European Union, Global Investors…We’re All Fed up with Greece!

By George Leong, B. Comm

I hate to keep coming back to Greece, but it’s turning out to be a major Greek tragedy over there. The country cannot pay back its initial $130 billion or so emergency bailout and now needs another $150 billion to pay back loans and avoid a sovereign debt default. The reality is that Greece is tanking and falling into shambles, waiting for a white knight to appear and clean up the financial crisis. The country needs to follow strict austerity measures.
I recall being in Greece in 1995 and wondering why there were so many buildings in the construction phase sitting idly with no progress. The taxi driver told me that, in Greece, all construction halts if interest rates are high, waiting for rates to decline before continuing.
Greece is a beautiful country full of history, and one that’s significant in the development of mathematics and the arts. Yet now there appears to be a Greek tragedy in the works.
After much debate and compromise, Greece was extended a second bailout package if it delivered a tough austerity program. In my view, it was a done deal, as Greece did not have another option. Stock markets rallied on the news. The uncertainty in Greece was over.
American-born Greek Prime Minister George Papandreou then shocks the global markets earlier this week after announcing that the country will need to hold a national referendum to determine if its citizens want to accept the new debt crisis bailout terms from the European Union. Papandreou is clearly trying to save his own hide.
Perhaps he should come back stateside and run for President?
Again, I’m talking of survival here for Greece. What is there to talk about? As I said the other day; imagine being on the brink of losing everything, but someone says, “Don’t worry; I have money for your debt crisis, even if you may not be able to pay it back.” Would you say no?
The European Union obviously is fed up with Greece and wants a resolution to the debt crisis. The European Union has demanded that Greece must accept the austerity measures plan in order to receive funds; otherwise, it may need to leave the European Union and go it alone. Of course, if this happens, Greece would go into default, which could lead to a financial crisis throughout the eurozone and cause havoc. Opposition parties in Greece are calling for Greek Prime Minister George Papandreou to resign and for a coalition government to accept the European Union deal. Germany and France have indicated that they are tired of the Greek stalling and want the deal done now.
In my view, it’s silly that Greece believes it has any other options left and is risking a catastrophic debt crisis and default. The debt crisis is not limited to Greece. Italy is also struggling with its own massive debt crisis and austerity measures, while Portugal wants more flexibility in the terms of its debt bailout. The demands, it seems, will not halt and Europe likely has more problems waiting down the road.
My feeling is that the risk continues to be high, as you can read about in Stocks Facing Many Hurdles Ahead.
Longer-term I continue to favor small-cap stocks. You can read why in Small-caps in a Bear Market, But Have a Long-term View
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Chinese Equities Experience Big Turnaround—Why it Might Not Last

By Mitchell Clark, B.Com

One sector of the stock market that we all know has been hammered is Chinese stocks. A large portion of all U.S.-listed Chinese stocks have dropped significantly in value due to a lack of confidence in their corporate reporting. Also occurring in the broader stock market has been a drop in the share value of well-known, respectable Chinese stocks, mirroring the trading action in the domestic Chinese equity market.

Since the beginning of October, however, there’s been a marked turnaround in Chinese stocks, especially those listed on Chinese stock exchanges. The Hang Seng Index, which is the main stock market index in Hong Kong, dropped to a low of around 16,000 early in October, then smartly reversed to its current level of around 19,500. By any account, this is an impressive turnaround, and the strength in Chinese stocks is due to expectations for monetary easing in China.
Right now, the U.S. stock market needs all the help it can get and any positive news on the Chinese economy would be very helpful. Smaller Chinese stocks trading on American stock exchanges typically take quite a while to report their quarterly earnings and many beaten-down positions will be reporting throughout November. There is an opportunity in this stock market for some bottom feeding in Chinese equities. Stock market conditions seemingly can’t get much worse for this group and there is good value out there.
Of course, a number of previously listed Chinese stocks were outright frauds in terms of their operations and financial results. Many of these companies listed by acquiring shell companies and renaming them. It’s an easier way for a company to get a U.S. stock market listing. In this market, I’d only consider the well-known Chinese stocks that have strong followings from the investment community and I’d focus on value.
Right now, I think it’s fair to conclude that stock market speculators would rather own gold over Chinese stocks. The resource trade is holding up despite all the risks out there and, while some Chinese stocks offer very low price-to-earnings ratios, the confidence issue isn’t going away anytime soon.
Chinese stocks were some fantastic wealth creators. Then they were fantastic wealth destroyers (unless you were short). It’s fair to say that Chinese stocks operate in a kind of Wild West environment, which lacks oversight and reporting regulations. The stock market knows that there are great growth stories out there; but, in today’s environment, all investors seem to want is safety and stability (see Growth & Momentum in a Market Like This? You Bet!). I don’t blame investors, considering all that’s transpired. We’re in an environment of great unknowns and this uncertainty is holding the Main Street economy back. Are we any closer to more certainty in the stock market? Right now, I’d have to say no.

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Understanding the European Crisis: Greece Is Not the Problem

By Michael Lombardi, MBA

Greece’s gross domestic product (GDP) in 2010 was only $304.87 billion. The proposed Greek “bailout” by the European Union includes about $180 billion in cash and a 50% cut in Greece’s debt. This is equal to more than one year’s GDP for Greece. It’s a huge bailout. It’s free money. The Greeks would be silly not to take it…that’s why, at the end of the day, they’ll grab it with both hands.
The perceived risk is that if Greek defaults, the first member of the 17-country euro zone could be eliminated and other countries would follow. This would cause problems for the relatively new euro (an ill-conceived idea in the first place),
But the real problem is not Greece; it is Italy. The third largest economy in Europe after Germany and France belongs to Italy. According to the World Bank, Italy’s GDP in 2010 was $2.05 trillion, almost seven times bigger than Greece’s economy.
Yesterday, for the first time since September 1997, the yield on Italy’s 10-year government bond hit 6.4%. Ireland was forced to ask the European Central Bank (ECB) for a bailout when its 10-year bonds hit a yield of 6.5%. For Portugal, the magic number was seven percent.
The bottom line is that the European Union can afford a bailout of Greece and it can persuade big European banks to cut the value of their loans to Greece, because the ECB can backstop the European banks.
But, put bluntly, the European Union cannot afford a bailout of Italy. This is the real problem. If Italy defaults, major European banks could go under; the euro would collapse. We would need to bring Julius Caesar back from the dead to restore unity in the European Union.
And what’s Italy doing about their problems? Very little. The government bickers back and forth about austerity measures. The most colorful leader in the European Union, Italian Prime Minster Silvio Berlusconi, manages to continue surviving government confidence votes. Italy’s Il Sole 24 Ore newspaper ran a front-cover story yesterday saying that, despite promising an Italian “economic overhaul” to the European Union, Berlusconi arrived at the G-20 summit in Cannes yesterday “empty-handed.” What else is new?
So what does this all this risk among European Union members mean for small investors like you and me?
It means a choppy stock market for some months to come. It means the euro and European Union could eventually disappear (as I have been predicting for more than a year now). It means that gold bullion becomes even more valuable. Hold on to your gold, dear reader, it will come in very handy in 2012.
Michael’s Personal Notes:
My son says that if there is one company he would love to own, it would be Starbucks Corporation (NASDAQ/SBUX).
As he explains it to me, Starbucks took something most of us use every day, coffee, and made it into a lifestyle statement. Where Apple Inc. (NASDAQ/AAPL) can only succeed by continuously introducing new products or upgrading old ones, Starbucks simply found different ways to present an old product: coffee.
In the 1950s and 1960s, if white-collar people became stressed, they would hit the bar (especially at happy hour) or they’d have a cigarette or two…or a pack.
Today, as society has become smarter and more aware of what alcohol and cigarettes can do to the body, taking a break at a Starbucks has become a safer fad.
Starbucks did one thing so many other food companies fail to do: it made the stores, the product, the service…all consistent. Walk into a Starbucks store in London, England, or Miami, Florida. They sell the same product. The stores look the same; the service is the same.
And business is booming. Starbucks reported yesterday that its fourth-quarter net income jumped 29% to $358 million (no wonder my son wants to own it). What recession? Sales at Starbucks’ U.S. stores open at least one year rose 10% in the company’s latest quarter.
Of the widely followed and widely held big American stocks, Starbucks’ stock has been one of the few to break above its previous all-time high hit in October 2007.
Would I buy Starbucks stock today? Unfortunately, no. I expect 2012 to be difficult year for the economy worldwide. And I don’t believe Starbucks will be exempt from the pullback in consumer spending I expect.
Where the Market Stands; Where it’s Headed:
The Dow Jones Industrial Average opens this morning up 4.2% for 2011.
Despite being old and tired, a bear market rally that started in March of 2009 continues to prevail today. The rally has lasted longer than most analysts had expected, including yours truly.
Stocks will continue to ride the “wall of worry” higher against the backdrop of pessimism amongst stock advisors and investors, better than expected corporate profits, easy monetary policy, and lack of investment alternatives to stocks.
What He Said:
“Investors have been put into an unfair corner. Those who invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those who have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi in PROFIT CONFIDENTIAL, May 27, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.
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Debt Crises & Economic Fragility Around the World: Is There a Better Reason to Buy Gold Right Now?

