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

Posts Tagged ‘U.S. economy’

Why My Coffee Is Costing So Much More This Year

By for Profit Confidential

Why Deflation is Out of the Question for the U.S. EconomyWe are told that in the month of January, inflation in the U.S. economy increased by one-tenth of a percent. In February, prices increased by a similar percentage. In the entire year of 2013, the “official” rate was only 1.5%. (Source: Bureau of Labor Statistics web site, last accessed April 8, 2014.)

Some economists are calling for even less inflation in 2014 and even outright deflation (a period when prices decline).

This is absurd! Anywhere you look, things are costing more each passing day.

Consider the chart of gas prices below. Since the beginning of the year, spot prices for gasoline have increased by eight percent.

Gasoline Unleaded - Spot Prices Chart Chart courtesy of www.StockCharts.com

Unfortunately, gas prices aren’t the only thing that has gone up. Basic food prices are skyrocketing, too!

Since the beginning of the year, corn prices have gone up 22%. Coffee prices are up more than 75% year-to-date. Why aren’t these price increases reflected in the “official” numbers? It’s because the government leaves out two very important consumer essentials when it calculates its official inflation rate: energy and food prices.

As we all know, over the past few years, food stamp usage in the U.S. economy has dramatically increased. In January of 2014, 46.5 million Americans were using food stamps. (Source: U.S. Department of Agriculture, April 4, 2014.) The use of food stamps in the U.S. economy is a well-known fact, but have you wondered why so many Americans can’t even afford to buy food? You can blame inflation. Food costs are rising quickly so it’s becoming increasingly difficult for people to keep up with rising food prices when their incomes … Read More

Auto Sales: Example of How U.S. Growth Is a Mirage

By for Profit Confidential

Dequincy Rate on Auto Subprime Loans JumpGrowth in the U.S. economy, as it stands, can be explained with one word. That word is “mirage.” The Merriam-Webster dictionary explains the word mirage as “something that is seen and appears to be real but that is not actually there.” (Source: Merriam-Webster online, last accessed April 3, 2014.)

It’s a story that is getting old. On the surface, economic data looks rosy, but when you look closer, you find a picture that is completely distorted. In fact, the fundamentals suggest the U.S. economy is deteriorating.

Take auto sales in the U.S. economy as one example. In the month of March, auto sales reached an annual level of 16.4 million units, up from 15.24 million units in January. (Source: Motor Intelligence web site, last accessed April 3, 2014.)

On the surface, the increase in auto sales looks good for the U.S. economy. Automaker stocks are going up. And the politicians can say, “Look, Americans are spending money once again!”

But when we look closer, we discover auto sales in the U.S. economy have reached a new six-year high—with the help of subprime lending. Cars are being sold to those with poor credit ratings.

You remember subprime lending? It was a big thing in 2004–2006, when consumers with very bad credit were getting loans to buy houses in the U.S. economy that they really couldn’t afford to buy. The same thing is happening in the auto market today. And the bubble in auto subprime lending is getting close to bursting.

In the first nine months of 2013, the 31+ day delinquency rate was up 23% from the same period in … Read More

Movie Tickets and New Homes: Why They Are Both in Trouble

By for Profit Confidential

The Untold Story of the Pinned-Down U.S. ConsumerIn 2013, consumer spending accounted for 67% of U.S. gross domestic product. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 2, 2014.) It’s plain and simple: economic growth cannot be achieved unless consumers are spending.

And unfortunately, higher prices and lower discretionary spending are putting the brakes on consumer spending here in 2014.

The Motion Picture Association of America says box office sales in the U.S. economy came in at $10.9 billion in 2013—up only one percent from 2012 and up just three percent from 2009. But here comes the kicker: the sales increase was due to higher ticket prices. The number of tickets sold for Hollywood movies in 2013 was down 1.5% from 2012 and six percent from 2009! (Source: Motion Picture Association of America, Inc., March 25, 2014.)

And the U.S. housing market is getting into trouble, too, as consumer spending pulls back. The chart below is of new-home sales in the U.S. economy from the spring of 2012 until now.

Houses Sold - New One Family ChartChart courtesy of www.StockCharts.com

You will quickly see from the chart that new-home sales in the U.S. economy peaked in late 2012/early 2013 and have come down since. Existing-home sales are also under stress and well below their post-Credit Crisis peak.

Why does the housing market matter? When homebuyers move into their new homes, they buy things like lawnmowers, appliances, furniture, and more. With home sales declining, it suggests consumer spending on these items will not be robust in 2014.

