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

Posts Tagged ‘financial crisis’

Stock Market Setting Up for Extended Break?

By for Profit Confidential

Soft Q1 Suggesting Market Set for Extended BreakThe S&P 500 index really hasn’t done much since the beginning of the year but churn…but then again, why shouldn’t it?

For stocks, 2013 was an exceptional year. If we get another positive year on top of dividends, then it’s total gravy.

The capital gains over the last several years have been highly unusual, representative of the gains often seen after a major financial crisis.

There are no bandwagons to jump on in this stock market. Investor sentiment finally had a bit of an awakening over the last several weeks. Big investors booked some profits after the big price recovery in February, which occurred because of verbal reassurances by the new Fed chair, Janet Yellen. If there wasn’t further hand-holding from the Fed, stocks likely would have continued January’s sell-off into a full-blown correction, helped by events in Ukraine.

I’m of the mind that the stock market may take an extended break over the next two quarters, as it’s so often done in the past—probably more of a price consolidation over a correction; top-line growth is still pretty modest.

I’m still a big fan of dividend income and also a higher weighting given to cash within a portfolio context. Very little stands out in this stock market as an exceptional buy. There are some exciting innovations in the marketplace, but valuations for many of these stocks are still way off the charts.

Precious metals continue to prove themselves as an unreliable asset class. Spot prices are stuck and all-sustaining mining costs per ounce are still going up. It’s a tough road ahead for precious metals stocks.

But this is … Read More

Markets Asking a Lot from Blue Chips; Can They Deliver?

By for Profit Confidential

Wall Street Earnings are beginning to roll in and quite a few companies are missing Wall Street consensus.

This doesn’t mean, however, that there isn’t growth out there; only that estimates have so far been a little optimistic.

CarMax, Inc. (KMX) is a well-known used-car dealer. The company’s latest numbers were decent, but they came in below what Wall Street was looking for.

Fiscal fourth-quarter sales grew nine percent to $3.08 billion, which is pretty good. Comparable store unit sales grew seven percent in the fourth quarter and 12% year-over-year.

The company had to correct some accounting procedures related to extended service plans and warranties, and it took a hit on earnings because of this.

CarMax is buying back its own stock and just authorized another $1.0-billion repurchase plan that expires at the end of the 2015 calendar year. The stock only dropped marginally on the news.

Another company that missed consensus but is very much a growing enterprise is AZZ Incorporated (AZZ) out of Fort Worth, Texas. We looked at this company last year. (See “Things Are Looking Up! Let’s Hope They Don’t Wreck It.”)

This is a good business. The company manufactures electrical equipment and components for power generation and transmission. Management recently said that business conditions are improving and new quoting activity is noticeably stronger.

Fiscal 2014 fourth-quarter revenues came in at $180 million, compared to $140 million in the fourth quarter of 2013. Earnings were $10.2 million, or $0.40 per diluted share, compared to earnings of $13.2 million, or $0.52 per diluted share.

While the company actually missed Wall Street consensus earnings by $0.02 a share … Read More

Why the Fed Will Have to Get Back into the Paper Money Printing Business Soon

By for Profit Confidential

U.S. Economic GrowthIn the early days of the 2008 financial crisis, the Federal Reserve said, “Job losses, declining equity and housing wealth and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.” (Source: Federal Reserve, March 18, 2008.) As a result of this, the central bank came up with the idea of printing paper money to stimulate the economy; thus, “quantitative easing” was born.

Five years later, the Federal Reserve’s balance sheet has grown to $4.2 trillion. We also saw the U.S. government increase spending to stimulate the U.S. economy after the Credit Crisis of 2008. The U.S. national debt skyrocketed from around $9.0 trillion back then to over $17.0 trillion today.

With all this money being created (by the Fed) and borrowed (by the government), the logical assumption is that there’s finally economic growth in the U.S. economy.

Wrong!

Paper money printing by the Federal Reserve and out-of-control spending by the government hasn’t really given much of a boost to the U.S. economy (aside from the stock market bubble it has created). Problems still persist. The amount of paper money that has been printed out of thin air is huge—an unprecedented event in American history.

