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

Posts Tagged ‘Sovereign Debt’

Stock Market: Where the Real Risk Is in 2014…

By for Profit Confidential

Risk Returns to Earnings ResultsThe Dow Jones Transportation Average is still very close to its all-time high, and so are countless component companies. The airlines, in particular, have been very strong in a classic bull market breakout performance. Many of these stocks have roughly doubled over the last 12 months.

Commensurate with continued strength in the Russell 2000 index of small-cap stocks and year-to-date outperformance of the NASDAQ Composite, this is still a very positive environment for equities. The NASDAQ Biotechnology Index continues to soar.

While strength in transportation stocks is a leading indicator for the U.S. economy, so is price strength in small-caps. Smaller companies are more exposed to the domestic economy, and while it’s too early for many of these companies to report fourth-quarter earnings, the Russell 2000 has outperformed the Dow Jones industrials and the S&P 500 over the last five years, confirming the primary upward trend.

Instead of an actual correction in stocks, we’ve only experienced price consolidation; the latest being in blue chips since December.

This is very much a market in need of a pronounced price correction, if only to realign expectations with current earnings outlooks. Fourth-quarter numbers, so far, are mostly showing limited outperformance, and those companies that have beat consensus are still, for the most part, just confirming existing guidance, not raising it. If this is a secular bull market, it’s time for a break.

A meaningful price correction in stocks would be a very healthy development for the longer-term trend. Corporations are in excellent financial shape, and the short-term cost of money is cheap and certain.

In order for this market to turn in a … Read More

Earnings Reports Masking the Rest of the Equation: Risk Remains High

By for Profit Confidential

Earnings Reports Masking the Rest of the EquationIt is earnings season and corporate numbers are plentiful. Blue chips are mostly reporting decent financial metrics, but I want to address the other side of the equation.

Investment risk in many capital market assets is still very high. And the reason why it’s very high is the fiscal and monetary experiments taking place around the world.

PepsiCo, Inc. (PEP) announced another good quarter that beat expectations, and while the outlook for the beverage and snack market is decent, this is only part of the picture facing equity market investors.

It is still important for investors to be extremely cautious (and conservative) in this environment. The sovereign debt crisis has not abated in the eurozone. U.S. monetary stimulus through artificially low interest rates and quantitative easing is not re-inflating assets to the degree wished for by the Federal Reserve. The U.S. fiscal situation remains a mess at all levels of government.

I’m the biggest believer in enterprise and taking a constructive view of equity market trading action. But there is this whole other universe out there of unquantifiable risk precipitated by undercapitalized banks, no fiscal flexibility, and exponential money supply stimulus that, so far, hasn’t created real, unassisted economic growth.

I’m not a “doom-and-gloomer,” but investment risk is equally, if not more important than potential returns with paper assets. And the world (including regulators) still can’t quantify the risk exposure within the global derivatives market.

This is still very much a perilous environment, as private economic deleveraging butts heads with public economic re-leveraging. Risk hasn’t gone away; it’s only being masked by the equity market. (See “The Only Way Read More

What Was Behind the Stock Market’s Massive Breakout?

By for Profit Confidential

What Was Behind the Stock Market’s Massive BreakoutSomething big happened at the beginning of the year—Wall Street gave up on Washington.

I’ve been trying to figure out how this incredible stock market action started at the beginning of the year. Things were trending fairly normally, and then institutional investors just started buying—blue chips first, a little break in February, then blue chips again, with a broadening out into the NASDAQ.

But there wasn’t any big catalyst that suddenly galvanized a change in investor sentiment. There wasn’t anything new from the Federal Reserve, and fourth-quarter earnings season hadn’t started yet.

But the Dow Jones Transportation Average and blue chips just took off.

It’s as if big investors just threw up their hands and said, “Forget policymakers; we’re going ahead anyway.”

The Dow Jones Transportation Average continues to be one of the key indices for the stock market. This is nothing new. The stock market run-up was led by this index and followed by blue chips.

Dow Jones Transportation Average Chart

Chart courtesy of www.StockCharts.com

The action in this index now is similar to the break it took in the last half of March. The index didn’t re-accelerate until the beginning of May.

Both transportation stocks and blue chips are definitely due for an extended break after this big run-up. It could very well last until second-quarter earnings season begins, or right into the fourth quarter.

But while the stock market needs to experience a retrenchment, there is still buying on the part of institutional investors. On a number of occasions, when the stock market opened down recently (either technically or on bad news), the main indices fought their way higher, often closing … Read More

This Stock’s 24% Year-to-Date Gain Signaling a Buy Opportunity?

