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

The Gold Mining Business Model’s the Best There Is for Any Industry

The economic news out there still isn’t great, but the stock market doesn’t seem to care. Equity investors seem only worried about first-quarter earnings and the outlook for the numbers remains very bright.

Also looking good in this market are precious metal stocks, as spot prices remain very strong. This is a sector that needs rising spot prices for stocks to keep advancing, but the money continues to tumble in if you’re a gold producer. In fact, the business model is so good that most growing producers don’t know what to do with all their excess cash (what a great problem to have!).

As an example of the kind of profitability you can find in the precious metal sector, Avion Gold Corporation (TSX/AVR) is but one junior mining company that’s cashing in due to strong gold prices.

Avion Gold is a junior Canadian gold miner with exploration and production facilities in West Africa. The company holds 80% of the Tabakoto and Segala gold projects in Mali. Avion Gold announced strong earnings of 18.63 million dollars ($0.05 per basic and diluted share) for the three months ended December 31, 2010. This compares to net income of 3.97 million dollars, or $0.02 per diluted share, generated in the same quarter last year.

According to the company, it sold 27,908 ounces of gold at an average realized price of $1,370 per ounce, which represents a 10% increase over the average realized selling price of $1,234 per ounce in the previous quarter. Gold revenues were 38.2 million dollars, compared to 14.2 million dollars in the comparable quarter of 2009.

Where I’m from, a business that sells 38 million dollars’ worth of goods and generates over 18 million dollars in profits on those goods is really doing something right. Avion Gold produced 26,090 ounces of gold in the fourth quarter of 2010 at a total cash cost of $520.00 per ounce. For all of 2010, the company generated record earnings of 31.5 million dollars, or $0.09 per share, compared to 2.6 million dollars, or $0.01 per share, in the prior year. Total revenues were 115.3 million dollars compared to 33.6 million dollars in 2009 and total production grew to 87,631 ounces of gold. This year, Avion Gold expects to produce about 100,000 ounces of gold and the company is still predicting production of 200,000 ounces a year in 2012.

This gold stock is just one in a large universe of junior mining companies that are making money hand over fist with gold prices over $1,000 an ounce. It’s a great business model and it’s likely to stay that way for a considerable period of time.

Investing in gold has always been a risky business, because you can’t control how much gold is in the ground and what’s going to happen to the price of the commodity on the open market. All you can do as an investor is play the market as it is. In my mind, however, it’s no different than investing in a technology company. The risks are the same and so is the unknown.


Which is the best business in Stock Market?

The Stock Market: What’s Really Happening with It

My take on what happens in the financial markets and what you hear from reporters and see in the media are two very different things. I guess you know that or otherwise you would not be reading my column.

The facts are the facts. Since the crisis in Japan hit a week ago, the Dow Jones Industrial Average has fallen 3.2%. But if we look closer, we see that North American stock markets started declining back on February 18, 2011—that’s when the Dow Jones hit a new record high for the bear market rally.

My opinion is that profit-taking (who can blame investors, stocks were up almost 100% since March 2009) was already underway. The earthquake in Japan accelerated the decline in stock prices not because of the damage to the Japanese economy, but for very different reasons:

The stock market has adjusted itself lower in the expectation that Japanese investors will pull funds out of North American stock markets and bond markets, as money is repatriated back to Japan to help pay for rebuilding the country’s devastated regions.

When the Kobe earthquake of 1995 hit, Japanese investors sold $30.0 billion in U.S. securities in the aftermath of that natural disaster. Depending on which news report you believe, the damage in Japan from last Friday’s earthquake is pegged at over $200 billion.

Japan is the second largest holder of U.S. Treasuries, second only to China. Japan holds about $886 billion in U.S. Treasuries (Source: “Rising yen adds to Japan’s woes,” Globe & Mail Mar.17, 2011). If Japan stops buying our debt because their needs have changed, and they start selling U.S. securities to bring money home for rebuilding the country, the ramifications in the U.S. will be higher interest rates.

Add to this the Federal Reserve’s comments earlier this week that they will not expand their $600-billion QE2 bond purchases, and one needs to seriously ask: if Japan will reduce its buying of U.S. Treasuries and the Fed will not continue buying them, who will buy the U.S. Treasuries we so desperately need to sell in order to finance our debt?