By George Leong, B. Comm

I find it absolutely laughable how Prime Minister George Papandreou needs to hold a national referendum to determine if the country’s citizens want to accept another $150 billion or so in emergency capital in order to repay Greece’s initial bailout from its debt crisis. I mean, we are talking of survival here for Greece. What is there to discuss? Let me put it this way: can you imagine being on the brink of losing everything, but someone pops up and says, “Don’t worry; I have money for you, even if you may not be able to pay it back?”
What really is disturbing is that the vote may not happen until early 2012 despite the European Union members now telling Greece that there will be no changes to its budget cuts and it needs to happen or no money will be advanced and the country will default. The uncertainty will impact the stock market until there is a concrete and workable resolution.
In addition, the one-year Italian bond surged nearly 50% to yield 5.17%, as worries mount that the country could default. Yields relate to risk and rise to compensate for buying higher-risk debt. Bonds in Germany offer much less yield—a reflection of the lower relative risk.
My feeling is that gold continues to be the place you need to have capital given the market risk. After the failure to hold above $1,900, the metal has struggled to find direction on the charts and has traded with little sense of direction at around $1,600 to $1,700.
Besides Europe, don’t forget the crippling debt levels and deficits in America. The powerful U.S. economic engine continues to show breaks and is stalling at this most critical time for the country.
We are also seeing some economic fragility in the BRICS countries. Brazil, India, and China are seeing some stalling in their economies and stock markets.
Buying has been driven by a combination of speculative trading in physical gold, gold ETFs, and buying as a safe haven investment.
Lombardi Financial initially turned bullish in 2002-2003 and has remained so ever since. Although at times the bullion has had a rough ride, prices have turned around significantly after first breaking above $400.00. We believe the spot price of gold will take a run at $2,000 by 2012 should the global economies and risk continue.
The simple truth is that gold is a trustworthy and realistic investment instrument that should be in every investor’s portfolio. Gold’s traditional role as a safe haven has made it the underdog in the world markets. It is an investment that people turn to only when stock or bond markets aren’t performing well, or when monetary policies are running amok. Yet, there is a sense that gold may be increasingly seen as a credible and realistic investment vehicle and not just as a safe-haven instrument for parking capital.
In the current climate, gold represents the best bet, while silver continues to be a trading commodity based on the economic recovery and demand for electronics and industrial applications.
My advice to you is to buy a mixture of exploration-stage miners along with small to large producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large producers. The SPDR Gold Trust ETF (GLD) is worth a look.
I think Europe is a mess and you can read my comments in my recent article, Europe: It Needs to Get Its Act Together.
And with Black Friday in a few weeks, retailers are hoping for buyers, but it will not be easy. You can read about this in Former Retail Superstar Struggling in Weak Market.


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Is There a Better Reason to Buy Gold Right Now?

Central Bank and Inflation—the Top New Fundamentals for Gold Stocks

By Mitchell Clark, B.Com

So the stock market is gyrating and this is the new norm. All equities can’t escape the prevailing trading action in the stock market, but the one sector that continues to have above-average potential is precious metals; gold stocks in particular. Not all gold stocks are doing well in this market, but there’s a lot that are, and they are smaller players that have their own growth stories. If I were a stock market
speculator focused on only one industry group, it would be on gold investments. The outlook is that good within the industry.
The best news for the spot price of gold and individual gold stocks isn’t the European debt crisis; it’s the fact that central banks are buying gold bars again. For years, the central banks of mature economies have been selling off their gold holdings for the simple reason that the assets didn’t generate any rate of return while sitting in the vaults. Now that there’s so much uncertainty in the marketplace and U.S. dollar leadership has lessened, many countries are quietly creating new stockpiles.
We’ve talked about a number of growing gold producers in this column (see Everything Gold Is Turning Into Some Serious Green). I watch dozens of gold stocks at once, and I’d stick with those trading near their 52-week highs. I’d rather try to buy gold stocks high, with the hope of selling at a higher price later, than try to buy low. If a gold stock isn’t doing well now, then it’s less likely to do so later. This isn’t the case for the rest of the stock market, but the gold sector in particular.
The stock market has already rewarded many gold investments, but the spot price of the commodity has so much upside potential going forward that the business model for established producers is very good. There is a lot of risk in the global economy and core inflation rates in mature economies are going up. If the stock market does nothing over the next six months, it’s my prediction that gold stocks will be some of the best performers, following the spot price as it slowly ticks higher.
For speculators in the sector, you want to choose from gold stocks that offer an attractive package—an established miner with growing production, ongoing exploration, declining cash costs, etc. With so much uncertainty in the world and the stock market, exposure to some gold investments is a must in this market. There isn’t any rush to consider much else.


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New Fundamentals for Gold Stocks

Why Stocks Will Rise as the Economy Deteriorates Further

By Michael Lombardi, MBA

“Michael, you write about the stock market rising in the weeks ahead and actually ending 2011 higher than it started (see Stock Market: Where it Will End 2011), but on the other hand you often write about the pathetic state of the U.S. economy. How can they differ so much?”
The above is an important question we often receive here at PROFIT CONFIDENTIAL from our readers.
The stock market and the economy…they are two very different phenomena that can often go in the opposite direction in the short term, but that eventually meet in the long term.
Yes, the stock market is a leading indicator of the economy. But in the short term, the job of a bear market and a bull market is to mislead investors as to the real direction of the markets. No bull market goes straight up; no bear market goes straight down. There are peaks and valleys on the way up and on the way down. However, in the long-term, the stock market does lead the economy.
Just look at October 2007. The bear market we are presently in started that month. Stocks came down steadily starting in October 2007, but the U.S. economy was doing fine at the time. By the end of 2008 though, the U.S. economy was well entrenched in the worst recession since the Great Depression.
Stock bull markets tend to move in long cycles of about 20 years in duration. A bear market has a shorter cycle, about five to 10 years, as a bear market tends to deal with the excesses of a preceding bull market more quickly. In a nutshell, greed takes a long time to build up. Fear comes quickly.
Let’s move to today, the markets and the economy.
If you are a long-time reader, you know my opinion about the stock market. We are in Phase II of secular bear market that will move stocks higher, as investors get the false sense that the economy is doing better and stocks are the place to be again. At this very moment, most stock advisors and investors are still very bearish. Hence, I believe this bear market rally will continue to ride “the wall of worry” higher.
Of all the things the stock market has going for it (strong corporate earnings, lots of pessimism out there), the lack of investment alternatives to the stock market is key. When the yield on the 10-year U.S. Treasury is two percent and the dividend yield on the Dow Jones Industrial Average is 2.5%, stocks are attractive.
But, in the long-term, the economy has severe structural problems. I write about them daily here in PROFIT CONFIDENTIAL. The Fed has kept the economy alive the past two to three years by aggressively increasing the money supply. This can’t go on forever.
At some point, the stock market will fall victim to higher interest rates brought about by rapid inflation and Phase III of the bear market will suddenly be upon us. That’s what the 10-year bull market in gold has been all about. At that point, the bear market in stocks and the economy will converge again, just like they did in 2008.

