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

Posts Tagged ‘U.S. economy’

Having Trouble Coming Up With Four Hundred Bucks

By for Profit Confidential

Economic Growth in 2014The burning question that’s facing economists like me today and that will only be answered in the future: did creating $3.0 trillion in new money out of thin air really make things better or worse for America?

My personal view, as expressed in these pages, is that the rich (the big banks and Wall Street) got richer from the “printing press” era, while the average American did not directly benefit from the Fed’s actions.

In fact, in America today, the spread in wealth between the rich and the poor has never been so great. As for the middle class, they are becoming extinct.

The “Report on the Economic Well-Being of U.S. Households in 2013,” recently published by the Federal Reserve, says 34% of Americans feel they are worse off today than they were five years ago, and 42% said they are holding back on the purchase of major or expensive items. (Source: Federal Reserve, August 7, 2014.)

But the data gets worse…

Of those Americans who had savings prior to the 2008 recession, 57% of them say they have used up some or all of their savings in order to combat the after-effects of the Great Recession.

Only 48% of Americans said that they would be able to cover a “hypothetical emergency expense” that costs $400.00 without selling something or borrowing money. Simply put, about half of Americans have less than $400.00 in emergency funds!

Meanwhile, 31% of Americans say they do not have any retirement savings or pension. Of those who are between the ages of 55 and 64, 24% of them expect to work as long as possible, … Read More

If the Economy Is Improving, Why Are Investors Pricing in a Slowdown?

By for Profit Confidential

U.S. Economy Slowing Down Here in 2014The Bureau of Economic Analysis (BEA) surprised even the most optimistic of economists when it reported the U.S. economy grew at an annual rate of four percent in the second quarter of 2014.

On the surface, the number—four percent growth—sounds great. But how serious should we take that gross domestic product (GDP) figure?

Firstly, I’d like to start by pointing out that the BEA often revises its GDP numbers downward. We saw this happen in the first quarter. First, we saw the BEA say the U.S. economy grew by 0.1% in the first quarter, then after a couple of revisions, they said the economy actually contracted 2.9% in the quarter.

I obviously expect the BEA to lower its initial second-quarter GDP numbers again.

But here’s what really worries me…

If the GDP data suggests the U.S. economy is growing, why are investors pricing in an economic slowdown?

The chart below is of the 10-year U.S. Treasury, the so-called safe haven. Back in 2007 to 2009, investors ran to U.S. Treasuries as a safe haven. As the U.S. economy improved, the yields on the 10-year U.S. Treasury started to rise as interest rates rose with general optimism towards the economy.

10 Year Treasury Note Yield Chart

Chart courtesy of www.StockCharts.com

But since the beginning of this year, yields on the 10-year U.S. notes have declined 18%. This is despite the fact the biggest buyer of these bonds, the Federal Reserve, has stepped away from buying these Treasuries as its quantitative easing program comes to an end.

At the same time, we have the stock market finally starting to give in. So if the stock market is a … Read More

Why a Full-Blown Market Correction Should Be Expected

By for Profit Confidential

Investors Can't Overlook to Succeed in This MarketThe monetary environment is still highly favorable to stocks and should continue to be so well into 2015. However, while this market can handle higher interest rates, stocks can only advance in a higher interest rate environment if gross domestic product (GDP) growth is there to back it up.

Because of the capital gains over the last few years and the across-the-board record-highs in many indices, investment risk in stocks is still high. Accordingly, it’s worthwhile reviewing your exposure to risk, particularly regarding any highflyers in your portfolio; they get hit the hardest when a shock happens.

Currently, geopolitical events between Ukraine and Russia have the potential to be the catalyst for a correction. It could happen at any time depending on what transpires.

The risk of stocks selling off on the Federal Reserve’s actions is diminishing. The marketplace is well informed about the central bank’s intentions and it’s quite clear that Fed Chair Janet Yellen doesn’t want to do anything to “surprise” Wall Street.

I still view this market as one where institutional investors want to own the safest names. The economic data just isn’t strong enough for traditional mutual funds and pensions to be speculating.

