Retail sales in the U.S.are estimated to rise 5.1% year-over-year in January, but then post three successive down months, bottoming at 1.5% year-over-year growth in April before steadily rising from May to August, according to The Financial Forecast Center. But while this growth sounds promising for the retail sector, there are other pundits that aren’t as positive. Retail Metrics predicts retail sales to grow two percent in January versus 4.3% in January 2011.

In December, retail sales excluding auto contracted 0.2%, down from 0.3% growth in November. The January reading will be reported in a few weeks.

In the retail sector space, sales have been largely mixed, with discounters and big-box stores faring the best, as shoppers flock to Wal-Mart (NYSE/WMT), Target (NYSE/TGT), and Costco (NASDAQ/COST) stores, along with the popular dollar stores and the massive hyper-supermarkets.

The reality is that consumer spending drives GDP growth. The way consumers spend will likely dictate how the economy will fare in 2012. With consumer spending accounting for about 70% of the GDP growth in this country, it will be critical to get consumers to spend.

Job creation is the most vital variable for the retail sector. The weekly initial claims have fallen below the threshold 400,000 level for weeks. In December, 212,000 jobs were created. The January reading is estimated to show the creation of 168,000 new jobs, but this is not good. The unemployment rate stands at 8.5%, which is too high for a healthy economy and could strangle growth in the retail sector. The Fed estimates that the unemployment rate will hold above eight percent this year. Moreover, economists feel that the economy needs to create at least 500,000 new jobs monthly to drive growth. Of course, I do not expect this will happen until at least 2013.

A strong U.S. housing market is also critical for the retail sector, as homeowners tend to buy new furnishings, including many big-ticket items. This is not happening, as home prices continue to decline dragged down by continued high foreclosures and short sales where homes are dumped below the mortgage value. Just take a look at the stalling electronic and furniture sales.

The key Case-Shiller 20-city Index remains weak and shows price declines continuing across America. If home values decline, consumers will tend to hold back on spending; thereby impacting the retail sector.

The reality is that foreclosures are driving the buying and this does not reflect well for housing price appreciation. It may not be until 2013 until prices start to steadily rise.

Jobs, confidence, and higher home prices are needed to drive spending in the retail sector. Only under this scenario will there be sustained spending and economic growth.

General Motors Company (NYSE/GM), may be struggling with sales at home, but in China, consumers want GM cars! You can read my discussion in General Motors: China’s Top Foreign Automaker.

The buying in small-cap stocks suggests continued economy recovery in 2012. So far this year, the housing and manufacturing data are encouraging and point to renewal.

The European debt crisis continues to be a major risk factor. The talks between Greece and its creditors to reach a debt swap deal have yet to be done and there is some speculation the country will be allowed to have a form of controlled default. The problem is that this would likely send jitters through the eurozone and global markets and wreak havoc.

A positive January indicates an up year for stocks in 2012 about 78.3% of the time, according to the Stock Trader’s Almanac, albeit this failed to materialize in 2011.

And, while the upward advance is encouraging, you might recall that there was a similar start in 2011 that ended up in a mixed trading year, with tech and small-cap stocks negative.

While investor sentiment continues to be bullish and market breadth positive, the lack of mass market participation is worrisome and makes stocks vulnerable to downside risk in the event of bad news surfacing in the U.S. and globally.

The charts of the key stock indices are strong; the blue-chip Dow Jones Industrial Average is showing a bullish golden cross with the 50-day moving average (MA) holding above the 200-day MA. On Wednesday, the chart of the S&P 500 turned more bullish, with the 50-day MA breaking back above its 200-day MA, which could signal more gains ahead.

The top two performers, the NASDAQ and Russell 2000, are holding on to a death cross, but even this may turn higher if the buying bias continues.

Small-cap stocks look the strongest on the chart at this juncture and will trend higher should the economy continue to improve.

Small-cap stocks tend to fare well following a recession when the economy begins to grow. After the recession ended in 2009, the small-cap Russell 200 advanced 25.28% in 2010, easily outpacing the 11.02% and 12.74% return of the DOW and S&P 500, respectively.

Yet, despite the overall performance of small-cap stocks, Wall Street focuses on large-cap stocks and those where there are investment-banking fees available. The rest generally “fly” under the radar, being largely under-followed and, thus, by extension, largely undervalued.

My advice is to ride the upward moves, but to make sure you have put hedges in place to protect your gains. It’s also never a bad idea to take some profits.

Reverse mergers are currently out of favor and I expect more of the same this year, which I discussed in How 2012 Is Looking for Reverse Mergers.

One of the most important markets for Facebook will be China and India given the fact that the two countries account for a third of the world’s population.

In China, just take a look at the numbers. Imagine that China, which strived for socialism under Mao Zedong during the Cultural Revolution from 1966 to 1976, has now become the epicenter of the Internet world with demand growing at a staggering pace.

The number of Internet users in China is tops in the world, with a whopping 505 million on the Internet at the end of November 2011, according to the China Internet Network Information Center (CNNIC). The number of broadband users stands at around 15.51 million users, up 18.6% year-over-year. There are also over 340 million smartphone users.

In addition, about 58% of Internet users in China roam the Web via their cell phones, according to the State Council Information Office.

These are massive numbers and point to the staggering growth.

But what is impressive is that the Internet penetration rate is still low at 37.7% versus over 70% in the U.S., so there is still ample room to grow.

Facebook knows the massive potential in China and wants to dominate the social networking space there, but there will continue to be restrictions in the communist country. A few years ago, Facebook met government resistance when trying to expand in this country where the government tries to control the media, which sometimes unfortunately includes freedom of speech. The key to achieve success is developing alliances with Chinese companies and then working hand in hand to develop the market. Facebook enlisted Chinese Internet giant Baidu, Inc. (NASDAQ/BIDU) to expand its reach.

In the mid-cap space, a Chinese social networking play is Beijing-China-based Renren Inc. (NYSE/RENN). Renren operates a real-name social networking Internet platform in China with about 137 million activated users as of September 30, 2011. The platform allows users to connect with each other. Services include social networking, online gaming, social commerce, and business social networking.

It will be exciting to see how Facebook does in China; but one thing’s for sure: I expect social networking could be the next big thing if allowed to flourish.

Another area that I feel has tremendous growth opportunities in China is travel, which I discussed in The Super-hot Chinese Sector.

The charts of the key stock market indices remain strong, but only the blue-chip Dow Jones Industrial Average is showing a bullish golden cross, with the 50-day moving average (MA) above the 200-day MA. And, despite bullish near-term signals, the NASDAQ, S&P 500, and Russell 2000 are holding on to a death cross, in which the 50-day MA is below the 200-day MA.

A bullish event on the charts occurs after the key stock indices have peaked on three successive upward moves with lower peaks; stocks have broken higher and suggest more gains.

And, as I said, the light volume on up days is a red flag and indicates stock market risk. The end result is a bearish divergence forming between price and volume, adding to the stock market risk.

The European debt crisis continues to be a major risk factor. The talks between Greece and its creditors to reach a debt swap deal have yet to be done and there is speculation that the country will be allowed to have a form of controlled default. The problem is that this would likely send jitters through the eurozone and global markets, wreaking havoc.

My advice is to ride the upward moves in the stock market, but make sure you have put hedges in place to protect your gains. It’s also never a bad idea to take some profits.

The mining area continues to be positive in my view this year.

Metals are strong, with gold back above $1,700, while silver powered above $33.00. Copper also edged higher, hinting at an economic recovery, as the metal is used in many industrial applications and is often seen as a barometer on the global economies.

February Gold is at $1,725 and above its 50-day MA of $1,667 and 200-day MA of $1,642 on stronger Relative Strength. Gold is overbought, so look for selling pressure.

My advice to you is to buy a mixture of exploration-stage gold mining stocks along with small to large gold producers. In this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers. Buy gold and silver stocks on weakness. SPDR Gold Trust ETF (GLD) is worth a look.

I like silver as a trade, but strategist John Stephenson is extremely bullish and feels that silver is heading towards $50.00 an ounce based on a historical ratio to gold.

The March Silver is bullish and holding above $33.00. The contract is above its 50-day MA of $30.86, but below its 200-day MA of $35.79. The Relative Strength is strong, but there’s an overbought condition. Silver plays to take a look at include Endeavor Silver Corp. (NYSE/EXK), MAG Silver Corp. (AMEX/MVG), and Silvercorp Metals Inc. (NYSE/SVM).

On the energy front, increased optimism towards the global economies will drive up oil prices. The March WTI Oil is holding above the $100.00 level and at its 50-day MA of $99.45 and 200-day MA of $96.54. A bullish golden cross is holding, with the 50-day MA above the 200-day MA.

Whatever you are trading, the key is prudence and not over-committing to any one area in the stock market.

In the large-cap gold space, Newmont Mining Corporation (NYSE/NEM) is a steady performer; read about it in Newmont Mining: A Class Act in Gold.

What if I told you that your share of the country’s mounting spending spree is around $48,812 per citizen or $135,262 per taxpayer? This national debt could take decades to pay off!

The U.S. national debt broke above $15.0 trillion and is worsening. President Obama said very little about the mounting national debt levels at his State of the Union address on Tuesday, but you cannot simply ignore the problem and pray it goes away. There’s no magic here.

The reality is that something drastic needs to be done soon regarding the national debt or the country’s financial strength will go down the toilet! Never mind talking about the European debt crisis; just look in our own backyard and there’s plenty of work to be done.

Whether it will be President Obama or the Republicans, I don’t care; but the next president will need to focus on significantly cutting costs and reducing the national debt.

