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

Posts Tagged ‘recession’

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

How to Profit from the Crimea Conflict

By for Profit Confidential

What the Crimea Tensions Mean for U.S. InvestorsThe eurozone and Europe are showing progress in finally getting out of their dismal multiyear double-dip recession; however, the uncertainties and hostilities unfolding in the Crimea region of Ukraine, which are threatening to escalate, could put a damper on the economic renewal in Europe.

With the recent vote in Crimea, whether legal or not, Russia has quickly passed a resolution and signed a treaty to annex Crimea to the Kremlin. The current buildup of Russian troops inside Crimea is a big concern, especially if a military conformation breaks out.

We are already seeing rising economic sanctions against Russia from the United States and countries in Europe. This is worrisome, as it could easily derail the economic renewal in Europe at this most critical time, stalling the region’s growth due to the major trading between Russia and Europe. A big impact could be the staggered flow of oil from Russia into Europe, which currently accounts for about 40% of the oil imports from Russia.

While I don’t think Russia will immediately cut the oil flow into Europe, as Russia also needs the oil revenues, I do expect Europe will look for alternative oil sources if the sanctions increase and tighten against Russia. If this were to occur, it could really hurt the country’s oil companies and the Russian economy overall.

Moreover, there’s also the retaliation from Russia, which would likely have an impact on Europe and potentially the global economy. The crisis comes at a critical time, as the eurozone is looking at gross domestic product (GDP) growth of 0.5% in the first quarter—a three-year high.

It’s clear something bigger may … Read More

Contrarian View: Is the Bull Market Really Just Beginning?

By for Profit Confidential

Did the Current Bull Market Really Start in 2013There is some resilience to this stock market, and it’s evidenced by the strength in many important indices.

The Dow Jones Transportation Average is a very important index, even if you don’t own—or aren’t interested in owning—any component companies. The reason for its importance is that it has a track record of leading the rest of the stock market. And it’s especially useful as an indicator of a bull market breakout.

Transportation stocks have a history of leading the economy and the stock market. Dow theory, in my view, is alive and well, and it’s worthwhile to track the index to help with your overall market view.

Lots of commentators view the stock market as having been in a bull market since the March low of 2009. I don’t see it that way.

I view the stock market’s performance since that low (no matter how it was induced) as a recovery market, not the beginning of a new secular bull market or cycle for stocks.

The breakout, from my perspective, was around the beginning of 2013, when institutional investors ignored all the risks (including the inability of policymakers to actually make policy) and decided to bid blue chips and transportation stocks with particular fervor.

The previous stock market cycle was a 13-year recovery cycle from the technology bubble that produced over-the-top capital gains until 2000. The stock market recovered from the massive sell-off only to be hit by the financial crisis and Great Recession.

A long-term chart of the S&P 500 is featured below:

$SPX S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Last year’s stock market performance was genuinely stunning; while the monetary … Read More

The Stocks to Own Right Now…

By for Profit Confidential

These Are the Stocks to Own Right NowWhy owning blue chips makes so much sense in a slow-growth environment: they have the cash and they are willing to spend it to keep shareholders happy—and that’s just one of the reasons.

Take Caterpillar Inc. (CAT), for example. This company is experiencing slow business conditions, because the mining industry is in its own recession.

The company can’t manufacture sales, but it can keep buying back its own shares. Management allocated $1.7 billion for share repurchases in this quarter alone. Last year, the company spent a total of $2.0 billion buying its own shares.

Caterpillar’s recent financial results surprised Wall Street. Even though sales were down comparatively, 2013 fourth-quarter revenues beat consensus by $1.0 billion and consensus earnings by $0.26 per share.

Caterpillar is a global benchmark and an enterprise worth following. The company offers a lot of industry and global economic information to investors. (See “A Must-Read for Long-Term Equity Investors.”)

Big corporations have the cash, and while capital expenditures on plant, equipment, and employees are restrained, shareholders are the beneficiaries of such strong balance sheets.

United Technologies Corporation (UTX) reported fourth-quarter revenues below Wall Street consensus, but earnings were better than expected. The company plans to buy back $1.0 billion of its own shares this year after spending $1.2 billion in 2013.

