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

Posts Tagged ‘stock advisors’

Stock Market Overvalued by 55%?

By for Profit Confidential

Why It Feels Like 2007 All Over AgainOne of the oldest and most reliable ways to assess the value of the stock market is to look at its price-to-earnings (P/E) multiple. This multiple measures how much investors are willing to pay for each dollar of earnings. P/E multiples of 15 mean investors are willing to pay $15.00 for every one dollar of earnings.

When we look at the Shiller P/E multiple, it’s yelling, “The stock market is overvalued!” Shiller’s P/E multiple (adjusted for inflation) stood at 25.61 for the S&P 500 in April. (Source: Yale University web site, last accessed May 13, 2014.)

Looking at Shiller’s P/E multiple for the S&P 500 companies on a monthly basis since 1881, it has only been above 25.61 eight percent of the time. Looking at the historical average, the present value of the Shiller P/E multiple suggests the stock market is overvalued by 55%!

Despite the market being overvalued, the number of bullish stock advisors continues to increase while bearish advisors are declining in numbers (which is negative for the stock market, as it always does the opposite of what is expected of it). Not many seem to be worried about a broad market sell-off (it’s another negative when investors become so complacent).

In the chart below, you’ll see the performance of the S&P 500; below it, you’ll see the results of a recent Investors Intelligence Advisors’ Sentiment Survey, with the bulls represented by the green and the bears in red. (Source: Investors Intelligence, last accessed May 12, 2014.)

s&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com​​​​

You will see from the chart above that those who were bearish (red) on the stock … Read More

Stock Margin Debt Reaches Record-High, Surpassing 2007 Pre-Crash Level

By for Profit Confidential

Proof Stocks Are Near Their TopAs key stock indices like the S&P 500 make new highs, bullishness increases almost daily, and stock advisors are saying buy more.

I am not surprised by this. All of these irrationalities tell us something very important: the bear is doing a great job of luring investors back into stocks as it gets ready to take their money away once again.

Dear reader, heed the warning signs of a market top…

Those who are very close to the companies in key stock indices are selling their shares at an extreme pace. According to CNBC, in February, insiders sold $5.3 billion worth of shares and bought roughly $268 million worth of shares; for every one dollar of stock they bought in February, they sold about $20.00 worth. (Source: “Insider Activity and Concentration by Industry,” CNBC web site, last accessed March 5, 2014.)

According to the Vickers Weekly Insider Report, corporate insiders are more bearish on the stocks of the companies they work for today than at any other time since 2007. (Source: MarketWatch, March 4, 2014.)

But insider selling activity isn’t the only indicator that worries me about the direction of the key stock indices. We see problems in corporate earnings, as well.

The number of companies warning about their corporate earnings for the first quarter of 2014 continues to increase. So far, 84 companies on the S&P 500 have issued negative guidance about their first-quarter 2014 corporate earnings. (Source: FactSet, February 28, 2014.) Remember: corporate earnings, at the core, are what drive the key stock indices higher. Even analysts aren’t very optimistic about corporate earnings; they are expecting first-quarter … Read More

If You Think Our Stock Market Is Overpriced, Wait Until You See This

By for Profit Confidential

Why We Are Reaching a Stock Market TopThe stock market in France has been on a tear! Below, I present a chart of the French CAC 40 Index, the main stock market index in France.

Looking at the chart, we see the French stock market is trading at a five-year high. With such a strong stock market, one would expect France, the second-largest economy in the eurozone, to be doing well. But it’s the exact opposite!

As its stock market rallies, France’s economic slowdown is gaining steam. In January, the unemployment rate in France was unchanged; it has remained close to 11% for a year now. (Source: Eurostat, February 28, 2014.) Consumer spending in the French economy declined 2.1% in January after declining 0.1% in December. (Source: National Institute of Statistics and Economic Studies, February 28, 2014.) Other key indicators of the French economy are also pointing to an economic slowdown for the country.

CAC French CAC 40 Index (EOD) Chart

Chart courtesy of www.StockCharts.com

And France isn’t the only place in the eurozone still experiencing a severe economic slowdown. In January, the unemployment rate in Italy, the third-biggest nation in the eurozone, hit a record-high of 12.9%, compared to 11.8% a year ago.

I have not mentioned Greece, Spain, and Portugal because they have been discussed in these pages many times before; as my readers are well aware, they are in a state of outright depression.