Of course, increasing the revenues the government takes in can also help. Taxes on the top one percent of the higher income earners and corporations are fair play. Revenues are also higher when the economy expands and jobs are created to drive consumer spending.

Get the 14 million or so unemployed Americans off to work each morning.

While there has been no indication of where the major cuts will be from, they will likely be from the top six budgetary areas: Medicare/Medicaid; Social Security; defense/wars; income security; interest on the debt ($223 billion!); and Federal pensions.

We know that President Obama will save money after the recent withdrawal of American troops from Iraq. This will help, but I hope there is not another war or conflict around the corner, or we will be in real trouble. North Korea? Iran? It’s a scary thought.

Where I think there will be additional cuts will be Social Security and possibly Federal pensions. The reality is that cuts and austerity measures are required. Greece, Portugal, Italy, and Ireland are cutting back on spending or they risk defaulting. The U.S. is no different. You just cannot go on and just print money and hope the debt problem goes away.

For months now, the stock markets have focused largely on the debt crisis developments in the eurozone and, in the process, ignored this country’s own debt and deficit issues.

The headline each morning would talk about the European debt crisis. The fiasco in Greece has been front-page news. I can’t recall the last time the U.S. national debt was on page one.

But the country also needs to be careful, as the economic renewal remains fragile; albeit, if the debt and deficit are not dealt with now, we would likely see further problems around the corner and a potential cut in the U.S. credit rating from the current AA+.

Moody’s and Standard & Poor’s have warned that another rate cut would be possible if the national debt and deficit situation is not resolved.

President Obama talked about the need to generate job creation and add some stimulus to the domestic manufacturing landscape. He proposes minimizing the advantage of foreign tax incentives that make American companies initiate job creation outside of the U.S. via placing a minimum tax on a company’s profits made overseas.

While the idea to deliver job creation makes sense, I cannot see how you can overcome the superlative tax breaks and much cheaper labor available overseas in emerging markets such as Asia, Eastern Europe, and Latin America. In these regions, the labor is significantly cheaper than their American counterparts, as the countries also want to drive local job creation.

The costs of plants and equipment, specifically the cost of operating overseas, are generally cheaper compared to the U.S. And also keep in mind that many of the major U.S. multinationals that have operations overseas also derive a good portion of their revenue stream from foreign markets, so it would not be as easy to do.

Take the case of General Motors Company (NYSE/GM), which I recently discussed in General Motors: China’s Top Foreign Automaker. The automaker used to be the king of cars in the U.S. until the Japanese and Korean automakers emerge decades ago. Given the change in the domestic environment, General Motors, like many U.S. companies, looked east towards China. The company reported an 8.3% year-over-year rise in sales in China to a record 2.55 million vehicles in 2011, down from 29% in 2010, but well above the average. China accounts for about 36% of total GM sales in 2011, so the region is critical for growth and for job creation in China.

Now, why would GM slow down production in China? Do you really think the Chinese government would sit idly by and allow GM to take some production back home, cut into Chinese job creation, and then sell the U.S.-made vehicles to the Chinese consumer? I doubt this would happen. GM will likely not be swayed by President Obama’s extra tax, as would be the case of many U.S. companies with key operations and sales in foreign countries, especially China.

The reality is that U.S. companies flourish in foreign countries due to the business incentives there and the ability to be close to the market, which often is different from that in the U.S.

President Obama also wants to offer a new tax credit for companies that close their operations overseas and generate domestic job creation along with more domestic tax incentives.

I like the reasoning and the move to bring in manufacturing and drive job creation, but, realistically, I cannot see why and how a multinational, which often has joint ventures in the particular overseas market, would suddenly close shop and move home.

And, while the investment community was pleased to see a change at the top and was hoping for a visionary to turn around the ailing “BlackBerry” in its life and death battle against the Apple Inc. (NASDAQ/AAPL) and “Android” devices, there was no extended search for a new leader. Instead, the new CEO, Thorsten Heins, who is also the former COO, has been given the daunting task of reversing the company’s fortunes, but his appointment is not drawing rave reviews on Wall Street. The future clearly is cloudy, as the company really needs a visionary and “go to” guy and I’m not convinced that an operations specialist will be able to right the ship.

The reality is that Heins may be better than the Research In Motion (RIM) co-founders who appeared to be caught off guard by the rise of Apple, but he is likely not like the late Steve Jobs or Richard Branson of Virgin Media, Inc. (NASDAQ/VMED). However, only time will tell if Heins can offer something different. The reaction by investors indicates pessimism with selling in the stock.

So, while Apple is moving along with innovation and creative products, the BlackBerry is vulnerable to being crushed in the wake of not only Apple, but also a host of Android and “Windows”-powered smartphones and devices.

As an investor, I would stick with Apple—the best of breed. The company is the largest company in the world, with an astounding market cap in excess of $394 billion, which would rank it 27th on the International Monetary Fund GDP rankings for 2010, between Iran and Austria. By comparison, RIM’s market cap of $7.64 billion is tiny. In fact, Apple has $25.95 billion in cash and no debt, so it could easily take out RIM if it wanted to. But Apple doesn’t have to do this, as its “iPhone” and “iPad” have garnered worldwide acclaim and are seen as sexy products, while RIM’s BlackBerry may be dying a slow death and its “PlayBook” tablet is essentially dead in the water, with no chance of competing against the iPad.

Apple has made many investors rich. I added a position in Apple for my Daily Profits online trading service at $87.00 in November 2008, with the stock up 387% since. That’s not that bad, but I was somewhat late the game in catching Apple before it began to move higher.

Investors recognizing this great opportunity in 1997 when Apple was trading at around $3.56 would have made nearly 120 times their money. An investment of about $13,000 in Apple in 1997 would make you a millionaire. A $100,000 investment is worth nearly $12.0 million!

Given this, I kind of wonder if I should have used the $100,000 I put down on a house in 1997 and instead bought shares of Apple. That’s what makes trading exciting.

We have seen an impressive start for stocks to begin the year, specifically the technology sector, with the NASDAQ up nearly seven percent. Read what I have to say in Technology Stocks: Invest in Them or Run for the Hills?

Yes, we all know about the fiasco with numerous Chinese reverse merger (CRM) stocks. Some companies are cheating and lying about their operations and are getting caught. The fear of reverse mergers has not only impacted CRMs, but has also sent a ripple throughout the vast majority of Chinese stocks. Yet the selling has been overdone and unjustified.

Many of you know that I have been a big supporter of Chinese stocks despite a down year so far in 2011. But take a look at the facts…

China will continue to be one of the top major growth regions in the world. China had about 1.341 billion people at the end of 2010, according to the National Bureau of Statistics.

And better yet, people are spending their yuans.

While consumers are hesitant and faced with high debt burdens in the United States, the new money in China is being spent on everything from housing to furnishing to vehicles and travel. The country is now the world’s largest buyer of luxury cars. The government’s mandate is to drive domestic consumption to push up growth.

The per capita disposable income in China was about $3,000 a year for urban residents as of January 20, 2011, according to the National Bureau of Statistics. For rural residents, it was a mere $925.00. The income has more than doubled over the past few years and wages are heading higher along with spending. At the present time, only a small fraction of China’s GDP is driven by consumer spending compared to about 70% in the U.S. China wants to drive consumer spending long-term and this will drive organic GDP growth.

In my view, no other country offers such incredible investment opportunities. Moreover, you can add in the fact that China is a neighbor of the world’s second most populous country, India, where there are also excellent growth opportunities, with over 1.1 billion people and great growth prospects. Imagine the combined markets when the disposable incomes in both countries rise upwards. The two countries are working on increasing their bilateral trade.

Overall, China is on the right path towards developing into a rising world economic power as well as a basin for incredible and sustained growth across many sectors, including industrial, mining, energy, services, and technology. The reality is that if it is saleable and in demand, then you know that China will likely have the consumer market for it. China knows that and so do many of the top multinational companies, including many in the United States.

At this point, I believe that there are good aggressive buying opportunities in Chinese stocks, specifically small-cap stocks. However, you should be cautious and take a look at buying value at the current price levels. Chinese stocks listed in the U.S. will continue to represent an excellent area for growth investors; yet, you also need to be careful and to be diversified in your portfolio, as there could be more downside risk.

An area that I believe is ripe for strong growth as the material wealth grows in China is the travel sector, which I recently discussed in The Super-hot Chinese Sector.

China is predicted to see major growth in its domestic travel from now until 2013, according to research report, China Tourism Industry Forecast to 2012, by traveldailynews.com.

As income levels rise in this country, we are seeing a corresponding increase in domestic travel. The country’s domestic travel market could be worth approximately RMB 3.9 trillion or about US$590 billion by 2020, according to a report published by The Boston Consulting Group (Taking Off: Travel and Tourism in China and Beyond). The country will see strong growth in its inbound travel industry from 2011 to 2013 that will be driven by overseas investment and the influx of foreign companies, according to traveldailynews.com report China Tourism Industry Forecast to 2012. But, while higher-end hotels like the Hilton are desirable, the cost is often out of reach for the majority of domestic and foreign visitors. I like the budget end of the hotel side similar to the Days Inn, Super 8 Motels, Howard Johnston, and Holiday Inns in the United States.

China has a population of about 1.34 billion people; over four times the size of the United States. The size of the middle class is over 300 million and this is expected to grow exponentially. The World Bank estimates that, within five years, there will be 542 million middle-class consumers in China. I have heard estimates of up to 700 million! And as wages increase so will the spending on non-essential items such as travel and recreation.