This is why the Dow Jones Industrial Average and other large-cap dividend paying stocks are so well positioned. They offer great prospects for increasing quarterly income, some capital gain potential (still), and downside protection compared to the rest of the market.

Of course, all stocks are risky. An equity security is priced in a secondary market where fear, greed, emotions, and a herd mentality are part of the daily pricing mechanism.

Accordingly, anything … Read More

Surprise: U.S. Housing Prices Now in a Decline

By for Profit Confidential

Three Strikes Against the U.S. Housing MarketThe S&P Case-Shiller 20-City Home Price Index, a measure of the housing market in key American cities, declined in May by 0.31% from April—the first monthly decline in home prices in 27 months. (Source: Federal Reserve Bank of St. Louis web site, last accessed July 30, 2014.)

The number of homes being built in the U.S. is also falling.  In June, the annual rate of new homes being built in the U.S. housing market declined 9.3% from May to the lowest level in eight months. (Source: U.S. Census Bureau, July 17, 2014.)

And pending home sales in the U.S. housing market declined in the month of June by 1.1% from the previous month. Pending home sales now sit 7.3% lower than they were in June of 2013. (Source: National Association of Realtors, July 28, 2014.) Pending home sales are considered to be a leading indicator of the housing market.

As no surprise, companies directly related to the housing market are struggling. The chart below of the U.S. Housing Index tracks the stock prices of companies involved in construction, mortgages, and home-building materials.

Housing Index Chart

Chart courtesy of www.StockCharts.com

The chart is collapsing, trading near its lowest level of 2014. Over the past few days, the index fell below both its 200-day moving average and its 50-day moving average.

Dear reader, please let me set the record straight: I don’t expect to see an outright collapse in home prices like we saw in 2007. What I am pointing out to you today is that the momentum we saw in the U.S. housing market in 2012 and 2013 is dissipating.

This observation is consistent … Read More

With Stocks Still Near Their Highs, What Should Your Priority Be?

By for Profit Confidential

One Key Index Close to Breaking This MarketThe Dow Jones Transportation Average is close to breaking its 50-day simple moving average. This, in itself, is not the end of the world; it did so most recently in April and recovered nicely.

But it is worth keeping an eye on, especially because the stock market is looking so tired right now.

Earnings are still streaming in and are generally okay. But there’s diminishing momentum. If the broader market opens up on positive news, on many days, it’s not able to sustain the gains. This is indicative of a stock market due for a break.

Summer action is typically slower, and while a 10% stock market correction would make it easier to put new money to work, the investing guide should be corporate outlooks—and they are pretty good going into 2015.

With Federal Reserve certainty, which includes diminishing quantitative easing and a very low interest rate environment going into 2015, the stock market is well informed regarding monetary policy.

Balance sheets remain in excellent condition, especially among blue chips, and the NASDAQ Composite is maintaining its leadership relative to the other benchmarks, which resumed about one year ago.

While the stock market has definitely earned a meaningful break, it very well could turn out to be another positive year with high single-digit returns, not including dividends. This is on the back of an exceptionally good year in 2013—a breakout year from what I view as the previous long-run cycle, that being a 12-year recovery period for the stock market.

But with this fundamental backdrop, I still view investment risk as being high and that quality is something that equity … 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

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

Top Sector Offering More Capital Gains

By for Profit Confidential

The One Sector with More Capital Gains to ComeWhile business conditions are pretty good in the domestic oil and gas business, they’re also holding up very well in the railroad sector.

If railroad companies and related services are old economy, they are still important economic benchmarks and they continue to be great businesses producing excellent returns to stockholders.

Union Pacific Corporation (UNP) is an important company to follow, even if you aren’t interested in owning a position. What the company reports about its business conditions is material and helpful in advancing your own market view. Union Pacific reports on Thursday.

Norfolk Southern Corporation (NSC) just hit an all-time record-high on the stock market. This time last year, the stock was around $77.00 a share; now, it’s close to $107.00.