Just like how investors have bought into the U.S. stock market again in hopes of U.S. economic growth, the same thing has happened in the eurozone. Investors have put money into France’s stock market in hopes of that economy recovering—but it hasn’t. We are dealing with a … Read More

Bad Weather to Blame for Consumer Spending Pullback? Numbers Argue Otherwise

By for Profit Confidential

Retail Sales All Slowing at the Same TimeMainstream stock advisors are blowing air…telling us the U.S. economy is stalling due to cold weather. They say the economic chill caused by the uncharacteristically cold weather this year is only temporary. I don’t believe this for a moment.

Sure, the weather had its impact. Consumers have been reluctant to go out and shop, and higher home heating bills might have them spending otherwise so far in 2014, but there’s more to the story.

While discussing existing-home sales for January, the chief economist at the National Association of Realtors said, “Disruptive and prolonged winter weather patterns across the country are impacting a wide range of economic activity, and housing is no exception.” Existing-home sales in the U.S. economy declined by 5.1% in January from the previous month. (Source: “Existing-Home Sales Drop in January While Prices Continue to Grow,” National Association of Realtors, February 21, 2014.)

The reality of the situation is that existing-home sales in the U.S. economy have actually been declining since August of last year. The annual rate of already built homes being sold in the U.S. economy was 5.33 million in August. In January, it was 4.62 million. (Source: Federal Reserve Bank of St. Louis web site, last accessed February 24, 2014.)

Below, I’ve prepared a table that shows the extent of the drop in existing-home sales in the U.S. economy.


Sales (Annual Rate)

% Change from Previous Month



















Source: Federal Reserve Bank of St. Louis web site, last accessed February 24, 2014.

But weak home sales aren’t … Read More

Amazon vs. Goldcorp: The Stock I Would Buy

By for Profit Confidential

Amazon vs. GoldcorpCarlo and I went to high school together about 30 years ago. We remained friends after we left school even though we went our separate ways. Our common thread is that we are both entrepreneurs running our own businesses. After years of not seeing each other, last night we spent a couple of hours together discussing the economy and investing.

Carlo’s complaint last night, which is characteristic of many investors today, was that he worked hard all his life, watching what he spent and saved. “But I’m being punished for it,” he lamented. Why? Carlo looks at other investors who had less than him, but who borrowed heavily after the credit crisis of 2008 to either buy stocks or buy real estate. And they’ve done remarkably well.

“I worked hard, saved, and bought bonds. Meanwhile, I lost money because the return I’ve gotten over the years hasn’t kept up with real inflation. What the government tells me is the inflation rate is a lie. I’m upside down!”

Carlo went on and on: “I know people with no education, people who have never ran a business, people who never saved, but they made millions since 2008 because they bought properties, interest rates went down, and real estate prices went up.”

The government, by lowering interest rates so aggressively since the credit crisis and keeping them low, “punished savers but boosted speculators,” he noted.

Yes, Carlo would have been better off to close his business in 2008 or 2009, take all his money, borrow as much as he could and either have bought stocks or real estate. He would be further ahead … Read More

The Truth Behind Second-Quarter 2013 Corporate Earnings

By for Profit Confidential

The second-quarter earnings reporting season is underway, and mainstream stock advisors have high hopes. But what we are seeing is “more of the same” of what we saw in last quarter’s S&P 500 company corporate earnings: revenues are lower; corporate earnings are mediocre, and share buyback programs are boosting per-share income.

Take E. I. du Pont de Nemours and Company (NYSE/DD), a constituent of both the S&P 500 and the Dow Jones Industrial Average, as an example. The chemical giant reported corporate earnings of $1.03 billion, or $1.11 per share, for the second quarter. These earnings were 12% lower than the same period one year ago.

Caterpillar Inc. (NYSE/CAT), the mining and construction company that is also a component of both the Dow Jones Industrial Average and the S&P 500, reported a decline of 43.5% in its second-quarter corporate earnings compared to the same period one year earlier; Caterpillar slashed its outlook for the entire 2013 year. The company’s profit fell to $960 million in the second quarter from $1.7 billion a year earlier. On a per-share basis, the company’s corporate earnings declined from $2.54 to $1.45. (Source: Reuters, July 24, 2013.)

This April, Caterpillar announced its first share buyback in more than four years. The company has or will purchase $1.0 billion worth of its own shares at market prices. (Source: Associated Press, April 25, 2013.) And, of course, this will boost per-share earnings.

Halliburton Company (NYSE/HAL) is one company that reported corporate earnings slightly above estimates at $0.73 per share compared to $0.72 expected. But the company’s profit actually went down for the second quarter to $679 million … Read More

Why Gold Bears Will Soon Find out They Are Wrong

By for Profit Confidential

There has been increased volatility in gold bullion prices as investors run from precious metals. According to data compiled by Bloomberg, gold bullion’s 60-day historical volatility reached 28.9% on June 13. This was the highest level since December of 2011. Average volatility over the past five years for gold bullion prices has been around 20%. (Source: Bloomberg, June 14, 2013.)

