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

Posts Tagged ‘European Central Bank’

My Poor Italy

By for Profit Confidential

Why This Stock Market Will Fall Like a RockThis morning came the news that Italy, a country very close to my heart (just look at my last name) and the third-biggest economy in the eurozone, is back in recession.

And Germany, the biggest economy in Europe, saw factory orders in June drop by the most since 2011.

While the financial media has taken the focus off the eurozone over the past couple of years, I have continued to tell my readers about how bad conditions are there. I have the pleasure to travel to the eurozone several times a year. I can tell you first-hand how people there are suffering. Outside of Germany and the smaller, rich countries, jobs in the eurozone are extremely hard to find and wages are very soft.

The European Central Bank’s move to bringing its overnight deposit rate to negative is obviously not having its desired effect of getting banks there to lend out more money. Many eurozone banks are in serious financial trouble. You can’t force a bank to lend money to its customers if the bank is concerned about its own financial health.

With about half of the S&P 500 companies deriving revenue from Europe, it is no wonder American corporations are having trouble increasing revenue. Last week, the eurozone introduced wide-ranging sanctions against Russia because of the Ukraine situation. Russia is Germany’s largest trading partner in Europe—obviously, eurozone companies will feel the pain of the sanctions imposed on Russia.

In the U.S., we were already dealing with an overpriced stock market—a market characterized by heaving corporate insider selling, too much bullishness among stock advisors, the VIX Index saying investors … 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

Double Bottom in for Gold Prices?

By for Profit Confidential

Gold Bullion Fear Index CollapsesWhile the Federal Reserve has cut back on its money printing program, the fact of the matter is that the “official” U.S. national debt is closing in on $18.0 trillion. The unofficial national debt (when obligations like Social Security, Medicare, Medicaid, welfare, and now Obamacare are taken into consideration) is closer to $200 trillion.

The Japanese national debt just hit one quadrillion yuan.

Many countries in the eurozone are drowning under debt. The European Central Bank recently started talking about printing money to finally get the eurozone out of its mess.

All of this is very well-known to Profit Confidential readers.

Why do I bring this up again today? I’m back focusing on debt because it is becoming more and more apparent that the only way to reduce the record national debt many industrialized countries have accumulated since the Credit Crisis of 2008 is to print even more money.

And the collapse in the volatility of gold bullion prices could be pointing to just that. To see what I’m talking about, take a look at this chart:

Volatility Index - CBOE Gold INDX ChartChart courtesy of www.StockCharts.com

In April of 2013, when the sharp decline in gold bullion prices began, volatility for gold prices was very high. Since then, the volatility index for gold, an index that essentially gauges investors’ fear factor for gold bullion prices, has collapsed.

And when we look at the price chart of gold bullion (see next chart below), we see strong support for the metal just below the $1,200-an-ounce level. This level has been tested twice and on both occasions, gold failed to fall below $1,200. In technical analysis, this is … Read More

The Biggest Race to Print Paper Money in History?

By for Profit Confidential

270813_PC_lombardiMany central banks within the global economy are involved in printing more of their paper money (often referred to as “fiat” currencies). There’s a race to devalue currencies in hopes to revive economies and maintain a competitive stance. Countries believe that by printing more of their fiat currency, they can improve their exports to the global economy, because the goods will be cheaper for those countries that have a stronger currency.

Recently, we heard from the central bank of Brazil that it will commence a program “with the aim of providing FX ‘hedge’ (protection) to the economic agents and liquidity to the FX market…” (Source: Banco Central Do Brasil, August 22, 2013.) In simple words: Brazil’s central bank is going to make sure the country’s currency stays low compared to the currencies of its trading partners.

Through this program, the central bank plans to sell US$500 million on Mondays, Tuesdays, Wednesdays, and Thursdays of every week. This intervention is expected to last until the end of this year, but the central bank also made it very clear that it will continue with its plan as long as necessary.

Similarly, Columbia’s central bank is taking steps to lower the value of its currency. It has bought significant amounts of U.S. dollars and printed pesos. The finance minister of the country, who also represents the government on the central bank’s board, stated that the government wants to keep the country’s currency value between 1,900 and 1,950 pesos per U.S. dollar. (Source: Reuters, August 20, 2013.)

