion or so of liquidity left, it’s going to be a race against the clock. J. C. Penney reported a 3.1% jump in comparable-store sales during the holiday shopping season, which is a good result for this turnaround play. (I’d rather stick with these two contrarian retail sector plays, though, which you can read about in “These Retail ‘Screw-ups’ Could Turn Things Around This Year.”)

My top luxury play in the retail sector, as many of you know, is Michael Kors Holdings Limited (NYSE/KORS).

In November 2013, I wrote, “The chart of Michael Kors shows the steady upward trend in the stock since the beginning of 2012. There is some congestion and resistance at this time…but we are seeing a bullish ascending triangle and a possible upside breakout on the horizon, based on my technical analysis.” The stock was up 20% Tuesday morning. (Read “My Favorite Pick Among the Luxury Brand Stocks.”)

It’s obvious why … Read More

Strategies for Defending Your Portfolio in a Down Market

By for Profit Confidential

What Investors Can Learn from the Super BowlIf you watched the boring Super Bowl game on the weekend, you’d have realized that a strong and superior defense can go a long way against a sound offense. But the battle in the trenches was easily won by the defense, and it’s an analogy I use in my trading strategy.

January ended on a sour note, being the first down month since August 2013. With the losses, we are now witnessing an uprising of the bears suggesting 2014 will be a negative year for the stock market. This reasoning is based on the Stock Traders’ Almanac that suggests there is a 46% chance of losses this year. I’m not convinced the stock market is heading lower, but the current stalling and inability of the stock market to move higher is a red flag. Despite an extremely oversold technical condition, I have yet to see any signs of strong buying support emerge—and in my view, this is worrisome and likely means more losses.

The irony in January was that the S&P 500 and Dow Jones Industrial Average actually lost more ground than the higher-risk NASDAQ and Russell 2000, which only lost 1.76% and 2.89%, respectively.

The key will be to watch how the S&P 500 reacts at its key support levels around 1,750 to 1,775. We already saw a bounce off this level, and now the index is staging a retest. As I have said in a recent commentary, failure to hold could see the index fall to 1,700, based on my technical analysis.

The stock market is failing to see any major positive catalyst. Earnings season has been average … Read More

Why Copper Prices Are Collapsing

By for Profit Confidential

Economic Growth Falls to 2009 LevelCopper prices are collapsing, a sign that manufacturing activity in the global economy is slowing.

The chart below shows copper prices are down more than five percent so far this year. Notice the steep decline in copper prices starting this January.

Copper is a major commodity used as a material ingredient in a wide variety of manufactured goods. If copper prices are declining, which means demand is falling, we get an early indication that manufacturers are producing less because customer demand is soft.

At the same time, in another startling development, the Baltic Dry Index (BDI), the next chart below, has collapsed 50% from the beginning of the year.

Copper - Spot Price (EOD) Chart

Chart courtesy of www.StockCharts.com

The BDI basically tracks shipping prices of raw materials in the global economy. When the BDI declines, it means fewer goods are being shipped in the global economy, a sign that the worldwide economy is slowing.

Baltic Dry Index (EOD) Chart

Chart courtesy of www.StockCharts.com

Last but not least, as we have been hearing in the news, the emerging markets in the global economy are in trouble.

Manufacturers in the global economy, not being able to sell enough to developed countries like the U.S. and Europe, were hoping to sell more of their goods to once “fast”-growing emerging markets. But now, economic growth in these countries is slowing, too.

Russia, one of the major emerging markets in the global economy, reported its 2013 economic growth rate was the lowest since 2009! The Russian Federal Statistics Service said the economy grew by 1.3% in 2013 compared to 3.4% in 2012. (Source: Bloomberg, January 31, 2014.)

Other emerging markets like India and China have … Read More

Emerging Market Chaos an Opportunity for Investors?

By for Profit Confidential

Opportunities Left for Investors in These MarketsIt’s amazing how investors here are nervous the Federal Reserve will eventually need to ratchet up interest rates from their current near-zero level.

Turkey’s central bank jacked up its interest rates to a whopping 12% from 7.75% in an effort to fight inflation and avoid a currency meltdown driven by our own Fed’s policies.

Years ago, there was distress in the global stock markets after currencies in the emerging markets began to tank. Of course, this is not good, as a weaker currency means less buying power by these emerging economies, which translates into less demand for goods made in industrial countries such as the United States and Europe. (Read “Time to Start Shifting Your Investment Strategy Overseas?”)

Now we are seeing some excessive selling in some emerging market currencies on concerns of further tapering by the Fed. The reason is that cheap money pumped by the Fed means lower U.S. bond yields, which forces American investors to look globally for higher yields and growth found in the emerging markets.

We are hearing about the vortex that will engulf the emerging markets and suck out the capital, creating a mass exit from these regions and driving chaos in the global markets.

While I agree the risk in the emerging markets is there, I doubt we will see a financial Armageddon surface. In fact, my feeling is I would be looking at buying the emerging markets on extreme weakness. These regions are becoming wealthier and have money to spend. For growth investors, I see a potential buying opportunity rather than a scramble for the exits.