As the volatility continues in gold bullion prices, the fundamentals remain strong. Actually, demand for gold coins is unprecedented right now.

Aside from individual investors buying gold bullion, central banks continue to diversify their reserves into gold bullion as fiat currencies fail to protect their wealth. In spite of the decline in gold bullion prices, as has been well documented in these pages, central banks form Russia, Turkey, and Kazakhstan continue to add precious metals to their reserves.

Bullish stock advisors are forgetting that we are standing on the cusp of a global economic slowdown—an event that bodes well for gold bullion. It may be difficult for my readers to envision right now, but with the recent exodus by investors out of U.S. bonds, once the stock market starts declining, there will be few other “stores of wealth” for investors to seek aside from gold.

Major economic hubs have been slowing down for some time and now, they are taking with them smaller nations that rely on their demand. China, Japan, India, Australia, Germany, and France—they are all begging for economic growth.

But instead of getting growth, world economies are slowing. The World Bank lowered its forecast for global growth last week. It now expects the global economy to grow … Read More

Truth Behind 1Q 2013 Earnings and What’s Next for Stocks

By for Profit Confidential

Corporate Earnings GrowthThis shouldn’t be a surprise to the readers of Profit Confidential.

According to an analysis done last week by the Wall Street Journal, in the first quarter of 2013, corporate earnings growth of companies in the key stock indices like the S&P 500 wasn’t really due to companies doing better. Rather, “research tax breaks” are what pushed 1Q13 earnings up for many S&P 500 companies. (Source: Wall Street Journal, June 14, 2013.)

Consider Intel Corporation (NASDAQ/INTC). The company spent $10.1 billion on research and development, which essentially lowered its effective tax rate from 28.2% in the first quarter of 2012 to 16.3% in the first quarter of 2013! This bolstered Intel’s corporate earnings.

Other big names in the S&P 500 like Google Inc. (NASDAQ/GOOG), Abbott Laboratories (NYSE/ABT), The Boeing Company (NYSE/BA), Yahoo! Inc. (NASDAQ/YHOO), and Xerox Corporation (NYSE/XRX) were able to use “research tax breaks” to also boost their corporate earnings.

While this technique helped companies boost 1Q13 earnings, profit expectations aren’t so rosy going forward.

Expectations for corporate earnings for the S&P 500 companies continue to drop. At the end of the first quarter (March 31), second-quarter corporate earnings were forecasted to grow at 4.5%. Now, corporate earnings growth for the second quarter is estimated to be only 1.3%. (Source: FactSet, June 7, 2013.)

Only four out of 10 industry sectors in the S&P 500 are expected to show corporate earnings growth in 2Q13. The information technology sector of the S&P 500 is expected to report a decline of 6.3% in corporate earnings this quarter and the health care sector could see its profits slide four percent!… Read More

Housing Recovery Already Comes to an End?

By for Profit Confidential

Rising Mortgage RatesThe housing market simply isn’t improving at the rate many in the mainstream media are telling us.

Home prices are still significantly lower than what they were during 2005 and 2006. On its own, there is no housing market recovery. All we are witnessing is the mere reflection of easy money provided by our central bank.

As I often write, to see a real recovery in the housing market, we need to see first-time home buyers active in the market. Unfortunately, they are not involved.

In April, first-time home buyers accounted for only 29% of all existing home purchases in the U.S. housing market. This was three percent lower than the previous month and 17% lower than April 2012, when first-time home buyers accounted for 35% of all home purchases. (Source: National Association of Realtors, May 22, 2013.)

According to a survey by Fannie Mae, last month, 40% of Americans said it’s a good time for them to sell their home. In April, the survey showed only 30% thought the same thing, and in the same period a year ago, this number stood at 16%. (Source: Realtor Magazine, June 11, 2013.) Hence, we are going to see more listings hit the housing market.

The inventory of homes for sale in the U.S. housing market increased four percent in April from the previous month nationally, but what’s troubling is that in a few areas, such as Stockton and Sacramento, California, new listings have surged 75% from a month earlier.

The basic concept of economics: when demand declines and supply increases, prices go down.

And the most common mortgage in the … Read More

Global Slowdown Accelerates as Smaller Nations Witness Export Slump

By for Profit Confidential

My advice: if you want to know what’s happening in the global economy, do not look to the key stock indices. They are misguiding investors into believing all is well, while the global economy stands on the verge of an economic slowdown.

