Posts Tagged ‘stock market rally’
Let’s start with the U.S. housing market. Has the recovery for it ended or just stalled?
My answer comes in one sentence: While it’s always a matter of location, only the high-end housing market is doing well, while the general market is weak.
I can see it in the mortgage numbers. People just aren’t taking loans to buy homes in the U.S. economy. In fact, mortgage applications are tumbling.
In the second quarter of 2014, Bank of America Corporation (NYSE/BAC) funded $13.7 billion in residential home loans and home equity loans—down 49% from a year earlier, when it funded $26.8 billion in similar loans. (Source: Bank of America Corporation, July 16, 2014.)
JPMorgan Chase & Co (NYSE/JPM) originated $16.8 billion in mortgages in the second quarter (ended June 30, 2014)—down 66% from a year ago. (Source: JPMorgan Chase & Co., July 15, 2014.)
And Wells Fargo & Company (NYSE/WFC) also reported a massive decline in mortgage originations. In the second quarter of 2014, it originated $47.0 billion in new mortgages—down 62% from the second quarter of 2013. (Source: Wells Fargo & Company, July 11, 2014.)
So even though interest rates continue at a record low, people are not borrowing to buy homes in the U.S. economy.
But it’s not just the housing market that is weak. The entire U.S. economy is soft…masked by an artificial stock market rally and skewed “official” government statistics that don’t give us a true picture of the unemployment situation or inflation.
We’ve all heard by now that Microsoft Corporation (NASDAQ/MSFT) is planning job cuts of almost 20,000. (Source: USA Today, July 15, 2014.) … Read More
There are two important charts I want my readers to see this morning.
The first is a chart that is an indirect measure of demand in the global economy. Right now, the Baltic Dry Index (BDI) sits at its lowest level of the year. Since the beginning of 2014, the BDI has fallen 60%.
The BDI measures the cost of moving major raw materials by sea in the global economy. The thinking is that the lower the cost to move goods by ship, the lesser the amount of goods to move (a strict demand/supply price situation).
Chart courtesy of www.StockCharts.com
What’s happening with the steep drop in the BDI can be seen in a corresponding slowdown in the global economy.
Germany, the fourth-biggest economy in the world, saw its industrial production decline by 1.8% in May after falling 0.3% in April. (Source: Destatis, July 7, 2014.)
Great Britain, the sixth-biggest market in the global economy, saw its production decline 0.7% in May, while its manufacturing decreased 1.3%. (Source: Office for National Statistics, July 8, 2014.)
France, the fifth-biggest economy, reports no gross domestic product (GDP) growth in the country in the first quarter of 2014. (Source: MarketWatch, July 8, 2014.)
In 2014, the Chinese economy will grow at its slowest pace in years. In Japan, the Bank of Japan (its equivalent to our Federal Reserve) has announced it will start buying exchange-traded funds (in specific, the Nikkei 400 ETF) to “boost the impact of (its) unprecedented easing.” (Source: “Bank of Japan Seen Buying Nikkei 400 ETF,” Financial Post, July 10, 2014.) Yes, the central bank of Japan is buying … Read More
Stock 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
Don’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
Something 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
In 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
The 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
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
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.
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
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.
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
Back 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.
There’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
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