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

Posts Tagged ‘european economy’

April 2012 Devastating for Retailers

By for Profit Confidential

consumer confidenceJust how bad is it getting out there?

There is no question that the U.S. east coast just experienced the warmest winter in decades. And, as a result, shoppers who were normally held back by cold weather were free to visit their favorite local store to shop and the retail sector welcomed them with open arms.

As strong retail sales—when compared to the previous year when we actually had a winter—rolled in during January, February and March of this year, some were claiming that this was proof of consumer confidence…that the economic recovery finally had some traction…that the retail sector looked great.

That theory hit a roadblock this past April. The retail sector missed sales estimates for the first time in five months this April (source: Reuters, May 3, 2012).

Also in April, McDonald’s Corporation (NYSE/MCD), the world’s largest fast food chain, came in with weaker than expected same-stores sales. The company says the weak sales reflect a difficult economic environment with challenged consumer confidence.

In Europe, Germany was supposed to have escaped recession…

But retail sales in Germany fell at the fastest rate in April in over 18 months (source: Markit Economics, April 27, 2012). Operating margins were under pressure in the retail sector and retailers felt they needed to provide deep discounts to get sales going. Not a good sign of consumer confidence in Germany.

In France, retail sales plunged to their lowest level on record in April (they started keeping records only in 2004). Oddly enough, this was the biggest falloff in 18 months and the retail sector in France had to discount, which squeezed margins; … Read More

Social Government in France: A Wrench in the Plans

By for Profit Confidential

Germany has lost its dance partner…

Francois Hollande is France’s first elected socialist president in 17 years. He has stated that he will reduce the government’s budget deficit while increasing taxes and increasing spending. He believes he can eliminate the budget deficit by 2017.

Just the kind of guy France needs…

Because of the European economy’s recession, France’s budget deficit is already worse than it was a year ago because of lower tax revenue. Hollande wants to spend €20 billion to get the economy going, lower the retirement age back to 60, and raise taxes on businesses and the rich.

The problem is that Hollande doesn’t spell out how France is going to pay for this spending and how he will be able to increase spending and reduce the budget deficit at the same time.

Let’s get real…

The wealthy and corporations in France are going to have little incentive to invest and create jobs if they know their tax rates are going to rise. Their profit margins are going to be squeezed by higher taxes.

These “disincentives” to business come at the worst possible time for France, which needs to create jobs in order to grow with the European economy’s recession hanging over them.

Hollande wants to meet with the Chancellor of Germany, Angela Merkel, to ratify the European fiscal pact, which focuses on austerity measures and reducing budget deficits through fiscal discipline. (I’m sure Merkel can’t wait to have a serious discussion with France’s new leader.) Hollande has explicitly said he will not go along with the fiscal pact of reducing budget deficits unless there are growth provisions … Read More

Quarterly Earnings Shocker from a High-tech Leader

By for Profit Confidential

Quarterly Earnings Shocker from a High-tech LeaderWe just had a buffet of quarterly earnings releases from some of the largest technology firms: Google Inc. (NASDAQ/GOOG); Microsoft Corporation (NASDAQ/MSFT); Intel Corporation (NASDAQ/INTC); and International Business Machines Corporation (NYSE/IBM).

Following the release, three out of the four firms’ stocks were up. Would you be surprised to learn that it was Google that disappointed investors with their quarterly earnings release? Investors have sold the stock hard; now down over $50.00, or 7.8%? Obviously, Google is an outstanding company with innovative products and a huge market lead in many sectors. What I find interesting is that, since the rise of Google, all we’ve heard is how you should replace “old” technology firms in your portfolio with the “new” high-tech firms as the prime investment strategy. This recent quarterly earnings release is a sign that even the best and brightest of new technology companies have a few lessons to learn from the old, blue-chip high-techs.

To start, Google actually had pretty good numbers in its quarterly earnings, with revenue rising 25% to $10.5 billion. The real problems are: Google’s ability to communicate with investors what the future plans will be regarding its investment strategy; how will the firm monetize some of its assets; and the European economy.