By for Profit Confidential

This Stock’s 24% Year-to-Date Gain Signaling a Buy Opportunity“Opportunity cost”—it’s a phrase used in microeconomic theory to denote the costs that are forgone by not having your resources in the highest returning assets.

It is a phrase that’s pertinent to the stock market.

Without question, I remain completely taken aback by what has transpired with the stock market since the beginning of the year.

Looking at the numbers, not being invested in many corporations has been costly.

Excluding the reasons why, the simple fact is that the Dow Jones Industrial Average is up 16% since the beginning of the year (not including dividends).

The S&P 500 is up 15.7%. The NASDAQ Composite is up 14.8% and the Russell 2000, an index of small-caps, is up 16.6% (not including dividends).

I think this stock market can smell the end of quantitative easing.

More meaningful, however, is the Federal Reserve’s policy regarding interest rates, which are going to continue to be low for the near future, as it has been made very clear.

This is a huge, perhaps neglected, certainty for the stock market and corporations.

Making the case for being a buyer in this market is extremely difficult. Institutional investors have already placed their bets and a lot of corporations—good companies with real staying power and solid prospects for earnings growth going forward—are fully priced.

Johnson & Johnson (NYSE/JNJ) is a benchmark stock. Like many large corporations, Johnson & Johnson does everything it can to squeeze every penny out of its bottom line. The company lays off employees, closes plants, and does everything to minimize taxes. Johnson & Johnson’s 10-year stock chart is featured below:

Johnson & Johnson Chart

Chart courtesy Read More

Growing American Business Inventories Paint Worrisome Picture

By for Profit Confidential

Growing American Business InventoriesThe biggest economic center in the global economy, the U.S., showed dismal growth in the last quarter of 2012. Sadly, the first quarter of 2013 is looking to be the same. Demand in the country is anemic at best as consumers are struggling.

New durable goods orders in the U.S. economy plunged 5.7% in March—the second decline in the first three months of 2013. (Source: United States Census Bureau, April 24, 2013.) Inventories of manufactured goods have been continuously increasing, seeing an increase in 17 of the last 18 months!

The HSBC Flash Manufacturing Purchasing Managers’ Index (PMI) for China indicated a slowdown in manufacturing output for the second-biggest economy in the global economy. The index plummeted to a two-month low in April, registering 50.5 in April compared to 51.6 in March. (Source: HSBC, April 23, 2013.) Any reading below 50 indicates a contraction in the manufacturing business.

Germany, the fourth-biggest economic hub in the global economy, is seeing its economic slowdown quicken. The Flash Manufacturing PMI for Germany dropped to a four-month low this month. The index stood at 47.9 in April, compared to 49 in March. (Source: Markit Economics, April 2013, 2013.) Yes, the manufacturing sector in Germany is experiencing a contraction. In Germany, exports orders to the global economy in April declined the most in 2013.

The “worsening” statistics I just gave you are of the main economic hubs in the global economy; others are in worse shape. France’s unemployment rate is becoming worrisome, and the country is bordering on a recession. Japan is already back in a recession; Italy is begging for growth.

Dear reader, … Read More

Why a Downgrade in the Credit Rating of U.S. Debt Is Imminent

By for Profit Confidential

A report from Standard & Poor’s (S&P), the credit rating agency, indicates there is more than a one-third chance that Japanese sovereign debt could face a downgrade. The report stated, “…the continuing prospect arises from risks associated with recent government initiatives and uncertainty of their success.” (Source: Janowski, T., “S&P says more than one-third chance of Japan downgrade, cites risks to Abenomics,” Reuters, April 22, 2013.)

In an effort to spur economic growth in the country, the Bank of Japan is printing money “like mad.” But we already know this concept hasn’t worked very well for the Japanese economy in the past. Japan is in an outright recession, with exports in a slump and the value of its currency in a freefall when compared to other major currencies in the global economy.

Why does it really matter to North Americans what happens in Japan? Even though S&P kept the credit rating on Japan’s sovereign debt at AA- (or investment grade), the concern is how vulnerable the U.S. debt really is to its own credit rating downgrade.

Just like the Japanese economy, the Federal Reserve is using quantitative easing to print $85.0 billion a month in new paper money and has thus far increased its balance sheet assets to over $3.0 trillion. Similarly, the U.S. government has been “spending with two hands, while borrowing with a third.” Why? It’s all in the name of economic growth.