In these pages, I have written about major economic hubs in the global economy, namely China, Germany, and France, going through an economic slowdown. But now the smaller countries are flashing warning signs as well.

India grew at the slowest pace in a decade in its fiscal year (ended March 31, 2013). The Central Statistical Office reported that production in India at factories, in utilities, and at mines only increased by two percent in April from a year ago. In March, it increased 3.4%. (Source: Bloomberg, June 12, 2013.)

The troubles for the global economy don’t end there.

In April, Malaysia reported its trade surplus fell to the lowest level since 1997. The country’s exports to the global economy surprisingly declined 3.3% from a year ago. There are now fears that Malaysia can very well run its first trade deficit in 16 years. (Source: Reuters, June 12, 2013.)

Exports from the Philippines fell 12.8% in April from a year ago. Indonesia has been witnessing an export slump for 13 consecutive months and recorded a trade deficit in April.

In the other parts of the global economy, the situation is similar.

We have no further to look than exports of iron ore from Brazil to China. In terms of tonnage, in 2012, Brazil exported 170 metric tons of iron ore to China, three percent higher than the previous … Read More

Stock Advisor Sentiment Suggests Sell-Off Ahead

By for Profit Confidential

Stock Advisor Sentiment Suggests Sell-Off AheadAs the key stock indices continue to climb higher, optimism amongst investors and stock advisors rises to a dangerous level.

According to the Advisor Sentiment tracked by Investors Intelligence, an indicator I follow to gauge optimism in the stock market, the number of stock advisors who are bullish towards key stock indices is at its highest since April of 2011. (Source: Investors Intelligence, May 22, 2013.) To bring this into perspective, in April of 2011, the key stock indices like the S&P 500 started to decline, dropping nearly 20% through October of that year.

The stock market is becoming very overbought and very overpriced. It’s not a matter of “if” the market faces a major set-back, but “when.”

The U.S. economy continues to struggle and early indicators of economic slowdown are flashing warning signs. Consider the Business Outlook Survey by the Federal Reserve Bank of Philadelphia, which provides an outlook for manufacturing activity in the Philadelphia area. The survey indicates demand has been weak, with new orders and shipments declining and inventories building up. (Source: Federal Reserve Bank of Philadelphia, May 16, 2013.)

The index of current manufacturing activity in the Philadelphia region registered at negative 5.3 in May compared to positive 1.3 in April. Any number below zero indicates conditions in the manufacturing sector are becoming poor.

This isn’t the only troubling statistic that shows the U.S. economy is headed towards an economic slowdown. Our economic growth is questionable; unemployment is still staggering; the majority of jobs created since the financial crisis have been in low-paying jobs, and a significant portion of the U.S. population is on food stamps…. Read More

U.S. Economy Fundamentally Tormented; No Amount of Money Printing Can Fix It

By for Profit Confidential

U.S. Economy Fundamentally Tormented; No Amount of Money Printing Can Fix ItThe U.S. economy is fundamentally tormented; no amount of money printing can fix it. The Federal Reserve continues to print $85.0 billion a month in new money, and the government continues to spread hopes of economic growth. Sadly, there isn’t any. In fact, Americans are struggling.

In a period of economic growth, the general standard of living is supposed to improve as people get jobs, spend money, and live in prosperity. As the economy improves, businesses spend, hire more staff, produce more products, and are able to see rising profits. In the U.S. economy today, we have the complete opposite.

A record amount of people in the U.S. economy are on food stamps. In January of this year, there were 47.8 million Americans on some form of food stamps. This number is eight percent higher than it was in January 2011, when 44.2 million people were using food stamps. (Source: United States Department of Agriculture, April 5, 2013.) Of the entire U.S. population, 15.1% are using some form of food stamps.

Why are so many Americans in the U.S. economy on food stamps? Millions of Americans are unemployed, and those lucky enough to find a job are working in low wage-paying sectors. And real wages are declining. This is all contrary to economic growth.

As for businesses in the U.S. economy, in March, factory output in the U.S. economy declined 0.1%—the second decline in the first three months of 2013. Furthermore, the capacity utilization for manufacturing—a measure of what manufacturers can produce and what they’re actually producing—declined by 0.2% in March. (Source: Board of Governors of the Federal Reserve System, … Read More

Experts at Propping Up Earnings? 70% of S&P 500 Firms Buy Back Stock in 2012

By for Profit Confidential

Experts at Propping Up EarningsThe corporate earnings season for the first quarter of 2013 may not be as positive as optimistic stock advisors believe it will be. The reality is that companies in the U.S. economy are struggling to maintain corporate earnings growth, so they’re resorting to employee cost-cutting measures.