Michael’s Personal Notes:

Yesterday, after the Federal Reserve concluded its regularly scheduled two-day Federal Open Market Committee meeting, Ben Bernanke said the Fed may look at buying more mortgage-backed securities, if the economic situation warranted, loosen up the housing market.
In my humble opinion, the Fed needs to stop forgiving the sins of the past, stop expanding its balance sheet, and start tightening.
Look at the Fed’s actions to date:
-- It has kept short-term interest rates down for years and has told us that the Federal Funds Rate will stay near or at zero until mid-2013…short-term interest rates to stay at zero for two more years!
-- The Fed has purchased $2.3 trillion in debt, including government treasuries in the period from December 2008 to June 2011 (two rounds of quantitative easing).
-- Swapped $400 billion of its short-term securities holdings for long-term debt in order to lower long-term interest rates.
In doing the above, the Fed has significantly increased the money supply. A total of $2.3 trillion has been added to the Fed’s balance sheet. That doesn’t happen without money being created. And the more money created, the less the U.S. dollar buys, the more inflation rises (see Economic Analysis: And Then Came Rapid Inflation), the higher the price of gold bullion goes.
Yesterday, the Fed told us much of what we already know: the economy is growing slower than originally thought; unemployment in the U.S. will remain high; and the European debt crisis is a risk for America.
What the Fed didn’t tell us is that, given its inclination to buy more mortgage-backed securities should the economy weaken further (which it will), another round of quantitative easing is in the cards. In a recent Bloomberg survey of economists, 69% of those surveyed said the Fed will embark on QE3 in 2012.
The government already owns Freddie Mac and Fannie Mae, who jointly own or guarantee half the residential mortgages in the U.S. With the Fed buying more mortgage-backed securities, the government and Fed will get more entrenched in the residential housing mortgage market.
I doubt George Washington ever envisioned a time when the government would own guaranteed loans on homes. This is not what the government was set up to do. It’s this type of Keynesian economics that have gone too far, for too long, and that continue to plunge our country into record debt. It’s also a wonder why gold isn’t trading at $2,000 an ounce today (see Answered: Can I Still Make Money Buying Gold Now?).

Where the Market Stands; Where it’s Headed:

I continue with the belief that we are in bear market rally that started in March 2009. Phase I of the bear market brought stocks down to a 12-year low on March 9, 2009. Phase II of the bear market, which we are presently in, is a rally within the confines of a bear market. This rally could last three to four years. The purpose of this bear market rally is to lure investors back into the “safety of stocks.”
Phase III of the bear market will bring stocks back down to where the bear market originally bottomed; in this case, 6,440 on the Dow Jones Industrial Average. Enjoy the current stock market rally while it lasts!

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in PROFIT CONFIDENTIAL, April 8, 2004. “We will wish Greenspan never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in PROFIT CONFIDENTIAL, April 27, 2004. Michael first started warning about the negative repercussions of Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.

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Why Stocks Will Rise

Market Risk: Why Upside Moves Will Not Be Easy

By George Leong, B. Comm

October was one of the best months for the stock market in history in spite of the market risk. Everyone was buying and it didn’t matter if it was technology, industrial, or some new never-heard-before-technology. Everything went up, which is why we are now facing some selling pressure.
Up we go, down we go. Traders are currently jittery following the strong October. The month ended on a ghoulish note on Halloween. November looks like it will also begin sour, with a jump in market risk.
European stocks got hammered. The FTSE 100 moved down over three percent, while other key European bourses plummeted as much as five percent. The selling was driven by a major surprise when the Greek Prime Minister said the country’s new bailout plan resulting from the debt crisis would have to pass a national referendum—adding more market risk and unknowns to the European and global situations. The reality is that there are revolts on the streets of Athens, as people are fighting to safeguard their previous benefits and lifestyles. I mean, why would you not fight to protect a cushy job with early retirement?
But, as I have said on numerous times in the past, Greece is not the only country in trouble. The other members of PIGS also add to the market risk. Speculation is swirling that Italy may be vulnerable to default. The country is undergoing their own austerity strategy, but I expect some surprises to pop up and this will prop up the market risk.
There is also the renewed concern towards the slowing in Asia, as China’s factory activity declined to its lowest level since February 2009. The economic weakness in Europe is negatively impacting exports in China and other Asian countries and adds to market risk.
Going back to the U.S., the key stock indices have each breached their respective 200-day moving average (MA), while the S&P 500 has moved back into the red for the year.
The downside break is worrisome and could point to more weakness to surface on the charts, especially if the non-farm jobs reading this Friday are poor, as many expect them to be.
On the plus side, based on the seasonal trends, market risk may decline, as the months from November to April have resulted in the biggest gains for the DOW and S&P 500 in the past, according to the Stock Trader’s Almanac.
Technology has been better, with stocks advancing in eight months from November to June.
So, while there are the market risk and volatility, if you trade the historical patterns, ride the gains, but make sure you also take some money off the table.
I continue to recommend using put options or buying short-based exchange-traded funds (ETFs) as an offset to the weakness. It’s easy and cost-effective as a hedge.
Just take a look at the various indices that closely reflect your holdings or put options on individual stocks that you have a large position in. Index Puts include the SPY (S&P 500), QQQ (NASDAQ), or IWM (Russell 2000).
Take a look at what I had previously said about the global economy stalling in Stocks Facing Many Hurdles Ahead.
An area that has been under some pressure, but which I really like longer-term, is China’s travel sector; you can read about it in China’s Travel Market: Why It’s an Attractive Chance for Investment.

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The Only Way the Stock Market Breakout Will Hold

By Mitchell Clark, B.Com

I continue to be dumbfounded by the actions of Greek politicians. Just when more certainty was returning to currency and stock markets, they screw it up again. Make no mistake; today’s stock market woes are largely due to the European debt crisis. I’m totally unimpressed by how this is being handled.
The stock market did a great job breaking out of its correction trading range. The question is, can the breakout hold? If Greece would get its act together, then this is a stock market that wants to go higher.
Everyone knows that corporate earnings tend to be managed by companies and Wall Street analysts. But corporate earnings have been decidedly strong this quarter and all throughout the year. I’m certain the stock market would be a lot higher today if it wasn’t for Europe’s sovereign debt crisis.
We’ve seen very solid corporate earnings from the technology sector, basic materials, healthcare, and industrial goods. Stock market investors revised their corporate earnings expectations lower going into 2012 and this is setting up the stock market for a new advance, providing that the debt crisis or some other shock doesn’t take place. It’s a tricky time to be a stock market investor—with the age of austerity comes a great unknown. There will be growth in the future, but will it be like it was before? It’s tough to imagine Main Street corporate earnings taking off without a new up cycle in the real estate market.
The current stock market is well set up for a decent rally. Valuations are reasonable, visibility for corporate earnings is mostly solid and there is lots of cash sitting on the sidelines. The key going forward will be renewed certainty on the European debt crisis and renewed spending from consumers. With confidence comes hope and with new hope for the future comes renewed consumer spending.
One thing that’s seems quite unlikely, however, is a speedy return to normal economic growth rates. We’re still coming off a major period of debt-fueled excess and both Main Street and Wall Street (banks in particular) are trying to establish a new normal for operations (see All Global Investment Risks Point to a Steady Dollar & Mediocrity in Stocks & Metals). I have to say that, if it weren’t for emerging markets, interest rates being low, and a weaker U.S. dollar, corporate earnings would not be so robust. Policy-wise, the Federal Reserve is making progress domestically. It’s Europe that’s holding things back.
The stock market was due for a little rest after such a strong breakout, but the Greek news was a real surprise. The expectation for the fourth quarter is for another round of solid corporate earnings and, accordingly, the breakout should hold. Any return below 1,200 on the S&P 500 Index would not be good technically. The stock market is muddling through the tough times. It’s time now for Greece to get its act together.

