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

Posts Tagged ‘stock market’

The Era of Financial Insanity

By for Profit Confidential

What Happens Next for the Stock MarketMy colleague Robert Appel (BA, BBL, LLB) issued a research paper to the subscribers of one of his financial advisories earlier this week. I thought it important that all my readers be aware of and understand the crux of what Robert is saying about our current economic situation and where it will eventually lead.

Here it is:

“The actions of the Federal Reserve (how far they went to ‘stabilize’ the economy) after the Credit Crisis of 2008 is unprecedented in American history. Of course, I’m talking about the Federal Reserve printing nearly $4.0 trillion in new U.S. dollars while keeping interest rates artificially low for almost six years now.

These actions have caused an ‘era of financial insanity’ that penalizes seniors, savers, and prudent investors, while rewarding borrowers, those who leverage, and risk-takers.

It encourages public companies to doctor their own bottom lines by borrowing money (at cheap interest rates) to repurchase their own shares. This reduces the denominator of their earnings numbers—giving only the illusion of prosperity—and also reduces share float, thereby putting upward pressure on stock prices since more money is suddenly chasing fewer shares.

Articles have appeared in several well-known financial publications, with sources, citing central banks around the world have injected $29.0 trillion into equity markets because they themselves simply could not manage a return at the very same rates they were inflicting on others!

The prime beneficiaries of these insane monetary policies are the banks themselves and the government itself. Because low interest rates allow Washington (and other, similar, fiat regimes) to manage debt payments that could not otherwise be managed in a ‘normal’ interest … Read More

The Problem With Reality in 2014

By for Profit Confidential

U.S. Economy Halfway to a Recession AlreadyEarlier this month, Jeremy Siegal, a well-known “bull” on CNBC, took to the airwaves to predict the Dow Jones Industrial Average would go beyond 18,000 by the end of this year. Acknowledging overpriced valuations on the key stock indices are being ignored, he argued historical valuations should be taken with a grain of salt and nothing more. (Source: CNBC, July 2, 2014.)

Sadly, it’s not only Jeremy Siegal who has this point of view. Many other stock advisors who were previously bearish have thrown in the towel and turned bullish towards key stock indices—regardless of what the historical stock market valuation tools are saying.

We are getting to the point where today’s mentality about key stock indices—the sheer bullish belief stocks will only move higher—has surpassed the optimism that was prevalent in the stock market in 2007, before stocks crashed.

At the very core, when you pull away the stock buyback programs and the Fed’s tapering of the money supply and interest rates, there is one main factor that drives key stock indices higher or lower: corporate earnings. So, for key stock indices to continue to make new highs, corporate profits need to rise.

But there are two blatant threats to companies in the key stock indices and the profits they generate.

First, the U.S. economy is very, very weak. While we saw negative gross domestic product (GDP) growth in the first quarter of this year, the International Monetary Fund (IMF) just downgraded its U.S. economic projection. The IMF now expects the U.S. economy to grow by just 1.7% in 2014. (Source: International Monetary Fund, July 24, 2014.) One more … Read More

Three Retail Stocks Showing Impressive Growth This Earnings Season

By for Profit Confidential

Three Retail Stocks That Are Nailing the Second QuarterIt wasn’t too long ago that NIKE, Inc. (NKE) reported another great quarter of solid growth in its business.

The company’s fiscal fourth-quarter numbers beat Wall Street consensus, and its sales from continuing operations grew 11% to $7.4 billion, or 13% on a currency-neutral basis.

In this market, double-digit growth is significant no matter if it’s in the top or bottom line.

Like the last several earnings seasons, corporations are typically only beating consensus on one financial metric (either earnings or revenues). But this is enough to keep investors buying.

Under Armour, Inc. (UA) blew the doors off of Wall Street consensus and the stock shot strongly higher.

The company reported a surge in new apparel sales. Total revenues grew a whopping 34% over the second quarter of last year to $610 million.