Now that the Federal Reserve is putting the brakes on quantitative easing (it will print less money each month), will we see businesses pull back on capital spending? Of course we will. When money is tight, businesses pull back on research and development, expansion, and acquisitions.

Consider this: since December of last year to this past … Read More

What the Breakout in the Gold-to-Copper Ratio Is Telling Us

By for Profit Confidential

Copper Flashing a Buy Signal for GoldCopper is considered an industrial metal, used in industries across the board. When copper prices fall, it’s usually an indicator of a slowdown in the global economy. On the contrary, gold bullion isn’t much of an industrial metal; rather, it is used as a hedge against uncertainty in the global economy.

When you look at these two metals together, often referred to as the gold-to-copper ratio, they tell us something very important: the ratio of how many pounds of copper it takes to buy one ounce of gold bullion has long been an indicator of sentiment in the global economy.

If the gold-to-copper ratio is in a downtrend, it means investors are betting on the global economy to grow. In contrast, if it is increasing (if the number of pounds of copper it costs to buy an ounce of gold is rising), it tells us investors are concerned about protecting their wealth in a slowing global economy.

Below, you’ll find a chart of the gold-to-copper ratio.

GOLD - Spot (EOD) Copeer ChartChart courtesy of www.StockCharts.com

Looking at the chart above, it is clear something happened at the beginning of 2014. Investors became very worried. Since the beginning of the year, the gold-to-copper ratio has increased more than 28%—the steepest increase in more than two years.

And the weekly chart of copper prices looks terrible too:

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

Copper prices have been trending downward since 2011. In 2013, these prices broke below their 200-day moving average and recently, they broke below a very critical support level at $3.00. While all of this was happening, on the chart, there was also a formation of a … Read More

Contrarian View: Is the Bull Market Really Just Beginning?

By for Profit Confidential

Did the Current Bull Market Really Start in 2013There is some resilience to this stock market, and it’s evidenced by the strength in many important indices.

The Dow Jones Transportation Average is a very important index, even if you don’t own—or aren’t interested in owning—any component companies. The reason for its importance is that it has a track record of leading the rest of the stock market. And it’s especially useful as an indicator of a bull market breakout.

Transportation stocks have a history of leading the economy and the stock market. Dow theory, in my view, is alive and well, and it’s worthwhile to track the index to help with your overall market view.

Lots of commentators view the stock market as having been in a bull market since the March low of 2009. I don’t see it that way.

I view the stock market’s performance since that low (no matter how it was induced) as a recovery market, not the beginning of a new secular bull market or cycle for stocks.

The breakout, from my perspective, was around the beginning of 2013, when institutional investors ignored all the risks (including the inability of policymakers to actually make policy) and decided to bid blue chips and transportation stocks with particular fervor.

The previous stock market cycle was a 13-year recovery cycle from the technology bubble that produced over-the-top capital gains until 2000. The stock market recovered from the massive sell-off only to be hit by the financial crisis and Great Recession.

A long-term chart of the S&P 500 is featured below:

$SPX S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Last year’s stock market performance was genuinely stunning; while the monetary … Read More

Reaching the Point of Maximum Optimism

By for Profit Confidential

Bear Market Twists News to Lure in More InvestorsThis past Friday, the Bureau of Labor Statistics reported 175,000 jobs were added to the U.S. economy in the month of February. (Source: Bureau of Labor Statistics, March 7, 2014.)

The way the media reported it…

“Friday’s jobs market report caught the market by surprise,” was what most media outlets were telling us via their untrained reporters. The expectation was an increase of 149,000 jobs in February (after a dismal December and January jobs market report) and so the usual happened—stocks went up and gold went down on a jobs market report that was only slightly better than what was expected.

The consensus, from what I read, is that the jobs market in the U.S. economy is getting better. Of course, I think of this as hogwash. And as I’ll tell you in a moment, this is the kind of misinformation that is characteristic of what happens in a bear market in stocks, not a bull market.

Within February’s jobs market report, we find:

The long-term unemployed (those who have been out of work for six months or more) accounted for 37% of all the unemployed in the U.S. economy. The longer a person is unemployed—likely because that person has not been re-trained for the jobs market—the less likely it is that person will eventually find work.

