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

Posts Tagged ‘inflation rate’

The Era of Financial Insanity

By for Profit Confidential

What Happens Next for the Stock MarketMy colleague Robert Appel (BA, BBL, LLB) issued a research paper to the subscribers of one of his financial advisories earlier this week. I thought it important that all my readers be aware of and understand the crux of what Robert is saying about our current economic situation and where it will eventually lead.

Here it is:

“The actions of the Federal Reserve (how far they went to ‘stabilize’ the economy) after the Credit Crisis of 2008 is unprecedented in American history. Of course, I’m talking about the Federal Reserve printing nearly $4.0 trillion in new U.S. dollars while keeping interest rates artificially low for almost six years now.

These actions have caused an ‘era of financial insanity’ that penalizes seniors, savers, and prudent investors, while rewarding borrowers, those who leverage, and risk-takers.

It encourages public companies to doctor their own bottom lines by borrowing money (at cheap interest rates) to repurchase their own shares. This reduces the denominator of their earnings numbers—giving only the illusion of prosperity—and also reduces share float, thereby putting upward pressure on stock prices since more money is suddenly chasing fewer shares.

Articles have appeared in several well-known financial publications, with sources, citing central banks around the world have injected $29.0 trillion into equity markets because they themselves simply could not manage a return at the very same rates they were inflicting on others!

The prime beneficiaries of these insane monetary policies are the banks themselves and the government itself. Because low interest rates allow Washington (and other, similar, fiat regimes) to manage debt payments that could not otherwise be managed in a ‘normal’ interest … Read More

Are We Really Headed for Deflation?

By for Profit Confidential

Forget Deflation; Inflation Is Becoming a Big ProblemThe Bureau of Labor Statistics (BLS) reports inflation in the U.S. economy increased by 0.1% in February from the previous month. (Source: Bureau of Labor Statistics, March 18, 2014.) As usual, these numbers have again brought up the theory of deflation—a period when general prices decline.

Reasons for the deflation fear? In 2013, inflation for the entire year was 1.5%. In 2012, it was 1.9%. Going back further, in 2011, it was three percent. If we extrapolate the inflation numbers from January and February of this year and assume the increase will be the same (0.1%) throughout the year, we are looking at an inflation rate of 1.2% for 2014.

Wells Fargo Securities LLC has gone one step further. Economists at the firm believe there’s a 66% chance that deflation in the U.S. economy will prevail and these chances have been increasing since 2010. (Source: Bloomberg, February 21, 2014.)

To me, this is sheer nonsense!

The reality of the matter is that the inflation numbers reported by the BLS exclude changes in food and energy prices—the most important things consumers use on a daily basis. When you include food and energy, inflation is running at a much higher rate.

The prices of basic commodities are skyrocketing. Take corn prices, for example: since the beginning of the year, corn prices are up more than 15%. Wheat prices are up almost 20% year-to-date. When you look at meat prices, such as lean hogs, you will see they have increased by more than 45% since January.

As I see it, deflation is nothing but a farfetched idea for the U.S. economy. (In a … Read More

Why You Shouldn’t Be Fooled by the Market

By for Profit Confidential

Why You Shouldn’t Be Fooled by the MarketFollowing a weak second quarter, the Dow Jones Industrial and S&P 500 indices are now in positive territory for the first time since the end of the first quarter on the backs of a positive July and August.

So far, August has proven strong for technology, growth, and small-cap stocks, with the NASDAQ and Russell 2000 up 4.2% and 3.4%, respectively, as of the close of Thursday. The S&P 500 is holding at 1,400, a level that I believe will be tough to hold. Every time I look at the long-term technical picture of the S&P 500, I’m concerned about the vulnerability. Since 2000, there have been two major tops at above 1,400, and the current bull market rally from March 2009 appears to be heading for a third top.

What I continue to see is an expectation-driven buying based on a best case scenario that includes a third round of quantitative easing (QE3) from the Federal Reserve, the saving of the eurozone, and strengthening in the U.S. economy. And then you have the uncertainty of the upcoming presidential election.