The Chinese economy saw its GDP slowed to 9.1% in the third quarter, down from 9.5% in the second quarter and over 10% in 2010. The Chinese economy may be slowing, but the growth is still staggering given the muted growth in the United States and Europe.

The reality is that the Chinese consumer is continuing to spend money. In September, retail sales in China grew a staggering 17% versus a muted 1.1% in the U.S.

To handle the expected increase in travel, there is a push to build more hotels and motels across the vast country.

I like Chinese travel stocks, including China Lodging Group, Limited (NASDAQ/HTHT), Home Inns & Hotels Management Inc. (NASDAQ/HMIN), and 7 Days Group Holdings Limited (NYSE/SVN). Note that these are not recommendations to buy; just an example of stocks to look at.

All three companies have above-average long-term share appreciation potential, but 7 Days Group is more interesting due to its better valuation versus the other two rivals.

7 Days Group is the third largest national economy hotel chain in China. The company offers limited services under the “7 Days Inn” brand, similar to budget hotels and motels in the U.S. In the third quarter of 2011, the company added 116 net hotels. As of September 30, 2011, 7 Days Group operated 838 hotels spread across 127 cities and 83,487 rooms. In addition, growth is expected to be strong, with 251 hotels in the pipeline.

7 Days Group may or may not have the greatest potential of the three stocks. Only time will tell, but what is for sure is that the travel sector in China is a key growth area.

I truly feel China continues to be the place to make money going forward, which you can read more on in China: On the Offensive Again.

The new GM stock debuted at $34.00 in November 2010 before moving to $45.00, but this was followed by a subsequent decline to the current low $20.00 level. Yet there is value with GM. Based on the estimated earnings of $3.74 in 2012, GM is trading at a price-earnings multiple of 6.53X based on the prevailing stock price of $24.49 on January 18. U.S. rival Ford Motor Company (NYSE/F) is trading at 7.84X its 2012 earnings per share (EPS), while Japanese leader Toyota Motor Corporation (NYSE/TM) trades at 9.29X its fiscal 2013 EPS.

However, General Motors is looking beyond the U.S. for its growth, specifically the company’s growing position in China’s massive auto sector, which has softened somewhat over the past year. Nevertheless, it continues to be the world’s largest auto market, with an estimated 14.5 million vehicles to be sold in 2011 versus about 12 million in the U.S. And with only about one in five Chinese owning a vehicle in Beijing and 30 of 1,000 in remote provinces, there is clearly ample room for growth, especially as the income levels continue to rise. In spite of mere 2.5% growth in 2011, industry pundits predict auto sales will rebound in 2012 with estimated growth of five percent to 10%.

Foreign auto companies looking for growth are expanding in China. General Motors may return to number one for automakers in 2011 driven by strong growth in China.

General Motors reported an 8.3% year-over-year rise in sales in China to a record 2.55 million vehicles in 2011, down from 29% in 2010, but well above the average. China accounts for about 36% of total GM sales in 2011, so the region is critical for growth.

So, while the GM story is encouraging in China, I continue to prefer the smaller Chinese auto-parts suppliers that provide parts and services to foreign and domestic automakers.

Two small-cap Chinese companies to take a look at include China Automotive Systems, Inc. (NASDAQ/CAAS, $5.19) and SORL Auto Parts, Inc. (NASDAQ/SORL, $2.47). Note that these are not recommendations to buy; just an example of stocks to look at.

You can buy GM as a longer-term holding, but I prefer to stick my capital in the small-cap Chinese auto plays for added growth and price appreciation potential.

Housing is showing signs of improvement, but it will be a while until the stock market is considered healthy. I discussed in What’s Really Driving the Housing Market.

China

There have been Chinese bears surfacing, suggesting that China would see its banking system and real estate market collapse in a hard landing. I was not of that camp. China continues to deliver and remains one of the top growth regions in the emerging markets.

In the fourth quarter, China’s GDP came in at 8.9%, which is impressive. However, it is down from the 9.1% in the third quarter, representing the lowest rate of growth in 10 quarters. The reading was nonetheless above the consensus 8.6% estimate. The country’s GDP expanded at 9.2% in 2011, while down from the sizzling 10.4% in 2010.

In December, China’s purchasing managers’ index held below the neutral 50 level at 48.7, but was higher than the 47.8 reading in November.

In my view, the lower rate of growth is positive, as the inflation in China has also steadily declined to more manageable levels. The country’s consumer price index (CPI) fell to 4.1% in December, down from 6.5% in July, representing five straight months of monthly declines in inflation.

The lower GDP was a controlled event by the Chinese ruling party after five straight increase-rate hikes and other monetary tightening in 2011 to get a grip on inflation. At 8.9%, the growth is superior to our anemic GDP growth and the muted growth in Europe.

The dire growth situation in the eurozone is a major risk and China has been impacted, as export demand for cheap Chinese goods has declined due to the lower demand from Europe and the U.S. The Chinese economy is face with idle manufacturing facilities and excess capacity. The country built an enormous landscape for manufacturing.

China wants to avoid a hard landing and halt the slide in GDP growth by initially pumping over $540 million into its banking system for new loans. If the country’s consumer inflation can fall to below the four-percent target towards the previous three-percent target, we could see additional monetary stimulus, including interest-rate cuts in China.

China’s real GDP is estimated to expand 9.5% in 2012, according to the International Monetary Fund, but there many question marks as to whether this is achievable given the stalling in Europe and other industrialized regions in Asia and Latin America. GDP growth in the Chinese economy could plummet to as low as 6.8% in 2012 should the growth situation in Europe and the U.S. falter, according to the Asian Development Bank.

China continues to be critical as far as the global economies go. The reality is that any impact on the Chinese economy would send shockwaves around the world and we obviously don’t want this.

A major area for importing in China is gold, which has helped to give some life to stalling gold prices. You can read my thoughts on this in China and India: Gold Buying Bullish

Don’t be fooled by the recent upswing in the markets. It’s true the economic situation continues to improve across America, but there is still $15.0 trillion in U.S. debt along with a mounting deficit, not only in the country, but also across many states. And, in this election year, there is increasing evidence that there could be political gridlock for at least the first quarter, as the two parties haggle for their policies, neither willing to give in.

But the risk is far greater. Standard & Poor’s downgraded the debt of France and suggested there were additional eurozone countries on the watch list ready for a credit downgrade. The downgrade of France is significant, as the country is one of the two strongest countries in the eurozone, the other being Germany. But data out of Germany suggest that the country has fallen back into a recession, albeit a mild one.

The situation could worsen, especially in the much weaker PIIGS eurozone countries; that is, Portugal, Italy, Ireland, Greece and Spain. I still feel that there could be more shocks ahead for Europe in 2012 due to the debt and growth issues.

Greece is in the midst of a complex debt swap program that is aimed at preventing a debt default in the country, but the plan is facing some obstacles that could derail the eurozone debt resolution. Greece warned of “catastrophic” results if the debt swap is not completed soon. A major sticking point is the interest rate Greece will pay. Creditors taking on the Greek debt want higher rates and avoid to major losses. On the other hand, Greece wants lower rates, which is expected. A failed deal would mean heavy losses for creditors and default for Greece. A compromise is in the best interest of both parties, so a deal must be salvaged.

And even if this deal is done, Greece will likely need the funds to continue flowing from the European Union and International Monetary Fund. Then there are also the other weak eurozone countries.

But what I view as a major problem is the impact of eurozone on the rest of the world, especially China, which is experiencing a higher risk of deeper slowing due to the reduced demand from Europe. China is pumping over $540 million into its banking system for new loans, as inflation is steadily on the decline. The country’s consumer price index (CPI) fell to 4.1% in December, down from 6.5% in July, representing five straight months of monthly declines in inflation. And, should China falter, the impact on the world could be devastating.

If you missed it, read what I said about 2012 and where stock markets may be heading in My Market View: A Risky Start to 2012.

We are seeing positive signs in jobs growth, consumer confidence, and the housing market, which were the key variables absent in 2011 and may be enough to drive stocks higher this year.

The housing market is clearly better than it was when the sub-prime mortgage fiasco led to a downfall in the U.S. economy and sent the unemployment rate spiraling higher.

In November, housing starts came in at the seasonally adjusted annual rate of 685,000 units, according to the Commerce Department. The reading was the highest since April 2010, but still well below the monthly one million plus housing starts considered healthy for a housing market. Building permits of 681,000 in November were also ahead of estimates; but, again, the number is far below what is widely deemed to be a healthy housing market.

What the readings offer is some hope of better readings to come, albeit, as I said, we also need to see a concurrent strengthening in job creation to drive a strong housing market. With strong jobs growth, consumers become more confident in buying homes and big-ticket items. In December, consumer confidence rose to 64.5, well above estimates and encouraging, but we need to see the reading approach the 90 level for a major impact.

The creation of jobs will help drive confidence and the housing market. In December, there were 212,000 jobs created and a surprise decline in the unemployment rate to 8.5%. This is positive, but we need to see the monthly job creation rise towards 500,000. The reality is that there are still over 13 million Americans pounding the pavement searching for work and hope. The high unemployment rate is expected to remain high at over eight percent this year in spite of the extended tax cuts to drive consumer spending and economic renewal.

The key Durable Goods Orders grew at a healthy 3.8% in November, well above the 0.5% decline in October. This metric is important, as it reflects the spending on non-essential big-ticket items, which indicates a rise in the confidence to buy.

A strong housing market is critical for the retail sector, as homeowners will tend to buy new furnishings, including many big-ticket items. Foreclosures have largely driven home sales and price declines across the nation, but there’s some hope. In 2011, the number of foreclosures and repossessions declined by 33% to 2.7 million, according to RealtyTrac. These are the lowest readings since 2007.