As the readers of Profit Confidential know, I have been very critical of quantitative easing. It may have been needed back when the financial system was on the cusp of bankruptcy in 2008. But continuing … Read More

Investor’s Manifesto: Five Motivations for Beating Market Chaos and Risk

By for Profit Confidential

Five Motivations for Beating MarketThe stock market is close to double-digit growth so far this year, as corporations continue to report modest earnings results.

Playing a market at an all-time high is tough. It makes me think a lot more about risk, portfolio strategy, and how to consider new positions—if any at all.

As a stock market investor/speculator, here are five motivations to keep in mind:

1. Business

When you buy one share of common stock in a corporation, you are officially a businessperson. You are the CEO of your own investment corporation—the pinnacle of capitalism. In order for any business to be successful over time, it must do what works. You can have a view, you can be totally outraged, but doing what works is what makes money. Buying, selling, and speculating in the stock market is business. Approach it as such.

2. Risk and Control

Investment risk is more important than potential return in any transaction. There is no rush to get in—ever. Be deliberate, cautious, diversified, informed, and skeptical. Most people would not go out and purchase a home or a company in an unfamiliar jurisdiction without doing a lot of research. The stock market is a secondary market. The founders of a listed corporation have already sold. As a businessperson, think constantly about how all the fundamentals in the world can hurt each one of your holdings. Risk in your portfolio is always something you wished you had spent a lot more time on after a shock.

3. Stock Market Action

Doing what works makes money. Being an individual investor, everything in the marketplace is beyond your control: the money … Read More

What the Global Economy Could Learn from Sweden’s “Mr. Fix-It”

By for Profit Confidential

Global Economy Could Learn from Sweden’sIt is absolutely critical that you evaluate all your holdings for risk.

The U.S. stock market needs to correct, but the sovereign debt crisis in Europe and the euro currency together remain a festering powder keg.

The real problem for the euro is the lack of leadership—in banking and politics—in the region. There is no flexibility in the euro currency to help those countries in need.

The failure of decisive action in the eurozone is pronounced, but it is too difficult. There is no unified political, financial, or regulatory leadership. So how can the euro work?

No situation is the same, but Sweden experienced a real estate crash and credit crunch in the early 1990s—the worst since the 1930s.

According to Bo Lundgren, known as Sweden’s “Mr. Fix-It,” here’s what Sweden did after a period of financial disbelief:

1. Sweden unified politically.

2. The government immediately guaranteed all cash deposits at all banks. Two banks (out of more than 100) were nationalized, and they had to give common stock to the government, which was later sold.

3. There was restructuring, the closure of tax loopholes, spending austerity, and a currency devaluation of 25%.

Currency devaluation is the very thing that struggling eurozone countries cannot do. The “Swedish Solution” was not perfect, but at the very least, it was decisive action. After several tough years, Sweden was back on the growth path.

Getting in front of sovereign debt is now critical.

Every quarter or so, there’s a shock in capital markets regarding the sovereign debt and banking crises in the eurozone. Then there are patchwork remedies and more sovereign debt.

Today, … Read More

Two Emerging Markets Stomping U.S. Growth

By for Profit Confidential

Markets Stomping U.S. GrowthWhen the U.S. equities market crashes, most foreign stocks do as well. But when it comes to capital appreciation, the correlation ends. Domestic Chinese stocks experienced a small resurgence lately, but they are still well down from their peak in 2007. China is still very much an emerging market, but several other emerging markets are doing much better. These economies are experiencing growth in domestic demand and are also selling a lot of product to their neighbors, China and Japan.

Thailand (the second largest economy in Southeast Asia) is actually an emerging market that is a better play than China itself. And, of course, you have lots of options as an investor if considering having some exposure to the region.

The iShares MSCI Thailand Capped Invstbl Mkt exchange-traded fund (ETF), symbol THD, has been on a tear lately, representing the broader stock market in Thailand. This ETF has about a billion dollars in net assets and is up approximately 38% year-to-date. Way better than China.

Things are really happening in Thailand. According to Thomson Reuters, this emerging market experienced 2012 fourth-quarter GDP growth of 3.6%, with strong domestic demand and an 18.2% increase in exports. Private consumption grew 12.2% during the quarter and both the government and central bank expect a solid increase in global trade this year.