Yet the reality is that Europe remains in a financial mess, with six eurozone countries in a recession and straddled with major debt and growth issues. Britain is also in a recession. Germany, the largest and strongest economy in the eurozone, is showing positive signs, but the problem will be the country’s focus and distraction in helping to save the eurozone. German Chancellor Merkel appears to be backing the desire of European Central Bank (ECB) to keep the eurozone together, but so far, we have yet to see any concrete … Read More

Corporate Profits Meeting Expectations— Stock Market Action Positive

By for Profit Confidential

Corporate Profits Meeting ExpectationsThe stock market is ticking higher in the face of continued weak economic news, and it’s mostly due to the good corporate profits we’re getting. For the most part, we’re so far seeing good corporate profits, because expectations were already reduced. Some companies are slightly reducing their outlooks for the rest of this year, but the declining visibility is modest. Corporations are being extremely conservative with their forecasts and rightly so. It makes it easier not to disappoint.

Corporate profits are mostly expected to be flat compared to last year. This makes dividend income all the more important. If you look at a number of blue chip, dividend paying stocks in this stock market, you’ll notice that many of them are actually trading right at their 52-week highs. While expectations for corporate profits continue to be very modest, institutional investors keep buying the dividends. It’s the only way to beat the inflation rate and the probability that the stock market will return little, if any, capital gains going forward.

I expect the U.S. economy will toy with a technical recession next year. I also expect that returns from the main stock market averages will be low, but that corporate profits will hold up well. One or two more years of difficulty will set the stage for the next business cycle to begin.

Intel Corporation (NASDAQ/INTC) slightly beat the Street for the second quarter, but revised its third-quarter outlook for corporate profits downward. The company warned that business conditions in the U.S. and particularly Europe are getting worse. This is no surprise, and due to its fair valuation, this is likely … Read More

Dividends Income: From Bubbles to Crashes, It Always Wins in the End

By for Profit Confidential

Dividends IncomeIn recent history, without dividends, stock market investors would generally be losing money. And this doesn’t include losses relative to the inflation rate. It’s been such a difficult stock market for the last decade, and the extreme volatility serves to illustrate just how risky equity securities can be.

In the 80s and the 90s, the best bet in town was the technology sector. The bull market was so strong that you didn’t need to bother with individual stock picks; you could have just invested in the NASDAQ Composite and done well. Dividend paying stocks were less valuable during those years because the bull market was so strong that the probability of capital gains far outweighed the certainty of dividends income.

It took about five years for the stock market to fix itself after the technology bubble burst. Then we experienced another mini-bull market, tied to low interest rates and big money being made in real estate. Always during a bull market, dividends income is less attractive. As we know, the bubble burst in real estate, and it almost brought down the global financial system.

We’re in a period now where the stock market is trying to fix itself once again after two over-leveraged bull markets collapsed. Since 2009, the best bet in the stock market has been (and continues to be) blue chip, dividend paying stocks. Just pull up a stock chart on International Business Machines Corporation (NYSE/IBM). In the age of artificially low interest rates, high sovereign debt, austerity measures, and slow economic growth, dividends income is now the most attractive asset out there. In my view, dividends … Read More

Stock Market Action Has Turned Positive and So Have the Prospects for Gold

By for Profit Confidential

The stock market is behaving extremely well considering the huge amount of investment risk in the global marketplace. There is, however, no other place for investors to put their money and be able to generate income (dividends) that beats the inflation rate. All assets are risky: real estate, gold, the stock market and even cash. Investor sentiment is all over the map these days and it’s the new reality in a slow growth environment.

I wrote previously about the Federal Reserve’s potential for new policy action, and while it’s total guesswork, I repeat my view that some new monetary policy action would not be a surprise. (See The Stock Market and Investor Sentiment Tank—QE3 Anyone?) It is an election year and the economic news of late hasn’t been inspiring. I think the stock market is now betting on this, and this speculation is contributing to stronger spot prices for gold.

The price of gold is looking really good in my view, and I think it won’t be long before we break $1,700 an ounce. I’ve been looking at a lot of gold stocks lately, and the stock market has come back to this speculative sector. Trading action in many small- and mid-tier gold stocks has been robust over the last couple of weeks.

