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

Posts Tagged ‘stock market rally’

Have I Got a Deal for You! The Stock Selling at 573 Times Earnings That Just Keeps Rising

By for Profit Confidential

Have Stock Market Investors Lost Their MindsStock market valuations are severely stretched by historical standards. Earnings multiples and other financial ratios no longer make sense. But despite this, investors are still buying.

I continue to preach: the days left in the stock market’s rise are numbered.

As I see it, excessive speculation rules the stock market right now. And that is dangerous because investors are making decisions that they shouldn’t be making. Irrationality is growing. Those who say the stock market will decline, like me, are few and far between.

Investors are putting big money into companies that are nowhere near being profitable.

Just look at Amazon.com, Inc. (NASDAQ/AMZN), a component of the S&P 500. According to bigcharts.com, Amazon.com stock is selling at 573 times its earnings! Since the stock market rally that began in 2009, the stock price of this online retailer has climbed more than 800%.

The price-to-book ratio of Amazon.com (that is the ratio of market value of the company compared to its book value) stands at 17.38. (Source: Yahoo! Finance, last accessed March 24, 2014.) The price-to-book ratio for Amazon.com’s sector—online retailers—is 11.0. (Source: New York University Stern School of Business web site, last accessed March 24, 2014.) By this measure, Amazon.com is overvalued by almost 60% compared to its sector average.

But Amazon.com is just one example of an overpriced stock; there are many other companies in the S&P 500 that don’t make sense as an investment, unless you are playing the “greater fool” theory. That’s when you buy a stock not because it pays a good dividend or because it makes a lot of money, but because the next guy … Read More

Why I’m So Cautious About 2014

By for Profit Confidential

170114_PC_lombardiDon’t for a second believe consumer spending in the U.S. economy is improving!

J. C. Penney Company, Inc. (NYSE/JCP) has announced it will be closing 33 stores in the U.S. economy. By doing this, the retailer will save about $65.0 million a year starting in 2014. 2,000 employees will be let go. (Source: J. C. Penney Company, Inc., January 15, 2014.)

Macy’s, Inc. (NYSE/M) is also closing stores.

Best Buy Co., Inc. (NYSE/ BBY) reported that for the nine-week period ended January 4, its comparable sales declined 0.8% from the same period a year ago. The CEO of the company, Hubert Joly, said, “…our holiday revenues were negatively impacted by a number of factors, including: (1) the aggressive promotional activity in the retail industry during the holiday period; (2) supply constraints for key products; (3) significant store traffic declines between “Power Week” and Christmas; and (4) a disappointing mobile phone market.” (Source: “Best Buy Announces Holiday Revenue Results,” Best Buy Co., Inc., January 16, 2014.)

Target Corporation (NYSE/TGT) is another retailer that’s been hurt by dismal consumer spending in the U.S. economy. The company expects a decline of 2.5% in its fourth-quarter comparable sales. Target has also lowered its corporate earnings guidance for the fourth quarter; it now expects to report earnings of between $1.20 and $1.30 per share. Previously, it stated its corporate earnings in the fourth quarter would be between $1.50 and $1.60 a share. The company also plans to close eight stores in the U.S. economy. (Source: Target Corporation, January 10, 2014.)

Each day, it is becoming more evident that consumer spending, which makes up about two-thirds … Read More

What Bernanke Cemented for Wall Street Yesterday

By for Profit Confidential

Why This Next Stock Market Bust Is Going to Be a DoozySomething very interesting happened yesterday.

The Federal Reserve said it would start “tapering” its quantitative easing program by $10.0 billion a month. In other words, the Fed will now print $75.0 trillion a month in new money instead of $85.0 trillion a month.

Firstly, the whole concept of the central bank printing money out of thin air never made sense to me because the money isn’t backed by anything. The Federal Reserve says that starting in January, it will print 11% less in new money. In 2014, instead of printing more than $1.0 trillion in new money, it will print (or “create,” if you prefer) $900 billion in new money.

But—and there is always a but—the Federal Reserve, through Bernanke’s press conference following yesterday’s meeting of the Federal Reserve governors, said it would adjust the amount of money it creates based on how the economy is faring. I take this to mean that if the economy slows again, the Federal Reserve could, and likely will, start printing even more money than it currently does.

And there is the question of the $4.0 trillion in new money the Federal Reserve’s balance sheet says it has created. How does the Fed get rid of the $4.0 trillion? I don’t think it can. I don’t think the Federal Reserve will find anyone out there who can take the $4.0 trillion, mostly in bonds, off its hands.

What really threw me for a loop yesterday was that when the Federal Reserve said it would start printing $10.0 billion less in new money each month, the Dow Jones Industrial Average rallied 300 points. Yes, we … Read More

Days of Stock Market Irrationality Numbered

By for Profit Confidential

key stock indicesIn the first 10 months of the year, key stock indices like the S&P 500 have gone up more than 20%. Others like the Dow Jones Industrial Average have lagged a little, but the returns are exuberant nonetheless.