Today, once a person becomes unemployed in the U.S. economy, that person remains unemployed for an average of 37 weeks! This number remains staggeringly high. Before the financial crisis, this number was below 15 weeks. (Source: Federal Reserve Bank of St. Louis web site, last accessed March 7, 2014.)

When you have a … Read More

Bond Market: Something Wicked Cometh This Way

By for Profit Confidential

Bond Investors to Face Severe Losses in 2014The bond market is in trouble.

As we all know, the Federal Reserve has been the biggest driver of bonds since the financial crisis. The central bank lowered its benchmark interest rate to near zero, then started quantitative easing, all of which resulted in the bond market soaring as yields collapsed to multi-decade lows.

The chart below will show you what’s happened to the U.S. bond market since the mid-1970s.

As you can see from the chart, the declining yields on bonds stopped in the spring of 2013 and have increased sharply since then.

30-Year T-Bond Yield Chart

Chart courtesy of www.StockCharts.com

What’s next for bonds?

The Federal Reserve is slowly taking away the “steroids” that boosted the bond market. The central bank is now printing $65.0 billion of new money a month instead of the $85.0 billion it was printing just a few months back. And now we hear the Federal Reserve will be slowing its purchases by $10.0 billion a month throughout 2014.

Since May of last year alone, when speculation started that the Federal Reserve would cut back on its money printing program, bond yields skyrocketed and bond investors panicked.

According to the Investment Company Institute, investors sold $176 billion worth of long-term bond mutual funds between June and December of last year. (Source: Investment Company Institute web site, last accessed February 26, 2014.) I would not be surprised if withdrawals from bond mutual funds are even bigger this year.

And China is slowly exiting the U.S. bond market, too. According to the U.S. Department of the Treasury, in December, China sold the biggest amount of U.S. bonds since 2011. In … Read More

Uncertainty in Emerging Markets Creating Certainty in Only One Market

By for Profit Confidential

This Is the Only Play that Will RewardFasten your seatbelt, dear reader. We’re in for a global financial crisis, a currency fiasco, and a stock market collapse all in the same year!

I’m being too bearish? Not after you read this…

In their search for economic growth in 2009, the Federal Reserve and other major central banks in the global economy started lowering interest rates and printing paper money.

While the central banks of the world wanted economic growth, they inadvertently created the “trade” for big investors like financial institutions and banks. I talked about this last Friday. (See “Stock Market: The Great Collapse Back to Reality Begins.”)

The “trade” had investors borrowing money from low interest rate countries and buying bonds in high interest rate countries, pocketing the spread. In the world of finance, this is often referred to as the “carry trade.” It works as long as the currencies of the low interest rate country and the higher interest rate country stay stable.

But now, the “trade” is backfiring as the currencies of emerging markets go into free fall.

China, the biggest economy in the emerging markets and second-biggest in the global economy, got most of the “trade” money. According to the Bank for International Settlements, in 2013, foreign currency loans and borrowing by Chinese companies from other countries was close to a trillion dollars. In 2009, it was only $270 billion. (Source: Telegraph, February 1, 2014.)

European banks have the biggest exposure to emerging markets, having lent them $3.0 trillion. Breaking down this number even further, British banks have loaned $518 billion to the emerging markets; Spanish banks come in second … Read More

The “Big Thing” for Companies This Year

By for Profit Confidential

Here Come the Job CutsLast year, the “big thing” with companies was buying back their shares to boost per-share corporate earnings. In 2013, share buybacks hit their pre-financial crisis high. If big public companies didn’t buy back so much of their own stock in 2013, per-share corporate earnings just wouldn’t be that great.

This year, I expect share buybacks to continue at the pace we saw in 2013. Another “big thing” companies will do this year will be labor force reductions (cost-cutting) to make corporate earnings look better in light of generally weaker sales.

