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

U.S. Dollar

US Dollar Devaluation Prediction for 2014

A debt crisis has taken the western world by storm, but few seem to be sounding the alarm. The U.S dollar, the go-to currency for global economic stability and growth, is imploding at an unprecedented rate.

Profit Confidential editors have been critics of the U.S.’s inability to reign-in government spending. Based on the White House’s own figures, the national debt will reach $20.0 trillion by the end of this decade—about 140% of our current gross domestic product (GDP).

Historically, countries that have incurred considerable debt and consistent national debt-to-GDP multiples of 120% or more have experienced currency devaluation. The U.S. dollar has been in a free-fall against other major world currencies since 2009.

You have to print money to make money. No one knows this better than the Federal Reserve. Since November 2008, Federal Reserve Chairman Ben Bernanke has initiated three rounds of quantitative easing (QE) in an effort to create more economic activity and increase home prices.

Since 2008, the Federal Reserve has printed roughly $3.0 trillion. And, it’s climbing each month by an additional $85.0 billion.

What have three rounds of QE accomplished? It was supposed to increase lending, create more jobs, and lower the unemployment rate. Instead, banks are sitting on a pile of cash and remain tight-fisted, fewer jobs have been created, and the unemployment rate remains high.

What QE has done is flood the global markets with trillions of U.S dollars. It’s not as if this new-found money is backed by gold. It’s simply created out of thin air.

In essence, the U.S. Federal Reserve, in an attempt to save the U.S., has ravaged and devalued the U.S. dollar. In the process, it has also eroded international confidence in the U.S. economy and the green-back.

What’s keeping the U.S. economy afloat? The Federal Reserve is artificially propping up the entire U.S. economy by buying a majority of the government debt issued by the Treasury department. As a result, the U.S. government has become dependent on borrowing (creating money) to finance itself. (Source: ”WSJ: Fed Buying 61 Percent of US Debt, Moneynews, March 28, 2012.)

Where does the U.S. government get the money to buy the bonds? It gets the Federal Reserve to create money out of thin air. This is a dangerous, unsustainable trend that cannot continue. The U.S. cannot continue to issue government debt and then print the money to pay for said debt.

At Profit Confidential, we expect the devaluation of the U.S. dollar to continue as the U.S. continues to pile on the debt. You can find regular commentary on the U.S. dollar in Profit Confidential.

Another Solid Earnings Season Ahead for Existing Winners?

By for Profit Confidential

Solid Earnings SeasonOne large-cap that always reports early is Costco Wholesale Corporation (COST). The company’s numbers came in solid.

Costco hit a wall not too long ago and was hard pressed to produce growth. But the company’s latest quarter beat the Street with considerable sales strength in the month of September.

In its most recent quarter, there was considerable growth in the company’s cash position and shareholders’ equity improved significantly.

For the 16 weeks ended August 31, 2014, Costco’s total sales grew nine percent to $35.5 billion, which is an impressive performance in retail. Of these total sales, membership fees (which are total gravy) grew 7.3% to $768 million.

Comparative store sales in the most recent quarter grew six percent in the U.S. market and the same internationally. If it weren’t for weaker gasoline prices and the stronger U.S. dollar, international comparative store sales would have improved by eight percent.

Earnings in the company’s fiscal fourth quarter grew to $687 million, or $1.58 per diluted share, representing a 13% gain on a per share basis compared to the same quarter last year.

Costco has been consistently ticking higher on the stock market since this time in 2010. The position hit a high in late 2013, then retreated commensurately with its financial growth. It’s only in the last couple of months that the company’s stock has reaccelerated.

For a new price trend, the stock needs to convincingly break out above $130.00 a share, which I think is probable.

The company’s latest quarter was very good and a reflection of solid management execution.

On the day that Costco reported, the Federal Reserve released the … Read More

The Biggest Risk This Coming Earnings Season

By for Profit Confidential

Biggest Risk This Coming Earnings SeasonFinancial reporting is ramping up and what corporations actually say about their businesses is the best market intelligence available to investors.

Acuity Brands, Inc. (AYI) is in the business of making lights for indoor and outdoor applications. Based in Atlanta, it’s highly likely you’re already using this company’s products without even knowing it.

The business of manufacturing lighting is not front-page news, but that doesn’t matter because for this company, it’s a very good business to be in.

Acuity just announced another quarter of double-digit growth and the company’s outlook remains strong, based on solid activity in the renovation and retrofit markets.

According to the company, its latest quarter produced 15% in total sales growth, hitting $668.7 million. Earnings and earnings per share increased 22% to $54.8 million and a record $1.26 per share, respectively.

Driving the company’s growth is the adoption of LED lighting, which now represents approximately 40% of Acuity’s total sales. Plus, management reported a 17% overall comparative quarterly gain in total sales volume, and the company’s cash position improved substantially in its most recent quarter.

