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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