But as this was all happening, we saw the formations of very troubling trends in the fundamentals that drive key stock indices higher. Companies on key stock indices started to show corporate earnings that were nothing but an illusion. They fiddled with their corporate earnings via massive stock buyback programs and cost-cutting to make them look better.

And as we now near the end of 2013, companies in key stock indices continue to do more of what they have been doing for a while: using “financial engineering” to make their corporate earnings look better. But the real gauge of how companies are doing—if you can’t trust their earnings—lies in their sales.

So far, 366 of the S&P 500 companies have reported their corporate earnings for the third quarter of this year, and only 53% of them have reported sales above the expectations. (Source: FactSet, November 1, 2013.)

Consider General Electric Company (NYSE/GE), one of the major companies in the S&P 500. In the third quarter of 2013, revenues for the company declined 2.3% from the same period a year ago. (Source: Investor Relations, General Electric Company, October 18, 2013.) But the company is buying back its shares!

The board of International Business Machines Corporation (NYSE/IBM), another big component of the S&P 500, authorized an additional $15.0 billion for the company’s stock buyback program. The company’s existing share buyback program already had $5.6 … Read More

A Funny Thing Happened on the Way to New Stock Market Highs

By for Profit Confidential

financial crisisThe financial crisis of 2008 was the biggest panic America had witnessed since the Great Depression. Dubbed the “Great Recession,” its after-effects linger. In fact, this is the worst post-bust recovery on record.

Today, for investors, especially stock market investors, there are two camps: those who believe we are in recovery, and those (like me) who believe something is wrong with this recovery…it doesn’t feel or smell right.

America, I believe, was forever changed following the financial crisis. There are more people working into their retirement years today than ever before because they can’t make it without working. There are more people on food stamp programs and government handouts than ever before.

As I wrote yesterday, the housing recovery isn’t real. We don’t have first-time home buyers coming in and buying homes to live in (like they should). Instead, large financial institutions have taken up the inventory of foreclosed homes to rent them out for a profit.

And most of the jobs that have been created since the financial crisis have been in the low-paying service sector—in retail jobs and restaurant jobs. Our kids are graduating from college (with plenty of debt) and are unable to find the job they trained for because they are competing against older middle managers for these jobs.

Our Federal Reserve, which I believe could be the only central bank in the world not owned by the government of the country it operates in, says our economic problems can be corrected by printing lots of extra paper money. That’s what the media is having us believe, too.

The real story is that money printing has … Read More

If the Economy Is Improving, Why Is This Happening?

By for Profit Confidential

Economy Is Improving, Why Is This HappeningWhile the media and politicians tell us we’re in an economic recovery…I keep writing about the slowdown we’re heading towards. How can I say that?

First, take out the stock buyback programs, and you’ll see that U.S. companies are seeing their earnings and revenues grow this year at their slowest pace since 2009. (More on that in today’s “Michael’s Personal Notes” column below.)

From a boring (but extremely important) economic point of view:

When a country experiences economic growth, industrial production of electricity and gas utilities pick up as factories and consumers use more electricity and other utilities. This is not happening in the U.S. economy. As a matter of fact, industrial production is contracting!

An index tracking industrial production of electric and gas utilities has declined almost eight percent since this past March. It stood at 103.76 then; in August, it stood at 95.62. (Source: Federal Reserve Bank of St. Louis web site, last accessed September 19, 2013.)

But it doesn’t end there.

Another key indicator of economic growth known as “capacity utilization” shows companies in the U.S. economy are operating below their historical norm. In August, the capacity utilization in the U.S. economy was 77.8%, three full percentage points below the historical average from 1972 to 2012. (Source: Federal Reserve, September 16, 2013.)

And we are seeing layoffs and discharges in the manufacturing sector accelerate in the U.S. economy. In March, there were 83,000 layoffs and discharges in manufacturing. In August, that number rose to 91,000—an increase of almost 10%. (Source: Federal Reserve Bank of St. Louis web site, last accessed September 19, 2013.)

When we look … Read More

Why the Risks So Outweigh the Reward in Today’s Stock Market

By for Profit Confidential

The chart below of the Dow Jones Industrial Average depicts the precise moment when the Federal Reserve made its announcement last Wednesday that it was not planning to taper its quantitative easing at this time.

Dow Jones Industrial Average Chart

Chart courtesy of www.StockCharts.com

This is really troublesome. Key stock indices have become addicted to easy money and any news about more money printing just drives the market higher. This pattern has been going on since the Federal Reserve first promised it would rev up its printing presses back in 2008.

