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

Posts Tagged ‘gold’

Taking It Too Far Again…

By for Profit Confidential

Why Interest Rates Will Rise Faster and Sooner Than Most ThinkWhat led to the 2008/2009 stock market and real estate crash and subsequent Great Recession can be attributed to one factor: the sharp rise in interest rates that preceded that period.

In May of 2004, the federal funds rate, the bellwether rate upon which all interest rates in the U.S. are based, was one percent. The Federal Reserve, sensing the economy was getting overheated, started raising interest rates quickly. Three years later, by May 2007, the federal funds rate was 5.3%.

Any way you look at it, the 430% rise in interest rates over a three-year period killed stocks, real estate, and the economy.

My studies show the Federal Reserve has historically taken things too far when setting its monetary policy. It raised interest rates far too quickly in the 2004–2007 period. And I believe it dropped rates far too fast since 2009 and has kept them low (if you call zero “low”) for far too long.

In the same way investors suffered in 2008–2009 as the Fed moved to quickly raise rates, I believe we will soon suffer as the Fed is forced to quickly raise interest rates once more while the economy overheats.

It’s all very simple. The U.S. unemployment rate is getting close to six percent. The real inflation rate is close to five percent per annum, and the stock market is way overheated. The Fed will have no choice but to cool what looks like an overheated economy. But the Fed won’t be able to do it with a quarter-point increase in interest rates here and there. It will need to raise rates by at least … Read More

Stock Market Pricing-in a Recession?

By for Profit Confidential

U.S. Economy Close to Technical RecessionBy no surprise to me whatsoever, the government’s third and final estimate of first-quarter U.S. gross domestic product (GDP) came in at a negative annual pace of 2.9%. (Source: U.S. Bureau of Economic Analysis, June 25, 2014.) The U.S. economy’s growth rate in the first quarter of this year was the worst since 2009.

I’ve been writing since the fall of 2013 that the U.S. economy would see an economic slowdown in 2014. I have been one of the few economists warning of a recession in 2014. My calls are not to scare or create fear; rather, they are based on the government’s own data.

Not to boast, but it’s like the creators of the first-quarter U.S. GDP report have been reading Profit Confidential! Everything we have been warning about came out in this most recent GDP report.

I’ve been harping on about how the U.S. consumer was tapped out…and low and behold, consumer spending in the U.S. economy increased by only one percent in the first quarter of 2014. In the fourth quarter of 2013, consumer spending increased by 3.3%. The fifth year into the so-called economic “recovery” and consumers are pulling back on spending for the simple reason that they don’t have money to spend.

The poor have no money; the middle class has been wiped out. And the rich are far from spending enough to make up for the lack of spending by the poor and middle class.

But have no fear, dear reader; stocks are up. The stock market is telling us we have nothing to worry about? It seems so.

I, for one, … Read More

Why I Never Pay for Coffee at Sam’s Bakery

By for Profit Confidential

Grains of coffee and dollarsThere’s a local bakery near my office I try to get to at least once a week. Sam and his wife own the bakery, and Sam is usually the one there serving espressos and cappuccinos to the many small business owners who meet there early in the morning to talk about business and the economy.

My problem is that I never pay for coffee at Sam’s bakery. “Don’t worry Michael, it’s been taken care of” is the standard line Sam usually gives me. Either Sam is giving me free coffee or one person is buying for everyone in the bakery.

But I think my free coffee streak is about to end.

Kraft Foods Group, Inc. (NASDAQ/KRFT) recently raised the prices of its Maxwell House and Yuban coffee brands by 10%. This is after another company called The J.M. Smucker Company increased its prices. (Source: Bloomberg, June 8, 2014.)

But it’s not just coffee prices that are moving up. Even the government itself is now predicting food prices will rise at an accelerated rate this year.

