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

Posts Tagged ‘gross domestic product’

Two-thirds of Americans Sit with Less Than $25K in Savings, Investments

By for Profit Confidential

Two-thirds of Americans Sit with LesConsumer spending, which is so desperately needed, only increases when consumers are happy—when they are confident about their jobs, savings, investments, and overall wealth.

Right now in the U.S. economy, none of that is present. For consumer spending to increase, you need consumer confidence in the U.S. economy to increase. I don’t see it, even after multiple rounds of quantitative easing and the government adding a significant amount of debt. Consumers are worried about the economy and are hesitant to spend.

A recent survey by Employee Benefit Research Institute proves the point. According to the national survey, Americans are losing confidence in their ability to retire comfortably. Their biggest concerns include job uncertainty and debt, with 42% of the respondents believing that job uncertainty is the biggest hurdle to their financial success. Likewise, 60% of the workers reported that they have total household savings and investments of less than $25,000. (Source: Employee Benefit Research Institute, March 13, 2012.) How can there be consumer spending growth under these circumstances?

The demand for most basic goods by consumers isn’t there either. As an example, the demand for cheese in the U.S. has been softening as we approach the holiday season. The Chicago Mercantile Exchange (CME) spot prices for cheese declined significantly during the week of November 5. Cheddar blocks fell by $0.19 a pound (lb) to $1.92/lb—more than nine percent. (Source: Milk Producer Council, November 9, 2012.) Weak cheese sales are a clear indication that consumer spending is pulling back.

And some 100 California farmers are closing down, because they are facing financial hardships due to weak demand for milk and lower … Read More

Why a Severe Stock Market Correction’s Imminent

By for Profit Confidential

Severe Stock Market Correction’s ImminentIn a sense, the stock market continues to be held hostage by the continuing sovereign debt crisis in the eurozone and the “fiscal cliff” in the U.S. But investor sentiment changed before recent worries regarding these two issues, and corporate earnings growth is slowing. I think we’ll be very lucky to see any gross domestic product (GDP) growth next year from Western economies.

Wall Street still expects broad-based earnings growth next year, but the estimated pace of this growth is being reduced considerably. Lots of Dow stocks, even Exxon Mobil Corporation (NYSE/XOM), are seeing their earnings estimates revised lower for 2013.

So we’re in a stock market where investment risk is high, uncertainty is great, and earnings outlooks are going down. It’s not a great time to be a buyer.

Apple Inc. (NASDAQ/AAPL) remains this market’s perfect benchmark stock, capturing investor sentiment at its core. Apple’s share price is now off its recent all-time high by $160.00 a share—that’s correction territory and the stock’s near-term downward trend looks intact. Apple’s stock chart is below:

Apple Inc Chart

Chart courtesy of www.StockCharts.com

And the pain (on the stock market) doesn’t stop there; Amazon.com, Inc. (NASDAQ/AMZN) is now at a major technical price floor and is very close to breaking down further. Google Inc. (NASDAQ/GOOG) is holding up okay in this market for now, but the position is still off by $100.00 a share since last month. (See “What Many Blue Chips Are Signaling.”)

The stock market is at a crossroads right now. All the information is in the marketplace: the declining expectations for earnings, the continuing sovereign debt crisis in the eurozone, … Read More

More Signs That China’s on a Global Hunt for Resources

By for Profit Confidential

Global Hunt for ResourcesChina may be slowing, but the resource-hungry country is always on the hunt for resources to help fuel its industrial growth in the decades ahead. And if you believe the country and its objective to double its gross domestic product (GDP) by 2020 (read “China’s Golden Years Still to Come”), then you have to believe that reliable resources will be needed. This means internal exploration and the buying of foreign resource companies.

In 2009 and 2010, Chinese energy firms made about $48.0 billion in acquisitions in North America, according to the International Energy Agency (IEA). The country has investments in the Canadian tar sands in Alberta, and I expect to see more Chinese capital flowing in.

And according to the IEA, China has targeted Iraq as its top oil source by 2030. (Source: “China to be main buyer of Iraqi oil by 2030, says IEA,” China Daily, November 13, 2012.)

Whether it’s in the Middle East, Africa, or Canada, China wants to and needs to pump up its access to oil reserves, regardless of the location.

Take Canada, for instance. In spite of political roadblocks from the Canadian government, China has been targeting Canadian energy plays; albeit, not all have played out.