While there is much work ahead, the domestic economy appears to be on the right path.

Jobs, confidence, and a stronger housing market are needed to drive spending in the retail sector. Only under this scenario will there be sustained spending and economic growth.

Small-cap stocks are up nearly four percent in the first two weeks of January. If the economy continues to improve, we could see nice gains this year. I discussed why you need to be in small-caps in Small-cap Stocks—Drop Them or Keep Them in 2012?

Other important developments like the continued political unrest in the Middle East, the Fukushima disaster, and a rating downgrade of the U.S. also added pressure on the markets. During the second half of 2011, the U.S. dollar represented a safe-haven play, while precious metals and most of the equity markets continued to decline.

During the year, the greenback appreciated 3.2% against the euro, as the market participants anticipated a break-up of the eurozone. Gold declined over 15% from its peak after COMEX increased the initial margin requirements in September.

The MSCI World Index was down 7.6% and the S&P 500 ended the year just above breakeven. The worst performing emerging markets for the year were India (down 24.6%) and China (down 21.7%).

Although the emerging economies enjoyed high growth rates in 2011, there was a decline in growth from 2010. The risk of inflation was the major problem that the emerging countries faced in 2011. China suffered from the tightening of its monetary policy and from the deceleration of the global trade.

On a positive note, I feel this year could be much better for equity investors, as central banks are likely to stimulate economies with printed money, which has the side effect of increasing demand for assets such as shares. And, as the stock dividend yields trade above bond yields, it is also likely to attract the interest towards investment in shares.

Regarding reverse mergers, during 2011, U.S. capital markets witnessed a series of irregularities related to many reverse merger companies from China, as there were allegations of fraud and financial misstatement. These irregularities forced the Securities and Exchange Commission (SEC) to pursue evasive actions and it published a cautioning report for investors in these China stocks, NASDAQ’s proposal of new listing requirements for reverse merger stocks and Moody’s Red-Flags report on China-based companies placed immense pressure on this asset category and resulted in significant loss of shareholder value.

Anecdotal evidence suggests an estimated loss of $34.0 billion in market capitalization related to these allegations of misrepresentation from China companies. Such depressing events have negatively affected the deal activity in the reverse merger space, as only 166 reverse mergers were closed during 2011, well down from 258 in 2010.

Considering the current false reputation relating to China reverse merger companies, it’ll be a big challenge for other Chinese firms to raise capital during 2012. Market participants anticipate a bleak outlook for this asset class during 2012 and expect new reverse merger companies to remain at 10-year lows and the merger activity well below the five-year average of 225 deals a year. Reverse merger stocks from China will remain dry.

The weakness of the reverse merger stocks is evident from the poor performance of the Bloomberg Chinese Reverse Mergers Index (CHINARTO Index), which is a market capitalization weighted index that tracks China-based companies that trade on U.S. exchanges following reverse mergers. During 2011, the index fell by 61.7%, compared to flat closing for the S&P 500 during the same period. In terms of valuations, CHINARTO is trading at a price-to-earnings (P/E) ratio of 4.11X and a price-to-books (P/B) ratio of 0.45X, compared to S&P 500’s P/E of 13.45X and P/B of 2.1X.

As I look forward into 2012, I believe the first half of 2012 might be dry for the reverse merger stocks, especially those from China, but the second half might bring along some positive surprises to boost the investments in these stocks. Despite the current turbulent market environment, there are some positive signs that have emerged and can act as a catalyst to trade selected reverse merger stocks.

You should be clear on the fact that the magnitude of profits from investing in reverse merger stocks is likely to be less when compared to the boom years in 2008 and 2009.

Small-caps have started the year on a bullish note and I feel it could be a strong year should the U.S. economy continue to strengthen. You can read my thoughts in Small-cap Stocks—Drop Them or Keep Them in 2012?

]]> http://www.profitconfidential.com/chinese-economy/how-2012-is-looking-for-reverse-mergers/feed/ 0 http://www.profitconfidential.com/stock-market/2012s-market-driving-sector-my-four-top-stocks/?utm_source=rss&utm_medium=rss&utm_campaign=2012s-market-driving-sector-my-four-top-stocks http://www.profitconfidential.com/stock-market/2012s-market-driving-sector-my-four-top-stocks/#comments Wed, 11 Jan 2012 06:48:45 +0000 George Leong, B.Comm. http://www.profitconfidential.com/?p=19408 The fourth-quarter earnings season is here and it will help to dictate the trading action over the next several months. There are high hopes of higher sales growth this earnings season in addition to earnings acceleration as the economy recovers, but the fourth quarter is estimated to show a decline in earnings growth and this is expected to continue in the first quarter-earnings season.

In the third-quarter earnings season, we did not see a consistent increase in revenues or the growth was marginal. In order to feel more confident, revenue growth needs to be strong.

The fourth-quarter earnings season is estimated to show a decline over the third quarter and this is a concern. For the fourth-quarter earnings season, estimates call for earnings to rise a mere 7.8% as of January 9, well down from the 15% as of October 3, according to Thomson Reuters.

Early on, of the 26 S&P 500 companies that have reported, only 54% exceeded estimates and 27% fell short. These early results are well below the third-quarter earnings season in which about 67% of S&P 500 companies beat estimates and 19% fell short. The blended S&P 500 earnings growth rate for the first-quarter earnings season is estimated at a weak 5.4%. This is worrisome.

In my view, the key will continue to be the ability of companies to report higher sales, which is what you want to see during an economic recovery. It indicates stronger spending and the increased confidence levels of consumers and companies in spending. But also be aware that the earnings side can be made to look better via aggressive cost cuts and control. In addition, watch for the guidance going forward, as this will also be a critical factor.

Alcoa, Inc. (NYSE/AA) started the earnings season after beating on revenues and coming in line with earnings. I was encouraged to hear that Alcoa predicted a deficit in the global aluminum market, which is important, as the metal is used broadly across numerous applications, including car motors, bike frames, tools, industrial use, and planes. What is important is that this indicates a potential pickup in global demand for goods.

Going forward, I continue to believe that technology will be the driver of the stock market going forward into the next several years. Take any opportunity to buy on weakness.

I have listed some of my favorites below (but note that these are not recommendations to buy; just examples of good opportunities out there):

Internet star Google Inc. (NASDAQ/GOOG) is why I love technology stocks. In the third quarter, Google blew away on revenues and earnings by a wide margin. The company’s addition of Motorola Mobility Holdings, Inc. (NYSE/MMI) …

The fourth-quarter earnings season is here and it will help to dictate the trading action over the next several months. There are high hopes of higher sales growth this earnings season in addition to earnings acceleration as the economy recovers, but the fourth quarter is estimated to show a decline in earnings growth and this is expected to continue in the first quarter-earnings season.

In the third-quarter earnings season, we did not see a consistent increase in revenues or the growth was marginal. In order to feel more confident, revenue growth needs to be strong.

The fourth-quarter earnings season is estimated to show a decline over the third quarter and this is a concern. For the fourth-quarter earnings season, estimates call for earnings to rise a mere 7.8% as of January 9, well down from the 15% as of October 3, according to Thomson Reuters.

Early on, of the 26 S&P 500 companies that have reported, only 54% exceeded estimates and 27% fell short. These early results are well below the third-quarter earnings season in which about 67% of S&P 500 companies beat estimates and 19% fell short. The blended S&P 500 earnings growth rate for the first-quarter earnings season is estimated at a weak 5.4%. This is worrisome.

In my view, the key will continue to be the ability of companies to report higher sales, which is what you want to see during an economic recovery. It indicates stronger spending and the increased confidence levels of consumers and companies in spending. But also be aware that the earnings side can be made to look better via aggressive cost cuts and control. In addition, watch for the guidance going forward, as this will also be a critical factor.

Alcoa, Inc. (NYSE/AA) started the earnings season after beating on revenues and coming in line with earnings. I was encouraged to hear that Alcoa predicted a deficit in the global aluminum market, which is important, as the metal is used broadly across numerous applications, including car motors, bike frames, tools, industrial use, and planes. What is important is that this indicates a potential pickup in global demand for goods.

Going forward, I continue to believe that technology will be the driver of the stock market going forward into the next several years. Take any opportunity to buy on weakness.

I have listed some of my favorites below (but note that these are not recommendations to buy; just examples of good opportunities out there):

Internet star Google Inc. (NASDAQ/GOOG) is why I love technology stocks. In the third quarter, Google blew away on revenues and earnings by a wide margin. The company’s addition of Motorola Mobility Holdings, Inc. (NYSE/MMI) will help Google in aggressively pushing sales of its “Android” phones.

Apple Inc. (NASDAQ/AAPL) continues to be the star and I expect continued strong results this year, especially with sales of “iPads” and “iPhones.” I advise taking the opportunity to buy Apple on the current weakness. My view is that the company is on fire and there is no stopping the momentum now, as Apple is in its own bull market.

Chipmaker Intel Corporation (NASDAQ/INTC) is the dominant chipmaker in the world and its concerted move into more mobile applications should pay off.

Yahoo! Inc. (NASDAQ/YHOO) needs a change of direction and may be on the verge of a potential takeover by private equity.

As I have said, the key will be revenues, especially organic growth. We want to see revenues grow to drive earnings instead of cost cuts. Without revenues growing, it is difficult to imagine a healthy economy.

Technology will continue to be the growth driver going forward, but be careful in the near term. You can read my thoughts on this in Technology Stocks: Invest in Them or Run for the Hills?