Dear reader, consumer spending patterns in the U.S. economy show troubling trends in the making. Sure, I talked today about how movie tickets … Read More

Will the U.S. Escape the Rapid Inflation That Usually Follows Massive Money Printing?

By for Profit Confidential

Proof Growth in Money Supply Not Spurring GDP GrowthIs the Federal Reserve ignoring the very basic law of economics…the law of diminishing marginal utility? You remember that term from economics in high school. The law of diminishing marginal utility states that the more of something you have, the lesser its impact on you.

The Fed has been printing money in hopes of stimulating growth in the U.S. economy. As the Fed printed more paper money, its balance sheet grew to over $4.0 trillion.

Below, I’ve made a table that looks at gross domestic product (GDP) growth in the U.S. each year since 2009, and where the balance sheet of our central bank stood at the end of each year.

In the table below, you will notice something interesting; aside from 2009, there is no real correlation between the increases in the assets (paper money printed) on the Fed’s balance sheet and GDP growth. In fact, after all the money the Fed has printed, the U.S. economy grew last year at its slowest pace since 2011.

U.S. GDP Growth vs. Growth in Size of Fed Balance Sheet

Year YOY Change
in GDP
Fed Balance Sheet (Trillions) YOY Change in Balance Sheet
2009 -2.80% $2.08 73.44%
2010 2.50% $2.31 11.21%
2011 1.84% $2.74 18.58%
2012 2.77% $2.86 4.36%
2013 1.87% $3.47 21.33%

Data source: Federal Reserve Bank of St. Louis web site,
last accessed April 1, 2014.

The Federal Reserve predicts the U.S. GDP in 2014 will increase between 2.8% and three percent; that’s a jump of about 50% since 2013. (Source: Federal Reserve, March 19, 2014.) I believe this to be way too optimistic. (And as we … Read More

The Truth Behind Friday’s Jobs Market Report

By for Profit Confidential

More Jobs Created but Underemployment Rate Goes UpBoy…did investors ever get excited about Friday’s jobs market report. In case you haven’t heard, in March, 192,000 jobs were added to the U.S. economy.

The chart below shows stock market investor reaction after March’s jobs market report was released Friday morning; and investors bought more stocks!

Sure, the March jobs market report showed some improvement. But investors overreacted, as usual. In fact, for me, it’s just more of the same old thing: investors are taking any type of good news as an excuse to push stock prices higher, which is a classic sign of a market top.

S&P 500 Large Cap ChartChart courtesy of www.StockCharts.com

Deep in March’s jobs market report, we just see more of the same structural problems that have been plaguing the U.S. economy for years now.

In specific…

  • 15% of all the jobs created in March were in the low-paying food services and drinking sector. That’s 30,000 jobs.
  • The number of part-time workers in the economy continues to rise at an alarming rate. In March, there were 225,000 more part-time workers than in February—there are a total of 7.4 million part-time workers in the U.S. economy!
  • The long-term unemployed in the U.S. jobs market continues to rise. In March, they accounted for 35.8% of all unemployed. Right now, the average duration of unemployment for an American worker is 35.6 weeks. At the end of 2007, it was 17 weeks. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 4, 2014.)

Finally, the underemployment rate—which includes people who have given up looking for work and people who have part-time jobs, but who want full-time work—remains very high. … Read More

Why the Fed Will Have to Get Back into the Paper Money Printing Business Soon

By for Profit Confidential

U.S. Economic GrowthIn the early days of the 2008 financial crisis, the Federal Reserve said, “Job losses, declining equity and housing wealth and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment.” (Source: Federal Reserve, March 18, 2008.) As a result of this, the central bank came up with the idea of printing paper money to stimulate the economy; thus, “quantitative easing” was born.

Five years later, the Federal Reserve’s balance sheet has grown to $4.2 trillion. We also saw the U.S. government increase spending to stimulate the U.S. economy after the Credit Crisis of 2008. The U.S. national debt skyrocketed from around $9.0 trillion back then to over $17.0 trillion today.

With all this money being created (by the Fed) and borrowed (by the government), the logical assumption is that there’s finally economic growth in the U.S. economy.

Wrong!

Paper money printing by the Federal Reserve and out-of-control spending by the government hasn’t really given much of a boost to the U.S. economy (aside from the stock market bubble it has created). Problems still persist. The amount of paper money that has been printed out of thin air is huge—an unprecedented event in American history.