Share repurchases help shareholders and corporate executives on a short-term basis, but if there is a drawback to them, it’s the opportunity cost of new business investment; excess cash could be invested in new research and development, expansion, acquisition, and innovation. A company that chooses to buy back its own shares is one that’s … Read More

Time to Start Shifting Your Investment Strategy Overseas?

By for Profit Confidential

Time for Investors to Take Another Look at EuropeFrom what I’m seeing, Europe and the eurozone appear to be in play once again, following years of torment and two recessions.

While there’s still a ways to go, you should put Europe on your radar, since a buying opportunity appears to be here. Now don’t go full-tilt and empty your capital into Europe. Instead, with the U.S. stock market facing some upside resistance, you may want to shift some of your investable capital to other regions of the world, including Europe and China. (See “China’s Macau Gambling Region: The Growth Opportunity” to learn about a small region in China that has high hopes.)

Now, I have been negative on Europe for years, but I saw some encouraging signs in 2013 after the eurozone emerged from its second recession.

The big attraction in Europe is the 800 million people living in the region who are armed with money to spend, similar to our domestic economy. For companies, Europe is a region that appears set to rally and may be a buying opportunity.

Some may question the slow growth in this region, but I say it’s better to buy at a time of misfortune than when everyone wants in—and that time of misfortune appears to be now.

OK, we still have unemployment in the double digits in the eurozone, but the confidence levels of its citizens are also on the rise, and this is good news; this means consumers will start to spend more, helping to drive economic renewal and gross domestic product (GDP) growth.

Just take a look at the region’s recent economic readings.

The GDP in the … Read More

The Catastrophe Called Collapsing Corporate Earnings Growth

By for Profit Confidential

89 of SP 500 Companies Issuing Negative Earnings GuidanceI keep telling you about my suspicion that the backbone of any stock market—corporate earnings growth—is disappearing. Now, we see it in the numbers…

Of the 106 companies in the S&P 500 that have issued corporate earnings guidance for the fourth quarter, an astounding 94 of them have issued negative guidance—that’s 89% of the companies issuing guidance, warning it will be negative, which is well above the five-year average rate of 63%. (Source: FactSet, December 13, 2013.)

And analysts continue to drop their expectations for corporate earnings growth for the fourth quarter. As of September 30, analysts expected fourth-quarter corporate earnings growth in the current quarter would be 9.5%. By last week, that rate had come down to 6.5%. (Source: Ibid.) I expect corporate earnings growth for the fourth quarter will continue to disappear.

So we have 2013 ending with the smallest increase in corporate earnings since 2009. How can 2014 be any better?

The risks that disappearing corporate earnings growth creates for the key stock indices continue to be ignored. And problems in the global economy are mounting, not improving, with each passing day.

Economic growth in China, the second-biggest economic hub in the global economy, is declining rapidly. The country is expected to post a growth rate this year that is “embarrassingly” low compared to China’s historical economic growth rate. Manufacturing activity in the country is rapidly declining. The HSBS Flash China Manufacturing Purchasing Managers’ Index (PMI) dropped to a three-month low in December. (Source: Markit, December 16, 2013.)

We are seeing an economic slowdown in the stronger eurozone nations like France. In December, manufacturing activity in this … Read More

Why These Stocks Are Long-Term Portfolio Must-Haves

By for Profit Confidential

Recession-Resistant Company with Long-Term ProspectsOne of my favorite things as an investment analyst is to try to find companies that perform well but consistently so. I’m talking about businesses that aren’t going away and are recession-resistant, at least to the best extent possible.

I think an equity market portfolio really should be a mix of different companies in different industries that also comprises businesses of different sizes at different stages of maturity.

I have a strong affinity for dividend paying stocks, but an equity market portfolio need not be all blue chips. I’m also a fan of index funds, and it’s quite evident that the vast majority of portfolio managers have a very difficult time beating the major indices over long periods.

Having watched so many blue chips trade so similarly over time, it’s clear that they don’t do much until they do. It may just be that no one can consistently anticipate the short-lived, but substantial capital gains that can occur (like this year) as market cycles change. The opportunity cost of not being in the equity market in its strongest years has proven to be substantial.