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The perennial question for any gold investor is whether to buy bullion or gold mining stocks. I favor gold stocks over the higher risk of other commodity options.

While generally favoring gold stocks, I view Newmont Mining Corporation (NYSE/NEM) in particular as a really good investment, because we see this stock bringing value to your portfolio for years to come.

Without a doubt, for those investors looking to hedge their portfolios with gold exposure, Newmont Mining deserves to be at the top of the list. This company stands out among other players for two reasons: 1) size; and 2) low production costs, even in the rising price environment.

Over the years, Newmont has grown rapidly through mergers and acquisitions, as well as the development of its existing reserves. This strategy resulted in the company’s diversified risks; namely, unlike junior producers, Newmont doesn’t depend on one or two of its mines for its future and it is certainly not exposed to politically unstable regions.

In that regard, the risk is spread out, as the company continues to maintain an aggressive worldwide exploration program and is actively participating in and taking advantage of the ongoing industry consolidations.

In terms of costs, Newmont enjoys an overall favorable cost structure, although the recent quarter painted a very bleak picture when it came to capital expenditures. Its South American operations are the major factor in keeping the company’s costs down. This is particularly true with the Yanacocha property in Peru, where cash costs are in the lowest per-ounce price range.

The company’s diversified portfolio of low-cost mines allows it to remain profitable, even during prolonged weakness in the gold bullion market. In the past 10 years, Newmont has posted net losses three times; yet each year it has generated positive operating cash flows.

Over the past five years, Newmont’s investment rate has been around 60% (the investment rate is the percentage of profits the company has returned back to its business operations).

This strategy is consistent with what most producers do; return every dollar earned, and then some, back into the operations. However, with Newmont, it seems to come with ease, adding further to its attractiveness, as it can grow even during periods of depressed gold prices and at a lower investment rate.

Newmont’s cash flows are highly sensitive to the price of gold, because the company remains largely unhedged, thus exposing itself to the whims of the gold market. However, market data and the current economic environment suggest that the gold market is dancing with the bulls, so the company’s unhedged strategy promises profits, as the price of gold rises further.

This is the stock that saw its market price go up double percentage points over the past three years and its sales double every three years. The company is growing aggressively—both internally and by acquisitions—and has sufficient cash in the bank to finance that growth.

Newmont Mining appears to be the perfect choice for investors looking for a company with excellent fundamentals, a proven track record, and experienced and knowledgeable management. Note that this is not a recommendation necessarily to buy the stock right now, but you should definitely take a look at it.

Newmont is a leader in gold. In technology, a company that has fallen on hard times, but that I feel is set for fresh growth is Microsoft, which you can read about in Microsoft May Be Set for Prime Time.

I’m a big believer in hedging against market weakness. A sound investment strategy is to take some profits off the table.

The key is to protect your profits by adopting a strong investment strategy and risk management to protect your hard-earned capital.

A favorite investment strategy I like personally for hedging is the use of put options as a defensive hedge.

Under this scenario, investors may be somewhat bearish or uncertain and want to protect their current gains against a downside move in the stock or the market with the use of index put options. By doing so, you are adopting a risk-managed investment strategy.

For those of you not familiar with options, a buyer of a put option contract buys the right, but not the obligation, to sell a specific number of the underlying instrument at the strike or exercise price for a specified length of time until the expiry date of the contract. After the expiry date, the particular option expires worthless and any responsibility is eliminated.

The buyer of the put option pays a premium to the writer of the option who gets compensated for assuming the risk of exercise. The writer of the put option is obligated to buy the stock from the holder of the put should it be exercised by the expiry date.

For the writer of the put option, the amount of premium received for assuming the risk is generally directly correlated to the volatility of the stock and market. The more volatile the stock, the higher the premium paid for the option. And low volatility translates into lower premiums.

You can buy puts for stocks and sectors. If you are heavily in technology, a good investment strategy is buying puts on the NASDAQ. Or let’s say you have benefited from the run-up in gold and silver; an investment strategy may be to buy put options on The Philadelphia Gold & Silver Index, which tracks 10 major gold and silver stocks.

If your assets are heavily weighted in technology, an investment strategy may be to buy put options in PowerShares (NASDAQ/QQQ) ETFs, a heavily traded put used for defensive purposes.

Just take a look at the various indices that closely reflect your holdings or put options on individual stocks that you may have a large position in and buy the appropriate hedge.

The current market risk is high due to the debt and growth problems in Europe and the U.S., which you can read about in European Union: Resolution Up in the Air Means Continued Risk.

The small-cap Russell 2000 had been down over 26% in 2011, but, by year-end, small-cap stocks rallied out of their bear market, minimizing the decline to a minor loss. But I continue to favor small-cap stocks, as the valuations are more attractive and may be worth a look for aggressive long-term investors.

And while I view the holding of large-cap stocks as an integral part of your portfolio, for added overall portfolio returns, I like small-cap stocks. These stocks add to the risk component of your portfolio, but you are compensated by a higher overall expected return from your investments.

Basic modern portfolio theory tells us that you can increase the expected return of a portfolio by simply adding more risk. This is the advantage of adding small-cap stocks.

A standard and simple measure of stock risk versus the market is called “beta”—a quantitative measure of systematic or market risk that cannot be diversified away and is generally in relation to the S&P 500 or another market/benchmark.

A beta of less than one implies that a stock has less risk than the market and hence less expected return, whereas a beta of greater than one implies a higher comparative risk versus the market, meaning possibly higher expected returns

An example as far as small-cap stocks go is semiconductor company Kulicke and Soffa Industries, Inc. (NASDAQ/KLIC). The stock has a beta of 2.83 versus the S&P 500. This means KLIC incorporates greater risk than the S&P 500 and will tend to move in correlation to the broader market, but at a faster rate.

In theory, should the S&P 500 move up, KLIC would move up by 2.83 times the move of the index; should the S&P 500 move down, KLIC would move lower by 2.83 times.

When markets rally, high beta stocks will tend to fare better. But a note of warning: buying only higher beta stocks does not necessarily translate into higher returns, as it also results in greater volatility and downside risk when the broader market declines.

To increase the overall risk of your holdings, you need to increase the expected return. The most important fact to understand is that you can increase the risk-reward profile of your portfolio by adding small-cap stocks and/or sectors that have higher growth potential.

If the global and U.S. economies show renewed growth, look to small-cap stocks to outperform.

One of the worst areas for losses last year was that of reverse mergers, but will the situation improve in 2012? Read what I have to say in 2011—Year of the Bear for Reverse-merger Stocks.

In 2011, small-cap stocks lagged blue-chips and large-cap stocks following a strong 2010. In my market view, the big difference in 2011 was the uneasiness of the economic renewal in the U.S. and global economies. And, despite a positive January 2011, stocks largely fell last year.

The general market view is that what happens in January is an important indicator for the year as far as performance goes. Historical records indicate that stocks have increased an average of 1.6% in January since 1969, according to Stock Trader’s Almanac.

I was off last year as far as my forecast and market view, as I underestimated the weakness of the eurozone debt and the inability of domestic jobs and housing market to turn around.

For 2012, my market view is cautious to start the year based on the high global risk.

The fact that the economy is expanding in spite of a lack of strong jobs growth is encouraging. We are seeing what economists call a “jobless recovery.” And my market view is that this will likely continue in 2012, as the unemployment rate is expected to remain high at over eight percent, despite the extended tax cuts to drive consumer spending and economic renewal.

This is also an election year, so there will be haggling as far as policies go, as both parties are aiming to set themselves up for the election. As such, many pundits are expecting to see political gridlock to start the year and this will likely impact President Obama.

My market view is that we need to see leadership from such areas as the banks and technology. However, there was recent evidence of slowing from large-cap technology companies.

It definitely will be a tricky year, albeit Wall Street is again estimating that stocks will advance over 10% in 2012. I’m not sure, but if the situation in Europe improves and China does not have a hard landing, then achieving a gain of 10% is reasonable…and the gain would actually likely be higher.

Again as I said at the start of 2011, if all goes well, my market view is that the S&P 500 could test 1,400 this year. How much the index rises will be dependent on the global and U.S. economies. My top areas for aggressive growth continue to be technology and small-cap stocks. Areas in technology that look promising include Internet and wireless.

I also like the big banks as the balance sheets strengthen and loans increase.

Gold and silver look good, especially the junior gold miners.

Outside the U.S., I continue to favor Chinese stocks.

While my market view is concerned with is the debt and growth situation in Europe, don’t forget the $15.0 trillion in U.S. debt and mounting U.S. deficit scenario domestically.

And then there are the high unemployment rate and declining wealth from falling home prices driven by home foreclosures and short sales. These factors need to improve to give us any hope for a better 2012; otherwise, things could play out similarly to how they did last year.

Read my view on the dire situation in Europe that needs to be remedied in European Union: Resolution Up in the Air Means Continued Risk.

The S&P 500 sits at 1,242 at the close of December 21. A year earlier, the Wall Street bulls, such as Bank of America Corporation (NYSE/BAC), predicted strong moves for the S&P 500 to 1,400, driven by technology and energy. So, unless the S&P 500 can rally 11% next week, Wall Street has miscalculated.

Some of the other Street estimates for the S&P 500 were even higher. Take a look.

J.P. Morgan: S&P 500 1,425

Barclay Capital: S&P 500 1,420

Goldman Sachs: S&P 500 1,450

As I said, last year at this time, I said, “I expect tech and small-caps to drive trading again in 2011.” It looked that way earlier in the year, but then the European debt crisis materialized,Chinashowed some stalling, and stocks began to sink quickly. In 2010, there were some rumbling concerning the weak condition of some of the banks inScotland, but clearly there was not a firm indication that the eurozone debt issues would magnify quite so much.