Another emerging market experiencing a big increase in both domestic demand and exports to China is the Philippines. Pull up the iShares MSCI Philippines Invstbl Mkt Idx ETF, symbol EPHE, and you’ll see a huge spike over the last year. According to Bloomberg, that country’s 2012 fourth-quarter GDP grew 6.8% on … Read More

Small-Cap Stocks at Record Highs: Uncle Ben Worked His Magic, but Soon It’s Going to End

By for Profit Confidential

Small-Cap Stocks at Record HighsThe Russell 2000 Index, which is generally considered to be the benchmark index for small-cap stocks, is doing well and has been doing well for some time now. The index is at an all-time record high, having recovered extremely well since the subprime mortgage–induced financial crisis. Its performance is quite amazing considering the weak gross domestic product (GDP) growth we’ve been experiencing.

Small-cap stocks, like the rest of the stock market, have been given a boost by the Federal Reserve’s easy money policies, but it’s not as if stock market investors have suddenly decided to jump on small-cap stocks because of further Treasury bond buying. Investors may be buying large-cap dividend paying stocks because they can’t get enough income to beat the rate of inflation; but small-cap stocks have been going up on their own fundamentals, and it’s especially due to their valuations.

There have been some spectacular stock market performances recently from the Russell 2000 component companies, and many are still trading for very reasonable valuations. These companies include: Eagle Materials Inc. (NYSE/EXP), Pharmacyclics, Inc. (NASDAQ/PCYC), athenaHealth, Inc. (NASDAQ/ATHN), Alaska Air Group, Inc. (NYSE/ALK), Brunswick Corporation (NYSE/BC), and Axiall Corporation (NYSE/AXLL), to name a few. Many of the small-cap stocks listed on the index are actually related to the housing industry.

The Dow Jones Industrials have now hit an all-time record high, and the rest of the stock market is right behind them. The S&P 500 is about three percent from its record high. All this, with weak or no GDP growth expected in the first quarter of 2013, spending austerity, and sovereign debt crises. (See “New Read More

Little Gain Now for Lots of Pain Later: Fed Policies Will Hold the Economy Down

By for Profit Confidential

Fed Policies Will Hold the Economy DownA lot of people feel the Federal Reserve’s policies will result in a major stock market collapse, which is a very real possibility. What we know is that the current cycle is actually favorable for the stock market and corporations in terms of low interest rates and a growing money supply; but real economic growth is still a very tough thing to come by in the U.S. economy.

In these pages over the last few months, we’ve been looking at a lot of successful corporations—corporations that don’t require monetary stimulus from the Fed. (See “A Top Stock with Increasing Dividends and Record Profits.”) But realistically, this doesn’t tell the whole story. The business cycle exists for most companies, and without question, it certainly does exist for Main Street.

The economic times we’re experiencing now aren’t that different than they were in the 80s. Unemployment was lower then, as U.S. government spending and borrowing accelerated tremendously and the trade deficit was out of control. The stock market went up a lot, crashed, recovered quickly, and then accelerated again. There was the savings and loan crisis and another recession, but the economy got through it and it was boom times after that. Then the cycle happened again—twice.

These events are a fact of life in business and for the stock market. Times change, but not the business cycle. All these events are beyond your control as an individual investor; therefore, the only thing that matters is how you structure your portfolio to deal with them. There is always a lot of noise in the marketplace—noise from politicians, the stock market, … Read More

Should You Buy Gold Stocks Right Now?

By for Profit Confidential

Should You Buy Gold Stocks Right NowThere is a serious problem in the gold mining business these days, and it’s not because of the stagnant spot price. Costs are going up industry-wide, and it is making buying gold stocks much less attractive.

Gold prices have been in consolidation for about a year and a half, and I feel they should experience an upward breakout later this year. But cash costs per ounce are going up, and I would say that the majority of gold producers are reporting this in their quarterly earnings reports.

It begs the question: should you buy gold stocks right now? My answer is no. I’d rather see you just buy gold. Why take the investment risk of betting on the spot price of gold, a company’s ability to meet production targets, and the industry-wide trend of higher costs? Right now, it’s not worth it. You might as well just speculate on gold prices, not gold stocks. That’s enough investment risk.