In light of the above events, it’s a wonder that the stock market has held up so well over the past week.

Michael’s Personal Notes:

I tried to buy more gold-related investments yesterday like I did on Tuesday, but gold prices started to rise Wednesday and they are continuing to rise this morning. Hence, I’ll sit tight for now. Hopefully we will see some more weakness in the precious metal prices, which I would view as a buying opportunity.

For those readers who follow technical analysis, my charts show good support for gold at $1,340 an ounce, about $60.00 below where it is trading today. I would be a buyer of more gold-related investments on any pullback towards $1,340 an ounce; unfortunately, this may not happen. Over the past 12 months, gold bullion is up $273.00 an ounce.

No bull market goes up in a straight line; no bear market goes down in a straight line. The bull market in gold is no exception. Since 2002-2003, I’ve followed a policy of buying gold-related investments on gold price pullbacks.

Where the Market Stands; Where it’s Headed:

Okay, Michael; what’s it going to take for you say that the bear market rally in stocks is over?

Technically speaking, the low point for the Dow Jones Industrial Average was 6,440 on March 9, 2009, when the bear market started. The high point was 12,391 on February 18, 2011. The mid-point between the high and low is 9,415. The bear market rally in stocks would have to break below 9,415 to be officially over. This morning, the Dow Jones Industrial Average trades at 11,613.

Whether you call it an overreaction to the Japan crisis or simple profit-taking, the stock market is obviously taking a breather. But until the market proves me otherwise, I see the bear market rally in stocks that started in March 2009 as still in force.

Bear market rallies usually end in the midst of investor euphoria. We haven’t seen that yet.

What He Said:

“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher—because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi, PROFIT CONFIDENTIAL, June 2, 2005. Michael recommended Google stock as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached $700.00 U.S. per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment.
What’s Really Happening with Gold Stock Market

Stock Market Correction Phase Over? Spot Price of Gold Looks to Be Bottoming

The third quarter has finally closed…and thank goodness. If you weren’t short the stock market, you were feeling its pain. The broader market basically fell off a cliff in the last week of July and first week of August. The S&P 500 Index has been trading in a tight range ever since around the 1,175 level and the near-term trend seems to be more of the same. If there is to be any breakout to the upside, we’ll need some hardy news; likely regarding the sovereign debt issue in Europe or new policy action from the Federal Reserve. While the earnings picture looks good, it’s hard to imagine spectacular results from this economy.

Also notable late in the third quarter was the price correction in commodities. It only seems reasonable that reduced expectations for global economic growth should be felt commensurately in the prices for raw materials. The spot price of gold is mimicking the recent trading action of the stock market and it’s unclear when it might resume its upward trend.

However, I do think that the medium- to long-run upward price trend in gold is intact and this is due to a combination of fundamental factors that remain in force. And we can’t forget that, while the Main Street economy isn’t producing much growth, inflation is still out there stalking consumers’ ability to employ purchasing power.

I think the current environment is an opportune one to consider gold investments and other precious metals like silver. We’re now in the price correction that precious metals deserved. The top stocks for speculative investors remain gold miners and it’s the one industry that is generating double-digit growth in revenues and earnings.

Long-term, income-seeking investors can be buyers in this market; but, of course, expected returns have been reduced. I think a blue-chip investor would be lucky to receive a 10% return on investment in the age of austerity. It’s the new reality of the economy and it’s going to last for quite a long time.

If you want to see something interesting, pull up a five-year stock chart on SPDR Gold Shares (NYSEArca/GLD). This is the gold exchange-traded fund (ETF) that’s very popular with both individual and institutional investors. Looking at the chart, you’ll notice a very consistent and defined upward trend in the value of the ETF. You’ll also notice the recent spike to a record price high of $185.00 and the subsequent price correction to its current level of around $157.00 per share. In my mind, this price correction has now fully returned the SPDR Gold Shares ETF to its primary trend and is signaling a technical bottoming out for gold. Accordingly, now seems like an appropriate time to consider new positions in these kinds of assets.


Spot Price of Gold Looks to Be Bottoming