Our own central bank, the Federal Reserve, has been putting pressures on the U.S. dollar. Though we … Read More

If the Shanghai Composite Index Is a Leading Indicator, Watch Out!

By for Profit Confidential

Is a Leading Indicator Watch OutExport-oriented provinces in the Chinese economy have turned pessimistic and anticipate exports will only grow at the rate of five percent this year. In 2012, they targeted an export growth rate of eight percent to 10%.

What’s troublesome about this is that exports from the Chinese economy account for 20% of the country’s gross domestic product (GDP). This means that, if exports from China to other countries decline, the Chinese economy will suffer an economic slowdown. (Source: Epoch Times, February 7, 2013.)

The Chinese economy has become fragile due to the economic slowdown in the global economy. Its biggest trading partner, the eurozone, is still suffering, while other areas have anemic demand.

As export volume falls in China, it is creating trouble for China’s manufacturing sector. The Chinese Purchasing Managers’ Index (PMI) declined to 50.4 in January from 50.6 in December of 2012. (Source: National Bureau of Statistics of China, February 1, 2013.) A reading above 50 means expansion in manufacturing, while a reading below 50 means contraction. January’s reading is not far from the pivot point into manufacturing contraction.

Getting a read on the Chinese economy is not that easy. Some say statistics out of China are not that reliable. But here is the official word from the Chinese government: in the third quarter of 2012, GDP in the Chinese economy rose 7.4% from a year earlier—the slowest growth rate in three years. (Source: China Daily, December 30, 2012.)

While time and more data will make the picture clearer, with Chinese exports stumbling, a contraction in manufacturing activity could be next for the Chinese economy.

And it’s … Read More

No Quick Fix for Eurozone; a More Difficult Road Ahead

By for Profit Confidential

The eurozone credit crisis is taking center stage once again. As I have been saying in these pages, it is far from over, even though the European Central Bank (ECB) has announced that it will do “whatever it takes” to save the eurozone. Economic conditions in the region are still deteriorating.

The debt-infested countries in the eurozone are reaching their lows with widespread economic slowdown, but I am more concerned that the stronger nations are starting to show signs of struggle as well.

France, the second biggest economic hub in the region, is in a period of next to no growth. The country’s unemployment is higher than 10% and increasing. The International Monetary Fund (IMF) expects growth between 0.3% and 0.4% for the French economy this year. (Source: Wall Street Journal, February 12, 2013.)

In the fourth quarter of 2012, the eurozone countries saw the steepest quarterly decline in industrial production in more than three years. Industrial production in the eurozone declined 2.4% in the fourth quarter, compared to a meager increase of 0.2% in the third quarter—the sharpest decline since the first quarter of 2009. (Source: Wall Street Journal, February 13, 2013.)

Looking ahead, it seems the credit crisis in the region is there to stay. According to a study conducted by Ernst & Young, banks in the eurozone have a massive amount of bad loans sitting on their books. The auditing firm estimated that these bad loans make up a grand total of $1.23 trillion, or 7.6% of all the loans issued in the region. (Source: Deutsche Welle, February 11, 2013.)

Dear reader; the truth … Read More

The Municipal Bond Threat: Another Reason Money Printing Can’t Stop Anytime Soon

By for Profit Confidential

Money Printing Can’t Stop Anytime SoonBefore I get into my rant today about the troubled municipal bond market, first I have to say that I just couldn’t believe it when I saw this cross the newswire yesterday:

On Wednesday, January 23, 2013, Congress voted to “temporarily” do away with the U.S. government’s debt ceiling. Once the Senate passes the measure and the President signs it, there will be no limit on the amount of money the government can borrow.

At this point, I’m thinking everyone in Washington has gone mad. How can you give the government unlimited borrowing power? The race to a $20.0-trillion national debt and a debt-to-GDP multiple of 125%—we’ll get there a lot quicker now!

Back to today’s story…

Municipal bonds investors beware!