Breaking it down, the company’s apparel revenues grew 35% to $420 million, while footwear sales grew 34% to $110 million on new product offerings. The company experienced significant sales growth of 30% in North America, while international sales doubled (representing approximately 10% of total revenues).

Previous guidance for 2014 was for sales growth of between 24% and 25% over 2013. Management boosted this guidance to between 28% and 29%, with operating income expected to grow between 29% and 30% over last year.

This time last year, Under Armour was trading around $35.00 per share. It’s doubled since then, and the position has further momentum in this market.

It is pricey, however, with a forward price-to-earnings ratio of around 60. But the stock is likely to stay this way; the business has operational momentum, and that’s what … Read More

The Sobering Issue

By for Profit Confidential

Why Our National Debt Will Double From HereAccording to the U.S. Congressional Budget Office, next year, the government is expected to incur a budget deficit of $469 billion and then another budget deficit of $536 billion in 2016. (Source: Congressional Budget Office web site, last accessed July 21, 2014.) From there, the budget deficit is expected to increase as far as the projections go.

Yes, the government’s own estimates are that our country will run a budget deficit every year for as long as the government’s forecasts go.

That’s quite unbelievable. We live in a country where the government (and politicians) feel it is okay to continue being “negative” every year, indefinitely. It’s like I’ve written many times: if our government were a business, it would have gone bankrupt long ago. But the government, through its non-owned agency, the Federal Reserve, has the luxury of printing paper money to fund its budget deficit and debt. If a business did that—printed money to pay its bills—that would be illegal.

Today, the U.S. national debt stands at $17.6 trillion with about $7.0 trillion of that incurred under the Obama Administration. (Is it any wonder a CNN/ORC International poll said this morning that 35% of Americans say they want President Obama impeached with about two-thirds saying he should be removed from office?)

But what happens to the budget deficit once interest rates start going up? We’ve already heard from the Federal Reserve that interest rates will be sharply higher at the end of 2015 and 2016 than they are now.

Earlier this month, the U.S. Department of the Treasury was able to borrow money (issued long-term bonds) at an interest … Read More

Small-Cap vs. Big-Cap: The Real Winners in This Market

By for Profit Confidential

Why I'm Not Giving Up on Small-Cap StocksHealthy second-quarter results from technology and banks are helping to drive buying in stocks. On Tuesday, the S&P 500 traded at an intraday record and is again looking toward 2,000, while the blue-chip DOW is edging toward another record.

While we are hearing about how the S&P 500 will break 2,000 and the DOW will reach 20,000, we are not hearing much about small-cap stocks, which have been under some pressure this year after leading the pack in 2013.

The Russell 2000 is struggling after failing to hold above 1,200 on two occasions; it’s currently down about 0.66% this year and 4.6% from its record.

Russell 2000 Small Cap Index Chart

Chart courtesy of www.StockCharts.com

I recently read how the failure of the Russell 2000 to follow the broader stock market higher is a red flag that could warn of a pending correction in the stock market.

Now, while small-cap stocks are probably the most vulnerable to selling at this time, I don’t feel that it’s time to simply ignore this high-beta growth group and focus solely on big-cap stocks.

My thinking is that investors are simply dumping some risk from their portfolio after recording strong returns in 2013. It’s not that small-cap stocks are inferior to the S&P 500 companies. In fact, as long as the economy continues to grow, small-cap stocks will fare well.

You just need to have some patience and think longer-term, as some of these small companies will become big companies. Case in point: I highlighted touchscreen technology provider Synaptics Incorporated (NASDAQ/SYNA) in October 2013, when the stock was a small-cap at around $46.00. The stock has since nearly doubled … Read More

Setting Up for the Slaughter

By for Profit Confidential

Stock Market Valuations Touching Historical ExtremesInvestors poured $4.3 billion into the SPDR S&P 500 (NYSE/SPY) last week, an exchange-traded fund (ETF) that tracks the S&P 500. For the week, ETFs tracking U.S. equities witnessed the most inflows in the last four weeks. (Source: Reuters, July 17, 2014.)