Part of the job for the executives of any organization is to let investors know what their investment strategy and guiding future expectations are with a solid business plan. While Google’s CEO Larry Page has tried to alleviate investor concerns, a drop of over seven percent immediately after the quarterly earnings release obviously shows there was a disconnect between what investors believed they … Read More

Two Major Eurozone Countries to Fall Back into Recession in 2012

By for Profit Confidential

Two big eurozone countries are headed back to recession this year.

Spain, the eurozone’s fourth largest economy, will fall back into recession in early 2012, according to a statement made by its Economy Minister.Spainhas the highest unemployment rate in the eurozone at a staggering 21.5%.Spainand its citizens are in real trouble.

Italy, the third largest eurozone economy, will also be technically in a recession in the first half of 2012. Italian consumer confidence sits at its lowest level in 16 years. We can see this in retail sales, which were at a 10-year low this holiday season (source: Codacons web site).Italyand its citizens are in real trouble.

Dear reader, I’m sure you’ve heard enough about woes in the eurozone in 2011. But here’s why it’s important to us here inNorth America:

Firstly,ItalyandSpainare respectively the third and fourth largest economies in the eurozone. These economies cannot fall back into recession without affecting the other 17 member countries. The biggest risk (a country that could fall back into recession as well) I believe is France, the second largest eurozone member.

Secondly, banks in the United Stateshave major exposure to eurozone countries. Hence, the risks that weak, or defaulting, eurozone countries represent are high for large American banks. Between the eurozone exposure andU.S. residential real estate bust, it’s no wonder to me that the stock prices of big American banks have yet to recover.

Thirdly, while there has been plenty of talk regarding fixing the eurozone countries with the largest debt exposure, there has been no execution.Germanycontinues to balk at idea of the European Central Bank (ECB) printing more money. (Our central bank; … Read More

Will This Be Lucky Year Number 12?

By for Profit Confidential

The year 2011 marked the 11th consecutive year that gold bullion prices closed the year higher than they started. Here’s the closing price for gold bullion each year since 2000:

2000 – $273.00      2006 – $638.00
2001 – $279.00      2007 – $838.00
2002 – $348.00      2008 – $884.00
2003 – $416.00      2009 – $1,092
2004 – $438.00      2010 – $1,405
2005 – $520.00      2011 – $1,530

To answer the question, “Will 2012 be another up year for gold?” (I tell you right now it will), we need to understand why gold bullion rises in price.

Historically, gold bullion prices have risen for three reasons:

1) as a store of wealth during times of questionable fiat (paper) money;

2) as an inflation hedge; and

3) as a commodity (jewelry).

Let’s work backwards. India has over taken China as the world’s biggest consumer of gold jewelry. I was in India this summer. People in that country love gold. Those who can afford it, flaunt it. With India’s economy close to booming, as more people enter the middle class in India, demand for gold jewelry will rise in India, pushing gold bullion prices higher.

Looking at inflation, I have written many times in 2011 that I believe rapid inflation will become an end result of the Federal Reserve’s expansive monetary policy. If the Fed keeps short-term interest rates near zero until mid-2013, like it has said it will, interest rates will have been at near zero for five years. In American history, we’ve never had a period of zero interest rates for five years.

And this brings me to the third reason gold … Read More

Stock Market: What Could Jump
Start a New Short-term Trend

By for Profit Confidential

If the U.S. stock market is going to advance in any meaningful way, then it’s going to have to do so based on domestic economic news, to the exclusion of what’s happening in Europe and China. The eurozone debt crisis is a very real risk to the global economy and so is China’s declining economic news, but, at the end of the day, the only way the U.S. stock market is going to go up is because of domestic fundamentals.

The stock market’s been looking for a reason to go up and, while some economic news lately reveals a positive trend, the numbers still reveal much lower-than-usual levels of business activity. It’s going to take a number of quarters yet for the real estate market and employment to balance themselves out. But even so, any uptick in economic news will move share prices markedly higher—institutional investors are chomping at the bit. (See If Europe’s Fixed, Stocks Should Resume Their Upward Trend)

Trading action now is also accentuated by relatively low volume, which always occurs around the end of the year. There’s also a fair amount of portfolio posturing that takes place among institutional investors and this has a tendency to skew share prices. You can expect big price swings over the next few weeks.