Gone are the days when municipal bonds were the “best investment.” Some may still argue that they provide tax breaks, but today the risks of holding them are piling up.

Cities across the U.S. are experiencing budget deficit problems. As budget deficits increase, the ability of cities and municipalities to pay their creditors decreases. A number of municipalities filed for bankruptcy last year, because they accumulated too much debt under their budget deficits—and defaulted on the payment of the municipal bonds they issued.

As we enter 2013, the epidemic of increasing budget deficits could make 2012 look like the tip of the iceberg!

Syracuse, New York, is estimated to have a budget deficit of $25.0 million this year. The city’s pension costs have increased 40% in one year and healthcare costs are rising at nine percent on a per-year basis. (Source: The Post-Standard, January 17, 2013.)

Cities and … Read More

Why Greece’s Depression Could Lead to a Global Recession

By for Profit Confidential

While the eurozone crisis is not front-page news like it used to be about a year ago, I see economic conditions in the eurozone actually getting worse. The economic slowdown in the region is becoming more severe as the days pass—even with the European Central Bank announcing it will do “whatever it takes” to save the eurozone.

In a recent review; the International Monetary Fund (IMF) said it expects Greece to require more help from its eurozone peers. It believes that all the measures taken by the eurozone nations since the troubles in Greece began aren’t enough to bring its debt to a sustainable level. The IMF predicts Greece will require another 5.5 billion euros to 9.5 billion euros from 2015 to 2016 to bring down its debt to a sustainable level. (Source: Wall Street Journal, January 18, 2013.)

I don’t really have to go into much detail about how bad the economic slowdown in Greece really is. Greece is in a depression.

To add to the misery, Spain, the fourth biggest economy in the eurozone, isn’t taking a break from its credit crisis, as its economic slowdown is deepening. The default rate on loans made to Spanish companies increased to 17% in the third quarter of 2012. Spain’s economy is expected to contract another 1.5% this year after shrinking 1.4% in 2012. (Source: Bloomberg, January 21, 2013.)

Meanwhile, Portugal and Ireland are pleading with their eurozone peers to extend their debt repayment schedule to the longest terms available. My take on the request? These two countries are probably running out of money again. The Bank of Portugal … Read More

Why U.S. Dollar’s Continued Fall Is Written in Stone

By for Profit Confidential

Written in StoneWhen the U.S. economy was on the verge of collapse after the financial crisis of 2008, the Federal Reserve came to the rescue. The central bank provided the financial system with quantitative easing—it printed money and bought bad debt from the big banks.

Today, the Federal Reserve will meet and discuss the further purchase of bad debt from the big banks or some other form of monetary stimulus. To me, it won’t be a surprise to see it “add” to its balance sheet with more money creation. The Federal Reserve already announced three rounds of quantitative easing; I highly doubt it will be shy to announce more.

What is troublesome to me is the speed at which the Federal Reserve is building its balance sheet. In January of 2008, the Federal Reserve had total assets of $927 billion—before quantitative easing and other stimulus poured into the markets. (Source: Federal Reserve, January 3, 2008.) Now, the same balance sheet stands at $2.9 trillion. (Source: Federal Reserve, December 6, 2012.)

The Federal Reserve’s balance sheet has grown by almost $2.0 trillion—200% in less than five years all from money created out of thin air!

One goal of the Federal Reserve was to buy mortgage-backed securities to stimulate the economy, and then to start selling the mortgage-backed securities back into the market in mid-2015. (Source: Bloomberg, December 7, 2012.) This way the central bank is not stuck with these securities while it gets back to its “pre-crisis balance sheet.” I wonder if we will ever really see this happen.

My concern? Quantitative easing has caused the U.S. dollar to decline steadily. Like everything … Read More

Who’s Next to Fall into Recession: Germany, France, or Austria? You Pick

By for Profit Confidential

Newsflash: the central bank of Germany, the Bundesbank, is raising red flags about the growth of the German economy. The bank expects Germany’s gross domestic product (GDP) to only grow at 0.4% in 2013, compared to a previously forecasted 1.6% in only June of this year.