As many of you … Read More

Recent Sell-Off in Apple Stock an Opportunity?

By for Profit Confidential

Apple Needs to Forfeit Margins in Favor of Market ShareApple sold a whopping record 51 million “iPhones” and 26 million “iPads” in its fiscal first quarter, which is great stuff at first glance. So why did investors scramble for the exits?

The problem is that the market expectations placed on Apple are enormous. But that’s what happens when you’re the top seller of smartphones in the United States. Wall Street wanted to see the company sell 55 million iPhones, so its four-million-unit miss was a disappointment.

What’s failing the company is its reluctance to sell a really cheap iPhone that caters to the emerging markets, which is, in reality, where much of the growth is for smartphones.

Apple has a deal with China Mobile Limited (NYSE/CHL) to mass market its phones in the massive Chinese market, where there are more than 750 million users. (Read “Apple Finally Takes Step That Will Take the Company to the Next Level.”) But while the deal was only recently formalized, the early indications are that sales of the iPhone in China aren’t all that great.

The problem is (as I have discussed on numerous occasions) Apple’s reluctance to sell a cheap iPhone. Price points are critical when selling products in the emerging markets, so the lack of a cheaper offering from the company will hurt its sales in China. China is not like America, Japan, or Europe as far as available discretionary income. When the per-capita income in China hovers around US$6,500 or so annually and Apple wants to charge $600.00-plus for an “iPhone 5S,” there’s clearly a disconnect.

CEO Tim Cook doesn’t seem to get it or it’s simply an … Read More

Time to Start Shifting Your Investment Strategy Overseas?

By for Profit Confidential

Time for Investors to Take Another Look at EuropeFrom what I’m seeing, Europe and the eurozone appear to be in play once again, following years of torment and two recessions.

While there’s still a ways to go, you should put Europe on your radar, since a buying opportunity appears to be here. Now don’t go full-tilt and empty your capital into Europe. Instead, with the U.S. stock market facing some upside resistance, you may want to shift some of your investable capital to other regions of the world, including Europe and China. (See “China’s Macau Gambling Region: The Growth Opportunity” to learn about a small region in China that has high hopes.)

Now, I have been negative on Europe for years, but I saw some encouraging signs in 2013 after the eurozone emerged from its second recession.

The big attraction in Europe is the 800 million people living in the region who are armed with money to spend, similar to our domestic economy. For companies, Europe is a region that appears set to rally and may be a buying opportunity.

Some may question the slow growth in this region, but I say it’s better to buy at a time of misfortune than when everyone wants in—and that time of misfortune appears to be now.

OK, we still have unemployment in the double digits in the eurozone, but the confidence levels of its citizens are also on the rise, and this is good news; this means consumers will start to spend more, helping to drive economic renewal and gross domestic product (GDP) growth.

Just take a look at the region’s recent economic readings.

The GDP in the … Read More

Long-Term Investors Shouldn’t Ignore This Key Financial Metric

By for Profit Confidential

recessionYou don’t often hear a lot about United Technologies Corporation (UTX) these days; it’s an old economy name that doesn’t seem to garner much attention from the media.

Nevertheless, the company that makes elevators, helicopters, airplane engines, and HVAC (heating, ventilation, and air conditioning) and fire/security systems continues to perform excellently. It’s a component of the Dow Jones Industrial Average, and the stock’s had an exceptional year. (See “The One Market Sector That’s Consistently Outperforming the Rest.”)

Approximately $17.0 billion of the company’s total sales in 2012 came from its “UTC Climate, Controls and Security” business. Next was “Pratt & Whitney” aircraft engines at $14.0 billion. “Otis” elevators and escalators brought in $12.0 billion in sales last year, followed by “UTC Aerospace Systems” at $8.3 billion and “Sikorsky” helicopters at $6.8 billion.

As a conglomerate with a strong constituent in aerospace, United Technologies has an excellent track record of increasing its dividends to stockholders.

 In 2012, the company increased its common share dividend by a total of 11.5%, representing its 76th consecutive year of paying dividends. According to the company, from fiscal year-end 2002 to year-end 2012, United Technologies delivered a 225% total return to shareholders, which is more than double the total return of the DOW or S&P 500.

In 2008, the company paid out $1.35 in total dividends per share. By the end of last year, that figure was $2.03 per share.

Of the company’s total sales, 40% are in the U.S. market, followed by 26% in Europe and 20% in the Asia Pacific region.

Since the recession, United Technologies’ sales, earnings, and earnings per share … Read More

What the Ice Cream Scooper Told Me in Venice

By for Profit Confidential

141113_PC_lombardiI’m blessed to be able to travel to Europe once or twice a year. I use the trips as an opportunity to see how the economies are faring over there. And I can tell you this first-hand: the economic situation in Europe is much worse than what we’re hearing from the mainstream media in the U.S. economy.