Domestically, the housing market failed to really improve all that much in 2011, especially with home prices continuing to decline acrossAmerica. President Barack Obama signed an $858-billion package to extend tax cuts for an additional two years and unemployment benefits that were set to expire. The package was aimed at driving consumer spending and growth, but it has fallen well short of any sustained growth. The jobs market remains a major issue.

The lack of any leadership was the downfall for many in 2011. The big banks failed to attract buying, while technology had its moments, but overall failed to inspire traders.

The index charts at this point are vastly different from a year ago when the major stock indices edged higher breaking the successive chart tops. At this point, we are seeing an intermediate downtrend with tough upside resistance that will make it difficult.

Europe continues to be a major hurdle, as I see more problems brewing down the road, especially with some of the PIIGS (Portugal,Ireland,Italy,Greece, andSpain) countries.

Chinais stalling.China’s GDP estimates for 2012 range from as low as 6.5% to as high as 9.5%. Comparatively, this range is superior to domestic GDP growth of 1.8% in the third quarter. I continue to favorChinaheading into 2012 and over the next several years, as long asEuroperegenerates.

The next several weeks after January 3, I will take a look at the global environment and offer you my forecast on what to expect for 2012. But right now, with only a few trading sessions left for the year, I advise taking some profits prior to the year-end. In addition, take a look at some of your losers if you want to absorb some losses to be used against your gains.

Read what I have to say about the alternative energy sector and a company that is trying to benefit from the electric car movement in The Alternative to Being Held Hostage by Oil-rich Countries.

The results were not limited to Oracle in the large-cap technology stocks space, but recently we also saw soft results and guidance from other bellwether stocks including Intel Corporation (NASDAQ/INTC), Dell Inc. (NASDAQ/DELL), and Hewlett-Packard Company (NYSE/HPQ). There was a common thread running through the reasons given for the shortfalls: blame the stalling global economies. With the debt issues inEuropeand muted growth there, companies are delaying their spending on technology upgrades. The same goes forChinaand theUnited States.

While I’m positive on technology stocks in the longer term, the near term is another story. The tech-laden NASDAQ is trading below its 50-day and 200-day moving averages and looks to close negative for the year unless we see a strong Santa Claus Rally next week. Traders are clearly apprehensive about technology stocks, as demonstrated by the fact that there has only been one bullish investor sentiment reading since October 31 and a mere six bullish readings since July 26, which is 103 sessions. This shows a lack of confidence.

The cautious climate for technology stocks and the overall market risk is also impacting initial public offerings (IPOs), which would have surged in a strong market. Not so at this time.

Internet gaming developer Zynga Inc. (NASDAQ/ZNGA) debuted in a $1.0-billion offering, or at $10.00 a share, on December 16. Hoping to cash in on the interest in social media plays, Zynga—a developer of the widely popular online games such as CityVille, FarmVille, and Mafia Wars—failed to inspire traders and has in fact fallen below its IPO price on overall disinterest.

Jive Software, Inc. (NASDAQ/JIVE), a developer of social business software, surged 25% on its first day of trading to close at just over $15.00 after trading at $16.50. The stock is holding just above $15.00, but may head lower if tech drifts down.

While I’m cautious in the near term, I continue to feel that technology stocks will be a critical area for growth opportunities going forward. The sector to watch for the best investment opportunity is the area of mobility applications for tablets and smartphones, as users shift away from the more cumbersome PCs and laptops. Apple Inc. (NASDAQ/AAPL) is the “best of breed” as far as technology stocks go in my view. Microsoft Corporation (NASDAQ/MSFT) also is worth a look as it gets set to launch its new smartphones with Nokia Corporation (NYSE/NOK) in its battle against “iPhones” and “Android” phones.

In the meantime, you could protect against possible weakness in technology stocks by buying index put options on the Powershares QQQ (NASDAQ) or by playing a potential aggressive downward slide in technology via the Direxion Technology Bear 3X (TYP).

In addition to liking technology in the long term, I also favor alternative energy plays, which I discussed in The Alternative to Being Held Hostage by Oil-rich Companies.

The housing market is clearly better than it was when the subprime mortgage fiasco led to a downfall in theU.S.economy and sent the unemployment rate spiraling higher. Yet we continue to see home prices decline across the top 20 metropolitan cities in America.

In November, housing starts came in at seasonally adjusted annual rate of 685,000 units, according to the Commerce Department. The reading was the highest since April 2010, but still well below the monthly one million plus housing starts that make up what is considered a healthy housing market.

Building permits of 681,000 in November were also ahead of estimates; but again the number is far below what is widely deemed to be a healthy housing market.

What the readings offer is some hope of better readings to come, albeit as I said, we also need to see a concurrent strengthening in job creation to drive a strong housing market. With strong jobs growth, consumers become more confident in buying homes and big-ticket items. Unfortunately, this has yet to happen and I feel it will not be until at least 2012 and 2013 before the situation in the housing market improves.

A strong housing market is critical for the retail sector as homeowners will tend to buy new furnishings, including many big-ticket items. This is not happening, as home prices continue to decline, dragged down by continued high foreclosures and short sales—a situation in which homes are sold below mortgage value. An S&P report showed that homes sold under these distressed circumstances are going for 20% below the actual value of the mortgage. Great, if you are buying; not so great if you are selling.

The reality is that foreclosures are driving the buying in the housing market and this does not bode well for housing price appreciation. It may not be until 2013 until we see prices steadily rise.

Jobs, confidence, and higher home prices are needed to drive spending in the retail sector. Only under this scenario will there be sustained spending and economic growth.

The unemployment rate fell to 8.6% in November, but there are still close to 15 million Americans officially still looking for work. I think the number of jobless people is higher.

If I were a homebuyer, I would likely be shopping given the massive inventory of homes for sale at prices well south of a few years ago. There is value in many regions whether as a primary or secondary investment property. For instance…looking for a retirement property? There are thousands of cheap condos available for sale in Florida and Arizona.

The current market risk is high and I continue to question the sustainability of upward moves in stocks. As such, you may want to make sure your risk management is in place, which I discussed in You Profited Big on the Stock Market Rally…Now What?

While a large part of the blame is solely on market leader Apple Inc. (NASDAQ/AAPL), RIM’s poor operational execution and mismanagement is a major factor for the current malaise for the maker of the “BlackBerry” smartphone.

The numbers tell the story. In the third quarter, revenues fell six percent year-over-year to $5.2 billion, albeit they gained 24% sequentially versus the second quarter. The company shipped about 14.1 million BlackBerry smartphones and a mere 150,000 “BlackBerry PlayBook” tablets, which have proved to be a massive disappointment. Comparatively, Apple sold a whopping 11.12 million “iPads” in its fiscal fourth quarter. And, worst of all, RIM estimates that shipments of its core BlackBerry smartphone will decline to between 11 million and 12 million units for the fourth quarter. These are poor metrics for RIM.

Just when you thought that things could not get worse, RIM announced last week that it would have to delay the launch of its new line of “BlackBerry 10” smartphones until late 2012. I’m not talking of a minor incident here, but a major gaff for a company trying to convince consumers and investors that it has a bright future and that they should trust the company. Failing to deliver a new product by a few days or weeks is acceptable, but it’s not when it’s months.

The reality is that BlackBerry no longer has that glamour it once entailed. The product is seen as archaic and old. Consumers are dumping their BlackBerry and buying the “iPhone” (I’m one of those and I’m very happy with my decision) and “Android” phones. Apple has millions waiting anxiously for new products and in line-ups for days to buy. RIM draws little excitement and barely any coverage for new products, and that’s when they are delivered on time. Even in RIM’s home base of Canada, Apple is king.

If someone would ask me, “What are the best stocks?” Apple would definitely be up there.

Apple is the “best of breed.” Just look at the iPad and iPhone sales. For 2012, estimates call for the sale of 62.5 million iPads. The PlayBook may be dead, with heavy company-sponsored discounting at the retailers, something that would not happen at Apple. I expect margins to continue to be squeezed at RIM.

In my view, RIM needs fresh ideas and a change of ownership or it could face possible extinction. For RIM, revenues are estimated to fall 2.7% in fiscal 2012, followed by a 1.6% drop in fiscal 2013. These metrics are horrible. Apple’s revenue growth for the next two years is 28.9% and 15.0%, respectively.

And, unless RIM can make its products more desirable, it may endure a slow death.

For the time being, I would long Apple and avoid RIM. RIM is tempting as a short candidate, but given its arsenal of patents, the company could be a takeover target.

Another large-cap technology stock that has been dead money for years and that may be ripe for some strong upside in the years ahead if its strategy plays out is Microsoft Corporation (NASDAQ/MSFT), which you can read about in Microsoft May Be Set for Prime Time

On Wednesday, oil cartel OPEC and its 11 member countries raised the production ceiling for its group to 30 million barrels a day in an effort to adjust for the increased output from post-Gaddafi Libya. The increase was in line with the 30.37 million barrels a day produced in November. The group decided that oil prices of $100.00 a barrel was reasonable and $80.00 was viewed as the low point that was acceptable for oil prices. This might be fine with OPEC, as it adds to their coffers; but with the average price of gasoline at $3.28 a barrel, consumers aren’t happy with these oil prices.

The government must continue to look at ways to reduce the country’s insatiable appetite for oil and reduce the impact of high oil prices on the economy.

Oil magnate T. Boone Pickens has long pushed his view to cut the country’s reliance on foreign oil. He is investing heavily in alternative energies such as natural gas and wind-powered energy generation.