Similarly, another eurozone country, Austria, slashed its forecast for the next year. Austria’s central bank now predicts its economy will only grow at the pace of 0.5% next year, much lower than the bank’s previous forecast of 1.7%.

I really don’t have to go into details about how badly the other debt-infested eurozone countries are performing. These pages are often filled with that. What I want to say today is that the entire region is deteriorating quickly, and the dynamics of the next recession there are going to be much different than in 2008.

The stronger nations in the eurozone are starting to suffer. And it’s not only Germany and Austria slashing their GDP growth targets.

France, the second-biggest economy in the eurozone, narrowly by-passed a recession in the third quarter of 2012, when its GDP growth fell to 0.2%. (Source: Associated Press, November 15, 2012.) Going forward, the French government is skeptical about economic growth prospects.

While the media is fixated in North America on the pending fiscal cliff, the picture developing in the eurozone is alarming. The region’s governments simply have too much debt and do not have enough tax revenue coming in. The European Central Bank (ECB) wants to take the same approach to avert the crisis as the Federal Reserve took here in the U.S.—and we all know how well … Read More

Poor Italy Can’t Get a Break: Another Change of Government at Hand?

By for Profit Confidential

This morning there’s news that Italy’s Prime Minister Mario Monti could be out and former Prime Minister Silvio Berlusconi back in, clouding the future of the eurozone’s third largest economy. With politics at play in many troubled eurozone countries, and as I have been harping on in these pages; the eurozone sovereign debt crisis is far from over and it will be a very long time before we see any economic growth in the region—continued recessions are more likely.

In the U.S., after the financial crisis hit, the idea was to expand the money supply aggressively and force lending so citizens could consume more goods and services, causing a return to economic growth. Similar steps were followed in the eurozone, but to a much lesser degree, as Germany opposes outright money printing.

While not at the pace of the Federal Reserve multi-quantitative easing programs, the European Central Bank (ECB) did manage to pump cash into the financial system and lower interest rates. Since October of 2008, ECB’s official interest rate in the eurozone has fallen from 3.75% to the current 0.75%. (Source: European Central Bank, Accessed December 6, 2012.) And when the sovereign debt crisis was at its peak, banks in the eurozone region borrowed 1.3 trillion euros from the ECB. (Source: Wall Street Journal, December 4, 2012.)

The ECB wants lending to increase in the region. It wants banks, big or small, to loosen their purse strings and loan money out to business and consumers. Unfortunately, this hasn’t happened. According to the ECB, loans to the private sector in the eurozone fell 0.7% in October, continuing their decline … Read More

Auto Loans: Next Bubble to Burst?

By for Profit Confidential

Next Bubble to BurstAuto sales data just released for the month of November have caught my eye. Auto sales in the U.S. economy have increased to a level similar to the level in January 2008—15% in November 2012 from November of 2011. Car sales are now running at the annualized rate of 15.5 million vehicles. (Source: Associated Press, December 4, 2012.)

On the surface, sounds like great news for the U.S. economy. Consumers are spending money on vehicles again. For some it provides a good gauge of consumer spending in the U.S. economy, but for me these data are not good. Why? Because auto loans are out of control.

Outstanding auto loans in the U.S. economy sit at $768 billion and have been increasing for the last six consecutive quarters. In the third quarter of 2012, auto loans debt in the U.S. economy increased by $18.0 billion. (Source: Federal Reserve, November 27, 2012.)

The news of auto loans rising is welcome, especially for an economist like me who has often complained that banks are making credit difficult for consumers in the U.S. economy. But what is very troublesome is that the delinquency rate on those auto loans has risen significantly.

From the second quarter to the third quarter of 2012, 38 states in the U.S. economy have reported increases in their auto loan delinquency rate. Over all, we when take into account all the states, the delinquency rate on the auto loans increased 15.2% in the third quarter from the second quarter of 2012. (Source: TransUnion, November 27, 2012.)

Another reason to be worried: 32.8% of all new auto loans issued in the … Read More

Uncertainty, Demand and Currency Debasement to Push Gold Prices Even Higher

By for Profit Confidential

I was recently talking to a friend of mine who considers himself a gold bear, somewhat of a rarity amongst my contemporaries. He believes gold prices are in a bubble and they will come crashing down, causing a lot of people to lose their wealth. He also added: “It’s just a metal, and no one can really use it.”