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Stock Market Got You Nervous? S&P 500 Says Smooth Sailing

By Michael Lombardi, MBA

Yes, I know all the news today is about the audacity of a Greece Referendum on getting free money (I talk about that in “Michael’s Personal Notes” below), but there are two stock market-related important news items I want to share with my readers first.
The third quarter ended September 30, 2011, marks the 11th straight quarter that the corporate earnings of the S&P 500 have beat analyst expectations.
Abby Cohen, senior U.S. investment strategist at Goldman Sachs Group Inc. (NYSE/GS) said yesterday that the S&P 500 is trading at a 33% discount to past periods of similar inflation. I’m not one to put much faith in the forecasts or statements of other analysts, but we need to put into context what Cohen is saying relative to corporate earnings at the S&P 500.
The S&P 500 is trading at 14.9 times current corporate earnings; not cheap, but not expensive either. However, the S&P 500 is trading at only 12 times estimated earnings for the 12 months ahead. With the S&P 500 beating analyst’s corporate earnings expectation 100% of the time over the past 11 quarters, achieving estimated earnings in the current quarter and the next three quarters of 2012 is not a stretch.
Dear reader; this is what I’m saying to you about stocks, as we enter the final two trading months of 2011:
The S&P 500 is priced at 12 times future earnings, an historic bargain. The dividend yield for the S&P 500 is presently 2.2%, better than what you can get on a 10-year U.S. Treasury (I’d rather own the S&P 500 than a 10-year U.S. Treasury for the next 10 years).
No, stocks are not a screaming bargain. But when you look at the interest rate environment today, when you look at the alternative investments to the S&P 500 and the Dow Jones Industrial Average, you realize that stocks are not a bad place to be, especially when the S&P 500 continues to surprise analysts and investors with corporate earnings that consistently beat estimates.
Please, don’t let the daily gyrations of the stock market influence you. Historically, stocks are undervalued compared to their corporate earnings and the present interest rate environment. Bullishness does not prevail amongst stock advisors and investors; in fact, bearishness does (see Forget the Economy: These Companies Are Still Earning Big Money).
These big daily losses and gains for the S&P 500 and the Dow Jones Industrial Average are a way for active traders to make a lot of money. While I realize it’s nerve-wracking to see the value of your investment portfolio fluctuate so much on a daily basis; but remember the more the daily markets fluctuate, the more money the day traders make. Traders want markets that move one percent to two percent a day!
For investors like you and me, there is very little evidence that the bear market rally that started in March of 2009 is over (see Strong Corporate Earnings and the Bear Market: How it Will Play Out).
Michael’s Personal Notes:
All the financial news this morning and yesterday was focused on the Greek Prime Minister’s idea for Greece to have a referendum on the Europe Union’s financial rescue package.
It’s a good thing.
The euro, my dear reader, is in jeopardy. When I travel to Europe each year (twice so far in 2011), I can’t understand how 17 countries, all with different goals and aspirations, can share the same fiat currency. It’s quite unbelievable how economically rich and poor countries share the same money.
Italy’s primary goal these days is to increase tourism. Germany’s goal, from what I can see, is to become the leading economic growth engine of Europe, with the headquarters of all the major European manufacturers (think cars) located in Germany.
The obvious is the obvious. Under the pressure of German Chancellor Angela Merkel and French President Nicolas Sarkozy, European banks agreed to take a 50% haircut off the value of their loans to Greece. Merkel and Sarkozy spearheaded an unprecedented European Union bailout of Greece.
And what does the Greek Prime Minister do? He throws a big wrench in the plans: he wants his people to vote on it! He wants his people to vote on getting free money!
While frowned upon by equity analysts and the media, a Greek referendum is sheer genius.
Here’s what a Greek referendum on the proposed European Union’s bailout of Greece does: it signals that democracy is important in Greece, it solidifies the Greek Prime Minister’s popularity (Andreas Papandreou’s popularity among voters plunged after he introduced so many austerity measures), and it confirms that Greece wants to be part of the euro currency. And that is what it’s all about…making sure the euro survives.
Greece has a sweetheart of a deal: Greece will receive about $180 billion and enjoy a 50% write-down in the value of its debt. It literally is free money. The Greek voters are not stupid. They know the severe repercussions if Greece doesn’t accept the European Union-led bailout. What this vote really does is strengthen the euro, something that will make the Chinese “lenders of last resort” very happy.

Where the Market Stands; Where it’s Headed:

Nice way to start a month…
The Dow Jones Industrial Average plunged 297 points in its first trading day of November. For the record, the Dow Jones Industrials gained 12.5% in October…one of its best months on record. In October, the stock market rebounded from the severely oversold level I had been writing about the past few weeks.
No, the bear market rally in stocks that began on March 9, 2009, is not over. The stock market doesn’t roll over and collapse when stock advisors are bearish and when investors are so worried about the economy and the stock market.
We are still in a Phase II bear market. During this phase, the stock market moves higher during a rally that can last three to four years. The purpose of the rally is to bring stock market investors back into stocks with the false sense that the economy is recovering.

What He Said:

I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.” Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories have experienced spectacular gains.
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You Profited Big on the Stock Market Rally…Now What?

By George Leong, B. Comm

Listen up folks, stock markets have had a great run advancing in five straight weeks and breaking away from or near to bear market status. There may be more upside moves ahead of us should the economy continue to improve, but you also need to be careful.

You have probably made some nice profits on your investment portfolio, so my advice to you is to take some profits off the table. I’m seeing some incredible euphoria amongst the bulls, but I do not believe stocks can continue to rally without some sort of market adjustment. I have discussed this belief numerous times in past commentaries.
If the economy doesn’t deliver jobs this week, your investment portfolio could retrench. The key now is to protect your profits by adopting strong risk management to protect your hard-earned capital. The last thing you want is to watch your gains disappear.
One of my favorite strategies I like personally to protect an investment portfolio is the use of put options as a defensive hedge.
Under this scenario, investors may be somewhat bearish or uncertain and want to protect the current gains against a downside move in the stock or the market with the use of index put options. By doing so, you are hedging your investment portfolio.
For those of you not familiar with options, a buyer of a put option contract buys the right, but not the obligation, to sell a specific number of the underlying instrument at the strike or exercise price for a specified length of time until the expiry date of the contract. After the expiry date, the particular option expires worthless and any responsibility is eliminated.
The buyer of the put option pays a premium to the writer of the option, who gets compensated for assuming the risk of exercise. The writer of the put option is obligated to buy the stock from the holder of the put should it be exercised by the expiry date.
For the writer of the put option, the amount of premium received for assuming the risk is generally directly correlated to the volatility of the stock and market. The more volatile the stock, the higher the premium paid for the option. And low volatility translates into lower premiums.
You can buy puts for stocks and sectors. If your investment portfolio is heavy in technology, you can buy puts on the NASDAQ. Or let’s say your investment portfolio has benefited from the run-up in gold and silver to record historical highs; a good strategy may be to buy put options on The Philadelphia Gold & Silver Index, which tracks 10 major gold and silver stocks.
If your investment portfolio is heavily weighted in technology, you can buy put options in PowerShares ETFs (NASDAQA/QQQQ), a heavily traded put used for defensive purposes.
It’s that easy. Just take a look at the various indices that closely reflect your holdings or put options on individual stocks that you may have a large position in.
In this market, safety is the key and your investment portfolio will benefit from it.
An area that I continue to like given the strength of metals is that of mining stocks. You can read about it in Why You Might Want to Look at Buying the Miners, where I list three examples of interesting mining stocks.
One of my favorite technology stocks continues to be Apple, Inc. (NASDAQ/AAPL), which you can read about in Apple Is Shining Bright…RIM Not So Much.

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It’s Still a Bear Market, But Not in Gold Stocks

By Mitchell Clark, B.Com

The top stocks in this market are large-cap, higher-dividend-paying companies with strong international operations. For speculators, gold stocks remain some of the best stocks in this stock market. The big companies have the cash and the economies of scale (to withstand the shocks to fundamentals and the stock market) and gold stocks have some of the best potential for capital gains, because these are the companies that are generating the most growth. The days of Internet stock market high flyers and software monopolies are over. You can trade the stock market, the futures market or you can invest in the real economy. And I’m not talking mom and pop shops on Main Street—I’m talking about the only real thing that counts in today’s global economy, and that’s natural resources.

The commodity price cycle and gold stocks have been experiencing the same price correction as the stock market. But, any reasonable economic analysis suggests that, with so much debt in the world and governments trying to grow their economies with reduced interest rates and printing money, the next major reckoning is about to be unleashed. We’re already seeing core inflation rates going up around the world and, as economies recover; there will be growing scarcity in a basket of raw materials. This is why gold stocks are poised for another major upward price trend—the fundamentals for the spot price of gold are actually getting better (see Precious Metals Sector Deal-making Padding Investor Wallets).

