Today’s Stock Market: Making Money by Copying Last Year’s Action

There’s no doubt that it’s been a choppy August and September for the stock market. But I want my readers to look at these facts:

The Dow Jones Industrial Average opened 2011 at 11,557 and opens this last trading day of September at 11,153, down 3.6% for 2011 so far.

At the beginning of 2010, the Dow Jones Industrial Average opened the year’s trading at 10,500. By September 30, 2010, the Dow Jones Industrials was trading at 10,000 after a rocky August and September—a decline of 4.8%.

In September of 2010, bearish sentiment amongst investors and stock advisors was at its lowest level of the year.

Today, bearish sentiment amongst investors and stock advisors is at its lowest level of 2011.

There’s a striking resemblance between 2010 and 2011 stock market action and I see this pattern continuing. Between September and December of 2010, the stock market rallied, ultimately leading to a 10% gain for stocks in 2010. On the backdrop of extreme bearishness, just like September of 2010, I believe stocks will rally from today’s level to end the year higher.

Yes, stocks could move 10% higher from where they are today to the end of 2011. Investors will have to gauge if the upside potential is worth the risk. Where do I see the greatest bargain? With gold bullion having corrected 15% from its recent price high, with the stocks of junior and senior gold mining down even more than 15%, I see the best bargains, the greatest upside potential, in the gold mining sector.

Michael’s Personal Notes:

Tomorrow, the longest-serving policymaker at the Federal Reserve, Kansas City Federal Reserve Bank President, Thomas Hoenig, retires.

In his last speech in office, Hoenig said that the Fed’s actions of trying to stimulate the economy by artificially keeping interest rates low will ultimately “buy problems.”

The Federal Reserve has kept short-term interest rates near zero for years now. The Fed has also bought more than $2.0 trillion in securities. Hoenig compared these actions to short-term bandages for the government’s failure to cut its debt to cut spending.

I’ve shared this opinion with my readers since the economic bust started: making the government bigger, having the government spend more at the cost of increasing the national debt, is not the answer. I’m happy an official such as Hoenig has the courage to speak his mind about what his contemporaries are doing…and why it isn’t working.

When President Obama leaves office, he will have increased our national debt by about $5.0 trillion—the greatest four-year increase in the national debt ever.

Where the Market Stands; Where it’s Headed:

A bear market rally in stocks started in March of 2009. This bear market rally that prevails today has the potential to take stock prices higher before the rally finally expires.

What He Said:

“Over the past few weeks, I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy and the stock market. There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.” Michael Lombardi in PROFIT CONFIDENTIAL, March 22, 2007. At the same time Michael wrote this, former Fed Chief Alan Greenspan was quoted as saying, “the worse is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”


Gold Stock Market

Stock Picking for New Opportunities—What It Might Take for Another Major Advance

Right now the broader market is taking a well-deserved break after a pretty successful first-quarter earnings season. This market needs a new catalyst if share prices are going to advance and there isn’t one present just yet, so stocks will trade on the economic news of the day. So far this month, the economic data are generally positive, but not overly so. I think we’re going to be in a slow growth environment for quite some time.

With this backdrop, it’s fair to say that there won’t be any major tailwinds for equity investors in the near future. It’s a stock pickers’ market that’s due for a correction. It is well-deserved, however, and we have to roll with the action.

In my economic analysis, there weren’t very much home runs in the earnings department. The economy just isn’t robust enough to produce some major outperformance. I would say that, generally, large-cap results were decent in the first quarter and the outlook for the second quarter is about the same. For smaller companies, which are still reporting their numbers right now, there hasn’t been much in the way of outperformance either, although several mining stocks came out with excellent financial growth due to strong spot prices. This was expected by the marketplace and even the most robust miner is selling off right now.

The stock market’s been due for a break for quite a while and it’s natural for this to occur between earning seasons. As an investor, I would be in no rush to take on new positions in this market, but I would be keeping a close eye on gold positions. This is long-term trend that’s not going away.

A number of very solid small-cap gold mining stocks are retreating in this market and this is a sector that’s ripe for some strong trading action later in the year. As I’ve been writing, I still feel that the precious metal sector represents some of the most attractive growth opportunities for equity investors and that any major consolidation or correction in the sector would be a great entry point for new positions.