Here’s just one small story that paints the picture…

A couple of weeks back, while in Venice for four days, I walked into my favorite ice cream store for my daily fix of Italian ice cream. I’m chatty wherever I travel, as I want to get the locals talking so I learn what’s going on.

After engaging the store’s only employee in conversation (I’m fluent in Italian), the young man, who was between 25 and 30 years old and educated, told me how happy he was to have his job as an ice cream scooper at this particular location of a well-known chain of Italian ice cream stores. “Jobs in Italy are very hard to come by,” he told me.

But what he said next really got me thinking…

The ice cream scooper said he travels 65 kilometers (that’s about 40 miles) each way to and from work each day. He takes the train. Total travel time is four hours a day; two hours in the morning to get to work, and two hours at night to get home from work. Yes, four hours a day to travel to a job scooping ice cream for tourists.

When I asked him about getting a job closer to the town he lives in, he … Read More

Perfect Opportunity for Investors to Liquidate Some Positions?

By for Profit Confidential

Perfect Opportunity for InvestorsWhat the heck is with this stock market? The ability of the stock market to hold and avert a major correction over the past two weeks and then follow this with an upward move on the charts is a surprise—at least in my view it is, as it clearly shows the bullish bias controlling this stock market.

The NASDAQ and Russell 2000 are at new recent highs as the desire for growth by investors continues, which has largely been the story this year.

The S&P 500 is within striking range of its September record high.

The focus on the debt ceiling is important but also way overdone, in my opinion, given that we are in the midst of the third-quarter earnings season and, well, it has been subpar early on.

Yes, it’s still early in the earnings season, but I expect more subpar results. Of course, what I expect doesn’t matter—momentum and speculation are what drive this stock market.

So far, about six percent of S&P 500 companies have reported, and a dismal 55% of these companies have beaten estimates. That’s just not good. The results are also well below the historical average at just over 60%, and to make matters worse, the results were compared to estimates that were already lowered by Wall Street. Revenue growth is also lackluster, as I expected, which is not what we should be seeing with an upward-trending stock market.

The big banks reported decent results, but much of the easy money in this stock market sector has been made. The retail sector, which I view as critical due to its impact on … Read More

More Evidence Pointing to Manipulation in Gold Market?

By for Profit Confidential

gold bullionWhile I avidly follow the actions of central banks to see where the gold bullion prices may be headed next, when I look at them today, their actions are speaking louder than words.

Central banks have pretty much stopped selling gold bullion, which is very important. In 1999, a number of central banks in Europe formed an alliance and agreed that they would not sell more than 400 tonnes of gold bullion per year. The agreement was called the Central Bank Gold Agreement (CBGA). In 2004, the CBGA was renewed again; this time the limit was 500 tonnes. Once again, it was renewed for another five years in 2009, and the limit is back to the sale of no more than 400 tonnes of gold bullion per year.

The chart below shows how much gold bullion the central banks in Europe sold in each period of the CBGA. (Source: World Gold Council web site, last accessed October 11, 2013.)

Years

Sales in Tonnes

CBGA 1

1999-2004

2000

CBGA 2

2004- 2009

1884

CBGA 3*

2009-2014

200.3

* Sales are until 2013.

Notice anything different? The central banks in Europe have put the brakes on their sales of gold bullion. In fact, from September 27, 2012 to September 26, 2013, these central banks only sold 5.1 tonnes of gold bullion! This is hands down the lowest amount sold since the agreement started in 1999.

When it comes to stocks, if owners of a stock aren’t selling and there’s a significant number of buyers who want to buy, the price of the stock usually goes up as the simple rule of economics … Read More

My Bet: New Fed Chief Loves Printing Presses More Than the Last Guy

By for Profit Confidential

corporate earningsCompanies in key stock indices have started to report their corporate earnings for the third quarter of this year. Not surprising, they are weak and show signs of stress.

According to FactSet, up until October 4, 90 companies in key stock indices like the S&P 500 issued negative guidance about their third-quarter corporate earnings per share. This is the highest number of companies posting negative guidance since the research company started to track earnings guidance back in 2006. (Source: “Earnings Insight,” FactSet, October 4, 2013.)

The corporate earnings growth rate for the S&P 500 is expected to be about three percent in the third quarter, and just like the last quarter, once again, a significant portion of the boost in earnings will come from the financial sector. If you take the financial sector’s corporate earnings out of the equation, earnings growth rates drop down to about 1.7%. Take away all the stock buyback programs public companies have conducted this year, and the earnings growth picture gets really ugly.

I think the smart money is sensing companies are struggling to grow, so they are starting to pull money out of the market.

According to the Investment Company Institute, for the week ended September 25, the long-term U.S. stock mutual funds had a net outflow of $3.8 billion in capital. Similarly, for the week ended October 2, the net outflow continued and increased to $4.12 billion. (Source: Investment Company Institute, October 9, 2013.)

Key stock indices like the S&P 500, Dow Jones Industrial Average, and the NASDAQ have shed some gains recently; they are much lower than their all-time highs posted just … Read More

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