You might not think about it, but the stock market is still in a long-term bear market. I don’t care what the definition of a bear market is; the stock market is still below its value in early 2000—that to me is a bear market. But what have come alive during the last 11 years are commodities and specifically the prices of gold and gold stocks. With all the risks around the world, including the European debt crisis, I don’t see the price of gold as being expensive at all. In fact, it isn’t as adjusted for inflation.

This is why I’m so bullish on precious metals, gold stocks in particular, and agriculture. All the debt and increasing money supplies will come back to haunt the global economy in the form of inflation. What economic growth we can generate now might just evaporate under the auspices of central banks trying to contain the very inflation that they created. That’s why gold stocks are sitting pretty. They already have the cash, the fundamentals and the growing demand for their commodity. It’s a new upward price cycle that’s about to begin.

Gold stocks are like any other stock market sector—they trade as a group. Most investors tend to associate their gold investments apart from their main stock market portfolio. I can’t predict where the spot price of gold is going to go, but all the global policy action that’s been going on since the subprime mortgage meltdown leads me believe that gold stocks will be the stock market’s major outperforming sector over the next several years.

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Penny Stocks, Stock Market Advice, Economic Analysis, Investing In Real Estate and Gold

Why We Can’t Have a Sustained Economic Recovery

By Michael Lombardi, MBA

Things are looking up for the economy again. Unfortunately, things are not always as they seem.

The U.S. Commerce Department said that the U.S. economy grew at 2.5% in the third quarter—the fastest pace in a year. Moody’s Investor Services last week raised the corporate ratings of both Ford Motor Company (NYSE/F) and General Motors Company (NYSE/GM), an indication that the car companies are doing better as well. All of a sudden, people are feeling good about the U.S. economy again.

But it was only this summer that analysts were calling for a second U.S. recession. Some economists said we were already in a recession. The numbers being released on the economy beg to differ. Or do they?

Fickle…that’s the word I use to describe today’s modern economists. The stock market starts heading down (as it did this past August) and all of a sudden we are headed for a recession. The stock market gets close to new high (as we are now), and the economists say we’ve turned the corner and are out of the recession.

What’s the truth? How do we make sense of all these numbers to make the right decision for our investment portfolios and for our businesses?

I’ll get right to the point, my dear reader. We cannot have a sustained economic recovery without a recovery in the real estate market (see Without This Fixed, the Economy Cannot Recover). Job growth in the U.S. will not happen unless the construction industry, housing industry and real estate market in general come back. And, from all sides, we can see that the housing market is far from a recovery.

Consider these facts about the real estate market:

The median price of a new U.S. home fell 10% in September 2011 from September 2010, the biggest drop in two years.

The median price of a resale home, which makes up 94% of the real estate market, fell 3.5% in September 2011 from September 2010.

Cash deals account for 30% of all home resale transactions in the U.S.

The Dow Jones U.S. Home Construction Index, an index comprised of the largest U.S. homebuilder stocks and a great leading indicator of the real estate market, is still down 80% from its 2007 high—the worst performance of all Dow Jones sub-indices

Now here’s the scary part about the real estate market: According to Bloomberg, there are 11 million homes in the U.S. where the mortgages are higher than the value of the homes.

Until we have a recovery in the real estate market, which could be years off, we can’t have a bankable economic recovery. That’s the bottom line. And that’s why we simply continue to be in a bear market rally—a period in which the stock market moves higher as the bear completes its Phase II cycle of luring investors back into the stock market before stock prices fall again.

New Cycle of Rising Interest Rates Closer Than We Think

If there is one thing that keeps me up at night, it is this simple question:

What will happen to the U.S. economy when interest rates start to rise?

The U.S. economy is ever so sensitive, likely the most sensitive it has been since World War II. The Federal Reserve has done an excellent job at keeping us away from a second Great Depression. The Fed has kept short-term interest rates near zero for years. The Fed has bought U.S. Treasuries (an unheard of action) and is trying to keep long-term interest rates down by buying long-term securities.

But we must face the facts: after a 25- to 30-year down cycle in interest rates, the unprecedented expansion of the U.S. money supply will create inflation. This is what the 10-year bull market in gold bullion has all been about. And, as inflation sets in, interest rates will rise (see The Economy? Stocks? This Is a Bigger Risk).

And herein lies the biggest problem with the economy.

The U.S. real estate market is already in trouble (read my lead story for today). If interest rates start to rise, the proverbial final “nail in the coffin” will have been delivered to the already-hurting real estate market.

My historical studies show that interest rates move in 20- to 30-year cycles, either up or down. Given the record increase in the money supply and record increase in the national debt, rising inflation will be the catalyst that leads to higher interest rates.

There is no doubt in my mind that interest rates will start a new 20- to 30-year up-cycle. It is only a matter of when it starts…and it might be earlier than most of today’s economists think.

Where the Market Stands; Where it’s Headed:

Last trading day of the month and it looks like October is going to go out with a bang! What a difference a month makes. We started out October close to 10,400 on the Dow Jones Industrial Average. We are closing the month around the 12,000 level. But, despite the market recent run-up, pessimism still reigns with stock advisors, investors, and consumers.

We are in Phase II of a secular bear market. This phase of the bear market will move stock prices higher, as the bear convinces investors that stocks are a safe investment again. Phase II of bear market rallies can last three to four years. This bear market rally has lasted 32 months thus far and shows no signs of abating.

What He Said:

“A Stock Market’s Obituary: It is with great sadness that we announce the passing of the Dow Jones Industrial Average. After a strong and courageous battle, the Dow Jones fell victim to a credit crisis and finally succumbed on Friday, October 3, 2008, when it fell decisively below the mid-point between its 2002 low and its 2007 high.” Michael Lombardi in PROFIT CONFIDENTIAL, October 6, 2008. From October 6, 2008 to November 27, 2008, the Dow Jones Industrial Average experienced one of its biggest two-month losses in history.
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Answered: Can I Still Make Money Buying Gold Now?

Most investors likely fall into one of these three categories:

They likely haven’t bought gold investments yet and they are thinking it may be too late to get in. Or they have bought gold investments and they are wondering if they should by more at these prices. Or, like me, they take as many opportunities as possible to buy more gold investments each time the price of gold bullion pulls back.

What most investors fail to realize is that the last real correction in the 10-year gold bull market occurred back in 2009. This year, gold bullion reached a high price of $1,895 an ounce on September 5, 2011. By September 26, 2011, the metal had fallen back to $1,598 an ounce (London fixed closing day prices). Smart investors would have seized the opportunity to buy more gold investments when the metal fell below $1,600 an ounce (see Gold Bullion’s Price Action: Time to Separate the Men from the Boys).

From its 2011 price high of $1,895 an ounce, gold corrected down 16%. A healthy correction in a long-term bull market…but, yes, I would have liked to see more of a wash-out. I would have liked to see the weaker hands and speculators flee gold investments. But, on the other side of the equation, I feel that the “light” correction is an indication that the bull market in gold bullion is strong.

Yes, I would get into the gold bullion market at this time. But there is a caveat. I wouldn’t be surprised to see gold move to the low $1,500 level. If it happens, I would just seize that opportunity to buy more gold investments. But, at the same time, if gold never makes it back to the low $1,500 an ounce, you will have secured your entry into this gold market now.

Each time gold bullion hit a new price high, be it $500.00, $700.00, $1,000, $1,200, or $1,500 an ounce, I said to buy more gold investments. I’ve been right all the way up.

All this money printing by world central banks since the credit crisis hit in 2008 has greatly expanded the fiat money supply. The more fiat money in circulation, the greater the threat of inflation. In Britain, inflation hit a three-year high in September—inflation there is running at 5.2% annualized! Inflation is also a problem in the U.S., although it’s not really getting any media coverage.

Gold investments…still the best hedge against excessive fiat money printing, too much debt at various government levels, and future inflation.