If there isn’t any new catalyst on the upside, there isn’t one on the downside either. This is a stock market that will likely drift over the near term. It’s called stock market malaise and it reflects a certain wariness as to whether economic growth is sustainable this year. Institutional investors remain unsure.

Stock picking over the very near term is going to be difficult as the broader market drifts. There’s no need for any major action just yet. I don’t see the equity market advancing in any meaningful way until we get to second-quarter earnings season. The current break has definitely been earned.


Gold Stock Updates

U.S. Debt Ceiling: The Least of Our Real Problems?

As I read the financial newspapers and the popular Internet sites this morning, I realize that if there is one thing I hope I achieve in my own daily writings, it is to make my readers wary, almost suspicious of what the media is telling them.

Here’s what got me thinking like this…

Yesterday, the U.S. dollar hit a fresh, new three-year low against a basket of six other major world currencies. The media was quick to point to the bickering amongst the Democrats and the Republicans (over raising the U.S.debt ceiling) as the reason the dollar was falling to a new record low. Wherever I looked this morning, the news sites were basically saying, “Washington can’t agree on increasing the debt ceiling, the deadline is closing in, and the dollar is falling because of all this concern.”

But that’s where reporters have it very wrong, as far as I’m concerned.

Let’s take the debt ceiling issue off the table for a moment and let’s assume Washington passed a new debt ceiling limit of $16.0 trillion or $17.0 trillion. Would the greenback still be falling off the cliff in value? Of course it would.

We are passing a law that says the government can borrow even more money. The greater the debt of a nation, the weaker its currency. We are actually better off if the government doesn’t pass a new debt ceiling and it starts spending within its means.

I don’t want my readers to buy the propaganda the media spits out. At the very least, I want my readers to be aware of the fact that most people reporting the financial news today know very little about finances or economic analysis.

The following are my five core beliefs. I hope my PROFIT CONFIDENTIAL family of readers will benefit from them.

The devaluation of the U.S. dollar that started in late 2008, early 2009, will continue as: (1) the U.S.economy deteriorates further; (2) the national debt level continues to rise; and (3) the Fed prints more money.

Inflation will become a real problem in America thanks to years of monetary policy that promoted artificially low short-term interest rates and the hyper-printing of U.S. dollars.

Gold prices will rise on the back of a weak greenback and too many dollars in the system and as inflation comes back.

The euro is as done as the dollar. Either Germanywill eventually kick the weaker countries out of the euro or it will adopt its own currency.

The stock market will eventually test its March 9, 2009, lows, as Phase III of the bear market sets in.

Where the Market Stands; Where it’s Headed:

The next couple of days will bring the close of July 2011. And with another month behind us, the bear market rally in stocks that started in March of 2009 will have lasted 29 months. A tremendous feat? Not really. As I have written before, the 1934 to 1937 bear market rally lasted 35 months.

I remain steadfast in my opinion. We are in phase II of a bear market. During this phase, the bear brings stocks higher in an effort to lure investors back into them. The easy money in this bear market rally has been made. But there still is upside potential for stocks, albeit it’s limited.

While the media is obsessed with theU.S.debt ceiling limit, the Dow Jones could easily continue to ride the “wall of worry” higher.

What He Said:

“The Dow Jones Industrial Average, the S&P 500 and the other major stock market indices finished yesterday with the best two-day showing since 2002. I’m looking at the market rally of the past two days as a classic stock market bear trap. As the economy gets closer to contraction, 2008 will likely be a most challenging economic year for Americans.” Michael Lombardi in PROFIT CONFIDENTIAL, November 29, 2007. The Dow Jones Industrial peaked at 14,279 in October 2007. A “sucker’s rally” developed in November 2007, which Michael quickly classified as a bear trap for his readers. By mid-November 2008, the Dow Jones Industrial Average was at 8,726.


Gold Stock Price

Economy and Debt: America on the Brink?

I’ll try my best not to be sarcastic this morning…

But what happened to all theU.S.jobs we were promised were headed our way? The Labor Department reported this morning that only 18,000 new jobs were created in June 2011, the lowest monthly job growth in nine months. The median Bloomberg estimate called for 105,000 new jobs for June.