Unfortunately, as this continues, the fundamentals that are supposed to actually drive key stock indices higher—corporate earnings—are under major pressure. We have been seeing companies in key stock indices playing “tricks” to increase their corporate earnings per share (such as buying back their own stock), but these antics can’t go on forever.

Software giant Microsoft Corporation (NASDAQ/MSFT) has announced the company’s board of directors has approved a share buyback program worth $40.0 billion. (Source: Microsoft Corporation Investor Relations, September 17, 2013.)

CBS Corporation (NYSE/CBS) said it has increased the amount of its share buyback program to $6.0 billion. (Source: CBS Corporation Investor Relations, July 25, 2013.)

These two companies are only two of the many big-name companies in key stock indices that are rigorously buying back their shares. Other names, like Juniper Networks, Inc. (NYSE/JNPR) and Time Warner Cable Inc. (NYSE/TWC), are taking a similar approach.

As I have recently written, it’s not just corporate earnings growth that’s the problem—revenue growth is also lacking. Companies in key stock indices enjoyed double-digit (or close to it) earnings growth in 2009, 2010, and 2011, as they … Read More

Four Important Stock Charts Showing Warning Signs

By for Profit Confidential

Four Important Stock Charts With the summer months drawing to a close, it has been a somewhat warm few months for the stock market with the S&P 500 and Dow recently at record highs.

Yet we are now seeing a pause, which may or may not be an indication that the current stock market rally has fizzled out after sizzling higher on the charts. Now, I would not be surprised to see a five-percent (or more) stock market correction. In fact, I would love to see a stock market adjustment.

Some of the market leaders in 2012 and 2013 are beginning to fade, and this indicates a possible near-term stock market top.

The leadership of the banks is sliding. The chart of the Philadelphia Bank Index below shows the current situation of a potential bearish double-top forming in these stocks. Failing to attract support (at the bottom blue support line to the right of the chart) could see bank stocks drop lower on the charts, and they will take the broader market down with them.

Bank Index chart

Chart courtesy of www.StockCharts.com

We are also seeing some exhaustion in the previously sizzling housing market. (See “Why the Housing Market Is Eyeing the Fed’s Bond-Buying Strategy.”) The chart of the S&P Homebuilders Index below shows the current downward trendline after the index peaked in May. A closer look shows that a bearish descending triangle may be in the works, which could see the housing sector stocks fall through the lower support line.

Based on my technical analysis, and as I have said in previous commentaries, I would be very careful about chasing housing stocks higher. The … 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 the Prediction I Got Wrong Back Then Is So Vital Today

By for Profit Confidential

stock market crashBack in late 2011, I created a widely circulated video that included six predictions. I hit it on the head with five of those predictions. But the winners are not what are important to my readers today; it’s the prediction I didn’t get right that’s vital now

Back then, I said the U.S. dollar was “dead” and wouldn’t go anywhere. I pointed out that if it were not for the continued crisis in the eurozone, the greenback would fall flat on its face. The dollar hasn’t gone anywhere since. And if it were not for investors taking their money out of European banks and moving them into U.S. dollars, our dollar could have collapsed.

My second prediction back then was that the euro would decline in value. And it has. Prediction three was that both interest rates and inflation would rise. The yield on the 10-year U.S. Treasury has risen about 50% since then. As for inflation, if we calculate it the way the Consumer Price Index (CPI) was calculated when Jimmy Carter was president, it would be almost three times the rate the government tells us it is today.

I compared the rally in stocks that started in 2009 to the period following the 1929 stock market crash (1934 to 1937) and warned that stock prices would eventually follow the same fate they did after the “fake” stock market rally that followed the 1929 crash. I still have that opinion today.

What I got wrong in my “Critical Warning Number Six” was my prediction on gold bullion—and I believe that equates to a bigger opportunity for my readers … Read More

Hard Proof There Is No Real Economic Recovery

By for Profit Confidential

Economic RecoveryThere’s a lot of talk about economic recovery these days. Mainstream economists are saying the U.S. economy will continue to grow, and the stock advisors are telling investors to buy on dips because everything is headed upward. Their arguments are: housing is hot, the unemployment rate is declining, and consumers are spending.

But I have to disagree with those claims. I believe this isn’t a real economic recovery. What we have seen since 2009 has been nothing more than a result of artificially low interest rates, money printing, and increased government spending. Real economic recovery only occurs when conditions improve across the board and return to their historical averages.

The jobs market, which should improve during an economic recovery, is actually stalled and tormented. The official unemployment rate has come down from 10% to 7.6% in May. But the official unemployment rate is not an accurate indicator of the jobs market, as it does not take into account the soaring rate of involuntary underemployment.

There is a spur of job creation in retail and other low-wage sectors, but the 4.4 million long-term unemployed in the U.S.—those who have been out of work for more than six months—aren’t seeing robust improvements. Each month, just 10% of them find jobs, and that number hasn’t changed in the last two years. (Source: Wall Street Journal, June 24, 2013.)

