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

U.S. Economy

The U.S. is the world’s largest national economy. In 2013, the U.S. reported gross domestic product (GDP) of $16.8 trillion, or 22.4% of global GDP. China was a distant second at $9.2 trillion. Japan’s economy was the third largest in 2013 at $4.9 trillion, with Germany ($3.6 trillion) and France ($2.7 trillion) rounding out the top five.

The U.S. is also the second largest economy by region. In 2013, U.S GDP of $16.80 trillion was just slightly behind the entire European Union at $17.35 trillion.

As the world’s biggest national economy the U.S. is also its economic engine. That’s because the U.S. is the largest consumer market in the world. In 2013, consumer spending accounted for 71% of the U.S. economy.

As goes the U.S., so goes the global economy. Since the stock market crashed in 2008, U.S. economic growth has been weak. In 2008, the U.S. reported negative GDP of -0.03%; in 2009, it slipped further to -2.8%. Since then, the U.S. economy has experienced uneven growth. Most recently, in 2013, the U.S. reported GDP growth of 1.9%.

Going forward, the International Monetary Fund (IMF) has cut its outlook for global economic growth, saying there are limits to the United States’ ability to shoulder the world’s economy on its own. Before the financial crisis, the U.S. routinely advanced at around 3.0% annually. For 2014, the IMF expects GDP to grow 2.2% and in 2015 it expects the U.S. economy to advance 3.1%.

Why Wal-Mart’s Sales Downgrade Should Worry Investors

By for Profit Confidential

Why Wal-Mart's Sales DowngradeOn November 30, Switzerland’s citizens will cast a very critical vote.

Through a referendum, they will vote for or against the Swiss National Bank increasing its gold bullion reserves to 20%, the central bank halting the selling of gold, and the storing of gold bullion in the country. (Source: Kitco News, September 30, 2014.)

If the results are in favor of the referendum, it will mean Switzerland’s central bank will be forced to buy a significant amount of gold bullion.

According to the most recent data from the World Gold Council, Switzerland has 1,040 tonnes of gold bullion in its reserves, equal to only 7.8% of its total reserves. (Source: “World Official Gold Holdings,” World Gold Council web site, last accessed October 16, 2014.) To bring its gold bullion holdings to 20% of total reserves, the central bank of Switzerland will have to buy 1,600 more tonnes of gold, or about 60% of all global mine output this year. Will the gold market be able to handle this kind of demand shock? I highly doubt it.

And if the central bank of Switzerland stops selling gold, a significant amount of gold will come off the market.

Finally, the vote on gold being stored in the country is just another example of the increasing appetite for the precious metal. We saw this phenomenon happen in Germany not too long ago when the country asked the U.S. for its gold back (the U.S. was “storing” it), but Germany was told it would have to wait seven years to get it.

The big picture: Since 2009, central banks around the world have bought … Read More

Why I Expect a Big Boost in This Company’s 2015 Dividend Payout

By for Profit Confidential

Company 2015 Dividend PayoutEven with the recent price retrenchment, there’s not a lot of value circulating in this stock market. Everything’s already gone up and the capital gains have been great the last few years. But it’s still a slow-growth environment in the global economy, and despite a very accommodative monetary policy, stocks can’t go up forever without experiencing a meaningful retrenchment.

Company earnings are pouring in and there have been some disappointments. But for a lot of mature large-cap businesses, this is a reflection of their industries’ cycles. Large companies in mature industries don’t grow by very much more than the low single-digits.

Which is why a company’s dividends are so important in a stock market that’s at a high but offering little value.

It’s difficult to imagine stocks this year serving up double-digit returns on the back of 2013’s standout performance.

And investor sentiment has changed, too, with oil prices being the catalyst for the recent “deflation worry” sell-off. (See “Is This Stock Sell-Off Just a Blip?”)

The stock market’s existing winners are the way to go going into 2015. There’s plenty of cash in company coffers for more dividends and more share repurchases. It’s a formula that’s worked for large corporations over the last several years, and there’s no reason why it won’t keep working in a slow-growth environment.

Texas Instruments Incorporated (TXN) had a good quarter. The company beat Wall Street consensus, producing substantial double-digit gains in comparable earnings on eight-percent year-over-year revenue growth.