You know my take on gold; I think exactly the opposite. Gold has a history of being money—it has been a store of value and a unit of transfer for longer than the fiat currency created by central banks. Sadly, my friend listens to the mainstream gurus who only speak one side of the story.

Since the financial collapse in 2008, gold has become the only savior. Sure, the stock market has increased since 2009, but ask those people who bought in before the market collapsed and never sold about the stock market. I am sure they will disagree with the claim. The Dow Jones Industrial Average and other key indices are still trading below where they were before the financial collapse started.

Yes, gold is gaining a lot of attention, but it is nowhere close to being considered as being in bubble status. A commodity, stock, or anything is usually in a bubble when the vast majority of people you speak to are in the game. Think about the tech bubble of the late 1990s or the real estate bubble of 2005–2006. Right now, few people are talking about gold as an investment; and if they are, I hear more people talking about being against gold than about buying it…. Read More

After a Terrible Q3 Earnings Season, Big
Companies Have to Deal with This

By for Profit Confidential

Q3 Earnings SeasonIf we had any hopes about the corporate earnings of big-cap companies improving, those hopes are close to being thrown out the window now. The most basic calculation of profit includes two factors: sales and costs. If costs increase, then corporate earnings suffer. If sales decrease, corporate earnings suffer again.

At this point, we know that third-quarter corporate earnings at big-cap companies were hit by softened revenues due to slowing demand from their customers and the uncertainty of the global economy.

Now big companies face another issue that could take their corporate earnings even lower.

Import prices in the U.S. economy have been increasing for three consecutive months. In October, there was an increase of 0.5%. September and August witnessed an increase of 1.1% and 1.2%, respectively. (Source: Bureau of Labor Statistics, November 9, 2012.) The average import-price increase per month since 1990 has been 0.2%. August, September and October 2012 all showed that import prices increased by much more than the average.

These price increases mean that corporate earnings of big-cap companies that rely on imports are going to suffer. Third-quarter profits were blamed on slowing demand, but I believe fourth-quarter corporate earnings will also be pressured due to rising prices.

The main culprit for all these increases is the falling U.S. dollar, as it significantly affects commodities prices. But I’m not going to discuss that much. All I have to say is: look at the chart below of the U.S. Dollar Index. The Index has sunk more than three percent from the beginning of August to now. In the same period, import prices have increased 2.8%.

usd stock market chart

Chart courtesy Read More

Two Largest Eurozone Countries Now Also Under Pressure

By for Profit Confidential

The ripple effects of the eurozone crisis are spreading across the region, and countries are witnessing severe economic slowdown. No, it’s not Greece, Spain, Portugal, or Italy alone; this time around, it’s Germany and France—two of the biggest and the strongest economic powers in the region—that are seeing their economies come under pressure.

The unemployment rate in the eurozone has reached its highest level ever—11.6% in September 2012, up from 11.5% in August. A total of 18.5 million people in the eurozone are unemployed. (Source: Eurostat, October 31, 2012.)

Though Germany’s unemployment rate is much better than the troubled eurozone nations, the country is going through an economic slowdown of its own.

One-third of Germany’s gross domestic product (GDP) comes from industrial production. In September, manufacturing in Germany fell by 1.8 %—the sharpest decline since April. To add further worries, industrial orders fell 3.3% in September from August, while the production of capital goods and intermediate goods fell by 3.5% and 2.2%, respectively, in the same period. (Source: Reuters, November 7, 2012.)

Similarly, France, the second-largest economy in the eurozone after Germany, is witnessing an accelerating economic slowdown. Industrial production fell 2.7% in France. from August to September. This was the steepest drop since January of 2009. (Source: Bloomberg, November 7, 2012.)

The Bank of France has announced that the country may see a contraction in the fourth quarter of this year. It was only three years ago that France struggled out of a recession. The country’s unemployment rate has reached a 13-year high, and the economic slowdown is deepening.

Now for the real question: where are we headed next … Read More

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