Michael’s Personal Notes:

Want to now what really went wrong in Europe? My fellow analyst Robert Appel presents his “Top 10 Reasons Why the Eurozone Was Doomed to Fail and What Happens Now.” Well worth the read…

1. Prior to the formative eurozone vote, had you asked the residents of the various countries if they lived in a democracy, they would have unanimously said yes.
2. The actual eurozone, however, was created by politicians who did not consult their constituents. Think about that…
3. After the eurozone vote, had you asked the residents of the various countries if they lived in a democracy, they would have still unanimously said yes.
4.Was the eurozone needed? In hindsight, the only obvious beneficiaries were the (private) banks and the politicians who saw their “power” increased a thousand-fold. Notice we did not talk about money; we talked about power. Yes, there is a difference, and we used that specific word deliberately.
5. Was the eurozone a good idea? Well, if you think about it, major cultural and anthropological differences meant that the zone was doomed to fail from the beginning. And indeed still is. Is money earned the exact same way in Greece as in Germany? That is really the only question you need to ask. The answer is obvious.
6. How will the current mess take to resolve? Short answer: No one knows. Longer answer: The eurozone may dissolve. We doubt it. Or, Germany may step up the plate and use its hard-working citizens to bail everyone else out. Or, they may make a “2-tier” zone where certain countries are a little less equal than others. (Yes, we do get the irony of this solution—creating tiers is really a giant step backwards, since the continent was already tiered, was it not?)
7. What are the chances of dissolving it? Answer: While this makes some small sense on paper, clearly the politicians will do whatever it takes to kick the can down the road, so to speak, just as was done with the subprime mess. They perceive correctly that dissolving the zone might cost them their jobs. And, as we know, politicians today will sacrifice anyone and anything to save their own jobs.
8. Are we getting all the facts? Actually no. The fact is that the Spanish and Italian problems—which are not yet full disclosed—could dwarf the Greek issues (issues which, please note, have been delayed, and obfuscated, but not resolved). Major world banks, as you read this, are reducing exposure to French loans and experts have opined that the bizarre deal recently cut with Ireland is not sustainable.
9. Who benefits from the mess? The U.S., which ironically saw its bond sales rise (even at effectively negative rates) and its buck soar. Two counter-intuitive events, of course, which make little sense yet which happened anyway. Also the “anti-one-worlders” benefit, since the Europe mess is going to make it that much harder to bring Mexico, Canada and the U.S. into one zone next.
10. When will have an answer? No later than next summer, we suspect, because frantic work among the politicians over the last few days has (we think) managed to push the problem forward to that period. In the meantime, we expect stock markets to try to rally between now and then.

Where the Market Stands; Where it’s Headed:

What a coincidence…

The stock market, as measured by the Dow Jones Industrial Average, closed yesterday at the exact number it started at in 2011: 11,577. We’ve gone from a market that sells off on bad news (as we witnessed most of this summer) to a stock market that rallies on bad news—the true sign of a market that wants to move higher. The year 2011 is looking more and more like a repeat of 2010 for the stock market (see Today’s Stock Market: Making Money by Copying Last Year’s Action).

Since March of 2009, we have been in a bear market rally. This rally will serve to lure investors back into stocks before Phase III of the bear market sets in. As I have been writing since March 2009, I expect stock prices to continue trending higher (see The Strongest Indication Yet That Stocks Are Short-term Oversold). However, the easy stock market profits of 2009 and 2010 will not be repeated. Bear market rallies can last three to four years.

What He Said:

“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us that housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi in PROFIT CONFIDENTIAL, December 4, 2007. That devastation started happening in the first quarter of 2008.
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Forget the Economy; These Companies Are Still Earning Big Money

Alcoa, Inc. (NYSE/AA), the first stock in the Dow Jones Industrial Average to report third-quarter earnings, missed analyst expectations. The Street was hoping Alcoa would earn about $0.20 a share. The company earned $0.15 a share. But let’s look closer.

Alcoa’s net income in the third quarter of this year more than doubled to $172 million from only $61.0 million last year; nothing to sneeze at.

And if we look even closer, we see that the world’s largest aluminum company is reflective of other large American companies. Alcoa, after posting consecutive quarterly losses in late 2008 and into 2009, slashed 20,000 jobs and closed non-profitable smelters. It cut costs, focused on profitability. And the profits started to roll in.

What the market wants is fast, big growth. We had that in 2009 and 2010. Company profits across the 30 large Dow Jones components have been very strong over the past two years.

Analysts are expecting the S&P 500 companies to report a 14% increase in third-quarter profits. Sure, that’s the slowest pace since late 2009 and a lot lower than the 19% growth in the earnings these companies experienced in the second quarter of 2001, but again, nothing to sneeze at. I think it’s steady and healthy earnings growth.

Corporate America has $2.0 trillion socked away in their coffers. That number will grow as these companies continue to post double-digit earnings growth. We’ll be surprised at how well corporate America will fare the remainder of this year even as the U.S. economy continues to deteriorate.

Michael’s Personal Notes:

September 2011 was the worst month for gold bullion prices in about three years. Gold was down 10% in price in September, which equates to almost $200.00 an ounce.

I want my readers to know that a 10% correction in gold bullion prices is not a big deal…and that a healthier correction would have been in the 15% to 20% range. Such a decline in gold prices would serve to drive speculators and “weak hands” from the gold bull market that started in 2001.

Is the price correction in the ongoing bull market in gold over? I hope so. But I wouldn’t be surprised to see some back-filling…some more downside before gold bullion makes a serious attempt to break through the $2,000 an ounce mark.

I would have been more comfortable if gold bullion prices broke down towards $1,500 an ounce in the recent correction—the metal only reached a low of $1,598 per ounce on September 26, 2011, before moving back up.

My message: I wouldn’t be surprised to see gold prices pull back again. I’m not convinced the correction is over.

Where the Market Stands, Where it’s Headed:

In October of 2007, after a 20-plus year bull market, a bear market was born. Phase I of that bear market brought stocks to a 12-year low on March 9, 2009. On that date, we entered Phase II of the bear market, a period in which stocks rise as the bear attempts to lure investors back into the stock market. This is where we are.

Phase II of secular bear markets tend to last years. With the 1934-1937 bear market rally, the duration was 35 months. So far, we’ve been in this Phase II bear market for 31 months. I believe that stock prices will mover higher before this Phase II bear market rally is over.

Phase III of the bear market will see stock prices approach their March 2009 level, possibly breaking below them and creating new multi-year price lows.

What He Said:

“Any way you look at it, the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second, and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. “As for the stock market, it continues along its merry way, oblivious to what is happening to homebuyers’ wealth. (Since 2005, I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. Dire predictions that came true.
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Without getting too technical, investors have two ways to bet on the price direction of stocks.
They can go “long” the market, which means they believe that stock prices will rise. Or they can go “short” the market, which means they are betting that stock prices will fall. Going “long” is easy; all investors need to do is buy stocks. And usually, when investors have a strong general consensus that the stock market will move higher, like they last did in October of 2007, stock prices go the opposite way and fall.

Going “short” is easy, too. Investors simply borrow stocks they do not own and promise to repay later. If the stock falls in price, the person shorting the stock keeps the difference between the price he/she borrowed the stock at and the price it is repaid at. Short selling is a huge function of the market.
Borrowed stock climbed to 11.6% of the market in August from 9.5% in July, according to Bloomberg. This is the biggest monthly increase in five years.
Let’s face the facts. The stock market took a big beating this summer. Worldwide, trillions of dollars were whipped off the value of equities. Investors thought the market was headed back to test the March 2009 lows and started selling stocks and shorting stocks.
But the bear market is too smart. He doesn’t make it easy. “Not so fast, I’m not finished the rally I started in March of 2009,” the bear market told investors as stocks started to rally late last week.
Historically, stocks have rallied when investors have taken a large short position in equities. I don’t see it being any different this time around. A recipe for higher stock market prices: lots of short sellers and lots of bears. We have both in the tent right now and it’s getting crowded.
Michael’s Personal Notes:
The Bank of England (BOE) is doing exactly what the Fed did, buying government bonds. And it’s doing it big-time!
The BOE has pledged to buy the most bonds since the depths of the 2008-started crisis, as the central bank races to stop the current euro-region debt crisis from pushing Britain back into recession.
To date, quantitative easing, which is what the Bank of England and Federal Reserve have done by buying their respective government’s bonds, has had no effect on job creation or economic growth. The action of buying government debt serves two purposes: 1) it insures there is a buyer for the debt (in case foreign investors, who buy most government bonds, get cold feet); and 2) it helps push domestic interest rates down.
However—and there is always a “however”—there is a big negative to central banks buying their own country’s government bonds. The money to buy the bonds needs to be created. In the old days, the printing presses would just print more fiat currency. These days, I believe the money supply is simply expanded electronically.
The problem with more and more money in the system is that the money being “printed” brings in more supply, and as per Economic Analysis 101, the more of something there is in supply, the lower the demand. In the case of fiat currencies, the more the supply, the more paper currency is needed to buy goods and services, and that’s how we get inflation. I believe this is exactly what the 10-year bull market in gold bullion has been telling us…rapid inflation ahead.
Where the Market Stands, Where it’s Headed:
Stocks are making their anticipated comeback from a state of being severely oversold.
I continue to believe we are in a bear market rally that started in March of 2009 and that this bear market rally will bring stock prices even higher before it’s over.
What He Said:
“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures, and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

Stock Market Update: Selling Capitulation in Place

Stocks plummeted over three percent at the open on Thursday, as the selling capitulation held despite several up days due largely to the oversold technical condition.