President Obama knows this and has increased government spending to foster less dependence on fossil fuels and to cut oil prices. The government has spent about $2.7 billion in stimulus to try to get the electric vehicle (EV) market going. And, with the high price of gasoline, I expect the demand for pure electric or hybrid vehicles to continue to grow.

There are estimated to have been 30.6 million EVs sold in 2011 worldwide and this is expected to rise to 51.3 million EVs by 2021, according to IDTechEx.In the U.S., the Obama administration has set a goal of one million EVs on the road by 2015. This is a nice start, but the focus must continue, especially if the election in 2012 results in a new president and party.

A play on the rising demand for EVs and other electric-dependent applications is AeroVironment, Inc. (NASDAQ/AVAV), based in Monrovia, CA. Founded in 1971, AeroVironment operates in two key segments: Efficient Energy Systems (EES); and electric-powered Unmanned Aircraft Systems (UAS).

The real intriguing thing about AeroVironment is its EES segment, which includes the EV charging solutions area. This is comprised of home charging, public charging, fast charging, data collection, grid-integrated communications, training, and support services. Clients include consumers, automakers, utilities, government agencies, and businesses. The charging systems are currently used in 25 states.

An important milestone for the EV unit was the company being selected by Washington State to develop and install a network of nine fast-charging stations for advanced EVs known along parts of the I-5 between Canada and Everett, WA, which are known as Washington’s electric highways. I feel this could expand to other states. The end result would be clean energy and reduced impact from high oil prices.
Clearly, there is plenty of long-term potential here and it appears that AeroVironment at on the forefront of this development.

At the top of my list for technology stocks continues to be Apple (NASDAQ/AAPL), as the company gets ready for a big holiday shopping season that promises to have “iPads” and “iPhones” on many shopping lists. You can see what makes me excited with regard to Apple in Apple Is Shining Bright…RIM, Not So Much.

The global economy is facing another possible bear market and the outlook is dependent on the economic releases and the actions of the policymakers. Recently, major central banks globally—the U.S. Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank—took coordinated actions on November 30, 2011, to increase dollar liquidity for European banks. This move didn’t mean any kind of bailout for Europe; neither does it better the credit quality of Europe, but it resulted in a strong positive reaction in the global stock markets to avert a bear market. This can surely be taken as an effort to shore up the global economy.

Another positive surprise came from China after it cut its bank reserve ratio to increase the cash supply for its banks. These actions are likely to boost the investor’s risk appetite and thus push buying towards stocks to try to get Chinese stocks out of their bear market.

Talking about reverse mergers, the year 2011 has turned out to be major bear market for investors in such stocks, as events like the SEC recommending a  cautious stance for such investors, the NASDAQ’s proposal of new listing requirements, and Moody’s “red flags” report on China-based companies have placed immense pressure on this asset category.

A large list of accounting fraud accusations as well as the questionable practice of performing reverse mergers with shell companies to get a listing on a U.S. exchange have made foreign investors more hesitant toward buying such stocks. These events have led to a slowdown in the deal activity in reverse mergers and the bear market in this area.

The bear market in reverse-merger stocks is evident from the poor performance of the Bloomberg Chinese Reverse Mergers Index (CHINARTO Index), which is a market capitalization weighted index that tracks China-based companies that trade on U.S. exchanges following reverse mergers. As of November 30, 2011, a bear market is firmly in place, with the index down 57.8% since December 2010 compared to the S&P Index decline of 12.6% during the same period.

According to the latest Reverse Merger Report, the third quarter witnessed the lowest quarterly number of reverse mergers since 2003. But, in spite of the current turbulent market environment, there are some positive signs that have emerged, which could be a catalyst to trade the better reverse-merger stocks regardless of the bear market.

Investors should be clear that the magnitude of profits gained from investing in reverse-merger stocks is likely to be less when compared to the returns from these comparative assets.

We are currently seeing a battle, as the S&P 500 tries to hold at its 50-day moving average (MA), but the real problem will be resistance at the 200-day MA, which you can read about in Market Risk: Why Upside Moves Will Not Be Easy.

Gold

The fact that gold is losing momentum at this time despite what I feel will be some tough years ahead for the European Union and eurozone along with the debt mess here is a surprise. But when the metal has increased as much as it has, there will always be those who believe that the price will retrench back to some medium-term support at around $1,600.

The price chart of cash gold appears to suggest a possible retest at $1,600. Since September, the trendline has been down. The metal has peaked on three successive moves, but each upward move was lower than the prior upward move: $1,925 (September); $1,800 (November); and $1,760 (December). Failure to hold at $1,600 could see the metal decline to below $1,500, as was the case in early July 2011. This is the current monetary risk.

But, as we move ahead, I continue to be bullish. As I recently said in a commentary, the metal may be set to move back towards $2,000 in 2012 if Europe falters and China stalls. Michael Purves, chief market strategist at BGC Partners, believes that gold stocks on price weakness, with a break below $1,600 representing a great opportunity to buy.

If you want to read more on why gold is a favorite, read Mining for Riches: Great Metals Stocks to Check Out.

But the risk is far greater. At the meeting of European leaders last week, a treaty to deal with the debt woes in the eurozone that was pushed by Germany and France failed to achieve a majority vote. The new treaty splits the 27-nation European Union, since only 23 of the 27 European Union countries agreed. The four countries voting against the treaty are Britain, Hungary, the Czech Republic, and Sweden. The failure to achieve a majority means a split, as well as continued uncertainty in the eurozone that will surely add risk to the global markets.

Based on the market response, there is little faith in the proposed resolution. Don’t forget that the European economy is massive, with over 500 million people. The eurozone debt issues need to be cleaned up in a timely and agreeable manner. It’s obvious that, with 27 members in the European Union, there will be differences in opinions and needs, as each country has their own agenda. It’s a lot easier when you deal with one government, albeit you wouldn’t know that in the U.S.

To try to avoid further slowing, the European Central Bank (ECB) decided to cut the eurozone’s interest rate by a mere 25 basis points to one percent. Heck, that’s nothing! Some, including myself, were expecting a more aggressive monetary strategy to try to revive the region and avoid another recession given the debt crisis. It was the second cut in five weeks, but it would have been a stronger signal to the world if rates were slashed to below one percent, which has never happened in the region, even during the recent deep recession. A cut to 50-75 basis points would have made more sense and would have given the region more of a boost. The ECB said that the eurozone could fall into a mild recession in 2012.

And what made the small cut worse was the ECB saying that there would be no fund set up for aggressive bond buying, which was a major disappointment, especially since there was speculation that the G20 was looking at a $600-billion International Monetary Fund lending program in the eurozone.

As we move forward, Standard and Poor’s has placed each of the 17 eurozone countries on credit watch and suggested that there could be rating cuts to all the countries, with the exception of Germany.

But what I view as a major problem is the impact of Europe on the rest of the world, especially China, which is experiencing higher risk of deeper slowing due to the reduced demand from Europe. China’s industrial output growth for November fell to its slowest rate in over two years. And, should China falter, the impact on the world could be devastating.

I sense stocks that will face difficult resistance and remain vulnerable to a downside reversal; but you can protect via put options, as I discussed in Today’s Stock Market: Managing Your Risk.

In the large-cap tech area, the big winner over the next few years could be Microsoft Corporation (NASDAQ/MSFT) if the company’s strategy to move more into mobile solutions pans out. You can read about how Microsoft could again achieve stardom in Microsoft May Be Set for Prime Time.

The European Central Bank (ECB) cut the eurozone’s interest rate by 25 basis points to one percent—the second cut in five weeks. However, keep in mind that the ECB increased rates two times prior to the cuts. The cut will have little impact on the effort to revive the region and avoid another recession given the debt crisis. The ECB should have cut interest rates to below one percent as we did in the U.S. and as the U.K. did. The concern was that inflation in Europe is three percent, so the fear was that lower rates could drive up inflationary pressures.

President Mario Draghi, President of the ECB, admitted that the eurozone may be set for a mild recession. If so, a 25-basis-point rate cut is not exactly a remedy. In addition, there appears to be no plans for a fund for bond buying after speculation on Wednesday that the G20 was looking at a $600-billion International Monetary Fund lending program in the eurozone.

The problem remains the possible S&P credit cuts in the eurozone and the muted economic renewal. I still consider the market risk to be quite high.

Also keep a close watch on China. The country’s economy is stalling as exports for cheap Chinese goods decline due to lower demand from Europe and the U.S. Gross domestic product (GDP) could plummet to 6.8% in 2012 from 9.1% if Europe and the U.S. falter, according to the Asian Development Bank. This is a valid concern that is causing some stir amongst traders.

And don’t forget the crippling U.S. debt levels and U.S. deficits. The powerful U.S. economic engine continues to show breaks and is stalling at this most critical time.

With all of this uncertainty that I feel could worsen as we head into 2012, gold continues to be the place you need to have capital.

The December Gold is edging higher at above $1,740 and its 50-day moving average (MA) of $1,700. The golden cross on the chart remains, with the 50-day MA above the 200-day MA of $1,606.

Michael Purves, gold bull and chief market strategist at BGC Partners, believes that gold could trade at $2,000 an ounce by March 2012.

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 and 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 to park 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.

One of my top areas at this time is the junior miners, which you can read about in Mining for Riches: Great Metals Stocks to Check Out. See what companies I like.

If you want to know what I think is one of the top gold plays available, read Newmont: A Class Act in Gold.

The month of December has historically been positive for stocks, so if you want to play the percentages, buy stocks now and ride a possible stock rally.

