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

Posts Tagged ‘real estate market’

About That 500% Jump in Interest Rates…

By for Profit Confidential

Economy and Stock Market Handle a Five-Fold Jump in RatesThe verdict is in…

Last week, at the end of its regularly scheduled meeting, the Federal Reserve said:

1)      It would continue to reduce the amount of money it creates each month. The Fed said it will be out of the money printing business by the end of this year. By that time, the Federal Reserve will have created more than $4.0 trillion new American dollars (out of thin air).

2)      And when the Treasuries and mortgage-backed securities the Fed has bought mature, they will roll them over—which means they will just continue collecting interest on the securities they bought as opposed to taking the cash when they mature. (Source: “Press Release,” Federal Reserve, September 17, 2014.) I doubt the Fed has any choice on this. If the Fed doesn’t roll over the Treasuries it has bought, who would buy them when they hit the market?

The Federal Reserve also provided its economic projection on where it expects the federal funds rate, the key U.S. interest rate, to be down the road:

1)      The central bank believes the U.S. economy will grow between two percent and 2.2% in 2014, then grow in the range of 2.6% to three percent in 2015. From there, it goes downhill. In 2016, the Federal Reserve projects more of the same—U.S. economic growth of between 2.6% and 2.9%. In 2017, the U.S. growth rate is projected to be sluggish and in the range of 2.3% to 2.5%. (Source: “Economic Projections,” Federal Reserve, September 17, 2014.) Hence, we are looking at four more years of slow growth.

2)      A majority of the members of the Federal … Read More

The Sobering Issue

By for Profit Confidential

Why Our National Debt Will Double From HereAccording to the U.S. Congressional Budget Office, next year, the government is expected to incur a budget deficit of $469 billion and then another budget deficit of $536 billion in 2016. (Source: Congressional Budget Office web site, last accessed July 21, 2014.) From there, the budget deficit is expected to increase as far as the projections go.

Yes, the government’s own estimates are that our country will run a budget deficit every year for as long as the government’s forecasts go.

That’s quite unbelievable. We live in a country where the government (and politicians) feel it is okay to continue being “negative” every year, indefinitely. It’s like I’ve written many times: if our government were a business, it would have gone bankrupt long ago. But the government, through its non-owned agency, the Federal Reserve, has the luxury of printing paper money to fund its budget deficit and debt. If a business did that—printed money to pay its bills—that would be illegal.

Today, the U.S. national debt stands at $17.6 trillion with about $7.0 trillion of that incurred under the Obama Administration. (Is it any wonder a CNN/ORC International poll said this morning that 35% of Americans say they want President Obama impeached with about two-thirds saying he should be removed from office?)

But what happens to the budget deficit once interest rates start going up? We’ve already heard from the Federal Reserve that interest rates will be sharply higher at the end of 2015 and 2016 than they are now.

Earlier this month, the U.S. Department of the Treasury was able to borrow money (issued long-term bonds) at an interest … Read More

The Mother of All Bubbles?

By for Profit Confidential

real estate marketAs I often harp on about in these pages; economic growth occurs when the general standard of living in a country gets better. You can’t say an economy is improving when a significant portion of the population is suffering. You can’t claim there’s economic growth when the poverty rate is increasing. You can’t say the economy is improving when personal incomes and savings are declining.

Looking at this a little closer…

Food stamps usage in the U.S. economy has increased 68% since 2008, with 47.66 million people, or more than 15% of the entire U.S. population, now using food stamps. Going back to 2008, there were 28.22 million Americans using some form of food stamps then. (Source: United States Department of Agriculture, November 8, 2013.)

From 2000 to 2012, the poverty rate in the U.S. economy increased from 12.2% to 15.9%—a hike in the poverty rate of more than 30% in just 12 years. In 2000, there were 33.3 million Americans living in poverty; this number grew to 48.8 million people in 2012. (Source: United States Census Bureau, September 2013.)

In 2008, the median household income in the U.S. economy was $53,644. In 2012, it was almost five percent lower at $51,017. (Source: Federal Reserve Bank of St. Louis web site, last accessed December 2, 2013.)

And because incomes have fallen and prices have risen, people have no choice but to save less.

Back in November of 2008, Americans saved an average of 6.1% of their disposable income, meaning they saved $6.10 for every $100.00 they earned after taxes. In August of this year, personal savings as a percentage of … Read More

The Only Way to Protect Your Investments from the Turmoil in China

By for Profit Confidential

The Only Way to Protect Your Investments from the Turmoil in ChinaThe deleveraging that’s taking place around the world is obviously echoed in tumultuous capital markets, but a retrenchment in the bond and stock markets has been overdue for ages.