Now that the Federal Reserve is putting the brakes on quantitative easing (it will print less money each month), will we see businesses pull back on capital spending? Of course we will. When money is tight, businesses pull back on research and development, expansion, and acquisitions.

Consider this: since December of last year to this past … Read More

Old Economy Strikes Again: Why Investors Need to Keep a Close Eye on This Rail Stock

By for Profit Confidential

This Old Economy Stocks the Best Indicator for the EconomyIt’s kind of odd to think about the railroad business providing such great returns to investors, but that’s what they’ve been doing. The old economy strikes again.

Union Pacific Corporation (UNP) just bounced off a record-high (again) on the stock market and the company reports April 17.

This company’s earnings are material, even if you have no interest whatsoever in the business of freight by rail. For the most part, Wall Street estimates have been going up for the company, for this year and next.

I don’t see the U.S. economy coming apart without some sign from Union Pacific. The company’s declining shipments of coal have been usurped by solid growth in oil railcars, construction materials, and automobiles.

If you’re inclined, check out the statistical data released by the Association of American Railroads (www.aar.org); it’s a treasure trove of economic conditions related to goods transported by rail and more useful than a lot of other data or commentary.

According to the association, for the first three months of 2014, U.S. railroads had cumulative volume of 3,301,422 carloads, up 0.4% over the first quarter of last year, and 2,937,811 intermodal units, up three percent comparatively.

Total combined U.S. traffic for the first quarter of 2014 was 6,239,233 carloads and intermodal units, for a gain of 1.6% over last year.

Now it’s not too difficult these days to find statistics to support any case. For investors, what corporations report is key.

I think the railroads are poised to deliver another solid quarterly performance. Union Pacific has defied the rest of the stock market and the position is up another … Read More

36% of American Workers Have Savings of Less Than $1,000

By for Profit Confidential

Number of Part-Time Workers in U.S. Economy Doubles as Companies Keep Eye on CostsI have said it many times in these pages: economic growth in the U.S. economy can only occur when the general standard of living for the average American improves. Sadly, each day, we see more and more evidence suggesting the opposite.

Consider the results from the 2014 Retirement Confidence Survey by the Employee Benefit Research Institute. (Source: Employee Benefit Research Institute, March 2014.) This survey asks workers and retirees about how they feel about retirement, among many other things. Here are a few of the highlights:

  • 24% of workers in the U.S. economy are not at all confident about having enough money to retire comfortably. Only 18% believe they can retire comfortably, but almost all who said this are from households who earn a relatively higher income
  • 58% of the workers and 44% of the retirees in the U.S. economy say they are having problems with the amount of debt they hold
  • 36% of the workers say they have less than $1,000 in savings. This number has gone up significantly from 28% in 2013
  • The rising cost of living and day-to-day expenses are getting in the way of retirement. 53% of the workers are citing these expenses as the biggest reason they are not saving for retirement

I believe things will get worse for both retirees and workers by the end of this decade. Let me explain why…

Public companies are struggling to post earnings growth this year. At this point, the only way for them to show better corporate earnings is by reducing their expenses. While some have started to lay off employees, others are cutting retirement benefits.

Take … Read More

Are We Really Headed for Deflation?

By for Profit Confidential

Forget Deflation; Inflation Is Becoming a Big ProblemThe Bureau of Labor Statistics (BLS) reports inflation in the U.S. economy increased by 0.1% in February from the previous month. (Source: Bureau of Labor Statistics, March 18, 2014.) As usual, these numbers have again brought up the theory of deflation—a period when general prices decline.

Reasons for the deflation fear? In 2013, inflation for the entire year was 1.5%. In 2012, it was 1.9%. Going back further, in 2011, it was three percent. If we extrapolate the inflation numbers from January and February of this year and assume the increase will be the same (0.1%) throughout the year, we are looking at an inflation rate of 1.2% for 2014.

Wells Fargo Securities LLC has gone one step further. Economists at the firm believe there’s a 66% chance that deflation in the U.S. economy will prevail and these chances have been increasing since 2010. (Source: Bloomberg, February 21, 2014.)

To me, this is sheer nonsense!

The reality of the matter is that the inflation numbers reported by the BLS exclude changes in food and energy prices—the most important things consumers use on a daily basis. When you include food and energy, inflation is running at a much higher rate.

The prices of basic commodities are skyrocketing. Take corn prices, for example: since the beginning of the year, corn prices are up more than 15%. Wheat prices are up almost 20% year-to-date. When you look at meat prices, such as lean hogs, you will see they have increased by more than 45% since January.

