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.

Visit:

Profit Confidential

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.
Visit:
Profit Confidential

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.


Visit:
Profit Confidential


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.


Visit:
Profit Confidential


New Fundamentals for Gold Stocks

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.

Visit:

Profit Confidential



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

Debt Crisis in Europe Highlights Continued Strong Fundamentals for Gold

It’s pretty difficult to get enthusiastic about the stock market with sentiment so focused on the sovereign debt situation inGreece. Even in the face of solid earnings expectations for the third quarter, investors are looking into the future and seeing slow economic growth, translating into slower earnings. It’s the perfect storm for equities and it makes choices for equity investors very limited.

The one sector that continues to stand out in my mind as offering the best risk-versus-reward scenario is precious metals, especially gold and silver. Both these commodities are experiencing a well-deserved correction and the fundamentals for higher spot prices remain intact. With investment risk very high in the equity market and so much uncertainty surrounding European banks and the euro currency, gold is going to be a key asset over the next several years.

And, even without all the turmoil surrounding sovereign debt in Europe, the fundamentals for gold are strong in the face of a huge increase in the U.S. money supply, inflationary pressures, and central bank demand for gold bars.

And don’t tell me that inflation isn’t an issue. The last time I checked, prices for things weren’t going down. Inflation jumped to three percent in the month of September in the 17 countries that use the euro currency, which was the highest inflation rate since October of 2008. And this is happening in a slow growth environment. I understand reduced expectations for global economic growth, but with the world awash in debt and countries stimulating their economies with increased money supplies, inflation is a very real threat and potential wealth destroyer over the next several years.

In any case, gold investments are one of the few asset classes that should outperform over the medium term and gold stocks should be on every investor’s radar screen.

The stock market is going through a tumultuous time right now, and has been doing so since the end of July. The S&P 500 Index just recently broke through its 25-day moving average and does not look healthy from a technical perspective. I wouldn’t be surprised at all if the Index hits 1,050 or even 1,000.

The saving grace over the near term should be third-quarter earnings, but any good news from corporations will be usurped by the debt crisis in Europe. Accordingly, equity investors will be well served by keeping a close eye on the spot price of gold and the opportunity for a new entry point. If everything comes apart in Europe, cash, gold and the U.S. dollar will be the marketplace’s only friends.
Strong Fundamentals for Gold Stock