The unemployment rate; it’s going the wrong way, up this morning to 9.2%—the highest level in six months.

All those trillions spent to stimulate the economy, all those “too big to fail companies” that were bailed out. Did all that money really make a difference? Sure it did. It ballooned our national debt to $14.3 trillion. Now the Obama administration has new ammunition. It can go to Congress and say, “See, jobs are not being created; the economy is so fragile, we need to spend more money to stimulate it. Increase thatU.S.debt ceiling.”

It is just me, or is all this starting to sound more and more likeJapan1991-2000?

According to Canada’s Globe & Mail (7/8/11), theU.S. economy needs to add 125,000 to 150,000 jobs a month just to keep up with people entering the labor force for the first time. We are nowhere near that type of job growth.

What happens next? My thinking leans towards the Fed continuing to increase the money supply, keeping short-term interest rates artificially low, and coming up with a new version of QE2 (all which are inflationary measures). No wonder gold prices are jumping higher again this morning.

Why did I start today’s issue by saying, “I’ll try my best not to be sarcastic this morning?” Many economists believe that the way to solve our economic issues, the way to stimulate the economy, is to have the government throw taxpayers’ money at the problem.

From the early days of the credit crisis, I have been in that other group of economists; the minority that believe that economic contractions should follow their natural path, as economic expansions do—unabated by government intervention that eventually leaves its citizens with an overabundance of debt.

Let’s look at it this way. During the real estate and mortgage boom years of 2003 to 2006, did the government do anything to slow the boom down? No. It actually spurred the boom on by reducing interest rates to historical lows. Now that the economy has gone bust, we are throwing money (we don’t have) at the problem. It’s an ironic situation.

Michael’s Personal Notes:

Talking about jobs…

Our neighbor to the north,Canada, a country with a population less than one-tenth of that of the U.S., reported this morning that it had created more jobs in June than the U.S.!

Canada created 28,400 new jobs in June (twice what analysts were expecting), pushing Canada’s unemployment rate down to 7.4%—the lowest jobless rate inCanada since 2009.

The Canadian dollar remains my favorite currency. I believe that, as the U.S. dollar continues to devaluate, the Canadian dollar will be a winner.

Where the Market Stands: Where it’s Headed:

We got to within 280 points of Dow Jones 13,000, and bang—the patheticU.S.job numbers report comes out, knocking stocks back down again.

In reality, the stock market could have taken it a lot worse today. Yes, it was a very poor June payroll growth number. Add that to continued woes inEuropethis morning with more pressure on the stock prices of Italian banks—and the market is taking the negative news in stride.

If this bear market was over, today’s bad economic news could have easily pushed the Dow Jones down 300 or 400 points. Hence my belief this is a stock market that very much wants to keep rising.

What He Said:

“There is no mixed signal about this: Foreclosures in the U.S.will continue to rise, the real estate market will get weaker, and the U.S.economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi, Profit Confidential, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.



Economy and Debt: America on the Brink?

Tonight: The Biggest Speech of His Life; What Investors Can Expect

Most Americans will be glued to the television tonight to see what the leader of the most powerful country in the world has to stay about his plan to get the economy going; in specific, to create jobs.

There is no doubt in my mind: President Barack Obama will be a one-term president unless he delivers on the promises he will make tonight.

The economic situation in the U.S. continues to deteriorate rapidly:

The “underemployment rate,” which includes part-time workers who want full-time work and people who have given up looking for work, sits at 16.2% in the U.S. right now.

Last week, the U.S. Conference of Mayors (which includes the mayors of 1,191 U.S.cities with a population of 30,000 or more each) called upon Obama and Congress to create major road and bridge improvement through some form of transportation bill.

More than 6.3 million households are past due by 30 days or more on their mortgages.

My bet is that Obama will push for huge job creation in the form of huge, multi-billion-dollar programs…infrastructure improvement and help with payroll tax. The Republican-controlled Congress will balk at raising personal taxes to fund these initiatives, so we are eventually talking more debt.

Many analysts are now expecting the Fed to unleash a new form of QE3. This will pump more money into the system as more dollars are printed. Let’s face the facts. The only way our politicians and the Fed know how to stimulate the economy is to spend more and print more money.