According to the U.S. Department of Agriculture, inflation in food prices in the U.S. economy will be between 2.5% and 3.5% in 2014. This is compared to just a 0.9% increase in prices in 2013. Inflation of meat prices is expected to be much higher. Beef and veal prices are expected to increase 5.5% and 6.0% respectively this year. (Source: U.S. Department of Agriculture web site, last accessed June 10, 2014.)

I believe food prices will rise much faster than what the government is predicting; I’m talking real inflation of five to eight percent per … Read More

About That Letter My Dad Got in the Mail Friday

By for Profit Confidential

Pay a Bank to Hold Your MoneyMy father is 87 years old. He’s in great shape, drives on his own, plays cards with the guys each afternoon, and has basically been enjoying retirement since he sold his business when he was 65.

Like all retirees, he and my Mom have been living off their savings for years.

And like millions of Americans, the low interest rates we have been enduring since the Federal Reserve decided back in 2008 that it was best to bring rates down to historically low levels (and keep them there for six years) haven’t been kind to them.

But last week, the letter we got in the mail, well, it was the last straw.

My folks have some of their money in the wealth management division of one of the largest banks in North America. On Friday, we received a letter from them that said the bank would start charging a fee of $500.00 a year if the balance in my parents’ accounts fell below $125,000.

Yes, you got that right. If my parents keep less than $125,000 in their accounts at this (essentially) brokerage arm of the bank, they will be charged $500.00 a year for the bank to keep their money.

Nice. (If you are a small business owner, imagine treating your customers like that!)

The letter ended by saying that if we are not happy with the bank, we can transfer the money to another financial institution by a certain deadline date and the transfer fee will be waived. Nice, again.

Dear reader, I have been writing to you for months that my view is essentially that money is … Read More

The New Land of Oz

By for Profit Confidential

When Gold Will Finally BottomYesterday was an amazing day for the markets.

Gold bullion hit a three-month low despite: 1) inflation rising rapidly in North America; and 2) the Chinese buying half of this year’s world gold production.

The stock market was up to a new high despite: 1) corporate insiders selling like mad; 2) corporate earnings growth collapsing; 3) the amount of money investors have borrowed to buy stocks standing at a record high; and 4) the economy stinking.

In the words of Robert Appel, my esteemed colleague, the following best describes what is happening with the markets:

“Time to take those ruby slippers out of the closet because we are definitely on our way to the ‘Wizard of Oz’ show once again. There is a view that the government and its ‘special contractor’ (the Fed) have things under control and we are now at the beginning of the biggest stock bull in history. We don’t buy that theory for a minute but we do acknowledge it exists.

“Those opposing this view—an ever-declining number—suggest that if inflation were defined as it was when the greatest economic minds of our age were still alive—the U.S. economy would be in big trouble. The recent corporate earnings wipeout in the retail sector was one of the most under-reported financial stories of the year.

“Interestingly (this is too bizarre to make up) the only major upside surprise in the retail sector in respect to first quarter earnings reports was Tiffany’s…where they can barely keep up with demand. No surprise for our readers as the ‘gap’ between rich and poor under QE [quantitative easing] has only intensified. QE … Read More

My Simple, Safe Investment Strategy for Playing Risky Stocks

By for Profit Confidential

Here's a Strategy to Play Momentum Stocks While Limiting RiskThere’s some hand-holding required out there in the stock market. We have seen destruction in the momentum biotech and Internet stocks that have corrected by more than 30%.

Now we are hearing some analysts on Wall Street saying to jump back in—but I’m hesitant at this juncture, as the downward risk is likely not over yet.

The reality is that, given the superlative gains recorded in 2013 by many of these biotech and technology momentum stocks, you shouldn’t be surprised to see the current malaise.

The fact that many of these highflying stocks in the stock market have more than doubled in a year should be a red flag. My simplest advice is to wait for the selling to subside in the stock market before you jump into these stocks.

You also need to be careful when hearing the bullish comments by Wall Street firms on these momentum stocks. Many of these firms have investment banking relationships with these stocks; it’s only natural to support your clients in the bad times.

Don’t get fooled by the stock market rhetoric. Instead, take a prudent approach to the stock market.