With the same fervor that gold stocks have had going up, oil stocks have hit hard with the spot price below $85.00 a barrel. That’s the thing you always have to deal with when you’re speculating in resource stocks; you have the operational business risk and the commodity price risk. Even if business is booming at … Read More

You Know the Market’s Worried When Spot Gold Moves up with the U.S. Dollar

By for Profit Confidential

dividend paying stocksInvestor sentiment continues to be best reflected in oil prices, which keep taking it on the chin. Certainly there’s an argument to be made that low oil prices are good for the economy and stimulative, but a WTI oil price below $85.00 a barrel reflects a global marketplace that’s very worried about the future. The worry is about slowing growth or lack of growth in the world’s most important economies.

The stock market is basically okay if the S&P 500 Index can keep itself above 1,300. Oil prices are likely to be subdued for quite a while, but the spot price of gold has been impressive. It’s possible that the correction in gold prices is over, with the marketplace so jittery on currencies. Everything, it would seem, is out of whack in financial markets. The last few years have really been unique.

This is why investment risk is so high in the current environment and why oil prices have been hit so hard. It’s very important that stock market investors be conservative. The U.S. economy is slowly creating a solid foundation for a new business cycle, but I’m afraid it’s likely we’ll get a recession first. Accordingly, there’s no particular reason to take on a lot of new positions in the stock market. Certainly one can invest in higher dividend paying stocks for the income. (See The Blue-chips Hitting New All-time Highs in Spite of Stock Market’s Correction.) You can’t beat the inflation rate staying in cash.

If oil prices reflect the diminishment of expectations for the global economy, then gold prices reflect all the angst because of … Read More

Why Getting the Business Cycle Right Is the Only Thing That Pays

By for Profit Confidential

dividend paymentTwo decades ago, everyone was making money from the stock market. There was a boom, and some of the best stocks were in the technology sector, mostly due to the proliferation of the Internet. You didn’t even need to own the best stocks; just owning the index was a profitable investment strategy. Then, the best stocks and the rest of the market came apart, because valuations got too extreme for the amount of earnings being generated. Many companies in the technology sector are still today recovering from the stock market bubble that burst.

Take Intel Corporation (NASDAQ/INTC), for example. This company is still growing its revenues and earnings, but what used to be one of the market’s best stocks turned out to be a big dud. The company’s stock price hasn’t done anything for years. In fact, Intel’s stock market price on a split-adjusted basis is the same now as it was in November 1998. That’s 13 1/2 years of dividend payments, but no bankable capital appreciation for long-term holders of the shares.

Another company with a similar story is Cisco Systems, Inc. (NASDAQ/CSCO), which is now trading at the same split-adjusted price as in October 2008. Even if the company’s dividend payments covered the inflation rate, if you still owned the stock from that time, you wouldn’t have made a dime.

The notion that long-term investing in the stock market is the only way to go is a total bust as far as I’m concerned. Long-term investing works—but only if you own the right businesses at the right time during the business cycle. Things happen; industries change and … Read More

Stock Market Correction: Why it’s Limited

By for Profit Confidential

earnings seasonsUnless we get a major shock like war or something related to the sovereign debt crisis in Europe, I don’t think the stock market is going to experience a lot of further downside. Stock prices might drift and then trade range-bound for a couple more months, but stock market valuations are fair and this provides a lot of cushion.

I do think there is more downside potential in gold, silver and oil prices and it’s not just related to slower growth in the global economy. A lot of the price weakness in these commodities is related to strength in the U.S. dollar, which experiences renewed enthusiasm every time there’s an uncertain development in the eurozone.

There remains, in my view, an underlying strength to the stock market at this time. Institutional investors want to be buyers in this market; they only need a reason to do so. I fully expect that large-cap companies that pay dividends will continue to be the market leaders going into 2013, because, in a slow growth environment, dividends income is crucial. I think it’s fair to conclude that expectations for capital gains are fairly low among all stock market investors, so dividends become the only way to beat the inflation rate.

Because we’re now in the lull between earnings seasons, increased dividends announcements are reduced. I think we’ll get another round, however, during second-quarter earnings season, largely because companies can and want to keep shareholders happy. The cash hoard among most large-cap companies remains substantial.