Barrick Gold Corporation (NYSE/ABX) is one of several large-cap gold stocks that are having a tough time on the stock market these days. Gold stocks have corrected much more than the actual spot price of gold due to rising costs. Earnings estimates for Barrick have been revised downward for upcoming quarters; and while you might argue that $30.00 a share is a floor for the stock, why bother taking the risk? Barrick’s stock chart is featured below:

ABX Barrick Gold Corp stock market chart

Chart courtesy of www.StockCharts.com

While I do feel that investors should already have exposure to gold and that gold prices are getting set for a breakout, I don’t see that breakout happening in the very … Read More

Super Stocks—Great Companies for Any Stock Market Portfolio

By for Profit Confidential

Great Companies for Any Stock MarketOver the years, I’ve seen a lot of wacky things in the stock market, from spectacular capital gains to equally spectacular wealth destruction (often from the same companies). Even the best companies on the stock market that offer rising dividends can crash. Remember the dot-coms? Those stocks shot straight upward in value for no other reason than they were just going up. Most became “dot-bombs.” Then there were the outright frauds—a lot of them, from gold miners to big-name companies to Chinese stocks (most with a big seal of approval from auditors). I know a person that was so scared, so outright certain that the financial world was going to end in 2008, that she just couldn’t take it anymore. She sold every security she owned for cash. She still won’t touch the stock market.

My grandmother also hated the stock market. She thought it was too risky. Of course, living through World War II and the Great Depression influenced her views. For her, nothing counted as much as cash. After the war, times were tough, but they slowly got better. She and my grandfather worked hard, and they saved their money—or rather they didn’t spend. Even in retirement, with no mortgage, she wouldn’t buy fresh bread—too expensive. She just didn’t spend; she saved, because that was her investment philosophy.

Nowadays, cash is still king, but it doesn’t pay any returns. I’m sure there are plenty of seniors who would love to have more of their savings allocated to cash, but artificially low interest rates can’t even beat inflation. A lot of people who are either saving for retirement … Read More

What the Top Technology Stocks Are Telling Us About the Market

By for Profit Confidential

What the Top Technology StocksThe breakdown in Apple Inc.’s (NASDAQ/AAPL) stock market price continues to be significant, and if the position drops to the $500.00-per-share level, it will represent a 29% drop from its recent all-time high on the stock market. It’s fair to say that Apple’s profitability is now well entrenched, but every business goes through its own economic cycle, and revenues and earnings estimates for Apple are coming down for future quarters. The company reports its earnings results on January 23.

The “AGA” stocks are important indicators because of the size of their stock market capitalizations. AGA is my acronym for Apple, Google Inc. (NASDAQ/GOOG) and Amazon.com, Inc. (NASDAQ/AMZN). These three technology stocks represent approximately $880 billion in stock market capitalization at current share prices.

Amazon.com has been on a tear over the last three years. The stock has done very well, even though it is incredibly expensive. Wall Street analysts expect Amazon.com to increase its top-line growth about 30% in 2012 and another 30% this year. Earnings estimates from the Street are all over the map. The company’s stock market chart is featured below:

AMZN Amazon.com Nasdaq stock market chart

Chart courtesy of www.StockCharts.com

I would say that the stock market is quite vulnerable if fourth-quarter earnings results don’t surprise to the upside. Meeting expectations isn’t going to cut it with investors, especially since those earnings expectations came down so much during the last earnings season.

The NASDAQ Composite looks to have formed a perfect head-and-shoulders technical formation, which began in early 2012. Oracle Corporation’s (NASDAQ/ORCL) recent earnings were good, but we’ll likely see continued weakness in technology stocks, at least those that are more consumer-oriented. Apple’s … Read More

My Near-Term Outlook for the Market as We Start 2013

By for Profit Confidential

Outlook for the Market as We Start 2013The S&P 500 had a pretty good year in 2012, up approximately 11.5% not including dividends. But, as is the norm in the current stock market, trading action remained choppy without any real trend.

The S&P 500 began 2012 strongly, rising consistently until May, when the index gave up all its gains. Then, with equal fervor, the S&P 500 moved solidly higher until September, before consolidating and pulling back on worries over the fiscal cliff. A lot of Wall Street analysts are saying to sell the current mini rally; but I’d wait until we get a look at fourth-quarter earnings to determine whether this turns out to be worthwhile.

There’s been quite a bit of consistency in the performance of the S&P 500 index since the stock market broke out of its low, set in March 2009. Solid rallies are met with solid retreats. The stock market advances, and then consolidates for a gain for the year. The year 2013 is likely to yield the same kind of trading action for the simple reason that investment risk is so high. The eurozone is in recession, and U.S. economic growth is really low. China and other Asian countries are export-driven, so their economic news shouldn’t surprise to the upside. Featured below is a three-year chart of the S&P 500 index:


$SPX S&P 500 large cap index stock market chart


Chart courtesy of www.StockCharts.com

The next major hurdle for the stock market in terms of policy action (or a lack thereof) is related to the debt ceiling. Previously, the stock market experienced a mini correction after policymakers were unable to extend a government shutdown due to the rising deficit. … Read More

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