My investment guidance is to stay on the sidelines and wait for a base to form before entering into new positions. High frequency trading, specifically on the short side, could make the selling worse, as we have seen in the past. The stock market is dangerous.

Driving the bearish sentiment is increased concern towards the slower growth and debt issues in Europe, along with weak jobs and inflation data domestically.

The worrying about Germany’s sluggish growth is conjuring up fears of another potential recession if the top country cannot reverse the situation. France is also slowing. There are also concerns that the major European banks with exposure to bad debts around the weaker European countries will be in trouble, which could trigger a financial crisis.

Morgan Stanley cut its global GDP forecast for 2011 and 2012 and added that the U.S. and the eurozone were “dangerously close to a recession.” Not exactly an endorsement. This tells me that the S&P downgrade of U.S. credit may have been the correct call.

And making matters worse was a jump in the headline Consumer Price Index (CPI) to 0.5% in July, above the 0.2% estimate and the 0.2% decline in June. Excluding food and energy, the core CPI was in line at 0.2%. This, along with a rise in the Producer Price Index (PPI), is worrisome.

The current sentiment does not look positive. In this country, we have the massive debt, the credit downgrade, stalling growth, high unemployment, and weak housing.

The charts continue to be negative, with a bearish death cross. Oil is also showing this. The near term is ominous. Be careful, as there is a lack of confidence in buying.

The near-term technical view remains BEARISH, as the key indices trade well below their respective 50-day moving average (MA) and 20-day MA on relatively weak Relative Strength.

The NASDAQ, S&P 500, and Russell 2000 continue to display a bearish death cross on their respective charts, an indication of potentially additional losses.

The downside risk remains extremely high and bearish.

I continue to sense that gains will not be sustainable. Until there is firm buying support and a base formation on the charts, it may be worthwhile to buy after a big dip and sell on a bounce. In other words, trade the current volatility.

The best call at this time continues to be gold. The October Gold broke $1,800 to a record $1,819 on Thursday morning. The chart looks bullish on strong Relative Strength. There is a golden cross on the chart, with the 50-day MA of $1,591 well above the 200-day MA of $1,467. I feel that gold prices will continue to edge higher, especially if the U.S. economy falters and another recession surfaces.

The best strategy for risk-averse traders is to protect via put options.

Again, you may want to be careful when buying on the current weakness. To be safe, stay on the sidelines.


Gold Stock Market Update: Selling Capitulation in Place

Investing in Gold: Why it’s Still One of Your Top Options in Risky Times

Greece needs more money to pay for its previous loan. Ireland is in financial chaos. Portugal and neighbor Spain are not on stable grounds and could need help. And then there are Italy and Belgium. The European Union is in trouble. Germany and France are helping to pay for the misfortunes in these other countries. Europe is facing significant growth and debt issues.

Then you have the rising inflation in China, where interest rates are edging higher. In China, inflation surged to 5.5% in May, the highest level in about three years. The Chinese central bank has increased the bank reserve ratios in an effort to stall lending. I also expect another interest rate increase to come, the fifth since October 2010. Slowing in China will have an impact on economic growth and other global economies that deal with China, including Europe, India, and the U.S.

Domestically, you have a national debt of over $14.0 trillion and a trillion-dollar deficit. There is an effort to lift the debt ceiling in order to spend more. But many states are struggling to make ends meet and are looking at severe cuts in their state budgets.

Given all of this risk, you should be investing in gold.

Gold is considered a safe-haven play versus that of silver. Investing in gold is a prudent move when the overall market risk rises, like what we are currently witnessing.

On the demand side, China is a significant buyer of gold. This is expected to continue, as the country hoards physical gold in its reserves. India is also a major buyer.

Gold is a limited resource that needs to be found and mined. There is a certain amount of global reserves in the ground, but, after that, there needs to be more exploration.

Gold has rallied in each of the last 10 years and shows a beautiful bullish price chart. My gold advice would be to accumulate gold on weakness.

On the chart, the August Gold traded at a record high of $1,577.70 on May 2. The current chart looks bullish on above-average Relative Strength. There is a “golden cross” on the chart, with the 50-day moving average (MA) of $1,517 well above the 200-day MA of $1,411.70.

Some pundits have suggested a $2,000 target on gold over the next few years. I even saw a staggering $5,000 price target on gold. Now, the latter may be the extreme, but I feel that gold prices will continue to edge higher, especially if Europe falters.

In the current climate, gold is the best bet, while silver continues to be a trading commodity.

Buy a mixture of exploration-stage gold players and small to large producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers.


Investing in Gold Stock:

Economy: Michael’s Top Seven Reasons to Worry

In my daily writings, my goal is not to continuously be the bearer of bad news. When it comes to the economy, my goal is to educate my readers as to the severe structural economic problems the U.S. faces in the hope that more awareness of the issues will help my readers prepare their portfolios for the inevitable hardships that lie ahead.

Most Americans go along their merry way, oblivious to the mounting economic challenges facing America. I assume that, since you and hundreds of thousands of others read this column daily, you do not want to be in the “merry oblivious group.” You want to know what’s really going on with different aspects of the economy and how they will ultimately play out for or against you.

The following are seven major problems facing the U.S.:

1. Foreign Ownership of America

Ten years ago, foreigners owned 20% of U.S. Treasuries. Today, they own between 40% and 50%. If we go back through history, when we see past countries exposed to such dependence on foreign investment, the debtor nation (in this case the U.S.) has eventually faced sovereign debt problems and high inflation.

2. Price Action of Gold

The price of gold has risen 413% in less than 10 years and, during that 10-year period, it has failed to face a major correction in its price advance. The spectacular but steady rise in the price of gold bullion is a leading indicator of either a collapse in the value of the U.S. dollar or rapid inflation or both.

3. The Fed

As blunt as I can be, and in a nutshell, here’s my opinion: The Federal Reserve’s printing press has been supporting the economy since March of 2009. At the end of this month, the Fed says it will stop its QE2 program—basically a fancy name for printing money, taking that money and buying U.S. Treasuries. I have read various reports issued by analysts and economists. Depending on which report I choose to believe, the Fed has been buying about 50% of the Treasuries issued by the government under QE2. Who will buy these Treasuries if the Fed stops buying them? Scary thought.

4. Debt

The U.S.’s budget deficit this year will be in the $1.5-trillion to $1.6-trillion range. Our debt ceiling (the amount the U.S. can legally borrow) is here and it’s $14.3 trillion. Only nine years ago, the national debt was $6.0 trillion. In less than a decade, our national debt has gone up 140%. But the official national debt numbers we hear do not include entitlements to U.S. citizens and unfunded liabilities. Include these and our total debt is in the $70.0-trillion to $100-trillion range, again depending on which analyst report you believe. The official national debt is expected to increase another $6.0 trillion by the end of this decade.

5. Government Gone Too Big

Under the Obama Administration, the government has only gotten bigger. Between 40% and 45% of households in the U.S. receive some form of government support. Over 30 million Americans use food stamps. And, of course, the government is the biggest employer in the country. Social Security and Medicare—those expenses are huge for the government. But conveniently, they are not included in the government’s total debt, as they are both unfunded expenses. The government took over Freddie Mac and Fannie Mae during the credit crisis. Since these two entities owned or guaranteed half the residential mortgages in the U.S., does this mean the U.S. government now owns or guarantees half of all residential mortgages in the U.S.?