And as investors continue to inject vast sums of money into the stocks, stock valuations are at historical extremes. When I want to see how expensive the stock market is getting, I look at the S&P 500 Shiller P/E multiple (the value of stocks compared to what they earn adjusted for inflation)…and it’s screaming overvalued.

In July, the S&P 500 Shiller P/E stood at 25.96. That means that for every $1.00 a company makes, investors are willing to pay $25.96. The stock market has reached this P/E valuation (25.96) only seven percent of the time since 1881.

The number suggests the stock market is overvalued by 57%, according to its historical average of 16.55. (Source: Yale University web site, last accessed July 18, 2014.) The last time the S&P 500 Shiller P/E was above the current level was in October of 2007—just before one of the worst market sell-offs in history.

But this isn’t the only indicator suggesting the stock market is overvalued.

Another indicator of stock market valuation I look at is called the market capitalization-to-GDP multiple. Very simply put, this indicator is a gauge of the value of the stock market compared to the overall economy. It has been a good predictor of where key stock indices will head.

At the end of the first quarter of this year, the Wilshire 5000 Full Cap Price Index … Read More

Why Higher Interest Rates Will Become a Necessity

By for Profit Confidential

A Weak Economy Masked By an Artificial Stock Market RallyLet’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 18,000. (Source: USA Today, July 15, 2014.) … Read More

How to Spot a Genuine Momentum Stock

By for Profit Confidential

How I Know This Stock's Headed HigherOne stock that’s experiencing serious upward price momentum is in the equipment rental business. Momentum stocks might typically be associated with other market sectors, but United Rentals, Inc. (URI) is doing fantastic operationally and the market is bidding.

It’s kind of odd to think of an equipment rental company soaring on the stock market, but United Rentals is doing just that. In its most recent quarter, the company handily beat Wall Street consensus and raised its full-year guidance.

According to the company, its second quarter produced sales of $1.4 billion, up 16.7% from $1.2 billion in the same quarter last year.

Management said that the company is experiencing solid demand in non-residential construction. It’s renting out more equipment at higher margins than normal.

Second-quarter earnings were $94.0 million, or $0.90 per diluted share, compared to $83.0 million, or $0.78 per diluted share, representing a gain of about 15%.

Adjusted earnings per share were $1.65 on a diluted basis, which was way above Wall Street consensus.

United Rentals is one of the largest equipment rental companies in the world, with more than 12,000 employees. The company is considered a mid-cap stock and has been doing extremely well since the middle of 2012, which you can see in the stock chart below.

United Rentals Inc Chart

Chart courtesy of www.StockCharts.com

Not only did United Rentals beat consensus, but it also raised its outlook for adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) and tightened its revenue range to $5.55–$5.65 billion for all of 2014, up from the previous outlook of $5.45–$5.55 billion.

Many companies do not have their SEC Form 10-Q documents ready when they … Read More

The Only Thing I Can Find to “Buy Low” These Days

By for Profit Confidential

The Second Half of 2014 What It Looks Like for GoldThe tally as of this morning:

The stock market is up 2.4% so far in 2014 as measured by the Dow Jones Industrial Average, while gold bullion is up 8.1% for the year.

“As an investor, do I get into gold or stocks at this point in the year?”

Well, if you’ve been reading my articles for a while, you know I’m not a fan of stocks right now. I simply believe the stock market has become a Federal Reserve–induced bubble.

And while there has been a lot written about price manipulation in the gold market, and while mighty Goldman Sachs still says the metal is headed lower in price, investors should look at gold bullion right now…that’s both old gold investors (so they can average down their cost) and new gold investors taking their first position.

Here are my reasons why…

In 2013, the Indian central bank and government imposed tariffs and restrictions on the importation of gold bullion into India, as they believed the demand for gold bullion in the country was hurting its national accounts. In the first quarter of this year, India started to ease its gold importation restrictions, and bang, last month, gold bullion imports into the country increased by 65% over June of last year. (Source: Bloomberg, July 16, 2014.) Demand for gold bullion in China, which I’ve documented in these pages, is also very strong.

