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

Posts Tagged ‘GDP growth’

Why China Catches My Eye as a Top Opportunity Right Now

By for Profit Confidential

My Top Three Foreign Investment OpportunitiesA few years ago, investors couldn’t get enough of Chinese stocks. This led to numerous frauds committed by crooks in China that has since tarnished the reputation and reliability of all Chinese companies, whether they’re legitimate or not, despite their operating in one of the top growth areas in the world.

While I’m not focused on Chinese stocks at this moment due to better trading opportunities in the domestic stock market, I monitor the country and remain convinced it’s still a key place to have some risk capital invested in. When the broader market understands this, I would expect renewed buying in Chinese stocks sometime in the future.

My view is that the country’s current leadership under President Xi Jinping, who assumed power in March 2013, has a vision to create a country of consumers, just like the United States; albeit, I doubt it will come close to what we see here with consumer spending driving 70% of gross domestic product (GDP) growth. In China, consumer spending drives about 30% of GDP so there’s work to do. In the second quarter, retail sales continued at a double-digit growth of 12.4% year-over-year.

The objective to cut the country’s dependence on exports and foreign investment makes sense. With a potential market in excess of one billion people, it’s the right move.

China may not be in the spotlight for investors now, but you cannot ignore the country. With the recent years of underperformance, I see great longer-term upside in Chinese stocks.

The Chinese economy is growing at well below the double-digit growth of the past, but comparatively, the growth is far superior … Read More

If You Only Look at One Picture Today, Make it This One

By for Profit Confidential

Stock Advisors Most Bullish Since 2007Five years ago, it looked like the world was falling apart. Remember when Lehman Brothers went bankrupt, freezing financing on Wall Street? The government had to bail out General Motors and the Federal Reserve pumped money into too-big-to-fail banks. Investors were running scared of the stock market.

Seems like years ago…but it was only 2008 and 2009 when this all happened. Fast-forward to today, and thanks to trillions of dollars of new money (printed out of thin air), the Dow Jones Industrial Average has ballooned back, close to 17,000.

The stock market became a bubble in 2007 when it surpassed 14,000, subsequently crashing down to 6,440 in March of 2009. Now the bubble is back; but bigger this time.

Bears like me, who believe the Fed created this new stock market bubble, are rare to find. More and more stock advisors and investors have turned bullish. They believe—incorrectly, I suggest—that all is well with the economy and that the stock market will head higher and higher.

To see just how many advisors have turned bullish on stocks, I really want you to look at the below chart of the Investors Intelligence Bull Index. Under the chart, you will see a black line, indicating the S&P 500.

 Investers Intellegence Bulls Chart

Chart courtesy of  StockCharts.com

The Investors Intelligence Bull Index tracks stock advisors’ opinions on the stock market. Currently, the index of stock advisors’ sentiment stands at 62.20, its highest level since (you guessed it) October of 2007. Whenever this index has gone over 60, the stock market has come down hard.

When it comes to investing, you don’t want to do what … Read More

How to Profit from China’s Shift in Consumer Spending

By for Profit Confidential

China's Consumers Eager Spend; How  Profit from RiseChina is facing some growth issues, but so are the majority of the countries in the Western Hemisphere.

The country’s new government leader, President Xi Jinping, came on board in March 2013 and is planning to change the landscape of China vis-a-vis a new focus on domestic consumption and a reduction in its dependence on exports and foreign demand.

This new plan will take some time to undertake, but if Jinping can mobilize the country’s massive potential consumer base into a spending machine similar to the United States, then we could see a spending revolution emerge behind the Great Wall.

But while investors in Chinese stocks have faced difficult times over the past few years due to fraud, I feel it’s not enough to avoid the country as a growth buying opportunity. (Read “Chinese Stocks Promise Higher Potential Gains?”)

While it may be true that the Chinese economy is stalling and that it may find it difficult to get back to its former double-digit growth, the gross domestic product (GDP) growth of 7.7% in 2013 was good. The Organisation for Economic Co-operation and Development (OECD) predicts the Chinese economy’s GDP growth will slow to 7.4% this year, compared to an earlier estimate of 8.2% in November. The slowing is attributed to the government’s move to control the credit risk and factory capacity in order to prevent a meltdown.

The fact you cannot ignore is the massive population, especially the more than 300 million middle-class consumers looking to spend their newfound wealth.