Both actions will continue to place immense pressure on the U.S. dollar. Is it any wonder that gold prices have been going through the roof? Does $3,000-an-ounce gold really sound unreasonable now?

Michael’s Personal Notes:

Talk about big numbers…

In a study for the Dallas-based National Center for Policy Analysis, a Boston University economics professor claims that the true debt of the federal government is $211 trillion.

According to Professor Laurence Kotlikoff, the government has been “incurring enormous unofficial debt and using fraudulent deficit accounting to keep these huge bills facing our children off the books.” Social Security and Medicare are two huge government liabilities not on the books of the government.

If Kotlikoff is right, with the Gross Domestic Product (GDP) of the U.S. at $14.0 trillion a year, it would take 15 years of all the GDP the U.S. creates to erase the $211 trillion in U.S. debt.

It’s very disturbing. If the government were a business, under section SFAS 158 of GAAP (Generally Accepted Accounting Principles), adopted in September 2006, it would be required to include on the balance sheet the full net value of pension assets and obligations, measured as the difference between the fund assets and the projected benefit obligation. A company does not have to show the full value of assets and the full value of liabilities—just the net of the two. The government is special—it doesn’t need to show its pension liabilities to the public.

Hence, when we hear that our “official national debt” is $14.5 trillion, it’s only the tip of the iceberg. Our true debt is 14 times that amount. It’s a U.S.debt crisis. How can the U.S. dollar sustain itself under this mountain of debt? It can’t. That’s what the rise in the prices of gold investments and gold stocks has been all about.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning down 1.3% for 2011. It is my opinion that the bear market rally in stocks that started in March 2009 remains intact. Despite this bear market being “long in the tooth” and tired, it still has life left in it. Stock market investment returns are limited at this point. The easy money in the stock market has been made (mostly in 2009). I estimate that the market could advance 10% from here on the upside before the bear finally retires this phase of its cycle.

What He Said:

“Bonds could now be a buy: Bonds rise in price when interest rates fall, as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates that the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in PROFIT CONFIDENTIAL, July 24, 2006. The yield on 10-year U.S. Treasuries fell from five percent in the summer of 2006 to 2.4% in October, 2011—doubling the price of the bonds Michael recommended.


Gold Stock Updates

Oil & Gold—Two Great Commodities Whose Prices Reflect the Fear in Financial Markets

The only trading action that seems to be working for long investors is in gold stocks these days. This isn’t a surprise, nor is it unexpected with the spot price of gold so high. Two more junior gold producers, AuRico Gold (NYSE/AUQ) and Northgate Minerals (AMEX/NXG), announced a deal to merge. The two juniors hope to create a new intermediate gold player and the expectation for production growth as a combined company is significant.

In this particular case, AuRico Gold is doing the buying. The company’s share price (which has almost doubled since the beginning of the year) appreciated swiftly to a recent 52-week high of $14.17 per share. Then the company announced the all-share deal to acquire Northgate. It’s a trend that we’re going to see more of over the coming quarters. With share prices lofty and bank accounts full, everyone in the gold mining business wants to bulk up before the party’s over.

The broader stock market’s trading action reflects the overall sentiment in the economy. Add in the fact that the month of September is often not a good one for stocks, and one could easily predict that the next several weeks are going to be difficult. The stock market isn’t expensively priced, but that doesn’t mean that it will be anytime soon. There’s a mini cycle going on in the stock market and it’s all about the revision of expectations for the future. Expected returns from stocks are going down big-time, as current economic data sink in. No doubt the stock market needs a major catalyst in order for it to advance. It’s unclear at this time what that catalyst will be. As is usually the case, the market will need a combination of factors to come together if it’s going to move higher in any sustainable fashion.

The S&P 500 Index did an impressive job of recovering from the 1,120 level. It clawed its way back to 1,200 and is now trying to balance itself out with the fears in the marketplace. The next major move could be anything. What’s likely in my view is that the trading action will very difficult until we get into third-quarter earnings. Any earnings warnings from corporations in this market will not be well received. The same goes for any changes in fourth-quarter visibility come reporting time. Everything now has a fragility to it—the economy, financial markets, and expectations for the future. The only exception is the market for gold; investors still view this specific asset as a haven, even though the spot price has already gone up dramatically.