A key point in my mind is 1,200 on the S&P 500 Index. If this main stock market index can keep above this level, then I would say it is holding up quite well all things considered. The sentiment is there for rising share prices and what this market really needs is more economic … Read More

Steep Bets Against Euro May Backfire

By for Profit Confidential

When everyone is on the bandwagon, that’s the time to get off… According to a report from the CFTC, short positions against the euro were at net $14.4 billion in the third week of November—a 17-month high. Seems everyone is betting against the eurozone and, with such a heavy consensus trade, I wouldn’t be surprised to see the trade—short euros against the U.S. dollar—backfire.

Europe’s Debt Crisis Continues to Pound Domestic Investor Sentiment—Who Has the Power Now?

By for Profit Confidential

It’s not a good situation to have your own domestic investor sentiment strongly influenced by the reality in an economy that’s far away. The U.S. stock market is at the point now where it could be making real gains based on its own solid corporate fundamentals.The debt crisis in Europe continues to be a thorn in the side of domestic stock market investors and, to be very frank, the richer European countries are getting fed up with the less well managed countries that created the debt crisis on their own. From my perspective, I think that U.S. institutional stock market investors are attributing too much credence to Europe’s story—it’s a debt crisis that only Europeans can fix.

Nowadays, of course, financial markets trade on global news and sentiments and, because the American economy has been on the rails, institutional investors are now trading off of economic news from the debt crisis in Europe and China to a lesser extent.

Similar to the subprime mortgage crisis, the debt crisis in Europe is all about a lack of leadership from politicians. The party’s been going on for so long that no policymaker has had the strength to challenge the status quo with a real double-take on how poorly things have being run. Stock market risk in the U.S. is very high at this time because of the failure of European leaders to deal with a sovereign debt crisis that involves many of their member economies. Add in the fact that only a few euro member countries can be considered “wealthy” and an easygoing attitude towards entrepreneurship, worker productivity, and lifestyle; it’s not that hard to envision many of these countries spending beyond their means. Especially in the case of Greece, where not everyone pays their income taxes. (See The Cycle of Debt Must Be Broken for the Whole System to Correct Itself.)

So it’s a real … Read More

Reduced Expectations & Consolidating Capital Markets—the Mediocrity Remains

By for Profit Confidential

Investment guidance is going down at this time and it’s certainly a reflection of slower economic growth at home and abroad. While China still remains a powerhouse emerging market, its monetary policy to slow down the economy is working. Investment guidance from domestic corporations that have reported so far in this third-quarter earnings season is mirroring what Wall Street has been doing—revising 2012 earnings guidance a little bit lower. While the current state of things remains very fragile, the stock market hasn’t broken down. The main stock market averages have experienced a meaningful correction and they are trading range-bound. You can see this quite easily in the S&P 500 Index, but also the Dow Jones Transportation Index, which remains one of the key indicators for the broader market. It’s very difficult for the rest of the stock market to advance without transportation stocks leading the way.

The Correction Within the Current Bear
Market Rally: Will It End Soon?

By for Profit Confidential

And so the S&P 500 Index is trading right around a key resistance level of 1,220 and, if it can prove to hold above this level, this could be the breakout the market’s been needing. It’s been a tough go for the stock market over the last several weeks and we’re due for a little upside.

Europe in Limbo as Asian Fear Rises

By for Profit Confidential

While Europe tries to sort out its mess, which could take some time, there are also issues in Asia. Any major issue there could devastate global stock markets.The situation in Europe continues to focus on the debt and growth, along with the funding. And, until it calms down in Europe, markets will likely remain shaky on this side of the Atlantic.

There is talk that Greece may need to leave the European Union due to its failure to satisfy financial targets set in place as a condition for receiving emergency capital from its European neighbors. I thought this could be a possibility given that I did not believe that the stronger nations of Germany and France would want to continue to fund the poor countries. The reality is that growth in both Germany and France has suffered with the focus squarely on saving the PIGS (Portugal, Ireland, Greece, and Spain).

In my global economic analysis, this trend cannot continue much longer or Europe will falter and fall into a deeper or new recession. The problem is that ousting Greece would not be viewed as a positive signal to the rest of the world, as it could signal a domino effect that could lead to other countries also leaving, which is not what you want to see.