CSX Corporation (CSX) is not as large in terms of market capitalization as Norfolk Southern or Union Pacific, but it is still a $31.0-billion company with extensive operations in the eastern United States and Canada.

Its second quarter of 2014 was a record quarter with sales growing seven percent to $3.2 billion on an eight-percent gain in volume.

Earnings growth was more modest, coming in at $529 million, or $0.53 per diluted share, compared to $521 million, or $0.51 per diluted share, for second quarter 2013. But management expects margin expansion going into 2015, and the Street wasn’t fazed.

Like so many other large-caps, the company is buying its own shares, including some $131 million worth during the most recent quarter.

By April of next year, the company will have spent $1.0 billion on share repurchases over the last two years.

Notably, CSX saw double-digit volume and revenue gains … 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

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

Stock Market Pricing-in a Recession?

By for Profit Confidential

U.S. Economy Close to Technical RecessionBy no surprise to me whatsoever, the government’s third and final estimate of first-quarter U.S. gross domestic product (GDP) came in at a negative annual pace of 2.9%. (Source: U.S. Bureau of Economic Analysis, June 25, 2014.) The U.S. economy’s growth rate in the first quarter of this year was the worst since 2009.

I’ve been writing since the fall of 2013 that the U.S. economy would see an economic slowdown in 2014. I have been one of the few economists warning of a recession in 2014. My calls are not to scare or create fear; rather, they are based on the government’s own data.

Not to boast, but it’s like the creators of the first-quarter U.S. GDP report have been reading Profit Confidential! Everything we have been warning about came out in this most recent GDP report.

I’ve been harping on about how the U.S. consumer was tapped out…and low and behold, consumer spending in the U.S. economy increased by only one percent in the first quarter of 2014. In the fourth quarter of 2013, consumer spending increased by 3.3%. The fifth year into the so-called economic “recovery” and consumers are pulling back on spending for the simple reason that they don’t have money to spend.

The poor have no money; the middle class has been wiped out. And the rich are far from spending enough to make up for the lack of spending by the poor and middle class.

But have no fear, dear reader; stocks are up. The stock market is telling us we have nothing to worry about? It seems so.

I, for one, … Read More

If You Learn One Thing This Year from Profit Confidential…

By for Profit Confidential

Living Off Mom & Dad Longer Than Ever BeforeDear reader, if you’ve learned one thing from reading these issues of Profit Confidential, I hope it is this: Don’t buy into the hype created by the rising stock market and the media that the U.S. economy is improving. The economic growth promised by the Federal Reserve and the politicians five years ago is still missing.

The majority of Americans are facing serious financial troubles. Their jobs don’t pay them well or enough. Those who are looking for better jobs can’t find them. Their salaries aren’t increasing, but inflation sure is rising. Many Americans can’t even afford to live in their homes!

And young Americans are in just as bad shape as retired Americans…

According to research by the University of Arizona, half of graduates, after they are out of college for two years, are relying on their parents or other family members for financial support. As per the study, graduates are postponing many of life’s goals, such as marriage, having children, or buying homes, because they can’t afford them. (Source: CNN Money, June 10, 2014.)

In times of economic growth, you have college graduates finding jobs easily. This isn’t happening. In fact, student debt in this country sits at $1.2 trillion, 85% of it guaranteed by the government and 11.5% of it 90-days-plus delinquent or in default. (Source: “$1 Trillion Student Loan Problems Keeps Getting Worse,” Forbes, February 21, 2014.)

But it’s not only college graduates in the U.S. economy who are suffering…

According to the “How Housing Matters Survey” by the John D. and Catherine T. MacArthur Foundation and Hart Research Associates, 52% of Americans have … Read More

Guess Who Is Pushing the Stock Market Higher Now

By for Profit Confidential

So That's Why Stocks Have Been Moving Higher…When I look at the stock market, I ask who in their right mind would buy stocks?