CNOOC Limited (NYSE/CEO), one of the three major state-owned oil producers in China, wants to buy Canada-based Nexen Inc. (NYSE/NXY) for $15.1 billion in cash, or $27.50 a share. With the prevailing market share price at $24.50, there’s a sense the deal could fail. The problem is that the deal has yet to be accepted by the Canadian regulators and government, which have cited security … Read More

A Ponzi Scheme Called America

By for Profit Confidential

dollar with magnifying glassAs we all know, the eurozone credit crisis has taken away any chance of economic growth in the global economy.

Spain—the current epicenter of the credit crisis in the eurozone—has seen its credit rating downgraded to a credit rating of BBB- from BBB+ by the Standard and Poor’s (S&P) credit rating agency. A credit rating of BBB- is the lowest investment grade credit rating issued by S&P and just one notch above “junk” status. (Source: Standard & Poor’s, October 10, 2012.)

In 2007, eurozone member Spain saw its national debt equate to 36% of its gross domestic product (GDP) that year. Now, with the government’s plan to borrow more than 207 billion euros next year, the country’s debt as a percentage of GDP will reach 91%. (Source: Business Week, October 11, 2012.)

Let’s not forget; Spain is a major contributor to the eurozone economy and is the 12th largest economy in the world.

From all of this, what bothers me is that the U.S. economy—the biggest economy in the world—is sitting on the credit rating of AAA, as issued by Moody’s Investor Services, and AA+ by S&P, the same credit grading that puts Spain’s rating at BBB-.

While the U.S. enjoys a strong credit rating of AAA, the national debt compared to GDP for the U.S. is much higher than that of Spain, a eurozone country. In the U.S., this year’s GDP is estimated at $15.5 trillion. (Source: Bureau of Economic Analysis, September 27, 2012.) But the total national debt of the U.S. stands at $16.2 trillion (see the U.S. debt clock at www.investmentcontrarians.com). This makes the U.S. … Read More

Here’s Why Chindia Will Be Sizzling Hot for Spending

By for Profit Confidential

Chindia Will Be Sizzling Hot for SpendingThe majority of you have likely heard of the growing reference to “Chindia,” the regions of China and India. The explosive demand for goods and services here will be driven by a combined population of about 2.5 billion people, or about 37% of the world’s population.

Yet it will not be just the staggering growth in population that will substantially increase demand, but also the size of each country’s economy and middle class. China and India, whose respective economies are ranked second and tenth in the world, will be a driving force behind the global demand for goods and services.

According to consulting firm Bain & Company’s web site, “China, followed by India and other emerging Asian economies, is creating a vast new population of consumers, whose growth will continue into the coming decade.” (Source: “The Great Eight: Trillion-Dollar Growth Trends to 2020,” Bain & Company, September 9, 2011.) The research suggested that about two-thirds of the world’s growth in the middle class will be derived from Chindia.

While the real gross domestic product (GDP) growth in the U.S. is estimated to run at 2.4% in 2013 and 2.8% in 2014, the number is below the world average of around three percent and 3.3%, respectively, according to the World Bank. China, which is showing some stalling, is still expected to expand its economy by 8.6% and 8.4%, respectively, while India’s GDP growth is estimated at 6.9% and 7.1%, respectively. The GDP growth in China is optimistic, as the country tries desperately to avoid a hard landing that is being affected by slower growth in the eurozone and global economy.

I … Read More

U.S. Economy Following Path of Greece & Spain?

By for Profit Confidential

national debtThe U.S. Congressional Budget Office (CBO) has issued another scathing report on the state of the mountainous U.S. national debt.

The CBO says the national debt will double by 2026 and reach 200% of gross domestic product (GDP) by 2037 unless firm action is taken to stem America’s annual trillion-dollar deficits. (For the benefit of my new readers, Greece got into trouble when debt-to-GDP in that country hit 130%.)

There is no doubt tax increases and radical spending cuts are needed to reduce the national debt. The CBO notes that, if congress allows the tax increases and the removal of spending programs on January 1, 2013—the “fiscal cliff”—then it will be the important first steps in reducing the budget deficit and so the national debt.

However, as I’ve mentioned many times in these pages, if congress does allow these tax increases and removal of spending programs to occur on January 1, 2013, it will send the U.S. economy further into recession. Does the elected government want to be responsible for sending the economy into a recession after just being elected in November? Not a chance.