As is usually the case, several catalysts came together at the same time to produce an unsurprising stock market sell-off. These included: comments from the Federal Reserve regarding quantitative easing, rising 10-year Treasury yields, weak earnings from benchmarks, and concern over China’s real estate market and its banks.

While China’s stock market has been in a pronounced downtrend since the first week in June, its banks are still controlled by the government, so any potential banking crisis in that country is a different game than we’ve seen before because of China’s $3.3 trillion in foreign currency reserves (mostly in U.S. Treasuries).

But that very game could have serious consequences for the U.S. stock market if China needed that money to flood its capital markets with liquidity. With a different approach to saving, money creation, and fiscal management in general, currency destabilization from China is an ongoing risk.

It was just a few years ago that capital markets treated economic news from China as emerging market news only. Now, China’s economic news is taken very seriously by the global economy, and the country’s numbers directly affect the U.S. stock market.

It’s just one more reason to be very conservative with your equity holdings now. Investment risk across all financial asset classes is high.

One thing that China and many of its U.S.-listed companies have proven is that they’re unreliable with their numbers. After countless missteps with U.S. regulators and outright frauds on … Read More

The New Housing Boom

By for Profit Confidential

New Housing BoomMy cousin and his family had to walk away from their house in Arizona. There were no buyers, and they were underwater after the market crashed. The whole thing was really hard on them on all fronts, and they had to move. They’re in Colorado now, closer to family, with the ordeal behind them.

Like most things, timing is everything. In real estate, institutional investors are buying homes like crazy to rent out. The new housing boom is for rentals.

The Wall Street Journal wrote that The Blackstone Group L.P. (NYSE/BX) is buying homes at a rate of about $100 million a week, with institutional investors now making up a third of all cash buyers. Affordability for individuals is going to get squeezed.

On the stock market, homebuilder stocks continue to roar. Lennar Corporation (NYSE/LEN) reported excellent strength in its financial results.

According to the company, its fiscal first quarter of 2013 (ended February 28, 2013), produced revenue growth of 37% to $990 million. New orders grew 34% to 4,055 homes; the company’s order backlog grew 82% to 4,922 homes. Earnings for Lennar grew significantly to $57.5 million, or $0.26 per diluted share, compared to net earnings of $15.0 million, or $0.08 per diluted share.

On the stock market, institutional investors have bid the stock up 30 points since last October. (See “Stock Market Sinkhole: ‘It Didn’t Look Unstable’.”) It’s a stock market breakout for sure, but it’s based on fundamentals. Lennar’s stock chart is below:

LEN Lennar Corp stock market chart

Chart courtesy of www.StockCharts.com

Homebuilder PulteGroup, Inc. (NYSE/PHM) quintupled on the stock market over the last six months. Hovnanian Enterprises, Inc. (NYSE/HOV) … Read More

Will Housing Stocks Crash?

By for Profit Confidential

Housing Stocks CrashOne of the most often talked about parts of the economy is the real estate market sector. Because real estate is such a large and important part of the economy, naturally, many eyes are focused on whether or not this market sector can and will rebound from its deep decline.

While we have certainly seen a strong bounce off the bottom, there are still many concerns for the future of both the real estate market sector and housing stocks, specifically. Investors in housing stocks are definitely ahead of the curve, as many housing stocks have increased substantially. With gains in excess of 100%, the question on many people’s minds is: will the real estate market sector continue its upward trajectory or are housing stocks teetering on the edge of a massive decline?

I think recent comments by the CEO of D.R. Horton, Inc. (NYSE/DHI), Donald Tomnitz, can illuminate a lot. Tomnitz stated in a conference call that he was quite concerned that the lack of jobs might lead to lower home sales next year. D.R. Horton is, by volume, the largest homebuilder in America. One of the most sobering moments was when Tomnitz stated, “I also see the fact that there are potential layoffs in a number of industries, especially the defense industry.” (Source: “D.R. Horton Falls as CEO Cautions on Job Growth Next Year,” Bloomberg, November 12, 2012.)

The question isn’t the current level of the real estate market sector. For the fourth quarter, which ended September 30, 2012, D.R. Horton reported net income of $100 million, a massive increase of 180% from the prior year’s quarter. Revenue … Read More

The Stock Market & Oil Prices: A Dangerous Duo

By for Profit Confidential

 investor sentimentIt really is the perfect environment for higher oil prices, which is both good and bad for the U.S. economy. Higher oil prices reflect a better economic outlook, as speculators bet on better gross domestic product (GDP) growth in the U.S. market. This translates right into the stock market. But, as we all know, higher oil prices also mean higher gasoline prices…and this is inflationary and cuts into consumers’ incomes.