Stocks are inherently risky securities, but a reasonably stable business that consistently grows its revenues and earnings is absolutely golden in an equity market portfolio, even if it isn’t the fastest-growing enterprise out there.

One company that I really like and that has been an open position since August of 2011 is DENTSPLY International Inc. (NASDAQ/XRAY). The company’s 10-year stock chart is featured below:

DENTSPLY Intl Inc. Chart

Chart courtesy of www.StockCharts.com

The only people I know who like going to the dentist are dental equipment salespeople and stock brokers. … Read More

Long-Term Investors Shouldn’t Ignore This Key Financial Metric

By for Profit Confidential

recessionYou don’t often hear a lot about United Technologies Corporation (UTX) these days; it’s an old economy name that doesn’t seem to garner much attention from the media.

Nevertheless, the company that makes elevators, helicopters, airplane engines, and HVAC (heating, ventilation, and air conditioning) and fire/security systems continues to perform excellently. It’s a component of the Dow Jones Industrial Average, and the stock’s had an exceptional year. (See “The One Market Sector That’s Consistently Outperforming the Rest.”)

Approximately $17.0 billion of the company’s total sales in 2012 came from its “UTC Climate, Controls and Security” business. Next was “Pratt & Whitney” aircraft engines at $14.0 billion. “Otis” elevators and escalators brought in $12.0 billion in sales last year, followed by “UTC Aerospace Systems” at $8.3 billion and “Sikorsky” helicopters at $6.8 billion.

As a conglomerate with a strong constituent in aerospace, United Technologies has an excellent track record of increasing its dividends to stockholders.

 In 2012, the company increased its common share dividend by a total of 11.5%, representing its 76th consecutive year of paying dividends. According to the company, from fiscal year-end 2002 to year-end 2012, United Technologies delivered a 225% total return to shareholders, which is more than double the total return of the DOW or S&P 500.

In 2008, the company paid out $1.35 in total dividends per share. By the end of last year, that figure was $2.03 per share.

Of the company’s total sales, 40% are in the U.S. market, followed by 26% in Europe and 20% in the Asia Pacific region.

Since the recession, United Technologies’ sales, earnings, and earnings per share … Read More

My Favorite Picks for After the Market Corrects

By for Profit Confidential

dividend paying stocksWhen we last looked at Alaska Air Group, Inc. (ALK), the position had pushed to a new record-high on the stock market, and it’s doing so again.

Many Dow Jones transportation stocks continue to exude price strength and in my mind, this action is one confirming factor that the broader stock market can go higher.

There has also been a spike in countless new initial public offerings (IPOs), which only makes sense with the stock market at an all-time high and the world awash in liquidity.

But it is difficult to consider buying stocks right at their highs. If one came into money and wanted to create a stock market portfolio, there’s not a lot of value for your investable dollar. Even income-seeking investors have to contend with high prices for the best dividend paying stocks.

Big investors have been buying dividend-paying blue chips all year and are likely to continue doing so unless there’s a catalyst to sell.

Automatic Data Processing, Inc. (ADP) just announced a solid 10% increase in its cash dividend to stockholders. The company will pay $0.48 a share, up from the previous $0.435 per share, on January 1, 2014 to shareholders of record on December 13, 2013. This is the company’s 39th consecutive year of increased dividends.

Not surprisingly, ADP has been a tremendous stock market winner this year. The position opened in January around $57.00 a share. Now it’s closing in on $77.00, with Street analysts continuing to increase the company’s earnings-per-share outlook for its next fiscal year. (See “Why Cash Is No Longer King.”)

For allocating new monies to the … Read More

My Top Three Stocks in This “Alternative” Housing Market Sector

By for Profit Confidential

Housing Market SectorIn late February, we took a look at Drew Industries Incorporated (DW) out of Elkhart, Indiana. The company is a major component supplier to the recreational vehicle (RV) market and also sells to the manufactured homes market.

The RV market has been experiencing a significant upswing in business conditions. Drew Industries’ total sales are 87% in the RV segment, and the company just reported another solid quarter of growth.

For the company, 2009 was a very tough year. Net sales dropped by more than $100 million compared to 2008, and the company incurred a major net loss. But business conditions turned around in 2010, and have been especially good over the last two years.