Companies have already started to lay out their plans for employee cuts…

Intel Corporation (NASDAQ/INTC) said it will be reducing its workforce by 5,000 this year. Here’s what the company spokesman, Chris Kraeuter, had to say: “This is part of aligning our human resources to meet business needs.” (Source: Randewich, N., “Intel to reduce global workforce by five percent in 2014,” Reuters, January 17, 2014.) Intel had flat fourth-quarter 2013 corporate earnings.

Hewlett-Packard Company (NYSE/HPQ), another major company in the key stock indices, is taking a similar approach. In 2014, it is expected to cut its workforce. According to its long-term restructuring plan, 34,000 jobs, or 11% of the total workforce, will disappear.

And job cuts aren’t just happening at companies in the personal computer (PC) industry…

We see this phenomenon occurring across the board. Companies in the retail sector are struggling as well. Macy’s Inc (NYSE/M) said it will be reducing its labor force to lower costs. As part of the company’s cost-cutting program to boost corporate earnings, it will be eliminating about 2,500 jobs in 2014. (Source: … Read More

Why We’re Headed for a Period of Stagflation and What It Means for Investors

By for Profit Confidential

Argument for Inflation Lies in This One ChartThe Bureau of Labor Statistics just reported that inflation in the U.S. economy increased by 0.3% in the month of December and that the Consumer Price Index (CPI) for the entire year of 2013 increased by only 1.5%. (Source: Bureau of Labor Statistics, January 16, 2014.)

Is inflation in the U.S. economy really this low?

It sure doesn’t feel like it. Every time I buy groceries, go out for dinner, get my car fixed, pay utilities bills, or fill up my car’s gas tank, it feels like I am paying a lot more than I did last year or the year before.

Dear reader, inflation is higher than what the CPI figures say because of the way the CPI is calculated; food and energy prices are taken out because they tend to be more “volatile,” according to the government. That means key items consumers buy on a regular basis—food and gas—are excluded from the official inflation numbers!

While the mainstream fears deflation in the U.S. economy, I’m concerned about an unexpected bout of higher inflation hitting us. Why would I think this?

I can sum up my argument for inflation ahead with just this one chart:

St. Louis Adjusted Monetary Base Chart

The chart above shows the currency (coins and paper notes) in circulation and deposits of banks at the Federal Reserve.

As you can see, since the financial crisis, the Federal Reserve has injected trillions of dollars into the U.S. economy. This is dangerous, in my opinion, for the simple reason that the more there is of any item in supply, the less the demand, and the lower the price. In this particular case, the … Read More

Railroad Parts Supplier Set to Keep Ticking Higher

By for Profit Confidential

Railroad Parts Supplier to Maintain Momentum in 2014To illustrate the solid business conditions that exist in the railroad industry, Westinghouse Air Brake Technologies Corporation (WAB) is a company that’s growing and has been an excellent stock market investment.

Operating as Wabtec Corporation, which was created in 2009 with the merger of Westinghouse Air Brake Company and MotivePower Industries Inc., the stock has been in business since 1869.

Back then, George Westinghouse showed potential customers in the railroad industry the first air braking system for railcars. Three years later, he invented the first automatic air braking system, which would engage if a railcar got separated from the train. The first installation of this innovative technology was in 1872 on a Pennsylvania Railroad passenger train. The rest is a history of growth.

The company’s been doing very well recently, with a growing cash position (long-term debt also has been going up), rising shareholders’ equity, and solid sales and earnings growth for such a mature, old economy industry.

According to the company, its third quarter of 2013 saw sales grow 7.5% to $631.4 million, while earnings grew an impressive 17.4%. With virtually every railcar in North America using some of the company’s products, its strongest growth in the most recent quarter was in remanufacturing, overhauling, and build services.

Westinghouse has been an outstanding wealth creator for shareholders over the last 10 years. Like most other stocks, Westinghouse got beaten up during the financial crisis. But for the most part, this position has been a consistent performer, and I think it will continue to be a winner, with fundamentals in the railroad industry being so good. The company’s 10-year stock chart … Read More

The Race That Will Not End Well

By for Profit Confidential

central bank Central banks around the global economy are involved in a race that will not end well. Of course, I’m talking about the race to the bottom of currency devaluation, which is being achieved through the printing of more and more paper money backed by nothing.