You don’t want to be caught exposed on this stock market unless you are fine with losing money should the selling intensify. Like I wrote at the beginning of the year, making money on the stock market will not be easy this year and capital preservation should be your objective.

Now, if you are willing to risk some capital and feel a stock market bottom is near, then what I suggest you do is consider using call options as a risk … Read More

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

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

How to Play an Upside Breakout in Oil Prices

By for Profit Confidential

Oil Prices Are So Dependent on RussiaOil prices could be setting up for an upside break if the situation in Crimea intensifies and a military conflict emerges between Russia and Ukraine over the rights to Crimea.

Since the price of West Texas Intermediate (WTI) crude broke out to over $100.00 a barrel in early 2011, oil prices have done very little, trading largely in a sideways channel with support in the $80.00 level and resistance around $110.00.

The global economic renewal has helped to support oil prices in spite of the continued stalling in China. Return to growth in the eurozone is also adding some support, but for oil prices to shoot higher, there really needs to be a geopolitical event, such as what we are seeing in Crimea. Of course, don’t forget the Middle East, which still has its major issues, especially with the speculation that Iran is building nuclear-enabled weaponry.

Light Crude Oil ChartChart courtesy of www.StockCharts.com

There’s also the crazy dictator of North Korea, Kim Jong-il, who has continued on the same path his father was on, isolating the country. His testing of several missiles earlier this week into South Korea was just another signal that he craves attention.

At the end of the day, to make money in oil will largely be dependent on the hot spots of the world.

While I doubt Russia will launch a military assault on Ukraine, you never know with President Putin. If this should happen, oil prices would vault higher to above $110.00 a barrel, and likely maybe even higher toward the $150.00 level, last reached in 2008 prior to the subprime crisis.

So while oil prices could ratchet … Read More

Why Is the U.S. Dollar Collapsing in Value All of a Sudden?

By for Profit Confidential

Whey the Fed May Need to Reverse its Decision to Cut Back on Money PrintingWhen news first broke from the Federal Reserve that it would slow down the pace of its quantitative easing program, the consensus was that the U.S. dollar would start to rise in value as the Fed would be printing fewer new dollars and actually eliminating all new paper money printing by the end of 2014.

But the opposite has happened.

Below, I present the chart of the U.S. Dollar Index, an index that compares the value of the dollar to other major world currencies.

US Dollar Index - Cash Settle (EOD) Ice ChartChart courtesy of www.StockCharts.com

As the chart clearly shows, the dollar started on a strong downtrend in July of 2013. When I look at the dollar compared to individual currencies like the euro and British pound, the picture looks even worse.

The common belief since the Credit Crisis of 2008: when there’s uncertainty, investors run towards the safety of the U.S. dollar. But something started to happen in mid-2013. Despite China’s economic slowdown, despite the situation with Russia and Ukraine, and with the Federal Reserve cutting back substantially on its money printing program, one would think the U.S. dollar would rally in value—but the opposite is happening.

Two reasons why the greenback is falling in value so fast:

First, world central banks have been slowly selling the U.S. dollars they keep in their reserves, as the percentage of world central banks that use the dollar as their reserve currency has fallen from more than 70% in the year 2000 to just over 60% today.

Secondly, with the Japanese and Chinese reducing the amount of U.S. Treasuries they buy and with the Federal Reserve reducing the paper … Read More

How Gold Has Caught Me by Surprise

By for Profit Confidential

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

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

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

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

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

Former Momentum Stocks Signpost to Sell?

By for Profit Confidential

Price Momentum Suggests Portfolio RebalancingA good amount of speculative fervor has come out of this market so far this year, but there’s still quite a bit of valuation froth around.

Across the board, 3D-printer stocks have come back. 3D Systems Corporation (DDD) still boasts a trailing price-to-earnings (P/E) ratio of around 150.

