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

Posts Tagged ‘sovereign debt crisis’

Stock Market Held Hostage by Eurozone Uncertainty

By for Profit Confidential

eurozoneThe stock market continues to be in correction mode and so are gold and oil prices. But, the trading action in the equity market isn’t that bad at all; the down days aren’t that pronounced and we’re seeing solid rebound days, which signals that buyers are definitely out there. Daily investor sentiment is no doubt affected by developments in the eurozone and I think it’s fair to expect things to get worse regarding the sovereign debt crisis. European policymakers are likely to apply another round of “patches” to the problem; but, next year, I think the eurozone will be in for some real turmoil.

This combined with the usual geopolitical concerns and slow growth in the U.S. economy means that there is no rush for stock market investors to take action. It’s like the domestic stock market is in some sort of holding pattern, waiting for a shock to occur. Regardless, investment risk remains very high.

The S&P 500 Index is now in danger of giving up all its gain since the beginning of the year. I suspect we’ll get some consolidation around 1,300 on the index, but if this breaks, we’re back to where we started. The stock market was due for a correction after this year’s solid price move. The problems in the eurozone are now compounding the pullback.

It’s my expectation that second-quarter earnings season will be just as solid as the first quarter. The stock market, however, just might look right past the numbers if problems in the eurozone get worse. It’s the uncertainty of it all that is keeping domestic investors from betting on domestic … Read More

Retail Sector Shines, Highlighting a Fundamental Strength in the U.S. Economy

By for Profit Confidential

corporate earningsIn a consumer-driven economy, what retailers say about their businesses is very important. For the most part, the retail sector has been saying that business conditions are getting better. A lot of retail stocks performed very well up until the recent stock market correction and valuations are reasonable. I’ve been writing about an underlying strength in the stock market and the U.S. economy and you can see it right now in the retail sector.

The strong first-quarter financial results of Wal-Mart Stores, Inc. (NYSE/WMT) beat consensus and the company expects strong profit growth in the current quarter. A lot of other brand-name companies in the retail sector reported very good numbers for the first quarter and many retail stocks are trading close to record highs on the stock market. Right now, with all the available news and lower oil prices, I’d say that second-quarter earnings season is shaping up to be surprisingly strong.

So, we have a stock market that’s in correction; however, economic news is showing mixed, but generally improving data. Lower oil prices stimulate consumers to spend and they lower the cost of doing business in the industrial sector. While speculators might bet that lower oil prices are a put option on the global economy, the spot price action directly affects the retail sector and that’s good for the economy.

As I keep saying, if we didn’t have the sovereign debt crisis in Europe, I believe the stock market would be a lot higher than it is currently. Corporate earnings growth may not be robust, but it isn’t flat either. The retail sector has been and should continue … Read More

More Downside for Gold & Oil Prices, as
U.S. Dollar Moves Above its Fundamentals

By for Profit Confidential

sovereign debt crisisGold and oil prices are having a really difficult time right now and I suspect that the falling price trend will continue for another month or so. The spot price of gold is going down because that commodity was due for a correction and because of strength in the U.S. dollar, which is trading up on worries about the eurozone. Oil prices are going down because of a massive of glut of oil in storage in the U.S. market and due to reduced expectations for global economic growth. It is the age of austerity and, frankly, I think it’s fair to expect a lot of change over the next 18 months, and by change I mean politically, economically and socially.

So far during the recent price correction, the stock market is holding up well. If the S&P 500 Index broke 1,300, I’d be more concerned, but because the market isn’t overpriced, institutional investors will continue to buy dividend yield when the market retreats. As for gold and oil prices; being commodities, they could experience significant price swings for the rest of this year, even as part of a long-term uptrend.

It’s going to be very difficult speculating on the long side in gold and oil stocks over the next several months. Oddly, it seems like the eurozone is calling the shots in U.S. capital markets. At the very least, the sovereign debt crisis is responsible for domestic investor sentiment.

I’m waiting for a bottom in spot gold; when it happens, I believe speculators should jump all over gold-related investments. The only caveat is the risks associated with the euro … 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

Current Stock Rally Has a Little More
Legs, But a Correction’s Imminent

By for Profit Confidential

sovereign debt crisisThere is a good possibility that the stock market will experience a major retreat/correction in the near future, as it has done so over the last two years starting in late spring. It’s related to the old stock market adage, “Sell in May and go away,” and it’s likely because the current stock rally has been going on very consistently since the beginning of the year.

This is another reason why I’m not very enthusiastic about being a buyer in the stock market at this time. A big change in investor sentiment at the beginning of the year fostered the current stock rally, aided by the Federal Reserve, temporary action on Europe’s sovereign debt crisis, and reasonable stock market valuations. The market expects good results this earnings season, as well as decent visibility. Without it, the currently stock rally will be over.

Even with good corporate news, this is a stock market that’s in need of a break—just like precious metals a little while ago. A lot of good news is now priced into stocks and I think it’s likely this year’s stock rally will take a break in the next month or so for the rest of the summer. Then, before the election, the stock rally should resume its final leg. That’s my best guess for the rest of this year. For 2013, all bets are off.