There is a slight premium in oil prices today related to tensions with Iran. It’s not a big premium, but my best guess is that it might be around $5.00 a barrel. The stock market certainly isn’t worried about higher oil prices right now; equities have too much support from the Federal Reserve to be concerned. Stock market investors are buying because of unprecedented monetary stability and the hope for better corporate visibility. Oil prices are going up because of demand and supply, coupled with some speculative fervor.

The big news in the stock market continues to be with large-caps, especially within the technology sector. As a group, I think technology is a little ahead of itself. Things just aren’t that rosy yet. But, with stock market valuations still very fair, positive investor sentiment is behind the big push. Institutional investors (like individuals) don’t have much choice out there in the investment landscape. Bonds and cash don’t pay anything and the real estate market is a bigger gamble than dividend payments.

Chatter in the investment world is toying with the possibility of oil prices heading to around $125.00 a barrel in the not-too-distant future. (See Why Oil Prices, Gold Read More

Our Annual Forecast: How Much
Home Prices Will Fall This Year

By for Profit Confidential

For the past four years I’ve been singing the same tune…

The U.S. economy cannot recover unless the U.S. housing market recovers. As a past “real estate man,” (in my life), I’ve never seen an economic recovery unaccompanied by a real estate market recovery.

There was a lot of speculation going into 2011 that it would be a year for the U.S. housing market to find a bottom. Well, the U.S. housing market hit a “bottom” last year, but not one to build upon.

U.S. new home sales fell 2.2% in December, which closed out 2011 with 302,000 new homes during the year, down from 323,000 new home sales in 2010 (Source: U.S. Commerce Department). In terms of number of units sold, this makes 2011 the worst year on record for new home sales—since 1963. So much for a U.S. housing market recovery.

Even though mortgages are at historically low interest rates, the low rates are not translating into new home sales. Sure, fear of further price declines in the U.S. housing market is discouraging people from buying new homes and directing consumers to rent instead, which I’ve been talking about.

And although fear of further home price declines may play a role, I’m more inclined to believe that the stagnant jobs market and weak economy are resulting in the greatest fear: uncertainty. This is what is really driving more people to rent homes instead of buying homes.

There are those still forecasting a rebound in 2012 for the U.S. housing market, but as I’ve been talking about in PROFIT CONFIDENTIAL, government estimates for foreclosures are still high at … Read More

Stock Market Reality: Good Corporate Earnings Just Aren’t Enough

By for Profit Confidential

Stock Market Reality: Good Corporate Earnings Just Aren’t EnoughOne thing really bothers me about the trading action in the stock market so far this year. While there is positive anticipation regarding corporate earnings, the stock market seems to be selling off on positive, non-corporate news and this is worrisome. Investor sentiment has improved from the fourth quarter last year, but it’s still not strong enough to foster any sustainable upward price trend at this time. Companies are forecasting good corporate earnings, but the marketplace just isn’t interested. “Fragile” is the word that I think best describes the state of the stock market right now.

Last year, corporate earnings were very good, especially considering the minimal GDP growth experienced in the U.S. economy. But the marketplace was more focused on the uncertainty created by Europe’s sovereign debt problems. Weak investor sentiment usurped the reality of good corporate earnings and strengthening balance sheets. This is why I wouldn’t be surprised at all if the stock market performed similarly to last year—a decent start, followed by consolidation, and then correction. Corporate earnings will be solid in 2012, but no one wants to buy them.

Individual investor participation in equities has been declining for years. This is no surprise considering the stock market hasn’t appreciated for over a decade. The hottest asset class in the last 10 years was mostly real estate, and then its collapse was met by significant price strength in commodities. It’s as if the general marketplace ignored corporate earnings and, accordingly, the stock market did nothing. (See How Stocks Are Reflecting the Structural Excesses of the World.)

I’ve been a student of the equity market my … Read More

My Must-read, Realistic Story About the Future of Our Kids

By for Profit Confidential

A realistic look at job creation here and around the world and its effect on the future of our kids. It’s 3:00 a.m. and I can’t sleep. A couple of days ago, I read a story on the high unemployment in Europe and how the young find it so difficult to find a job (“Europe’s Lost Generation: No Jobs or Hope for The Young,” The Globe and Mail, 11/07/11). Because of the lack of job creation here in North America, I can’t get the idea of our kids having no future out of my head.

My mind is racing from India, to Europe, to North America, to my own children, to the lack of job creation. Having been in Europe twice this summer, I saw firsthand the plight of young, educated people who simply can’t find a job, despite how desperately they look, because there are no jobs to be had. There is no job creation in Europe.