When share prices go down, yields for dividends go up of course. Most of the stock market’s leaders haven’t actually … Read More

Dividend Increases Soar as Companies Return Excess Cash

By for Profit Confidential

U.S. economyAs expected, there have been a lot of dividends increases from big, brand-name companies with excess cash on their books. New business investment is somewhat lagging given all the risks in the marketplace, so it’s much easier for companies to increase their dividends and/or initiate new stock market buybacks. This is, after all, what stock market investors’ want.

It’s pretty clear that the U.S. economy isn’t accelerating; it’s just slowly moving forward with an improving underpinning. What was evident in the recent gross domestic product (GDP) news was that the inflation rate is affecting GDP growth and it’s not only due to higher energy costs. Consumers have to spend more to attain the same amount of goods and that puts the brakes on economic growth.

For the most part, however, investor sentiment in the stock market remains positive and the corporate news is mostly good enough for institutional investors to be buying. And this is what they are buying—large-cap companies with increasing dividends.

We’ve had all kinds of increased dividends announcements from the big companies that you know, such as IBM (NYSE/IBM), Johnson & Johnson (NYSE/JNJ), American Express Company (NYSE/AXP), DuPont (NYSE/DD), ExxonMobil Corporation (NYSE/XOM), Procter & Gamble Co. (NYSE/PG), and the list goes on. (See Dividends: The Only Way to Keep the Mini Bull Market Alive.)

This makes the S&P 500 Index appropriately valued at 1,400 and, if the economic news holds relatively positive, we just might get another 10% in price appreciation from the stock market this year. Nothing should surprise you when it’s an election year. The Federal Reserve seems intent on keeping stock market investors … Read More

Stock Market Performing Well Given
Only Slight Outperformance on Earnings

By for Profit Confidential

 corporate earningsWe’re getting into the heart of first-quarter earnings season and the stock market to me seems appropriately valued. But, while corporate earnings are decent, no brand-name companies are hitting their numbers out of the park. And this begs the question; how can the stock market advance? My answer is that I don’t think it can much further.

Corporate earnings are so far coming in as expected. Slight out performance, especially on earnings per share, is pretty much a standard goal of corporations and is reflected in guidance. The stock market appreciated in advance of this earnings season and therefore is due for a consolidation. The next catalyst for an upward move in the equity market will have to be economic news and it will have to be fairly good in order to move the market.

There is a little momentum in employment, spending and housing construction, but I think it’s fair to say that most analysts expect only modest good news on the economy. The Federal Reserve has done all it can to try to re-inflate the U.S. economy and will continue to print money at a record rate to prevent a recession. This is why I’m just cautiously optimistic about the coming quarters and, as an investment strategy in the stock market, I’m advocating large-cap dividend paying stocks for the vast majority of a portfolio. In my mind, investment risk in equities is too high, not having the securing of dividends. (See TJX Companies: One of the Best Stocks (and the Most Boring) in the Marketplace.) The money is there on the part of institutional investors to move … Read More

Working Hard All Your Life and
Saving: Why It Hasn’t Worked Out

By for Profit Confidential

quantitative easingFor some time I have been saying that those people who were prudent, who worked hard all their lives and saved their money, are being punished by historically low interest rates, which are below the inflation rate.

Clearly, artificially low interest rates below the inflation rate help those who are in debt, including the U.S. government, because their interest costs are greatly reduced.

Savers include those retirees who saved prudently all their lives and are now relying on interest income from their savings to help fund their retirement. Savers can also be those of working age who have reasonable amounts of debt, so that they are capable of saving money for retirement or for a large purchase. They, too, are depending on the interest earned on their savings to help finance their retirement or a large purchase.

The problem is that, with interest rates at historic lows, savers who do not want risk and who invest in bank CDs or GICs are earning next to nothing on their savings. To compound the problem, savers are earning interest that is below the inflation rate, which not only wipes out the little interest they earn, but also eats into their savings, because their savings have not kept up with the inflation rate. How can the U.S. experience an economic recovery in such an environment?