During the Great Recession, the company’s 2009 sales dropped to $398 million. By 2012, total sales were a record $901 million, which is a pretty significant turnaround for any business.

Last year Drew Industries returned $45.0 million to shareholders with a special cash dividend of $2.00 per share. Between 2001 and 2012, the company quadrupled its content per travel trailer and fifth-wheel RV. Drew Industries now operates 31 manufacturing facilities in 11 states.

Drew Industries’ five-year stock chart is featured below:

Drew Industries Inc Chart

Chart courtesy of www.StockCharts.com

Drew’s third quarter of 2013 also revealed continued economic growth. The company’s consolidated net sales grew 11% to $251 million. Earnings jumped significantly, growing 52% to $14.8 million, or $0.62 per fully diluted share. The company finished the third quarter with a solid gain in its cash position.

It’s great to see genuine new business growth in an old economy industry. Drew’s solid business execution is noteworthy, especially in an industry … Read More

The Last Standing Stock Market Bear?

By for Profit Confidential

If you are a stock market investor, you’ve probably come to the same realization I have: the stock market is behaving irrationally. These days, the fundamentals don’t really matter. What’s even more frustrating is that when you do talk about the fundamentals behind the market’s continued advance missing, you are ridiculed.

Soft revenues at public companies are just one area of concern. As of October 25, 244 companies on the S&P 500 have reported their third-quarter corporate earnings; only 52% of them registered revenues above the expectation, which means companies are selling less than they expected—not a good sign. Third-quarter corporate earnings growth is now expected to be just 2.3%. A month ago, the same number stood at an even three percent. (Source: FactSet, October 25, 2013.)

We are seeing some of the well-known bears of the stock market turning bullish. “Dr. Doom” is suggesting investing in stocks, and others like David Rosenberg, who has been bearish for years, are turning bullish.

Is this the peak optimism?

As it stands, investors believe the stock market is a safe place to be again. The charts of key stock indices only show an upward trajectory.

S&P 500 Large Cap Chart

Chart courtesy of www.StockCharts.com

What will happen once the euphoria comes crashing down again? After all, irrationality cannot go on forever.

The most recent and best example of a stock market crash we have is from the financial crisis of 2008. We saw key stock indices come down like a rock. That stock market crash wiped out consumer confidence. Those who were retiring and saving each dollar for their golden days (by investing in stocks) saw their … Read More

Trouble Putting Food on Table for 17.6 Million American Households?

By for Profit Confidential

Trouble Putting Food on Table for 17.6 Million American HouseholdsI harp on about this over and over again: economic growth is when the average consumer is optimistic about their future; they are spending money, they know they will have a job tomorrow, and they are saving. In the U.S., we are seeing the opposite of all this.

In fact, consumer confidence in the U.S. continues to plummet; the Conference Board Consumer Confidence Index, an indicator of consumer spending, plunged more than 11% in October from September. (Source: Conference Board, October 29, 2013.)

But the misery doesn’t just end there for consumers in the U.S. economy. They are struggling to even buy the most basic of needs—food.

According to a recent study by the United States Department of Agriculture (USDA), in 2012, 17.6 million households in the U.S. economy were “food insecure”—they had difficulty bringing food to the table due to a shortage of resources. (Source: United States Department of Agriculture, September 2013.)

And as a result of so many Americans having trouble putting food on the table, it is costing taxpayers significantly. According to the U.S. Senate Budget Committee, over the last five years, the U.S. government has spent $3.7 trillion on 80 different poverty and welfare programs. The amount of money spent on these programs was five-times greater than combined spending on NASA, education, and all federal transportation projects over the time period. (Source: U.S. Senate Budget Committee, October 23, 2013.)

When I look at all these statistics showing how Americans are suffering, talk of economic growth or economic recovery just doesn’t sit well with me. I tend to focus on facts, rather than the noise. The noise … Read More

Where to Find the Best Potential Growth in the Automotive Industry

By for Profit Confidential

Best Potential Growth in the Automotive IndustryThe auto industry is back on its feet again, following some lean years during the recession in 2008 when General Motors Company (NYSE/GM) had to be saved by the government. And whether you agreed with General Motors (GM) being bailed out or not, the reality is that the company has rebounded via massive restructuring and better leadership with a stronger vision of where the company should be headed. Moreover, GM now employs over 210,000 people, which may not have been the case if the automaker had been allowed to fail.