As usual, the CBO assumes some pretty rosy numbers in its calculation of the national debt. The CBO assumes that the 10-year U.S. Treasury note will average roughly three percent during the next 20 years!

I can’t see this happening; long-term interest rates will eventually rise, which will increase the interest payments on the national debt, which will widen (not shrink) budget deficits…leading to a doubling of debt-to-GDP much sooner than 2037.

Of course, as the economy worsens towards the end of this year … Read More

Blue-chips: Watch & Wait for the Best Ones to Correct Further

By for Profit Confidential

The daily ebb and flow of the stock market really illustrates the degree to which investors buy and sell based on their emotions. Europe says there’s an idea to work more closely on the sovereign debt crisis; the stock market goes up. Europe doesn’t really execute on said idea; the stock market goes down. Granted, it’s tough for an equity investor to make solid choices after all that’s transpired since mid-2008. In the end, the rollercoaster of uncertainty in today’s stock market (blue-chips or not) only serves to lengthen time horizons for a reasonable return on investment.

My view on stock market investing in this kind of environment is to stick with conservative, blue-chip companies that pay dividends. I would be following specific blue-chip stocks in this market; those with long track records of successful wealth creation. But speculating for capital gains is a whole other story. In the late 1990s, it was easy to make money from technology stocks. Now it’s a completely different ballgame. (See Stock Market: The Good News for 2012) Blue-chips might not be the fastest growing companies; but, then again, there’s not a lot of growth out there to be had.

There’s always room in an equity portfolio for some high flyers, but the days of five percent to six percent in gross domestic product (GDP) growth are gone. In the age of austerity, which has been forced upon us due to high levels of sovereign debt, economic growth is incremental, basically moving with the population.

I’ve written before that, if I were a new investor, I would be a buyer of blue-chip stock … Read More

Europe’s Sovereign Debt Means Zero
Growth for the Next Few Years

By for Profit Confidential

sovereign debtJust when the U.S. economy and the housing market are turning up, Europe’s sovereign debt bomb critically injures global capital markets. That’s my biggest fear going forward and it’s a very real possibility. The U.S. stock market would be quite a bit higher if there was more certainty in the eurozone.

Something has to give with Greece. Even with substantial austerity measures, that country’s finances are unsustainable. The bond market is priced for absolute safety right now and, in a sense, it’s expecting the worse. The stock market is in correction and the only thing holding it up is its reasonable valuation. And it’s not as if Greece declaring bankruptcy is that much of a shock, it’s the risk to the euro currency that’s the problem.

So, the domestic stock market continues to be held hostage by sovereign debt problems in the eurozone. Of course, the U.S. also has a sovereign debt problem, but it’s fixable as long as there’s the will to do so. Regardless, if you’re a country with sovereign debt that’s greater than your gross domestic product (GDP), it’s a big problem. It’s like cascading credit card debt; paying off the monthly balance with another credit card. It’s a very difficult cycle to get out of.

Right now, a lot of the economic news from Europe is showing virtually no economic growth. Recession or zero growth is now in the eurozone. While I view the U.S. economy to be in a continued recovery, Europe’s sovereign debt problems are likely to be the catalyst for the next U.S. recession. I still am worried about geopolitical risks associated … Read More

Global Economies Backtracking

By for Profit Confidential

economic recoveryThe debt and growth problems in the eurozone continue to dominate the headlines. The eurozone countries are looking at the impact of Greece exiting the 17-country eurozone. Greece can’t even elect a coalition government to deal with the austerity measures.

Now there’s news that the eurozone is continuing to slide. Not really a surprise. The eurozone composite Purchasing Managers’ Index (PMI) contracted to 45.9 in May, the lowest level since June 2009, and below the 46.7 reading in April. It was also the ninth time the PMI was below the neutral 50 level since June 2009. The reading clearly indicates that growth will be challenged.

France is stalling. Germany, the largest and most influential country in Europe, expanded at a muted 0.5% in the first quarter. Moreover, declining inventories suggest less demand for goods. The problem is that the weakened countries of Germany and France are not conducive to economic recovery in the eurozone. You will discover over time that this is true.