According to estimates from the Brooking Institution’s Hamilton Project, after adjusting for population growth, it could take up to three years for the unemployment rate in the U.S. economy to get back to its prerecession level.

The fact: American consumers are the ones that … Read More

What Recovery? Americans on Food Stamps Outnumber Population of Spain

By for Profit Confidential

Americans on Food Stamps Outnumber Population of SpainAs of March of this year, 47.7 million Americans are now on some form of food stamps. Between 2000 and 2012, the number of Americans resorting to food stamps increased more than 171%. In 2000, there were just 17.1 million Americans on food stamps. (Source: U.S. Department of Agriculture, June 7, 2013.)

There are more individuals on food stamps in the U.S. economy than the entire population of Spain—46.17 million. (Source: World Bank web site, last accessed June 21, 2013.)

That costs the government money. The expenditure for food stamps in 2012 was $74.6 billion, almost 116% higher than what it paid in 2008. That’s a cost that could pick up even more speed if, as all indicators show, inflation begins to rise.

The key stock indices in the U.S. economy have skyrocketed since the Great Recession, due in large part to money printing, but the average American Joe hasn’t seen his living conditions improve—in fact, they have actually deteriorated.

Instead, the rich appear to be getting richer and the poor are facing more challenges, while the middle class is disintegrating. According to a Pew Research report, the bottom 93% of households in the U.S. economy witnessed their net worth drop by four percent between 2009 and 2011. The richest seven percent of U.S. households saw their wealth increase by 28% in the same period. (Source: Associated Press, April 23, 2013.)

The misery for the middle class doesn’t end here; the Census Bureau reported in the first-quarter that home ownership in the U.S. economy dropped to its lowest level in 18 years. Just 65% of Americans owned their homes in … Read More

A Mirage Called the Stock Market

By for Profit Confidential

A Mirage Called the Stock MarketWhile an economic slowdown is looming over the global economy, no one seems to care, as stock markets continue to reach new record-highs—giving investors false hopes of economic growth. But how long can this mirage actually last?

The economic slowdown in the global economy I’m talking about is a worldwide pullback in growth. Take India as the first example. According to India’s Central Statistics Office, the Indian economy is growing at five percent—its slowest pace in a decade! The director general of the Confederation of Indian Industry was quoted late last week as saying, “With no visible pick-up in any key levers of the economy, the situation remains grim.” (Source: Mallet, V., “India records slowest growth in a decade,” Financial Times, May 31, 2013.)

China, the second-biggest economic hub in the global economy, is facing headwinds, as its economy is growing at its slowest pace since 2009. Japan has undergone the largest per-capita quantitative easing program in history (its debt-to-gross domestic product [GDP] is running above 200%), and that country is back in a recession.

The unemployment rate in the eurozone was reported last week at 12.2% for April. It was 12.1% in March. The unemployment rate in Spain stood at 26.8 % and in Portugal, it stood at 17.8%. (Source: Eurostat web site, May 31, 2013.)

And industrial metal prices, which are supposed to be a leading indicator, are all heading downward.

Take a look at the chart below of the Dow Jones-UBS Industrial Metals Index. This index provides an overall picture of the performance of industrial metals.

$DJAIN Dow Jones-UBS Industrial Metals Index stock chart

Chart courtesy of www.StockCharts.com

Since the beginning of the … Read More

If This Is Economic Growth, Then What Will an Economic Slowdown Look Like?

By for Profit Confidential

As I have written in these pages many times before, economic growth in a country happens when people are finding jobs, real wages are rising, consumers are spending, businesses are expanding and seeing their inventories decline, and the general standard of living is rising.

But all of these events are missing in the U.S. economy.

The jobs growth we have witnessed following the Great Recession has been in low-wage-paying sectors. Despite the politicians telling us we have economic growth, we still have a significant number of Americans unemployed or working part-time because there aren’t any full-time jobs for them. The underemployment rate, which I consider to be a better measure of the jobs market situation, still stands around 14%, and it’s been at that number or higher for years.

In periods of economic growth, businesses spend their money, creating higher-paying jobs as they do. In the current U.S. economy, businesses are still shying away from spending; rather, they hold a pessimistic view on the economic growth potential of the current U.S. economy. Many companies have taken to the process of buying their shares back in order to make their per-share corporate earnings look better.

According to the Bureau of Economic Analysis, personal consumption expenditure, a measure of consumer spending in the U.S., decreased 0.2% in April after a dismal rise of only 0.1% in March. (Source: Bureau of Economic Analysis, May 31, 2013.)

Disposable income (what Americans have left after paying taxes) also declined in April, shedding 0.1% in the month.

Even with all the gains in the key stock indices and politicians saying we have economic growth in the … Read More

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