A recent study by Haver Analytics and money manager Gluskin Sheff have estimated that, since 2008, savers in the U.S. economy have lost over $1.0 trillion in interest income during the economic recovery. This study takes the difference between the low interest rates of the last few … Read More

Event Trading on Dividends—This Is the Market for It

By for Profit Confidential

dividend payoutsBecause the Federal Reserve created an environment of artificially low interest rates, investors both large and small are craving income. You can’t get any real return from cash and the opportunities in bonds just barely cover the inflation rate and have long durations. Real estate investment trusts (REITs) can yield a greater amount of income, but a lot of investors are wary of these securities. This is why large-cap, dividend paying stocks have done so well lately, because no other asset class generates any material income for investors. Dividends are an income stream, but also provide security in a very uncertain world.

When the Federal Reserve announced several months ago that it would keep interest rates low and stable for an extended period of time, the stock market was handed a big gift. Institutional investors have been very active, pouncing on shares of companies that announce increased dividend payouts, and I think we’re going to see many more positive dividends announcements in the near future. I will be very surprised if we don’t.

This is why I’m much more bullish on large-caps as a stock market group. (See Must-haves for Your Stock Market Portfolio.) Big companies that pay dividends are the best bang for your buck in the age of austerity and high sovereign debt. We’re not in a stock market environment at this time that rewards speculative investing. Commodities continue to prove their inherent volatility and smaller companies aren’t being pursued by institutional investors. There are always good trades out there, but with stock market valuations reasonable, a large-cap dividend paying stocks can move just robustly as any … Read More

Municipal Bond Defaults Doubling;
Bailout Options Diminishing

By for Profit Confidential

inflation rateWhile the U.S. economy is apparently improving (at least that’s what the media has been telling us), there are more municipalities defaulting on bond payments and facing widening budget deficits.

Moody’s Investors Services just released a study on the municipal bond market that showed that, for all of the municipal bonds it covers, there were only 71 bond defaults between 1970 and 2009. Moody’s rates over 17,000 municipal bonds.

The world has changed since the financial crisis hit in 2008. The pressure has been on the municipalities and their widening budget deficits since 2008, because the cities and states no longer have the revenue to cover their expenses.

From 1970-2009, Moody’s cited 2.7 annual municipal bond defaults per year on average. In 2010 and 2011, there were 5.5 average annual defaults per year—a more than 100% increase in the annual rate of municipal bond defaults. Clearly, there is a shift here in the wrong direction. Of course, no sooner does Moody’s release these results than we hear of more budget deficit trouble with municipalities.

Harrisburg, Pennsylvania, is back in the news saying that, for the first time in its history, it will default on its municipal bond payments today, March 15, 2012.

In 2009, when Harrisburg first got into trouble, it was able to lease municipal land to the state to receive the funds to cover its municipal bond payments. In 2010, the state simply sent aid over to meet the city’s debt service obligations.

This year, the government is split between defaulting on payments and selling more of its assets to cover its debt and municipal bond payments. … Read More

U.S. Inflation Rate Running at 10%, According
to Popular Financial e-Letter’s Readers

By for Profit Confidential

Thank you to the thousands of our readers who participated in last week’s inflation survey. Here are the results with my comments.

On the first question, as to which index best reflected the inflation rate in this country, the Everyday Price Index at eight or the Consumer Price Index (CPI) at 3.1%, 94% of our readers believe that eight percent is better reflection of the true inflation rate in America:

This is a landslide victory for the Everyday Price Index. This result was further confirmed by the second question in which I asked what the true inflation rate is in this country.

The winner of the true inflation rate by a wide margin was 10%. The great majority of Profit Confidential readers believe that inflation is running at 10% per annum.

Of course, not everyone who responded to the survey left comments, but I can tell you that, out of the hundreds of comments that were left, less than one percent of readers believe that inflation is NOT a problem. Everyone was very, very worried that the inflation rate was worsening.

Below are survey respondent comments that reflected what the majority had to say:

“Yes, we’re worried about inflation big time. Although our house is losing value, we still need to pay for the fixed amount on our mortgage. Without wage inflation, the inflation rate (food, gas, child care) in everyday items really eats up our budget. We’re worried we can’t even save for retirement if the inflation rate keeps up at this pace, no matter how we try to save money.”

“I’m on a fixed income and unfortunately, the Read More

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