According to the International Labor Organization, the youth (under 25) unemployment rate is 29% in Italy, 44% in Greece, and 48% in Spain. The “iPod Generation,” as they are often referred to, is in serious trouble, as industrialized countries fail at job creation.

Having returned from our office in India just a couple of weeks ago, I can see exactly what the problem with job creation in Europe and North America is about. Sure, the “Occupy Wall Street” movement could spread right across the U.S. and Canada, and they can protest all they want, but they are barking up the wrong tree. Wall Street is not the problem. Lack of job creation is the problem.

The fundamental problem with job creation in Europe and North America is the increasing … Read More

Forget the Economy; These Companies
Are Still Earning Big Money

By for Profit Confidential

Alcoa, Inc. (NYSE/AA), the first stock in the Dow Jones Industrial Average to report third-quarter earnings, missed analyst expectations. The Street was hoping Alcoa would earn about $0.20 a share. The company earned $0.15 a share. But let’s look closer.

The Chinese Economy: What
You Need to Know Right Now

By for Profit Confidential

There have been warning signs inChinathat investors must be mindful of, including high inflation, speculative real estate buying, slower demand, and slower gross domestic product (GDP) growth.

Economy? Stocks? This Is a Bigger Risk

By for Profit Confidential

There’s plenty to say about the economy and the stock market this morning…my opinions on both can be found below. But right now I want to talk about something the media and analysts have not been focusing on, something I believe will eventually come to bite us hard in North America. Inflation in Europe is surging and this is a big concern for me.

Economic Analysis: The FedEx Chill

By for Profit Confidential

Michael gives you his view on FedEx Corp. (NYSE/FDX), a company that economists and analysts often look to as a gauge of future business activity.FedEx Corp. (NYSE/FDX), which runs the world’s biggest cargo airline, is a company that economists and analysts often look to as a gauge of future business activity.

Last week, FedEx stock hit a two-year low. Yes, you can buy the stock of this excellently run company today for the same price it sold for in mid-2009. Why? FedEx reported last week that it would earn less this year than previously estimated, as FedEx saw its U.S. shipments fall for the second quarter in a row. The stock of United Parcel Service Inc. (NYSE/UPS), FedEx’s main competitor, is close to a two-year low as well.

All in all, FedEx’s recent earnings results and earnings forecast for the entire year are better than expected. FedEx is reporting U.S. shipments declined on three percent in its latest quarter.

Given the continued conservatism of businesses, the backlash from the delayed increase in the government spending limit by Congress, the economic woes in Europe, and general pessimism amongst American consumers, FedEx’s business activity report is actually encouraging.

No, I wouldn’t run out and buy this stock. At a dividend yield of less than one percent and a price/earnings multiple of over 15, this stock is still too expensive for me.

But what’s encouraging is that this bellwether company is telling us that the U.S. economy isn’t crashing. What I can tell from FedEx’s reports is that there is no economic growth in the U.S. and that business is slowly deteriorating, not collapsing.

Based on FedEx’s forecasted earnings, retail sales in the U.S. will not crash this year. More than likely, retail sales in the U.S. … Read More

Stocks & Economy: Contrarian View You Won’t Read Elsewhere

By for Profit Confidential

You’ll read a lot today about the Federal Reserve’s statement yesterday that it will buy long-term treasuries in an effort to bring down long-term interest rates. Why Michael thinks this is a counter-productive mistake.No, no, no! They’ve got it all wrong! The actions of the government and the Fed are contra to what the economy needs to get it going! More damage is being caused to the economy than good.

You’ll read a lot today about the Federal Reserve’s statement yesterday that it will buy long-term treasuries in an effort to bring down long-term interest rates. That’s a mistake in my opinion. It’s counter-productive.

Sure, the argument will be that lower long-term interest rates will be good for the real estate market. But we must realize that consumers are not interested in buying homes. The 30-year mortgage rate was already at a 30-year low before yesterday’s announcement and consumers were not buying homes. You can bring long-term interest rates to two percent and consumers will not move to buy houses, because they have no faith that housing will move up in price!

Now look at the repercussions of bringing long-term interest rates down:

  • Seniors dependent on long-term bond income will have less income, which means they will spend less, actually hurting the economy.
  • The rate of inflation will not outstrip the return on long-term bonds, making the dollar less valuable…any investor buying bonds today is losing the purchasing value of his/her money, as inflation outstrips investment returns.

Many economists said yesterday that the Fed’s attempt to lower long-term interest rates will not provide any significant stimulus. In fact, three Fed officials voted against the move.

You’ll hear news today that the stock market is going down because the Fed indicated yesterday that there is “significant downside risks” to the economy. Stocks are not … Read More

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