The best near-term indicator for share prices continues to be the spot price of oil. A weaker oil price is exactly what the economy needs, but it also serves to illustrate declining sentiment about the future. Stocks won’t advance until the economic news shows some major improvement.


Oil & Gold—Two Great Commodities

The Biggest Bubble of Them All—Right Before Our Eyes

There’s an organization that’s been around for about 235 years. It’s more like a business today, taking in money and paying its bills.

After World War II, this business really got into high gear. It started exporting its goods all over the world. It actually lent money to its trading partners. Business was booming.

But then something happened. The business got too big. Too many managers were hired with their own agenda. The business started paying its people too much. Its trading partners caught on quickly, as they saw the big business getting bloated, and the trading partners started making their own goods.

The partners simply copied the manufacturing practices of the big business. And since the smaller trading partners had access to much cheaper labor costs, the small trading partners have become big suppliers over the past 20 years.

The big business went from being a company that lent money to its trading partners (customers) to a business that needed to borrow money from its suppliers in order to stay a float.

In regular business, it doesn’t matter if you have been around for 235 years. You go to a bank because you need money and, unless you meet the bank covenants, you will not be able to get a loan. This means that, unless you make money, you are out of business.

The big business I’ve described above is called the United States of America. It’s bankrupt. Its staff members, called politicians, spend more money than they take in. But, unlike a real business, the United States has a line of people (investors, domestic and foreign) who want to lend money to it.

And this is where this storyteller gets stuck. Why are people lining up to buy U.S. government debt? Would you invest your money in a 10-year bond that yields 2.2% per year (less than inflation) issued by an entity that has the world’s single biggest debt burden?

There’s an obvious answer. People are flocking to U.S. Treasuries because they see security in them compared to other government-issued debt. But, on the contrary, I see other governments implementing austerity measures to balance their budgets in two to three years. I fail to see this with the United States.

In this day and age, nothing is guaranteed. No, the U.S. will not file for bankruptcy or default on its debt. But it will pump the system with more U.S. dollars in a desperate effort to increase inflation—making the debt that investors and foreigners have bought worth less and less as time goes by.

Bill Gross, head of PIMCO, and the world’s biggest bond fund, was right when he said earlier this year that he was avoiding U.S. Treasuries because the returns could be risky. He was just too early in his opinion.

Never underestimate the length of time it takes to create a bubble, because we are living through one of the biggest bubbles ever created — U.S. Treasuries.

Michael’s Personal Notes:

Housing prices aren’t just falling in the United States…

This morning, it was reported that house prices in the United Kingdom fell in August the most they have in 10 months.

The Nationwide Building Society, based in Swindon, England, said that the average cost of a home in the U.K. fell about half of one percent in August from July. Most economic research reports on U.K. house prices for the remainder of this year are negative despite the prediction that the Bank of England will keep its benchmark interest rate at 0.50% until mid-2012.

The only major industrialized country left where housing is booming (yes, booming) is Canada. Canadian house prices continue to reach new record highs each passing month. In Toronto, Canada’s financial center, builders can’t put up condo buildings fast enough. Demand outweighs supply. Building cranes can be seen all over the skyline.

While economists in the U.K. have flatly blamed the slowing economies in the Unites States and major European countries for the U.K. economy stalling, Canada’s largest trading partner is also the United States. Add to that the fact that the Canadian economy actually contracted in the last quarter (negative GDP), and the only question that remains is not if, but when will the balloon pop for the Canadian housing market?

Where the Market Stands; Where it’s Headed:

As I had predicted, we closed out August in not-so-bad shape. The Dow Jones Industrial Average officially closed the eighth month of the year up half a percent for 2011. What started out looking like a catastrophe in the first couple of weeks of August was actually a buying opportunity.

I feel sorry for the thousands of investors who pulled money out of the stock market when the Dow Jones Industrials was having those 400- and 500-point daily drops. At the risk of sounding arrogant, I’m pleased we stuck to our guns, as many of our paid-for financial newsletters recommended buying equities when the Dow Jones Industrials fell below 10,800 in early August.

The bear market in stocks that began in March of 2009 enters its 31st month today.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe 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 at under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended by Michael’s advisories gained in excess of 100%.


The Biggest Bubble of the Gold Stock