In April, retail sales grew by 11.9%, which is pretty darn good, given the growth we are … Read More

Proof the Incentive to Work Is Fading

By for Profit Confidential

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

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

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

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

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

Baltic Dry Index ChartChart courtesy of www.StockCharts.com

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

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

Will the U.S. Escape the Rapid Inflation That Usually Follows Massive Money Printing?

By for Profit Confidential

Proof Growth in Money Supply Not Spurring GDP GrowthIs the Federal Reserve ignoring the very basic law of economics…the law of diminishing marginal utility? You remember that term from economics in high school. The law of diminishing marginal utility states that the more of something you have, the lesser its impact on you.

The Fed has been printing money in hopes of stimulating growth in the U.S. economy. As the Fed printed more paper money, its balance sheet grew to over $4.0 trillion.

Below, I’ve made a table that looks at gross domestic product (GDP) growth in the U.S. each year since 2009, and where the balance sheet of our central bank stood at the end of each year.

In the table below, you will notice something interesting; aside from 2009, there is no real correlation between the increases in the assets (paper money printed) on the Fed’s balance sheet and GDP growth. In fact, after all the money the Fed has printed, the U.S. economy grew last year at its slowest pace since 2011.

U.S. GDP Growth vs. Growth in Size of Fed Balance Sheet

Year YOY Change
in GDP
Fed Balance Sheet (Trillions) YOY Change in Balance Sheet
2009 -2.80% $2.08 73.44%
2010 2.50% $2.31 11.21%
2011 1.84% $2.74 18.58%
2012 2.77% $2.86 4.36%
2013 1.87% $3.47 21.33%

Data source: Federal Reserve Bank of St. Louis web site,
last accessed April 1, 2014.

The Federal Reserve predicts the U.S. GDP in 2014 will increase between 2.8% and three percent; that’s a jump of about 50% since 2013. (Source: Federal Reserve, March 19, 2014.) I believe this to be way too optimistic. (And as we … Read More

Important Message Retailers Are Sending Us About the Economy

By for Profit Confidential

Consumer Spending Hits Trouble TerritoryConsumer spending in the U.S. economy is highly correlated to consumer confidence. If consumers are worried about the economy, they pull back on their spending.

The Conference Board Consumer Confidence Index decreased by 1.63% in February from January. (Source: Conference Board, February 25, 2014.) And we see the corresponding pullback on consumer spending in weak U.S. retail sales.

Macy’s, Inc. (NYSE/M) reported a decline of 1.6% in revenue in its latest quarter—which includes the holiday season. For its just-completed fiscal year, company revenues were up by only 0.9%. (Source: Macy’s, Inc., February 25, 2014.)

Sears Holdings Corporation (NASDAQ/SHLD) reported a decline of 12.6% in revenues in its latest quarter. Yes, I know this company is having problems; but a drop in revenue of 12.6% for a retail giant like this—and during the holiday shopping season—is an indicator that consumer spending is very weak. (Source: Sears Holdings Corporation, February 27, 2014.)

Target Corporation (NYSE/TGT) reported revenues fell by 3.8% in its last fiscal quarter. (Source: Target Corporation, February 26, 2014.)

Best Buy Co., Inc. (NYSE/BBY) is in a very similar situation. The company reported a decline of more than three percent in revenues for its latest quarter. And for the 12 months ended February 1, 2014, Best Buy’s revenues fell 3.4%. (Source: Best Buy Co., Inc., February 27, 2014.)

The retailers I just mentioned are just a few of the many retailers that reported a decline in their revenues in the last quarter of 2013, which suggests consumer spending is in troubling territory.

My point is that those companies that are closest to consumer spending—the big American retailers—are giving us a … Read More

These Two Indicators Say U.S. GDP is Already Declining in 2014

By for Profit Confidential

2014 Worst Growth Year for World Economies Since 2009In 2013, the U.S. economy, as measured by gross domestic product (GDP), rose at an average rate of 1.9% compared to 2.8% in 2012. And as it stands, GDP may slow further in 2014.

What makes me think this?

In January, U.S. industrial production declined by 0.3% from the previous month. This was the first decline in production since August of 2013. Production of automotive products in the U.S. economy declined by 5.15%, and appliances, furniture, and carpeting production declined by 0.6% in the month. (Source: Federal Reserve, February 14, 2014.)