My concern is that the fragility of the eurozone impacts the global economies that trade with the region. The 27-nation European Union is clearly feeling the pinch. Britain just entered its second recession since the financial crisis in 2008, impacted by the sluggishness in the eurozone. Britain saw its gross domestic product (GDP) contract 0.3% in the first quarter following a 0.2% decline in the fourth quarter. The country continues to face budgetary concerns and, without higher exports to drive revenue income, Britain will continue to face hardship this year and into 2013.

The European debt crisis and muted growth in the eurozone have also impacted ChinaRead More

Economic History Repeats Itself

By for Profit Confidential

gross domestic productThe U.S. durable goods report is an important gauge of economic growth. It focuses on big-ticket items that are purchased by businesses and consumers, which are meant to last at least three years; a sign of business and consumer confidence.

In April 2012, the headline new U.S. durable goods order number was up 0.2% (source: Department of Commerce). This matched analysts’ estimates. But when you look deeper, we see a sign of nothing short of catastrophe in economic growth in this country.

To truly get a gauge of economic growth and possibly jobs growth, it is important to remove transportation and defense spending from these headline number in order to get core durable goods.

Core durable goods orders, which include investment in capital equipment and machinery, fell 1.9% in April, when compared to March! Not only was a positive number expected, but worse: March’s weak number was revised drastically downward by the Department of Commerce!

We were originally told that core durable goods orders dropped 0.8% in March, but that number has just been revised down and now shows a steeper decline of 2.2%!

Not only was April’s number weak, which does not bode well for economic growth and jobs growth, but also March’s number was far worse than expected.

This is the first time in a year that core durable goods orders experienced consecutive declines: March and April!

And this tells me that the U.S. gross domestic product (GDP) numbers for the second quarter will be very, very weak!

Without spending by corporations on capital equipment, it is no wonder that jobs growth has slowed in the last … Read More

The 2013 U.S. Recession

By for Profit Confidential

US DollarAs I’m sure you’ve heard…

Tax increases and government spending cuts in the U.S. are set to take place on January 1, 2013.

Originally, the purpose of the payroll tax cuts was to stimulate the U.S. economy; government spending programs (like extending unemployment benefits) were also aimed at getting the economic recovery going.

The tax cuts and government spending initiatives that were enacted to help the economy “rebound” from the crisis and recession of 2007 add up to roughly $433 billion, or approximately 2.9% of U.S. gross domestic product (GDP) (source: Bloomberg).

If GDP growth is expected to be in the two-percent range in 2013 and we subtract 2.9% from it, then we automatically get a recession number of -0.9% for GDP growth.

As we get closer to the U.S. Presidential election and to the first day of 2013, the press has paid closer attention to the tax cuts and government spending initiatives being reversed, because of the recession implications…so much so that January 1, 2013, is now being referred to as the “fiscal cliff.”

Just this week, the U.S. Congressional Budget Office (CBO) put out a note stating that Congress needs to address the fiscal cliff or the U.S. economy could be in a recession in the first part of 2013.

Of course, the issue will most likely not be addressed until right after the election, giving Congress very little time to act. (It might not matter anyway; a recession-plagued Europe, a slowing Chinese economy, and a slowing U.S. economy might put us in recession before 2013). (See: Economic Growth in the Second Half of 2012 to Deteriorate.)… Read More

Paying the U.S. Government to Hold Your Money

By for Profit Confidential

U.S. economyI know it sounds crazy, but it’s true. Investors are paying the U.S. Treasury to hold their money in exchange for participation in expected rapid inflation.

Treasury Inflation Protected Securities, more commonly known as TIPS, are bonds backed by the U.S. government that protect against rapid inflation. TIPS pay interest like every other bond, except that the interest is tied to the consumer price index (CPI).

If inflation rises—as measured by the CPI—then the holders of TIPS get a fixed rate of interest plus the positive change in the CPI. If inflation falls—as measured by the CPI—then the holders of TIPS get a fixed rate minus the change in the falling CPI: an investor will lose money if inflation falls.

The U.S. Treasury recently sold 10-year TIPS for a record-low interest rate of negative 0.391% (source: Bloomberg, May 17, 2012). In essence, the buyer of this bond is paying the U.S. Treasury 0.391% to hold his or her money in exchange for a play on expected rapid inflation.

This is the third sale in a row where investors paid the U.S. Treasury to hold their money, but this last one hit the record.

Most interesting, these bonds were for a term of 10 years…not 10 months, which means that more and more investors are skeptical that the Federal Reserve can somehow manage to keep rapid inflation contained, which will eventually lead to a much higher CPI.