6. U.S. Dollar

Since June of 2010, less than 12 months ago, the U.S. dollar has declined 16% against a basket of six major world currencies. The devaluation has been steady and slow. Frankly, considering all the debt the U.S. has piled on, I’m surprised that the U.S. dollar hasn’t simply collapsed. Maybe it’s being supported. I don’t know; I’m just a writer. But I have studied history. And I can tell you that no superpower has thrived as its currency has devalued. In the case of the U.S., the situation is dire—the U.S. dollar is the reserve currency for 70% of world central banks. If they all dump the dollar, the repercussions to the U.S. economy will be insurmountable.

7. House Prices

The average price of a home in the U.S. has declined 33% in 20 major cities from their 2006 price peak, according to the S&P/Case-Shiller Index. It will be years before the housing market recovers…a major impediment to the U.S. economic recovery.

Yesterday, at a conference in New York hosted by Standard & Poor’s, Robert Shiller, co-founder of the S&P/Case-Shiller House Price Index, was quoted as saying that he would not be surprised to see U.S. house prices decline another 10% to 25% over the next five years. Shiller noted that, in Japan, housing prices fell for 15 years after Japan’s property bubble burst in 1990.

For eight consecutive weeks now, the bellwether U.S. 30-year fixed mortgage has dropped, and consumers are still not interested in buying houses.

A 30-year fixed U.S. mortgage today costs 4.49%. Last year at this time, it was 4.72%. The record low was 4.17% in November of 2010 (Source: Freddie Mac).

If the 30-year mortgage rate in the U.S. fell to three percent, would buyers surface? I doubt it. Consumers have no faith in the housing market and the inventory overhang is unprecedented. Just when you think the housing market can’t get any worse, it will get worse.

Based on the above, I’m sure you can see why I’m so concerned about America’s future and my kids’ future. American is no longer the industrialized leader it was following World War II. We face severe economic problems in the years ahead; hence you see why I’m long-term bearish on the stock market.

Next week, I’ll tighten the time frame and give you my more immediate reasons as to why I believe the U.S. economy will soon fall back into recession. Today’s U.S. economy…it’s looking very similar to me to the Japan economy of the 1990s.

Where the Market Stands; Where it’s Headed:

Stocks broke through their longest losing streak since 2009 yesterday. Although I was disappointed the market didn’t end on its high for the day, the market is putting in a base here.

I’d be worried if the Dow Jones Industrial Average fell decisively below the 12,000 level (12,124 was the opening this morning), but until then, the “tired” and “long-in-the-tooth” bear market rally presides.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe that only a few of my readers and a small fraction of the general public have taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.


Top Seven Reasons to Worry in Gold Stock

Gold Remains the Story, as the Dollar Keeps on Sinking

In recent trading sessions, gold has kept up its steady upward pace, while silver rose to a 30-year high and palladium hit a nine-year high on Monday this week. The driving forces behind precious metals’ performances are simple to explain—the dollar is sinking and the demand for alternative investments (to money, mind you) is surging. As evidenced by the U.S. Dollar Index, which is a six-currency yardstick of the dollar’s strength in international markets, the Index has dipped further on a widely expected decision by the Federal Reserve to unleash “QE2,” another neat abbreviation for the second round of quantitative easing.

The main goal behind QE2 is maintaining interest rates that are low in order to incite organic growth. But how we are supposed to have organic growth at the expense of the world’s reserve currency remains a mystery. In recent trading sessions, gold responded to this conundrum by having both its futures and spot prices trading strongly above the old resistance level of $1,300 per ounce.

As the dollar weakness continues, so does the dip-buying. The latter is triggering surges in demand for precious metals, as investors, both large and small, continue to focus on protecting whatever wealth they have left after the crash of 2008 and the recession of 2009. So far this year, precious metals have posted significant gains due to most central banks around the world insisting on low costs of borrowing, so that consumer spending should receive the boost it has needed.

To illustrate, for the nine months of 2010, gold has gained 24%, while silver has advanced 48% and palladium even more, surging 60%, compared to their 2009 year-end levels. In addition, precious metals have outperformed global equities, treasuries and most base metals. As a by-product, exchange-traded funds where precious metals have been the underlying assets have also seen significant surges in investment.

Perhaps these statistics collected by Bloomberg will help in putting things into perspective. For 2009, the global aluminum industry had generated revenues of $50.2 billion, which represented a compounded annual growth rate (CAGR) of only 2.1% over the period from 2005 to 2009. In addition, the global base metals market’s aggregate revenues for 2009 were $172.5 billion, generating a CAGR of 5.1% for the same period from 2005 to 2009. Furthermore, the global material sector had total revenues of $6.87 trillion in 2009, which represents the same growth rate of 7.1% compounded over the same period. And, the global coal and consumable fuels market recorded total revenues of $367 billion in 2009, which represents a CAGR of 10.3% for the period from 2005 to 2009.

As for gold, the global gold market recorded total revenues of $73.5 billion during 2009, which represents a CAGR of 20.1% for the period from 2005 to 2009. And, although gold may be trailing behind silver and palladium so far in 2010, note that the global precious metals and minerals market, which excludes gold, has generated total revenues of $32.3 billion in 2009, representing a CAGR of a modest 4.4% over the period from 2005 to 2009.

Whichever way you look at it, the statistics don’t lie. Investors see gold as a safe haven, as a viable alternative to money and as a way of dealing with global volatilities that have certainly changed the game for many since the crash of 2008. True, gold will have short-term ups and downs; but, in the long term, the threat of inflation and more volatility is almost palpable and likely to keep the secular bull market in gold going for the foreseeable future.
Gold Stock Market

Simple Advice: If You Can’t Buy Actual Gold, Invest in Gold Stocks

Since early 2009, gold is up 45%, currently hovering around $1,300 an ounce. Caught in the brushfire, towns in which gold mining companies, large or small, have made their home are displaying the classical symptoms of a boom: rising home prices; unrelenting construction; insatiable demand for skilled workers; and just an overwhelming sense of optimism that things are finally changing for the better.

One such region nests in Ontario, Canada; the province’s northern gold belt, along which many long abandoned mines are going through a renaissance of epic proportions just because investors have finally come to their senses and realized that gold is the only true safe haven against global economic instabilities and the ever-weakening U.S. dollar.

According to Brock Greenwell, a statistical analyst with Ontario’s Ministry of Northern Development, Mines and Forestry, “I’ve been here a long time and 2010 is looking like a record year for gold exploration. It’s unprecedented.”

According to the latest mining statistics out of Ontario, there are 12 gold mines operating in the region, with four more ready to commence production in 2012. Considering that operating costs by mining companies for 2010 are likely to hit $620 million, compared to $389 million spent last year, it is more than likely that more new mines will come online in the near future. As Greenwell put it, “It’s an absolute boom. There are 40-plus companies here at any given time.”

So, who is there “at any given time?” Canada’s Red Lake gold belt, located about 500 kilometers northwest from Thunder Bay, is considered one of the world’s richest high-grade gold regions. For example, Goldcorp (NYSE/GG) has its blockbuster Red Lake mine there, which, along with adjacent complexes and exploration projects, employs close to 1,200 people. There is also Rubicon Minerals (AMEX/RBY), known for making significant capital investments in its Phoenix Gold Project — 60.0 million dollars at the last count — located in the Red Lake gold zone where the company owns about 65,000 acres of prime exploration property.

At the same time, small towns in and around the golden belt are barely keeping up with the demand, from housing to infrastructure to labor force. They are so unprepared for the boom that they don’t even have an adequate tax structure to fund everything that the Red Lake gold mining industry requires. Yet, regardless of the municipal growth woes, gold exploration and development is not abating. In addition to the already operating mines, new drilling technologies, capable of going deeper than ever before, are now unearthing new ore bodies on old and often abandoned gold properties.

Clearly, if there was a star on the dark sky after the crash of 2008, it was gold. In the short and medium terms, you would be hard-pressed to find an analyst who is not bullish on gold. But not many will commit to an opinion on gold in the long term.

Here is what I think. I don’t even have to wish for financial trouble to arise somewhere else in the world. The mess we have got ourselves into in the U.S. will take years to untangle. The financial and credit crisis has deep roots, the pulling of which could take a decade, if not longer. Adding fuel to the gold’s flaming fury is the fact that the U.S. must keep printing the money to keep its head above water. So, if anyone would ask me if I’m bullish on gold in the long term, I have two words: “You bet!”


Gold Stock Market