Almost weekly, I hear news about different central banks in the global economy cranking up the speed of their printing presses; they are fixated on printing money because these central banks believe they can solve their economic problems by printing. They are wrong!

Our own Federal Reserve is creating $85.0 billion a month in money with the hopes of bringing economic growth to the U.S. economy. But this strategy is failing the masses in America. Those who have benefited the most from this exercise have been big banks, Wall Street, and the rich. The poor and middle-class are in a worse situation now than in 2007!

But it’s not just the Federal Reserve that’s printing massive amounts of new money. Other central banks are doing the same under a fancy phrase: “quantitative easing.”

In its most recent monetary policy statement, the Bank of Japan reiterated it’s take on printing. It said the central bank will continue to work towards increasing the monetary base in the country by 60 trillion to 70 trillion yen per annum. The central bank will buy Japanese government bonds, exchange-traded funds (ETFs), and real estate investment trusts with the freshly printed money. (Source: Bank of Japan, November 21, 2013.) (Yes, the Bank of Japan is buying securities that trade on the stock market. As our next American financial crisis approaches, I … Read More

My Favorite Picks for After the Market Corrects

By for Profit Confidential

dividend paying stocksWhen we last looked at Alaska Air Group, Inc. (ALK), the position had pushed to a new record-high on the stock market, and it’s doing so again.

Many Dow Jones transportation stocks continue to exude price strength and in my mind, this action is one confirming factor that the broader stock market can go higher.

There has also been a spike in countless new initial public offerings (IPOs), which only makes sense with the stock market at an all-time high and the world awash in liquidity.

But it is difficult to consider buying stocks right at their highs. If one came into money and wanted to create a stock market portfolio, there’s not a lot of value for your investable dollar. Even income-seeking investors have to contend with high prices for the best dividend paying stocks.

Big investors have been buying dividend-paying blue chips all year and are likely to continue doing so unless there’s a catalyst to sell.

Automatic Data Processing, Inc. (ADP) just announced a solid 10% increase in its cash dividend to stockholders. The company will pay $0.48 a share, up from the previous $0.435 per share, on January 1, 2014 to shareholders of record on December 13, 2013. This is the company’s 39th consecutive year of increased dividends.

Not surprisingly, ADP has been a tremendous stock market winner this year. The position opened in January around $57.00 a share. Now it’s closing in on $77.00, with Street analysts continuing to increase the company’s earnings-per-share outlook for its next fiscal year. (See “Why Cash Is No Longer King.”)

For allocating new monies to the … Read More

Three Key Indicators Say U.S. Economy in Trouble

By for Profit Confidential

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

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

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

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

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

One indicator of consumer … Read More

Dividend-Paying Stocks a Hold, but for the Rest of the Market?

By for Profit Confidential

Dividend-Paying StocksThis market has been due for a major correction for quite some time. The marketplace expected it (including myself), but what we got instead was share price consolidation with continued leadership from blue chips and small-caps.

Countless stock market indices are right close to their highs, including the S&P 500, Dow Jones Industrial Average, and Dow Jones Transportation Average. There’s also the Russell 2000 Index of small-cap stocks, which has performed exceptionally well throughout this year. Finally, the NASDAQ Biotechnology Index continues to be a powerhouse wealth creator, having doubled in value over the last two years.

All this in an environment of satisfactory earnings but very little in the way of top-line growth. While the stock market has every reason to pull back significantly, fighting the Fed has proven to be unprofitable in equities. The opportunity cost of not being in the stock market since the financial crisis has been significant.

The monetary reflation has seemingly worked for the stock market so far, but it’s very clear that corporations remain unwilling to make major new investments, which would go a long way in helping the Main Street economy. Instead, they are keeping shareholders happy by returning their excess cash in the form of dividends and paying for those dividends with share buybacks. (See “If You’re Looking for Rising Dividend Income…”)

Given current information, I see no reason why prevailing conditions in capital markets might change significantly near-term. With funds continuing to flow into equities, the stock market needs a catalyst to effect a major retrenchment in share prices.

Balance sheets among many large U.S. corporations continue to … Read More

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