Tesla Motors, Inc. (TSLA) is still going strong. It’s one of few super-hyped stocks that made a strong recovery in January after a material sell-off months before. (See “Buy High, Sell Higher: Top Investment Strategy for Buoyant Markets?”) The position just bounced off $265.00 per share. Next year, Wall Street estimates the company will do more than $5.0 billion in sales.

Looking at the stock market currently, there’s a lot of indecisiveness and geopolitical events are overshadowing the action.

Watch large-cap biotechnology stocks (or the NASDAQ Biotechnology Index) for their trading action specifically. This group of stocks reaccelerated strongly in February and is very much overdue for a material correction.

I’ve noticed several key momentum stocks within the group have started rolling over. This should be a strong contributing indicator to the short-term action unrelated to specific events happening in Ukraine.

Gold is holding up well with the geopolitical tensions, and oil prices are too, but to a lesser degree.

Stocks are due for a break. What looked like the makings of a material correction in January, equities reversed direction after the Federal Reserve, once again, reiterated its willingness to be highly accommodative to capital markets.

This kind of market (after such a strong 2013 for stocks) warrants a significant degree of caution. I wouldn’t be jumping onto any bandwagons. … 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

The Great Social Media Stock Bubble of 2014

By for Profit Confidential

Allan Greenspan Be Bearish on the Stock Market Right NowA few days ago, I woke up to news that reminded me of the “Dot-com Boom” of the late 90s and early 2000. I’m sure you remember those days—the days when any company with “.com” attached to it received a lot of attention….and a high stock price. Investors bought these stocks without any concern for non-existent revenues; forget earnings.

These days, social media stocks are the new “dot-com” wonders. We recently heard that Facebook Inc. (NYSE/FB) bought “WhatsApp,” an instant messaging application for smartphones, for $19.0 billion. The valuation doesn’t make much sense; the company has only 50 employees, 460 million monthly users, and no clear business model.

Last year, we saw Twitter, Inc. (NYSE/TWTR) do an initial public offering (IPO). On its very first day of trading, the stock price increased by more than 70%. This company lost more money in 2013 than it did in 2012. Twitter’s loss per share in 2013 amounted to $3.41 compared to a loss of $0.68 in 2012. (Source: Twitter, Inc., February 5, 2014.) But investors shouldn’t fear; in the last quarter of 2013, hedge funds got into the game and bought Twitter’s stock.

Dear reader, I’m not saying Facebook or Twitter is a sell. What I am saying is that the behavior we see on the key stock indices, especially for social media stocks, is not sustainable. It resonates with what we have seen in the past—investors pouring money into companies with no business model to generate profits.

In Allan Greenspan’s past words, key stock indices are showing signs of “irrational exuberance.”

I’m concerned about the big picture for key stock … Read More

The Last Group of Burgeoning Stocks

By for Profit Confidential

The Income Stocks Investors Now CraveQuite a bit of speculative fervor has been zapped out of this market, which is helpful for the longer-run trend.

With the exception of biotechnology stocks, trading action has softened in initial public offerings (IPOs), 3D (three-dimensional) printer stocks, cloud software stocks, and even a lot of restaurant stocks that only recently were very hot.

The stock market is just a continuing cycle of fluctuating investor sentiment. Valuations among junior energy producers got really excessive last year and the entire group now seems to be in consolidation.

Gold and silver stocks appear to have been toast for a while. As is always the case in resource investing, even the best growth stories can’t generally get their share prices moving if the underlying commodity price is stagnant. Precious metals stocks have always traded in manias, and this is not likely to change.

In a slow-growth environment, dividend income is key. And after an exceptional year like 2013, it may just be the only rate of return to be had.

But like so many large-cap stocks last year, some of the best dividend payers have already gone up tremendously. There isn’t a lot of value for an equity buyer these days.

One specific sector that continues to be relatively hot is the master limited partnerships (MLP) of energy companies. There is very good yield to be had from this sector in addition to the potential for capital gains. There have been countless new listings of these securities, and the North American production boom is the reason.

One firm that illustrates the combination of capital gains and income that can be found … Read More

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