As I see it, deflation is nothing but a farfetched idea for the U.S. economy. (In a … Read More

What the Collapse in Copper Prices Means for Investors

By for Profit Confidential

Why Are Copper Prices CollapsingAlmost daily, there’s a new piece of information coming out about the Chinese economy that suggests economic conditions there are worsening. We see China’s manufacturing sector is contracting and there’s a credit crunch in the making.

The Wall Street Journal ran a story last Friday on the state of the Chinese economy and its rapid decline in growth. It cited Premier Li Keqlang’s warning to investors that China was “likely to see some corporate defaults in debts.” (Source: “China Reports Broad Economic Slowdown,” Wall Street Journal, March 14, 2014.)

The economic slowdown in the Chinese economy is another reason why the U.S. economy will slow down in 2014.

Too often investors forget that China is one of our major trading partners and a significant number of American companies operate in China. If the economic slowdown in the Chinese economy gains strength, then those American companies selling goods to China and those operating there will see their profits shrink.

As the Chinese economy boomed over the past 10 years, the prices of copper and other base metals needed in the building of the country’s infrastructure skyrocketed. Now, with an economic slowdown looming in the air for the Chinese economy, base metal prices, especially copper prices, are sliding lower.

The chart below shows how copper prices have declined significantly since the beginning of 2014.

Copper - Spot Price (EOD) CME ChartChart courtesy of www.StockCharts.com

How will lower copper prices affect North American investors? Those companies in the U.S. economy that deal with base metals, such as copper, will see their profitability decline; thus, their stock prices will decline.

On a macro scale, the sharp decline in copper … Read More

Stocks the Broader Market Can’t Move Without

By for Profit Confidential

This Company Is a Barometer for the Whole MarketIt’s been a very choppy start to the year for stocks and with no real trend to latch onto, the news of the day is the catalyst for the trading action.

There is still a positive undercurrent in the equity market, and it’s evidenced, in part, by particular strength in a number of key stock indices. (See “If This Indicator Turns, the Stock Market’s in Trouble…”) But it’s also apparent in a number of leading stocks—the positions that led the stock market in its 2013 breakout performance.

One of these stocks that continue to be a standout and outperformer is Union Pacific Corporation (UNP), an old economy railroad stock that is very much a canary in the coalmine for the U.S. economy.

The railroad business has been exceptionally good the last few years. And if coal shipments have diminished, then oil and fracturing sand have made up the difference and then some.

But for regular freight, business conditions have been pretty decent, according to the railroad companies, and this is material news that rises above the noise. Vehicle shipments have been strong, which has helped a lot.

According to Union Pacific, in spite of what management referred to as significantly weaker coal shipments, volume growth and pricing gains in regular freight produced a record fourth-quarter operating ratio (a measure of profitability) of 65%.

The company reported that its fourth-quarter operating revenues grew seven percent to $5.6 billion, up from $5.25 billion in the same quarter of 2012. Management said that volume growth from agriculture, automotive, intermodal shipments, and industrial products more than offset declines in coal and chemicals…. Read More

U.S. Income Disparity Hits Highest Level Since 1920s Britain

By for Profit Confidential

How the Rich Have Gotten Richer in This EconomyIn today’s U.S. economy, we have a very small portion of the population earning most of the total income generated by the economy, while the majority of people suffer, as their incomes have failed to rise at the pace of the rich.

According to a study by the Paris School of Economics, the richest 0.1% of Americans takes home nine percent of the U.S. national income. The bottom 90%, which is pretty much everyone else, earns just 50% of the national income. (Source: MarketWatch, February 26, 2014.)

Income inequality in the U.S. economy is worse now than it was during the 1920s in Great Britain.

Aside from income inequality, the other big problem with the U.S. economy is that the majority of Americans simply don’t have liquid wealth. Liquid wealth is assets that can be quickly converted into cash if needed (a home is not considered liquid).

According to Phoenix Marketing International, 25% of U.S. households hold about 75% of the liquid wealth in the U.S. economy. (Source: Phoenix Marketing International, January 16, 2014.) The U.S. is becoming more and more like Europe, where there are the very wealthy and the very poor. The middle class, who should be the backbone of the American economy, well, they have all but disappeared.

Consider that in December of 2013, 22.7 million households in the U.S. economy used food stamps. Not long before then, in 2010, that number was 20.6 million households. (Source: U.S. Department of Agriculture, March 7, 2014.) And that’s after the U.S. government cut back on food stamps funding!