Inflation, what gold bullion acts as a hedge against, is starting to gain momentum. The Producer Price Index (which tracks changes in the prices producers pay) increased by 0.4% in June from the previous month; that’s an annualized … Read More

My Top Tech Stock for Wealth Creation

By for Profit Confidential

Top Wealth-Creating Tech Stock for the Risk-Averse InvestorThe numbers are still coming in pretty good this earnings season and corporate outlooks are holding up well for the year.

Stocks have been trading off of Federal Reserve Chairman Janet Yellen’s monetary policy report to Congress, and less so on earnings.

This market is tired and you can see it in the trading action of individual stocks that beat the Street with their earnings. Most market reaction is pretty mute.

One that wasn’t, however, was Intel Corporation (INTC). The company’s second quarter really got institutional investors fired up. The stock was $26.00 a share mid-May; now it’s close to $34.00, which is a very big move for this company.

Microsoft Corporation (MSFT) doesn’t report until next week, but the company’s shares moved commensurately with Intel’s.

Earnings strength from these older technology benchmarks is really good news for both the stock market and the economy in general. It means that the enterprise market is spending money again, and that’s exactly what the technology industry needs.

Even Cisco Systems, Inc. (CSCO) got a boost from Intel’s earnings results. This stock has been trying to break out of a long price consolidation. It hasn’t really done anything on the stock market since its bubble burst in 2000.

I actually view Microsoft as an attractive company for equity portfolios looking for higher-quality stocks.

The position is very fairly priced and offers a current dividend yield of just less than three percent. And management has a multifaceted business plan focused on growth in personal computers (PCs), the cloud, and devices.

But the best potential with a company like Microsoft is its prospects for … Read More

The Big News on 2Q14 Earnings Season So Far

By for Profit Confidential

My Two New Favorite Stocks This Earnings SeasonThe numbers are in from Johnson & Johnson (JNJ) and they’re good. The position sold off on the news, which is no big surprise considering how well it’s done since the beginning of the year.

Johnson & Johnson is still mostly a pharmaceutical play, but it won’t likely be able to produce the same growth results it experienced from its hepatitis C drug in its most recent quarter.

The company adjusted its earnings-per-share guidance slightly higher and lowered its full-year sales guidance also just slightly.

The second quarter saw the company produce sales growth of nine percent to approximately $19.5 billion and adjusted earnings growth (excluding one-time items) of about 12% to $1.66 a share, which handily beat Wall Street consensus. (See “Why This Institutional Favorite Tops My List of Stocks.”)

While I do think that second-quarter earnings from blue chips will be pretty decent, it’s not unreasonable at all for these positions to sell off on the news. Stocks have come a long way, even just since the beginning of this year.

The stock market needs a break, or at the very least, another material price consolidation. It would be a healthy development for the long-run trend.

Another company that just reported a decent second quarter was CSX Corporation (CSX), which is the biggest railroad in the eastern U.S. market.

Management cited broad-based economic momentum in its rail freight business. The company’s numbers basically met consensus with second-quarter sales growth of 6.5% to $3.24 billion and earnings of $529 million, or $0.53 per share, up a penny from consensus.

The company plans to increase its capital spending … Read More

How Many Warnings Can You Give?

By for Profit Confidential

Why Stocks Will Not End 2014 WellI’ve been writing in these pages for most of 2014 on how the stock market has become one huge bubble. On my short list:

The economy is weak. The U.S. experienced negative growth in the first quarter of 2014. If the same thing happens in the second quarter (we’ll soon know), we will be in a recession again. Revenue growth at big companies is almost non-existent.

Insiders at public companies are selling stocks (in the companies they work for) at a record pace.

The amount of money investors have borrowed to buy stocks is at a record high (a negative for the stock market).

The VIX “Fear” index, which measures the amount of fear investors have about stocks declining, is near a record low (another negative for the stock market).