And factories in the U.S. economy just aren’t as busy as they used to be. The capacity utilization rate, a measure of companies using their potential production, was 78.5% in January. The average rate between 1979 and 2013 has been 80.1%. While a difference of two percent in factory utilization isn’t a big number, because overhead is often fixed in factories, a two-percent decline in production is a big deal.

Then there’s the inventory problem; inventories in the U.S. economy continue to increase. In December, inventories at manufacturers increased by another 0.5% to $1.7 trillion. From December 2012, they have increased by 4.4%. (Source: U.S. Census Bureau, February 14, 2014.)

We have a situation in the U.S. economy today where factories are working at lower capacity than they have historically, while business inventories are rising—two bad omens for the economy; hence, you can see why I’m concerned about economic growth in 2014.

It’s a domino effect…

Inventories increasing suggest consumer demand is stalling. Examples of consumer spending declining in the U.S. economy are many. As I have … Read More

Revenues Down for This Aluminum Stock; Trouble for Global Economy Ahead?

By for Profit Confidential

Revenues Down for This Aluminum StockWhile the focus is on the government shutdown and debt ceiling, I’m getting ready for the start of another earnings season, to see if America delivers. Of course, the somewhat muted gross domestic product (GDP) growth has me fully expecting to see a drag in revenues across the broad.

Alcoa Inc. (NYSE/AA) starts the third-quarter earnings season when it reports after the markets close tomorrow. The company is a pretty decent indicator for the global economy, as aluminum is used in a broad assortment of industrial and consumer applications around the world.

The company is forecasted to earn $0.06 per diluted share on revenues of $5.71 billion, down 2.1% year-over-year, according to Thomson Financial. For this reporting year, Alcoa is expected to see revenues contract 2.8%, followed by 2.8% growth in 2014. This essentially means zero growth over two years. In my books, that’s not good; this clearly indicates a global economy that’s in trouble.

I don’t even think traders are expecting some miraculous jump in revenues or earnings in the third-quarter earnings season. Wall Street has already downgraded expectations for the earnings season.

Earnings growth for the third-quarter earnings season is estimated at 3.2%, according to a FactSet report dated September 27. (Source: “Earnings Insight,” FactSet Research Systems Inc. web site, September 27, 2013; last accessed October 4, 2013.) The number is well down from the estimate of 6.5% as of June 30.

The financial sector is expected to report the top growth, while the healthcare sector is projected to report the lowest level of growth in the third-quarter earnings season. Of course, should the U.S. government shutdown … Read More

How the Market’s Letting the Fed Get Away with Its “Wishy Washy” Policies

By for Profit Confidential

How the Market’s Letting the Fed Get Away with Its “Wishy Washy” PoliciesAnalysts and investors demand clarity when a company reports or offers up guidance. But when it comes to the Federal Reserve, investors and analysts don’t seem to demand the same level of clarity, even though the central bank has been what I would label “wishy washy” as far as its policies and what it offers up to the market.

The stock market is trading (and it has been for a while) on what the Federal Reserve says about its quantitative easing program, namely its monthly bond-buying strategy.

Yet the Federal Reserve appears to be saying one thing, only to contradict it with the next statement. This type of confusion and uncertainty is not what I want to hear. I want more certainty in order to formalize my trading and investment strategy. The cloudiness offered by the Federal Reserve doesn’t help.

Case in point: at last week’s Federal Open Market Committee (FOMC) meeting, Federal Reserve Chairman Ben Bernanke, to the surprise of nearly everyone both on Wall Street and Main Street, announced that the bank had decided against tapering, despite what I see as moderate growth in the economy. Yes, the country continues to slug along, but with the second-quarter gross domestic product (GDP) growth at 2.5% and with the Federal Reserve estimating the country will continue to expand at a rate above two percent this year and in 2014, the Federal Reserve should have begun to rein in some of its bond buying. Pundits were estimating a $10.0-billion cutback to start.

Well, even that small cut didn’t happen. Bernanke said the economy was still fragile, and the Fed didn’t … Read More

How Red Flags in the Retail Sector Are Threatening U.S. GDP Growth

By for Profit Confidential

Red Flags in the Retail Sector Are Threatening U.S. GDP GrowthThese days, I’m not shopping all that much unless there’s a massive discount at the stores. In fact, I only shop when the deals are significant.