For economic growth, you need personal incomes rising at … Read More

The Untold Story of the Tapped U.S. Consumer

By for Profit Confidential

Consumer Debt Posts Biggest Quarterly RunOne of the most important lessons I have learned over my investing career is to go back to the basics when I’m unsure about something and see if it all makes sense.

Remember 2007 and the important year it was for the stock market? Investors bought stocks that year without paying much attention to the fundamentals. Then in 2009, the stocks of some of the most well-known companies in the world got punished for no apparent reason; but investors didn’t buy stocks in 2009, because they thought the bottom would fall out of the economy.

Yes, I know the above are two extreme examples of investors being too greedy or too fearful, and thus, they made the wrong investment decisions; but a few years from now, I think we could be looking back at 2014 and making the same comparison.

Here’s what I’m talking about…

These days, no matter where you look, the general census among economists is that the U.S. economy is witnessing economic growth. We hear stock advisors defend their bullish positions with arguments of increasing auto sales in the U.S. economy, jobs creation, and companies posting great profits (all fallacies).

But as I have argued many times in these pages, the U.S. economy is stressed and fragile. Auto sales are strong because we have sub-prime loans for auto buyers coming into play; jobs growth in the U.S. economy has been meek and concentrated in low-paying service jobs; public companies are posting per-share earnings growth because of record stock buybacks; and Americans are increasing their spending by either tapping into their savings or by borrowing money.

Something very … Read More

Reaching the Point of Maximum Optimism

By for Profit Confidential

Bear Market Twists News to Lure in More InvestorsThis past Friday, the Bureau of Labor Statistics reported 175,000 jobs were added to the U.S. economy in the month of February. (Source: Bureau of Labor Statistics, March 7, 2014.)

The way the media reported it…

“Friday’s jobs market report caught the market by surprise,” was what most media outlets were telling us via their untrained reporters. The expectation was an increase of 149,000 jobs in February (after a dismal December and January jobs market report) and so the usual happened—stocks went up and gold went down on a jobs market report that was only slightly better than what was expected.

The consensus, from what I read, is that the jobs market in the U.S. economy is getting better. Of course, I think of this as hogwash. And as I’ll tell you in a moment, this is the kind of misinformation that is characteristic of what happens in a bear market in stocks, not a bull market.

Within February’s jobs market report, we find:

The long-term unemployed (those who have been out of work for six months or more) accounted for 37% of all the unemployed in the U.S. economy. The longer a person is unemployed—likely because that person has not been re-trained for the jobs market—the less likely it is that person will eventually find work.

Today, once a person becomes unemployed in the U.S. economy, that person remains unemployed for an average of 37 weeks! This number remains staggeringly high. Before the financial crisis, this number was below 15 weeks. (Source: Federal Reserve Bank of St. Louis web site, last accessed March 7, 2014.)

When you have a … Read More

Important Message Retailers Are Sending Us About the Economy

By for Profit Confidential

Consumer Spending Hits Trouble TerritoryConsumer spending in the U.S. economy is highly correlated to consumer confidence. If consumers are worried about the economy, they pull back on their spending.

The Conference Board Consumer Confidence Index decreased by 1.63% in February from January. (Source: Conference Board, February 25, 2014.) And we see the corresponding pullback on consumer spending in weak U.S. retail sales.

Macy’s, Inc. (NYSE/M) reported a decline of 1.6% in revenue in its latest quarter—which includes the holiday season. For its just-completed fiscal year, company revenues were up by only 0.9%. (Source: Macy’s, Inc., February 25, 2014.)

Sears Holdings Corporation (NASDAQ/SHLD) reported a decline of 12.6% in revenues in its latest quarter. Yes, I know this company is having problems; but a drop in revenue of 12.6% for a retail giant like this—and during the holiday shopping season—is an indicator that consumer spending is very weak. (Source: Sears Holdings Corporation, February 27, 2014.)

Target Corporation (NYSE/TGT) reported revenues fell by 3.8% in its last fiscal quarter. (Source: Target Corporation, February 26, 2014.)

Best Buy Co., Inc. (NYSE/BBY) is in a very similar situation. The company reported a decline of more than three percent in revenues for its latest quarter. And for the 12 months ended February 1, 2014, Best Buy’s revenues fell 3.4%. (Source: Best Buy Co., Inc., February 27, 2014.)

The retailers I just mentioned are just a few of the many retailers that reported a decline in their revenues in the last quarter of 2013, which suggests consumer spending is in troubling territory.

My point is that those companies that are closest to consumer spending—the big American retailers—are giving us a … Read More

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