So business conditions for Acuity are pretty good. Company management expects the North American lighting market to grow by the mid- to high single-digits in the upcoming year.

Corporate reporting, while only at a trickle as earnings season is just about to begin, has mostly been decent so far.

There have been good numbers from Bed Bath & Beyond Inc. (BBBY), NIKE, Inc. (NKE), Carnival Corporation (CCL), FedEx Corporation (FDX), Steelcase Inc. (SCS), and Paychex, Inc. (PAYX).

Of course, share prices have already gone up tremendously and good earnings are playing … Read More

The Nine-Month Check-Up

By for Profit Confidential

Nine-Month Check-UpWith nine months behind us this year, today we look at how two popular forms of investment have done in 2014 and where I think they are headed for the remainder of the year.

Starting with stocks, the Dow Jones Industrial Average closed yesterday up 2.8% for the year. Given the risk of the stock market, 2.8% is no big gain. I wrote at the beginning of 2014 that the return on stocks would not be worth the risk this year. I was on the money. When we look at the broad market, the Russell 2000 Index is down 5.4% for the year.

Going forward, as you know as a reader of Profit Confidential, I see stocks as risky. Plain and simple, stocks are overpriced in an environment where the Federal Reserve is putting the brakes on paper money printing and is warning that interest rates are going higher.

On a typical day, I see the Dow Jones up 100 points; the next day, it’s down 100 points. This is happening in an environment where trading volume has collapsed. I wouldn’t be surprised to see October deliver us a nasty stock market crash.

Moving to gold (and this is very interesting), gold is flat for the year in U.S. dollars. But if we look at gold in Japanese yen, gold is up 4.6% for 2014. If we look at gold in Canadian dollars, bullion is up 4.6% as well this year. And if we measure gold in euros, we find gold bullion prices are up 10.4% in 2014.

What explains this?

Yesterday, the U.S. dollar hit another six-year high … Read More

Where the U.S. Dollar Is Headed and What It Means to You

By for Profit Confidential

U.S. Dollar Is HeadedFor the U.S. federal government’s fiscal year, which ends this Tuesday, the Congressional Budget Office (CBO) predicts a budget deficit of $506 billion. (Source: Congressional Budget Office web site, September 26, 2014.)

But just because our annual deficit is declining, that doesn’t mean our national debt is rising by an equal amount.

In fact, between September 20, 2013 and September 20, 2014, the U.S. national debt increased by $1.0 trillion. (Source: Treasury Direct, last accessed September 23, 2014.)

And the government is expected to post budget deficits until at least 2024.

According to a report released by the CBO, the U.S. government’s budget deficits will amount to $7.19 trillion between 2015 and 2024. (Source: Congressional Budget Office, August 27, 2014.) That’s roughly $780 billion a year on average.

Each year the government incurs a budget deficit, it has to borrow money to pay for its expenses and as a result, the national debt increases.

With the national debt now at $17.7 trillion, adding another $7.19 trillion takes the total to $24.89 trillion within 10 years. But as I showed you earlier in this story, government debt is rising at a much faster pace than national debt.

My prediction: a national debt of $34.0 trillion within 10 years.

For the current fiscal year, the U.S. government is estimated to pay $430 billion in interest on the national debt. The Federal Reserve has stated it plans to raise interest rates starting in 2015 and will continue to do so right through to 2017.

According to the CBO, interest payments on the government’s debt will triple within 10 years.

While I’m sure traders … Read More

A Rational Look at Gold

By for Profit Confidential

Rational Look at GoldThe fundamentals that drive gold prices higher are in full force and improving. Central banks are buying more of the precious metal (to add to their reserves), while countries that are known to be big consumers of gold bullion post increased demand.

According to the India Bullion & Jewellers’ Association, India’s monthly gold bullion imports are expected to rise by as much as 50% in the coming few months—in the range of 70 tonnes to 75 tonnes per month compared to an average of 50 tonnes to 60 tonnes now. (Source: Reuters, September 18, 2014.) This is mainly due to the festival/wedding season fast approaching in India.

If India continues to import 70 tonnes of gold bullion each month, then the total imports just to India will be 31% of all world gold mine production (based on 2,700 tons in annual mine production).

India used to be the biggest importer of gold bullion until China took over as the biggest importer of the precious metal two years ago. And demand for gold in China remains strong as well.

But while demand for the precious metal is rising, production is declining.

In the first five months of 2014, U.S. mine production was 85,400 kilograms (kg), down four percent from the 89,200 kg of gold bullion produced in the first five months of 2013. (Source: U.S. Geological Survey, last accessed September 22, 2014.) As I have written before, lower gold prices have caused gold companies to close mines where production made sense at $1,600 an ounce gold, but not at $1,200 an ounce gold.

While I won’t delve into all the talk … Read More

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