Bullishness among stock advisors, as measured by Investors Intelligence, is near a record high (again, a negative for the stock market).

The Federal Reserve has issued its economic outlook, and it says interest rates will be much higher at the end of 2015 than they are today and that they will continue moving upward in 2016.

The Federal Reserve has said it will be out of the money printing business by the end of this year. (Who will buy all those T-bills the U.S. government has to issue to keep in business?)

And yesterday, in an unprecedented statement, Janet Yellen, during her usual semi-annual testimony to Congress, said the valuations of tech stocks are “high relative to historical norms.”

How many warnings can you give investors?

Well, the warnings don’t seem to matter. The Dow Jones Industrial Average has … Read More

Investors Forgot Everything That Happened Just a Few Years Ago?

By for Profit Confidential

The Economy and the Stock MarketThere 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).

BAtic Dry Index (EOD) INDX Chart 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

Simple Wealth-Creating Strategy for Long-Term Investors

By for Profit Confidential

Compounding Strategy Every Investor Should ConsiderAs a strong believer in the wealth-creating effects of large-cap, dividend paying stocks, I’m also an advocate of dividend reinvestment, which is the purchasing of a company’s shares using the cash dividends paid.

This can be done commission-free from your broker and/or through the company itself if it offers such a program.

Dividend reinvestment is a powerful wealth creator if you do not require the income paid out by a corporation. It is a great way to invest and to grow your money over the long-term.

As the timespan increases, the percentage return produced by the S&P 500 becomes weighted to dividends. It’s kind of old school, but the numbers add up. Even over a few short years of good broader market performance, total investment returns can increase substantially over simple capital gains.

For example, if you bought shares in Intel Corporation (INTC) at the beginning of 2010, that stock would have produced a capital gain to date of approximately 50%.

But if you reinvested the dividends paid by Intel into new shares each quarter, your total investment return, including dividends and new shares, jumps to approximately 75%, which is a very big difference!

In the utility sector, Duke Energy Corporation (DUK) increased on the stock market about 30% over the last three years. But by reinvesting the company’s dividends into new shares during that same time period, your total return could have climbed to around 49%. Again, this is a material improvement.

Of course, dividend reinvestment excludes the potential returns to be had with the income being applied to other potential assets.

But the process is so easy, and … Read More

Taking It Too Far Again…

By for Profit Confidential

Why Interest Rates Will Rise Faster and Sooner Than Most ThinkWhat led to the 2008/2009 stock market and real estate crash and subsequent Great Recession can be attributed to one factor: the sharp rise in interest rates that preceded that period.

In May of 2004, the federal funds rate, the bellwether rate upon which all interest rates in the U.S. are based, was one percent. The Federal Reserve, sensing the economy was getting overheated, started raising interest rates quickly. Three years later, by May 2007, the federal funds rate was 5.3%.

Any way you look at it, the 430% rise in interest rates over a three-year period killed stocks, real estate, and the economy.

My studies show the Federal Reserve has historically taken things too far when setting its monetary policy. It raised interest rates far too quickly in the 2004–2007 period. And I believe it dropped rates far too fast since 2009 and has kept them low (if you call zero “low”) for far too long.

In the same way investors suffered in 2008–2009 as the Fed moved to quickly raise rates, I believe we will soon suffer as the Fed is forced to quickly raise interest rates once more while the economy overheats.

It’s all very simple. The U.S. unemployment rate is getting close to six percent. The real inflation rate is close to five percent per annum, and the stock market is way overheated. The Fed will have no choice but to cool what looks like an overheated economy. But the Fed won’t be able to do it with a quarter-point increase in interest rates here and there. It will need to raise rates by at least … Read More

« Older Entries
Financial Reports
Enter your e-mail address to subscribe to
Profit Confidential — IT'S FREE!
Enter e-mail:
ALSO RECEIVE A FREE COPY of our exclusive report:
"A Golden Opportunity for Stock Market Investors"