While key stock market indices creep higher, the fundamentals suggest the complete opposite. But despite valuations being stretched, insiders selling, corporate revenue growth being non-existent, and the U.S. economy contracting in the first quarter of this year, the S&P 500 is up seven percent since the beginning of 2014, the Dow Jones Industrial Average is getting closer to the 17,000 level, and the NASDAQ is back above 4,000.

As I have written before, a company can buy back its stock to prop up per-share earnings or cut expenses to improve the bottom line, but if revenue isn’t growing, there is a problem. In the first quarter of 2014, only 54% of S&P 500 companies were able to grow their revenue. (Source: FactSet, June 13, 2014.)

Going forward, things aren’t looking bright either. For the second quarter of 2014, 82 S&P 500 companies have already provided negative guidance for their corporate earnings. I expect this number to climb higher.

And consumer spending, the driver of the U.S. economy, is very weak, as evidenced by negative gross domestic product (GDP) in the U.S. economy in the first quarter of this year.

So if the overall environment is negative for the equities, who is buying stocks and pushing the stock market higher?

The answer (something I suspected some time ago): central banks are buying stocks.

A study done by the Official Monetary and Financial Institution Forum (OMFIF) called Global Public Investors 2014, states that central banks and public institutions around the world have gotten involved … Read More

What Do This Quarter’s Mixed Earnings Results Mean?

By for Profit Confidential

Market May Be Entering a New Cycle—But Don't Buy Just Yet!Oracle Corporation (ORCL) announced a quarterly revenue gain of three percent, but Wall Street was looking for more and the company’s share price retreated on its earnings results.

If it weren’t for the Federal Reserve, we probably would be in a correction, if not a consolidation, which has been the broader market’s go-to trend when it should have retreated further.

It’s such a mixed bag out there both in terms of economic news and corporate reporting.

While I think dividend-paying blue chips have the advantage going into the second-quarter earnings season, if the Federal Reserve wasn’t so extremely sensitive to Wall Street, this market would probably be a lot lower.

Even the Fed’s recent language is assuaging. If this market had to operate on its own (with free market interest rates and liquidity), things would be a lot different.

But this isn’t the environment we live in. Economic history clearly supports the scenario that it doesn’t pay to fight the Fed and that Wall Street will move mountains when it has Fed certainty.

Lots of investors bemoan the quarterly earnings cycle or game, but I don’t. I want to know a public company’s up-to-date financial results as frequently as possible.

While earnings are managed, over time, a business can’t manufacture success unless it’s a fraud (which, sadly, does happen).

Big companies have the operational leverage and the cash to keep boosting their earnings per share. Oracle’s latest financial results were uninspiring, and while recognizing that this is a very mature business with growing competition in the cloud, the position advanced a material 10 points since last June—this seems so overdone…. Read More

Why Gold Went Up $50 Yesterday

By for Profit Confidential

Perfect Inflation Storm BrewingWell surprise, surprise, surprise.

Gold bullion rallied just under $50.00 an ounce yesterday…and nobody expected it. (Okay, maybe just me. In a single day yesterday, my portfolio went up by twice the amount the stock market has risen in all of 2014.)

Going through all the major financial web sites, I read story after story yesterday on why gold was rising so fast. They were all wrong; just reporters grabbing at straws, trying to explain something they know very little about.

As I started writing in these pages in 2014, inflation is becoming a real problem in America. Years ago, I started writing about how all this money the Federal Reserve is creating out of thin air would become inflationary. That’s exactly what is starting to happen now.

Why is the Fed starting to pull back on its money printing operation with the goal of being out of the money printing business by the end of this year? Why is the Fed telling us that after keeping interest rates near zero for years, by the end of next year, the federal funds rate will move up to 1.13% and by the end of the following year, it will move to 2.5%?

In my opinion, we are being told this because the powers that be see inflation in the cards, and they are working on trying to curb rapid inflation before it happens. And if there is something gold thrives on, it is inflation.

Even the manipulated government statistics are now pointing to inflation.

The Bureau of Labor Statistics reports prices in the U.S. economy increased by 0.4% in May after … Read More

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