Without question, investors do not need to be buyers in this market. It might seem odd for a stock market analyst to advocate not investing in a stock rally, but the current environment is a time to reap, not sow new positions. … Read More

Dividends: The Only Way to
Keep the Mini Bull Market Alive

By for Profit Confidential

bull marketI think this year’s bull market is still alive, but it will take good corporate earnings and visibility to carry it forward. We’ve had a really good run up until now and the current price consolidation is not unexpected. I want to reiterate that the stock market is still very fraught with risks that are based on fragility in the U.S. economy and outside factors like the sovereign debt crisis in Europe and geopolitical concerns in the Middle East. I suppose these risks have been with us for years, but I know that investor sentiment is delicate enough to turn this stock market on a dime.

I still believe that a conservative investment stance is warranted and I would not be a big buyer of new positions in this stock market. In my view, the stock market is in the process of topping itself out after a long period of recovery from several big shocks. This doesn’t mean that the stock market won’t be higher at the end of this decade than it is now, but I do see a lot of problems over the next couple of years. Monetary stability, positive investor sentiment and reasonable equity valuations are responsible for carrying the stock market so far this year. What’s required going forward is confirmation in the economic news.

As part of a conservative investment stance, I’m a big believer in large-cap companies that pay dividends. Anybody reading this column over time knows this. The fact of the matter is that large-caps have performed exceptionally well since the financial crisis low in March 2009 and they’ve proven to be … Read More

Stock Picking Now? What’s the Rush?

By for Profit Confidential

big-cap companiesWhen you think about speculating in the stock market, everyone wants the same thing: the biggest capital gain in the shortest amount of time. Of course, if it were easy to be a consistent stock picking winner, everyone would be doing it.

I like to approach stock market speculation the same way I would create a portfolio of big-cap companies—by building a handful of holdings. For speculating, I would allocate a certain amount of dollars to the endeavor and slowly build three to five positions, as the opportunities present themselves. And, like a large-cap stock market portfolio, I would be diversified. I wouldn’t put all the money into just one story. Perhaps you might own a couple of mining stocks, a biotech company, and an IT firm. You’ve got to spread it around a bit, because stock picking is mostly a losing game. I’ve said this before and I’ll say it again: at any given time, there are actually very few, if any, really attractive stocks to buy with conviction. You should never be in a rush to go stock picking. There is no urgency in the stock market. Urgency only comes from someone who is trying to sell you something.

In my experience, there’s nothing like a great junior gold miner as a potential focus for the speculator. Mining is an event-driven business (just like biotechnology), but if drilling results score, so do investors. (See The Stock Market’s Next Best Trade Is Shaping up.) Like all resource speculation, the returns are magnified if the underlying commodity is experiencing a bull market. For the most part, good opportunities in … Read More

What We Can’t Forget About in the Stock Market Today

By for Profit Confidential

 sovereign debt crisisStreet analysts are saying that, because of higher oil prices, the Dow Jones Transportation Average is showing a real divergence from the rest of the stock market. According to Dow Theory, confirmation from this index is required in order to uphold the primary trend in the stock market. It’s kind of an old-fashioned way of predicting the stock market, but I do believe in it.

Oil prices have been stronger lately because of geopolitical concerns, but a lot of the stocks within the index also performed extremely well up until early February. They’ve been due for a price correction and, after January’s very strong start, this isn’t a surprising development.

Union Pacific Corporation (NYSE/UNP), which is a benchmark stock that I follow weekly, saw its share price correct significantly between August and October last year. This was during a period when oil prices went down. Since the beginning of October last year, UNP’s share price turned around, going from a low of around $80.00 a share to a recent all-time high of $117.40 per share on the stock market. And this was done while oil prices were slowly ticking higher. A lot of other stocks that comprise the Dow Jones Transportation Average also performed similarly, especially among railroad and trucking companies. So, in my estimation, we can’t just attribute weakness in the index to higher oil prices. Many of the component companies have been trending higher since last fall.

I’ve mused before about problems with the country of Iran and how these geopolitical events are contributing to higher oil prices. (See The Market Strategy You’ll Want to Use Read More

Unpleasant Forced State Budget Cuts

By for Profit Confidential

California Governor Jerry Brown and his Democratic government made financial projections for California’s current fiscal year, which began July 1, 2011. Only three months into the current fiscal year, tax revenue for California has fallen $705 million. The risk?

New Record Highs on the Stock
Market—Who’s Hitting Them?

By for Profit Confidential

It would be so wonderful if the sovereign debt crisis inEuropewas not at hand. It never pays to live in a fantasy world, but corporate earnings are coming in so good that the market would be a lot higher if we didn’t have to worry about country debt.

And the Next Country to Fall
in Europe Will Be…

By for Profit Confidential

I have to tell you, I thought it would be Spain. My thinking of the order in which the sovereign debt crisis would engulf Europe was first Greece, then Spain, then Italy.

But it looks like I was wrong. Italy, home of my favorite Italian wine, is next.

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