Texas Instruments achieved a new record in gross margin as both analog and embedded processors (which comprise just over 80% of the company’s total sales) … Read More

About That QE4…

By for Profit Confidential

Another Round of Money Printing Coming SoonIt’s widely expected that at the end of this month, the Federal Reserve will end its third round of quantitative easing (that began in September of 2012). This is QE3, where the Federal Reserve was printing $85.0 billion of new money every month and using it to buy U.S. Treasuries and mortgage-backed securities (MBS). In the beginning of 2014, the Fed started reducing the amount of money it was printing each month.

Is there another round of quantitative easing (more commonly known as QE) coming?

Here’s why I ask…

First, U.S. long-term bond yields are collapsing. Back in 2013, when the Federal Reserve hinted that it might move away from quantitative easing, we saw U.S. bond yields soar. Between May and December of 2013, yields on the U.S. 10-year notes almost doubled. But since then the unexpected happened.

10 Year Treasury Note Yield Chart

Chart courtesy of www.StockCharts.com

Since the beginning of 2014, the yields on the same bonds have plunged 30%. Despite the Federal Reserve telling us it expects to raise interest rates in 2015 and 2016 (which would be catastrophic for bonds), bond prices are rising… Odd, to say the least.

Second, I hear hints about QE4 from key members of the Federal Reserve. In an interview with Reuters, the president of the Federal Reserve Bank of San Francisco said, “If we really get a sustained, disinflationary forecast…then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider.” (Source: “Exclusive: Fed’s Williams downplays global risks, eyes U.S. inflation,” Reuters, October 14, 2014.)

In other words, if inflation in the U.S. economy doesn’t meet the … Read More

What the Fear Index Is Telling Us About Stocks Now

By for Profit Confidential

Why This Stock Market Rout Is Here to StayOver the past few months, I warned my readers the stock market had become a risky place to be. While I also suggested euphoria could bring the market higher than most thought possible—to the point of irrationality—the bubble has now burst. Key stock indices are falling and fear among investors is rising quickly.

Please look at the chart below of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). This index is often referred to as the “fear index” for key stock indices. If this index rises, it means investors fear a market sell-off. If it declines, investors are complacent and not worried about the stock market falling.

Volatility Index Chart

Chart courtesy of www.StockCharts.com

In just the last 18 trading days (between September 19 and October 15), the VIX has jumped 122% and now stands at the highest level since mid-2012. It has also moved way beyond its 50-day and 200-day moving averages, which shows strength and momentum to the upside from a technical perspective.

Sadly, the VIX isn’t the only indicator telling us that investors don’t want to be in the stock market. Below you’ll find the NAAIM Exposure Index chart, a measure of equity exposure of active money managers (the so-called smart money).

NAAM Exposuer Index Chart

Chart courtesy of www.StockCharts.com

Active money managers continue to reduce their exposure to equities as key stock indices fall. On September 2, 82% of their collective portfolios were exposed to the stock market. Now, it’s only 33%. This represents a decline of 60% in their equity market exposure.

On the fundamental front, the stock market is constrained as well. Each day, we are seeing deteriorating economic data … Read More

Off-the-Radar Company Delivering Attractive Earnings

By for Profit Confidential

One Off-the-Radar Company with Attractive ResultsOn the day that the DOW, S&P 500, and NASDAQ Composite dropped two percent on global growth worries, once again, several companies reported very good numbers.

But investors are paying less attention to corporate results and more attention to economic news from around the world that suggests that the only mature economic engine running at any positive speed currently is the U.S. economy.

PepsiCo, Inc. (PEP) had another good quarter. The company’s two businesses, food/snacks and beverages, produced modest single-digit growth in consolidated sales.

Net earnings grew five percent, while earnings per share grew seven percent over the third quarter last year. Management also increased its expected constant currency earnings-per-share growth for this year from eight to nine percent.

The company expects to return a total of some $8.7 billion to shareholders this year, comprising approximately $3.7 billion in dividends and $5.0 billion in share buybacks.

PepsiCo is on track to deliver what investors expect. The stock just hit a new all-time record-high still with a 2.8% dividend yield.

Getting into third-quarter earnings season a little further should help focus the stock market’s attention but clearly, sentiment has really turned.

If the trading action continues to wane, good businesses are going to become more attractively priced and equity investors looking for new positions will have better choices.

I do believe that for the investment risk, sticking with existing winners is a good strategy regarding large-cap, dividend-paying blue chips.

Dividend income really matters in a slow-growth environment, and corporations would still rather return cash than take on major new ventures.

Previously in these pages, I’ve written that for long-term investors, I … Read More

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