Consider the six largest banks in the U.S. economy; they announced a reduction in their collective labor force of about 21,000 in the first three months of 2013—the highest amount since the third quarter of 2011. (Source: Bloomberg, April 9, 2013.) Why? Because if it’s difficult to increase revenues, just cut expenses to maintain profits.

JPMorgan Chase & Co. (NYSE/JPM), a component of the S&P 500, posted record corporate earnings for the past three years but has planned to cut 17,000 employees by the end of 2014.

American Express Company (NYSE/AXP) is planning to cut 5,400 jobs this year, reducing its workforce by 8.5%.

Other measures companies are taking to maintain corporate earnings growth include major stock buyback programs. In the fourth quarter of 2012, S&P 500 companies purchased $93.5 billion worth of their own shares. For the whole of 2012, S&P 500 companies purchased $385 billion worth of shares. Of all the companies on the S&P 500, 70% were involved in buying back their shares in 2012. (Source: FactSet, April 3, 2013.)

As I have continually said in these pages, at the end of the day, corporate earnings fuel real stock market rallies. Right now, key stock indices are running ahead of themselves, and I’m looking at this as a warning sign.

In the third quarter of 2012, S&P 500 companies reported negative … Read More

Producer Price Index Soars to Annual Rate of 8.4%; Government Says No Inflation

By for Profit Confidential

Government Says No InflationWhile the “official” numbers may not show it, inflation in the U.S. economy is a major problem, and it’s hurting any chance we may have of real economic growth.

The Bureau of Labor Statistics says inflation in the U.S. economy has caused prices to increase by only 12% since 2007—what $1.00 could buy in 2007 costs $1.12 today. (Source: Bureau of Labor Statistics web site, last accessed April 5, 2013.) As my readers know, I believe these inflation numbers are materially understated.

In February, the U.S. Producer Price Index (PPI), what many economists consider to be an early signal of where inflation might be headed, posted the highest month-over-month rate of change since October 2012. The PPI rose 0.7% in February from January. (Bureau of Labor Statistics, last accessed April 5, 2013.) Using February’s number as a base, the PPI is rising at an annual rate of 8.4%.

Corn futures at the beginning of 2007 were priced around $350.00 per lot. Now the same future costs $630.00 each—an increase of 80% in the last five years. As corn is an ingredient in a significant number of different foods, general food prices have also increased.

But despite the inflation we are experiencing, Americans’ wages aren’t rising. In the first quarter of 2007, the average hourly earnings of all private-sector employees in the U.S. economy was $20.70 per hour. In the first quarter of 2013, it increased to $23.80 an hour—a six-year increase of less than 15% (source: Federal Reserve Bank of St. Louis web site, last accessed April 5, 2013); not enough to keep up with inflation.

Adding more to the … Read More

One in Three Americans Has No Confidence They Can Retire Comfortably

By for Profit Confidential

Three Americans Has No ConfidenceConsumer confidence is the key to any growth in the U.S. economy. If it declines, U.S. economic prosperity becomes questionable, as a lack of consumer confidence directly impacts consumer spending. My worry: the Thomson Reuters/University of Michigan’s preliminary consumer sentiment for the month of March plunged to its lowest level since December of 2011.

This popular consumer sentiment index—an indicator of consumer confidence—fell to a reading of 71.8 in March, compared to 77.6 in February. (Source: Chicago Tribune, March 15, 2013.)

The Thomson Reuters/University of Michigan survey also showed Americans are turning pessimistic about their finances. Only 20% of Americans believe their finances will improve this year—a record low for the survey!

Similarly, 30% of consumers believe U.S. economic conditions will get worse. In February, only 22% of American consumers believed the U.S. economy will deteriorate.

But the misery for American consumers doesn’t just end here. According to a report released by the Employee Benefit Research Institute (EBRI), 28% of Americans have no confidence that they will retire comfortably. This was the highest amount of individuals with this belief in 23 years. (Source: Wall Street Journal, March 19, 2013.)

The EBRI report also showed that the number of Americans saving for retirement has plummeted. In 2009, 75% of American workers saved for their golden days; now, this number has declined to 66%—a decrease of 12%.

By no surprise, as consumer confidence is turning sour, companies operating in the U.S. are seeing its effects—to say the least, they are tired of bleak consumer spending.

The CEO of Dollar Tree, Inc. (NASDAQ/DLTR) said, “the consumer is under pressure, burdened … Read More

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