The European Central Bank (ECB) maintained its benchmark lending rates at 1.50% at the Thursday meeting. But the situation is cloudy in the eurozone, after the ECB cut its gross domestic product (GDP) growth forecast. Of course, this is not a surprise given the recent downgrades in Europe.

Morgan Stanley cut its global GDP forecasts for 2011 and 2012 and added that the U.S. and the eurozone were “dangerously close to a recession.”

UBS and Citigroup cut the forecast for global … Read More

Don’t Just Look to Europe; U.S. Has Its Own Issues

By for Profit Confidential

Stock markets are battling negative sentiment here. The situation was helped by the crisis in Europe, but you cannot just blame the Europeans, as there is a financial mess of our own here.We have the PIGS (Portugal, Ireland, Greece, and Spain) battling with debt issues in Europe. Spain is not fully there yet, but may inevitably need to find money. These countries are referred to as the PIGS because of their need for financial help.

Stock markets are battling negative sentiment here. The situation was helped by the crisis in Europe, but my economic analysis is that you cannot blame the Europeans, as there is a financial mess of our own here.

The key stock indices are languishing below their respective 50-day moving average (MA) and 200-day MA. The near-term technical picture is bearish and is dangerous at this time without any base or support.

A debt resolution was approved by the Senate and White House. The deal calls for a $2.1-trillion increase in the debt ceiling to around $16.4 trillion, which will allow the country to pay its debt obligations and spend. First of all, this is just adding to a massive debt load. In return, there will be spending cuts of about $2.4 trillion; but over a 10-year period!

The debt increase is not what we needed, but was essential. The government will need to focus on the cost side and implement its own austerity programs with discipline in order to cut the deficit and begin to work to bring down the massive $14.6-trillion national debt. It’s scary looking at the debt load and watching the mounting interest payments.

And in a “what if” scenario, can you imagine the impact of higher interest rates? It would make interest payments much higher and make it that much more difficult to reduce … Read More

How European Debt Fears May Spread

By for Profit Confidential

First it was Greece, then Ireland, followed by Portugal. These countries are suffering from severe debt loads (sound familiar?), are unable to pay the interest, and are potentially defaulting. And the trouble in the eurozone is far from over. What this means for Europe and the rest of the world, including the U.S.First it was Greece, then Ireland, followed by Portugal. These countries are suffering from severe debt loads (sound familiar?), are unable to pay the interest, and are potentially defaulting.

Greece recently agreed to a new five-year austerity program in order to receive more funds to repay its initial emergency loan. The country will have to cut spending and sell off government businesses in order to raise money, but it will be a difficult path and messy.

While Portugal is not a significant player in the European Union, weakness there could impact other countries, including neighbor Spain, which also needs to raise more capital. The problem is that Spain is a major global player, with its economy the ninth largest in the world.

But the trouble in the eurozone is far from over and may in fact just be beginning. In the worst-case scenario, it could spread like a wild fire across to other regions in Europe.

The yield required from debt instruments in Spain and Italy is on the rise, as fears mount that these two countries may also soon need financial relief. Italy just saw its debt cut. Unlike Greece, Ireland, and Portugal, my concern is that Spain and Italy are the third and fourth largest economies in the Eurozone and problems here could be devastating to not only the rest of Europe, but globally as well—in Asia and the United States.

Italy is facing problems dealing with its $1.4-trillion debt and may be the next European Union country to seek financial help, but Portugal may need a second round of financing. Portugal recently saw its debt cut to … Read More

And the Next Country to Fall
in Europe Will Be…

By for Profit Confidential

I have to tell you, I thought it would be Spain. My thinking of the order in which the sovereign debt crisis would engulf Europe was first Greece, then Spain, then Italy.

But it looks like I was wrong. Italy, home of my favorite Italian wine, is next.

U.S. Treasuries: Only Fools Rush in

By for Profit Confidential

It all started back in April, when Standard & Poor’s warned that its AAA credit rating for the U.S. would be at risk unless the U.S. government came up with a plan to reduce the national debt and the annual budget deficit.

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