Even though gas prices have come down and commodities have sold off recently, the record-low interest rate environment and current easy-money policy may lead to a point where rapid inflation eventually rises higher … Read More

Eurozone Weakness: Don’t Take It Lightly!

By for Profit Confidential

debt crisisEurope is an ocean away, but it’s literally in our backyard as far as the impact from its credit crisis and it doesn’t appear to be going away anytime soon.

Greece can’t even elect a coalition government to deal with the tough austerity measures that the previous government agreed to in order to receive a second tranche of emergency funds. Another election is set for June 17, 2012, to try to form a government. Failure to do so or to meet on the budget requirements could see Greece drop out of the eurozone. And, in spite of what some are saying, the G8 leaders don’t want Greece to exit the eurozone.

Then there’s the reality. Greece is a weak player balancing on a tightrope and it will likely take decades for the country to emerge from its mess, but even this is not guarantee. In fact, the situation in Greece could worsen if the tough austerity programs fail to deliver debt cuts and cost control. Germany, which is fighting its own gross domestic product (GDP) growth issues, is not interested in funding anymore money to Greece and wants to focus on its own economy.

The same goes for France. The wine may be great here, but the growth is a bit shaky.

And then there’s Spain with its rising bond yields. The 10-year auction yields fell to 6.16% as of May 22 on optimism towards additional help for the eurozone. The high yield places pressure on Spain in financing and is not sustainable given the country’s troubled debt and muted growth. The high yields are an indication of potential … Read More

The Weakest Economic Showing of the Year?

By for Profit Confidential

consumer spendingMore bad economic news…

U.S. retail sales for April rose at the slowest rate of 2012. While the retail sector was expected to continue its torrid pace of consumer spending increases in 2012, this report proves my theory: lack of a real winter (because of much better than usual weather in January and February) on the east coast this year resulted in consumers going out and doing their spring shopping early.

To get the real picture on consumer spending, we need to remove car sales, filling up at the local gas station, and building materials from the retail sales numbers to get core retail sales. Core retail sales came in at 0.1% in April (source: Department of Commerce), well below the consensus economic forecast of 0.3%.

April core retail sales in the U.S. were at their lowest level since December of 2011—a poor sign for the fragile retail sector.

What was the big soft spot in April retail sales? It was weak sales at the clothing stores and at the department stores that weakened the retail sector considerably for April.

Sales at building materials stores in the retail sector also experienced a weak April. Obviously these areas were affected by the warm weather and Easter being moved up to March this year.

Let’s face the facts…

If economic growth was strong and the economic recovery was really taking shape, retail sales would have been stronger in April. Instead, there is no follow-through to that short burst in real sales earlier in the year.

The main problem, as I’ve cited countless times in these pages, is that real disposable income is … Read More

Retail Sector Forecast Remains Cloudy

By for Profit Confidential

retail salesConsumer spending remains fragile and will impact the retail sector and gross domestic product (GDP). The key drivers are jobs and wealth generation from such sources as stocks and housing.

In the retail sector space, sales have been largely mixed, with discounters and big-box stores faring the best, as shoppers flock to Wal-Mart Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Costco Wholesale Corporation (NASDAQ/COST), along with the increasingly popular dollar stores and the massive hyper-supermarkets.

The reality is that consumer spending drives GDP growth. The way consumers spend will likely dictate how the economy will fare in 2012. With consumer spending accounting for about 70% of the GDP growth in this country, it will be critical to get consumers to spend.

Spending on big-ticket items continues to be fragile. Durable Goods Orders fell 4.2% in March, well below the drop of 1.7% expected and the 1.9% gain in February. Excluding transportation, the reading fell 1.1% compared to the 1.9% gain in February.

In March, retail sales excluding auto increased 0.8%, down from 0.9% growth in February, but above the 0.6% estimate.

Job creation is the most critical variable for the retail sector. The weekly initial claims have been below the threshold 400,000-level for weeks.

In March, a disappointing 120,000 jobs were created, well below the 200,000 estimate and the 240,000 in February. The jobless rate was 8.2%, which is an improvement, but it’s still too high for a healthy economy and could strangle growth in the retail sector.

The Fed estimates that the unemployment rate will hold above eight percent this year. Moreover, economists feel the economy needs to … Read More

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