Stock prices rallied sharply again yesterday on news that IBM plans to buy back an additional $15 billion of its stock, on top of $400 million remaining under the company's current stock repurchase plan.
As a result of the anticipated stock buybacks, IBM estimates that its 2008 earnings per share will rise to $8.25 from earlier forecasts of $8.20.
Although the Dow Jones Industrial Average rose 115 points, my investment models indicate that stock prices in general have merely rallied back to price-resistance levels from significantly oversold levels, and that stocks will pull back through the remainder of this week.
My forecast is based primarily on the fact that nothing has changed on the economic front, with an overwhelming number of economic indicators suggesting that economic growth in the U.S. will slow and inflationary pressures will continue to mount during the next few months.
Yesterday morning, the U.S. Department of Labor reported that the prices of finished goods ready for distribution to retailers rose at the fastest pace in more than 26 years, primarily as a result of rising energy, food and medical costs.
Meanwhile, the Case-Shiller Home Price Index showed that, on average, home prices in the nation's most populated cities continued to trend lower, falling 9.1 percent during December.
As a result of rising inflationary pressures and falling home values, the Conference Board announced that its index of consumer confidence in future economic conditions fell during February to the lowest level in five years.
Meanwhile, The Home Depot — the world's largest home-improvement retailer — announced that its earnings from continuing operations fell 20 percent during the fourth quarter of 2007 compared to the same period a year ago, while its same-store sales declined 8.3 percent.
Going forward, the retailer expects both its sales and earnings to decline further during fiscal 2008. The company estimates that its 2008 sales will fall between 4 percent and 5 percent.
Target and Macy's also reported disappointing operating results for the fourth quarter of 2007, with Target's net earnings falling 8.2 percent and Macy's earnings (excluding a tax benefit) declining 10.3 percent.
Macy's is in the process of closing nine of its stores and cutting its workforce as a result of the softening economy.
At the risk of sounding like a broken record, I urge you once again to ignore the latest rally in the U.S. equities market. My research strongly indicates that the stock market advances during the past two days resulted from one-time events that will have no lasting impact on the economy. Consumers will continue to feel the negative effects of the slowing U.S. economy and my models indicate that corporate profits will fall sharply during the first two quarters of 2008.
If you'd like to learn more about my analysis of the financial markets and information on how to profit from a slowing economy and rising inflationary pressures, sign-up for a risk-free trial subscription to my ETF Strategist newsletter.
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