In my view, this is the new reality in the retail sector. And it’s not only hurting the retail sector, but it is also supporting an increase in traffic at the major discount mall operators, such as Tanger Factory Outlet Centers, Inc. (NYSE/SKT) and king of discount malls Simon Property Group, Inc. (NYSE/SPG), which owns the well-known Premium Outlets centers.

If you haven’t been to the Premium Outlets malls, these are large malls where there are as many as 100 stores offering quality goods at cheap discount prices. All of the major retailers are there.

Yet the retail sector continues to show mixed results that clearly do not suggest consumer spending is rising at levels the economy wants to see, given the low interest rates.

Retail sales in July were better than expected, but in my view, they still don’t support a massive spending push in the retail sector, which means potential problems brewing for America’s gross domestic product (GDP).

We are beginning to see weakness amid the department stores in the retail sector. There was even a disturbing report from bellwether retail giant Wal-Mart Stores, Inc. (NYSE/WMT), which reported dismal growth in the U.S. and around the world. When this happens, you know all is not right in the retail sector, as Wal-Mart is a good barometer of consumer spending activity.

So it wasn’t a surprise to see department store Macy’s, Inc. (NYSE/M) fall short in its fiscal second quarter after … Read More

What Key Emerging Markets Are Saying About the Global Economy Now

By for Profit Confidential

emerging marketsIf everything is so fine with the economic recovery in both America and the global economy, then why are the emerging markets failing to rebound? It seems somewhat odd how the global economy could be fine when its key trading partners in the emerging markets are not.

You all know how much I like the emerging markets longer-term. (Read “Think Global for the Best Investment Opportunities.”) However, the short- to mid-term is another story, as there’s clearly some stalling.

The HSBC Emerging Markets Index (EMI) declined to a contractionary 49.4 reading in July, versus an expansionary 50.6 in June. This was the first contraction reading since 2009.

The HSBC reading is also a red flag to the stock market that, as I have been saying in recent commentaries, is showing some cracks in its foundation.

If the U.S., Europe, and China are fine, then the emerging markets should be too—but they’re not fine, so you should be wary of this. A pickup in the emerging markets is needed to get the ball rolling on economic growth.

As shown on the iShares MSCI Emerging Markets (NYSEArca/EEM) exchange-traded fund (ETF), the emerging markets have been under some duress since peaking in May, based on my technical analysis.

 the iShares MSCI Emerging

Chart courtesy of www.StockCharts.com

Here’s what’s happening at this juncture:

GDP growth in China has stalled, holding above seven percent. The manufacturing sector may be contracting, that is if you believe the HSBC estimate over the official estimate from Beijing, which says manufacturing is expanding.

Then you have the dismal state of affairs in the eurozone and Europe. Six of the 17 eurozone … Read More

The Worst Jobs Report in Four Months Does One Thing

By for Profit Confidential

economic growthThis morning we got news that 162,000 jobs were created in July in the U.S. economy—the worst showing in the past four months. (Source: Bureau of Labor Statistics, August 2, 2013.)

And when we look closely at the July U.S. jobs market report, it gets worse.

First off, the previous months’ numbers keep getting revised downward; the number of jobs added to the U.S. economy in May was revised down from 195,000 to 176,000, and June’s numbers were revised down from 195,000 to 188,000—combined, that’s 26,000 jobs that never really happened.

The underemployment rate, a statistic I consider to be a better measure of jobs market conditions, remained staggeringly high at 14% for the month of July. The big blow: it was higher than what it was during the months of March, April, and May, and only slightly lower than June. The underemployment rate takes into account people who have given up looking for work and part-time workers who can’t get full-time work.

There are close to one million discouraged workers in the U.S. jobs market, and the number of individuals working part-time because they are unable to find full-time jobs remained unchanged at 8.2 million in July.

Of course, one must ask: where are we seeing growth in the jobs market? If you guessed low-wage-paying sectors, then you are right. In July, a combined 85,000 jobs were added in the retail, trade, leisure, and hospitality sectors—more specifically, in food services and drinking places. This is 52% of all the jobs created during the month!

Employment in industries like construction, transportation and warehousing, mining and logging, and government sectors were … Read More

How Bad Is the U.S. Economy?

By for Profit Confidential

While I continue to hear politicians and the mainstream media tell me the U.S. economy is in a full-fledged recovery, I totally disagree with the notion.