GM is now a $50.0-billion company, and while it is no longer the stock market leader in its backyard, the company has been able to grow a very healthy and viable business in China, where GM is the country’s top foreign automaker. Apparently, the Chinese love their GM vehicles and associate the brand with prestige and quality. (Imagine that! Maybe Americans are missing out…)

General Motors Company Chart

Chart courtesy of www.StockCharts.com

For GM, China was the path to recovery. The country has invested billions of capital into the world’s largest auto market and so far, it has paid off.

In fact, GM now sells more vehicles in China than domestically. In the first half of 2013, GM and its joint partners sold a record 1.57 million vehicles, up 10.6% year-over-year, according to the company. Sales in China exceeded the 1.4 million GM vehicles sold in the United States. Now, you can say that China actually helped to save GM from the salvage yards.

The auto market in China is potentially enormous, and its growth will be largely dictated by government policies towards … Read More

Finally, a Politician & a Central Bank Who Criticize Paper Money Printing

By for Profit Confidential

Politician & a Central Bank Who Criticize Paper Money PrintingThese days, central banks are on a very dangerous monetary policy path. Paper money printing has become the norm. Major central banks around the world are taking the same actions; they have learned the phrase “quantitative easing” well. Economy’s soft; no problem! We’ll just print more money so our currency falls in value and our exports rise! (If only it were that simple.)

Two central banks are at the forefront when it comes to implementing paper money printing: the U.S.’s Federal Reserve and the Bank of Japan. And it isn’t a secret how poorly these two nations are faring despite their quantitative easing efforts.

In these pages, I have been very critical of quantitative easing.

With that said, to date, I have only heard one senior financial politician and one central bank head criticize the use of quantitative easing.

Canada’s Finance Minister, Jim Flaherty, at a private dinner with his G20 equals this week, criticized the use of quantitative easing by the U.S. central bank. The following day, he said, “It’s not good public policy.” He said the U.S. should have never implemented quantitative easing, but “Now that they’ve done it, they should get out of it as quickly as they can.” (Source: “‘Not good public policy’: Flaherty appears at odds with BoC, G20 as he criticizes U.S. quantitative easing,” Financial Post, October 16, 2013.)

The governor of the central bank of Canada, Stephen Poloz, has a similar take. He said, “[we] certainly agree that quantitative easing is one of the last things we want to be in a position to have to use.” (Source: Ibid.)

Finally, … Read More

Why I Remain Pessimistic on This Stock Market

By for Profit Confidential

Remain Pessimistic on This Stock MarketThe third-quarter corporate earning season has begun. And as I have been predicting, earnings growth just isn’t there this quarter.

If companies in key stock indices are beating their earnings estimates, it’s because they are beating already lowered expected earnings. What’s the biggest problem with the corporate reports I’m seeing? Revenue growth is disappearing.

What we have seen so far:

International Business Machines Corporation (NYSE/IBM) reported third-quarter corporate earnings per share were up 11% from the same period a year ago, but revenues fell four percent from the third quarter of 2012. (Source: International Business Machines Corporation, October 16, 2013.)

The Goldman Sachs Group, Inc. (NYSE/GS) reported corporate earnings of $2.88 per share for the third quarter of 2013. In the same period of 2012, corporate earnings were $2.85 per share. And revenues plunged 22% from the second quarter! (Source: Goldman Sachs Group, Inc., October 17, 2013.)

What we have seen so far in respect to the earnings of big public companies isn’t anything impressive. In fact, it’s just more evidence pointing to key stock indices running on nothing but propped-up earnings due to stock buyback programs made largely possible by easy monetary policy.

Going forward, I just expect to hear about more companies struggling with revenue growth; thus, you can understand my skepticism on rising key stock indices. Every “party” comes to an end, and the gains we now see on the key stock indices could disappear very quickly. I believe caution and capital preservation are the best investment strategies right now as key stock indices run ahead of themselves.

The fundamentals: real rising corporate earnings and real rising … Read More

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