I believe the truth of what’s going on with the U.S. economy is the total opposite of what we are being fed by both politicians and the mainstream media.

Look at the chart below of the change in the real U.S. gross domestic product (GDP) since the fourth quarter of 2011.

Real Gross Domestic Product Chart

If we were witnessing recovery, or a period of economic growth, would we be seeing the GDP collapsing? The rate of change in the GDP has actually been declining since the first quarter of 2012. This by no means should be taken lightly, as it indicates a recession may be following because economic activity isn’t flourishing.

In fact, I see even more indicators favoring a recession ahead.

Consumers in the U.S. economy are struggling—their pockets are getting emptier. Jobs are being created in the low-paying retail and service sectors. Meanwhile, prices for goods are increasing. Thanks to higher oil prices, I suspect prices for goods will continue to see an uptick.

Dear reader, current estimates of GDP growth are too optimistic—but this will change. Consider this: The Federal Reserve expects U.S. GDP to grow 2.3%–2.6% this year. Currently, in the second quarter, we are only running at an annual GDP growth rate of 1.7%. This is 26% below the Federal Reserve’s lower estimates. Will our economic activity jump by 26% for the balance of this year? I highly doubt it.

This all brings me to one conclusion: the effects of the … Read More

Why You Need to Watch This Chinese Rail Stock in Spite of Stalling GDP Growth

By for Profit Confidential

GDP growthAmerica was built and linked by the railroad that spans the nation, connecting the Pacific and Atlantic oceans. The railroad has great importance, as people use it for travelling and companies for transporting their goods. Without the railroad, commerce wouldn’t have been able to grow as much as it did heading into the 20th century.

An ocean away in China, we have also been seeing an economic revolution that may be stalling but, in my view, continues to be one of the top growth markets in the world longer-term.

While there are many that would argue this, I’m not in that camp. (Read “How to Buy Blue Chip Chinese Stocks on the Cheap.”) Yes, the near term could pose issues in China as far as its stalling GDP growth, but I simply cannot ignore the massive potential there, given the country’s population and increasing trading partners and global markets.

One area of major growth has been China’s expansion of its transportation network, whether it’s roadways, air space, or rail. Just like America, China needs to expand its transportation network to allow its companies to flourish and to connect its 1.3 billion citizens.

China’s Premier, Li Keqiang, said that he wants to increase the rate of development of China’s railway network via a specific development fund, according to Bloomberg.

A mid-cap Chinese railroad stock that I have been following for a while is Guangshen Railway Company Limited. (NYSE/GSH). The company trades in the U.S. via its American depositary shares (ADS).

The company’s key focus at this time is its passenger services. This network includes the Guangzhou–Shenzhen inter-city train … Read More

The Truth and Worldwide Risk Behind China’s Big Slowdown

By for Profit Confidential

Chinas SlowdownTroubles in the Chinese economy are mounting as the economic slowdown in the world’s second-biggest economy takes its toll—troubles that could wash ashore here in North America sooner than most expect.

The Flash China Manufacturing Purchasing Managers’ Index (PMI) registered at 47.7 for July—a new eleven-month low. (Source: Markit, July 24, 2013.) Any reading below 50 on the PMI represents contraction in the manufacturing sector.

The Chinese economy is heavily focused on manufacturing, so a contraction of this magnitude indicates a severe economic slowdown for the country.

And that’s not all…

Gross domestic product (GDP) for China’s economy is quickly slowing. After growing for years at 10% per annum, in the first quarter of this year, China’s economy grew at only 7.7%; in the second quarter, the rate slowed further to 7.5%. (Source: MarketWatch, July 23, 2013.) Growth of 7.5% per year for the Chinese economy is embarrassing when compared to its historical average.

So why would an economic slowdown in China’s economy be a problem for us here at home?

China’s economy is the third-biggest destination for U.S. exporters.

As the economic slowdown in the Chinese economy strengthens, demand for goods and services within the country will decline. American exporters will face more downward pressures on profits as they export less to China. And U.S. GDP will get hit as exports are considered one of the major factors in its calculation.

But the damage the economic slowdown in the Chinese economy could have on American and Canadian exporters is just one small piece of the puzzle. Corporate earnings of U.S.-based companies operating in the Chinese economy will also … Read More

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