The odds for success are way better than what you would find in Vegas.

The S&P 500 edged higher in December in 45 years, while declining in 15 years since 1950, according to the Stock Trader’s Almanac. The average gain for the index during this time was 1.6%. But the index stock rally this year could be higher, as this is a pre-election year. The S&P 500 has returned 3.30% in this situation in the past.

If you like small-cap stocks, take note, as small-cap stocks tend to have a stronger stock rally than big-cap stocks beginning near the mid-point of December. That’s next week. The Russell 2000 has advanced an average 2.7% over the past 31 years, including 24 up years. And, in pre-election years, the results have been stellar, with the Russell 2000 advancing 4.4%.

But, for the best stock rally gains, technology has fared the best, with the NASDAQ up 5.4% in December in pre-election years.

At this time, the eurozone still needs to ratify the debt plan, which is placing some pressure on stocks. Standard & Poor’s placed each of the 17 eurozone countries on watch and said there could be rating cuts to each with the exception of Germany. The reality is that the problems in Europe are not going away. Even when a resolution is finalized, there will be continued growth problems in Europe down the road. The chart of the top 350 European companies shows the absence of a stock rally in European stocks.

With the recent stock rally, the 200-day moving average (MA) is the target. The S&P 500 advanced 7.4% for the week to December 2; nevertheless, the index closed lower in all but three of the last 12 sessions. The broader market continues to hobble along, but has advanced from August.

The key stock indices rallied after trading lower at their respective 50-day MAs, but the 200-day MA will be a crux to overcome during a stock rally. Only the DOW has managed to break its 200-day MA. About 36% of all U.S.-listed stocks remain below their 200-day MA at December 6. About 67.5% are above their 50-day MA, down from 75.43% a month earlier.

Over the next few weeks, the retail sector will be highlighted. A strong push will drive up the fourth-quarter GDP and give a lift to stocks heading into 2012. The early signs have been positive. There were record sales of $52.4 billion on Black Friday along with a strong Cyber Monday. The optimism was supported by a surprise jump in the Consumer Confidence for November to 56.0, which was above the estimate of 42.5 and the revised 39.8 in October. The strong reading suggests that consumers may be feeling better.

The chart of the SPDR S&P Retail Index shows a bullish double bottom followed by a subsequent rally back to the recent highs.

December is looking good; if the eurozone can sort out its mess, a stock rally could materialize into January. The odds favor going long the stock market.

While stocks look positive for December, I’m not keen on the housing market as we move into 2012, as I discussed in Home Sweet Home? Not for the U.S. Housing Market.

I’m also not keen about our massive debt load, never mind the debt crisis in Europe. You can read why this country has a lot of work ahead of it in America, Time to Talk About Our Debt.

In November,China’s purchasing managers’ index broke below the neutral 50 level to 49.0, the first sign of factory contraction in about three years. The country’s sub-index for new orders fell to 47.8 in November, while the sub-index for new export orders fell to 45.6 in November. This is an indication that the demand for Chinese-made goods is declining, according to theChinaFederation of Logistics and Purchasing.

As you all know, there have been warnings signs inChina, including high inflation, speculative real estate buying, slower demand, and slower gross domestic product (GDP) growth.

Any impact on the Chinese economy could send shockwaves around the world. The Chinese economy, which had been charging ahead on all cylinders, becoming the envy of the world, is showing some growth pains that could hamper the country’s rate of growth.

The dire growth situation in Europe is a major risk. Don’t get too excited about the eurozone debt news, as the region will face some difficult hurdles ahead over the next year or two—namely anemic growth. But another significant threat is that China’s economy is stalling as export demand for cheap Chinese goods declines due to the lower demand from Europe and the U.S. The Chinese economy is faced with idle manufacturing facilities and excess capacity. The country built an enormous landscape for manufacturing, but the demand is contracting.

A problem is that the global demand for cheaper-made Chinese goods has been on the decline. Part of the reason for this is that other industrialized countries are looking at driving domestic employment by protecting local manufacturing and this would negatively impact China. For this reason, the Chinese want to stimulate domestic demand for the country’s goods.

To try to avoid a hard landing and drive up the economy,China announced that it would cut its bank reserve requirements as of December 5 in an effort to provide easy money and drive the slightly stalling Chinese economic machine. This would be the first cut in three years, clearly suggesting concern on the part of the Chinese government.

China’s real GDP is estimated to expand 9.5% in 2012, according to the International Monetary Fund; but there are many question marks as to whether this is achievable given the stalling in Europe and other industrialized regions in Asia and Latin America. GDP growth in the Chinese economy could plummet to as low as 6.8% in 2012 should the growth situation in Europe and the U.S. falter, according to the Asian Development Bank.

Don’t push this aside, as this is a valid concern that is causing some stir amongst traders.Chinais not immune to slowing. My real concern is that a hard landing, if it should happen, could devastate the stock markets inChina, manufacturing, real estate, and the financial system.

The concerns towards China and governance issues in small Chinese stocks have lead to the drying up of Chinese IPOs listed in the U.S., which you can read about in Chinese Reverse Mergers Stocks Taking More Hits.

If you want a safer strategy for playing China, you can find out how by taking a look at How to Play China with Less Risk.

Now, there are some who would argue that the unemployment rate plummeted to 8.6% from nine percent; but given that only 140,000 new jobs were created, the decline was a surprise to me. The Federal Reserve estimated that the unemployment rate would hold at nine percent in the fourth quarter and not decline to below this threshold level until 2012, so it’s a surprise.

The unemployment rate is at a two-and-a-half-year low, but my feeling is that there has likely been a large group of job seekers that left the employment market after failing to land a job and this helped to drive down the official unemployment rate. The unofficial unemployment rate is likely still at over nine percent or as high as 10%. It will be interesting to see what happens to the unemployment rate when these job seekers return.

I must admit that the jobs market is improving and much better off than in late 2009, when 15.7 Americans were looking for work and the unemployment rate was a whopping 10.2%. Today, there are still around 14 million Americans applying for about 2.9 million jobs. This is not a good ratio and underscores what I feel continues to be a deficient jobs market. The reality is that the unemployment rate likely declined because more workers left the workplace.

Pundits estimate that the country will need to create around 400,000 to 500,000 jobs monthly in order to drive down the unemployment rate to a healthy level. I simply do not see this happening over the immediate term given the global economic stalling.

President Obama and the Federal Reserve are trying. Obama introduced a $447-billion plan to drive job creation, but whether it will work or not is up in the air. It’s not going to be easy and everyone realizes this. The Fed has come out on numerous occasions and said that jobs will be an ongoing issue going forward, with the unemployment rate holding around nine percent and improving a bit into 2012.

Another issue will be the rising number of underemployed Americans, which are those taking work that is beneath their experience and education levels along with less hours than full time. The problem is that workers have little choice due to the fierce competition for the good full-time jobs with benefits and medical coverage. This means that more workers will have no medical benefits and will continue to sink deeper into debt.

So, before you get all giddy about jobs, take a deep breath and pause, as there need to be a lot more jobs created before related problems like housing market and confidence pick up.

I like small-caps, especially when the economy is recovering, as you can read in Small-caps Rally Out of Bear Market: Time to Look at Buying Some.

IPOs out of Chinadestined for the U.S.market continue to be dead in the water. Read about the issues in Chinese Reverse Merger Stocks Taking More Hits.

But don’t be fooled, I’m not convinced the current upward moves in stocks mark the beginning of new bullish leg higher given the debt risk in Europe and issues domestically.

I recently discussed the reality of a recession hitting Europe. I still feel this could be in the works, as I believe there is way too much optimism towards the eurozone debt strategy.

S&P announced that it may cut the outlook of France within 10 days. The problems in Europe are not going away and, even if with a resolution, there will be continued problems.

A major concern of mine is China. The National Development and Reform Commission suggest that China’s GDP will decline to eight percent in 2012 and seven percent in 2013, down from 9.1% in the third quarter. The GDP contraction may not seem to be that big, but for a country the size of China, it’s significant and should be worrisome for its key trading partners in the United States, the eurozone, and Asia.

In Europe, everyone is talking about the debt and how the global central bankers are going to help the eurozone clean up its financial mess. Yet the reality is that we still do not know exactly what the bankers are willing to do. Don’t forget there are still economic growth issues to deal with in many eurozone regions, so just saying you’re going to helpEurope doesn’t mean it’s true.

The reality is that the eurozone and Europe in general are facing high unemployment like we’re witnessing here and lower consumer demand from consumers in Europe and globally. My feeling is that continued muted growth and high debt in the eurozone could drive another recession.

Outside of the eurozone, in the United Kingdom, manufacturing contracted at a two-year high, conjuring up the fear of a recession in a region that is struggling. GDP growth in the UK is predicted to slow to 1.1% this year, down from the previous 1.9% estimate in January, according to The British Chambers of Commerce. The report suggests that the UK’s GDP will rebound 2.1% in 2012. While 2012 and 2013 appear to be reversal points for the economy, the actual growth will be dictated by a best-case scenario. What happens if Italy and Portugal and some of the other weaker eurozone countries fail to reverse their fortune? The impact would be quite negative on theUKand could drive a recession.

According to investment firm Schroders, at its Annual Crystal Ball roundtable, the UKcould enter another recession in 2012 should the eurozone fail to recover. The region’s unemployment rate is predicted to jump to over nine percent with home prices falling six percent. Does this sound familiar?

So while the media talks up a debt resolution in Europe, the reality is that the global economies, specifically in Europe, will continue to lag.

Obviously, I think the eurozone in serious trouble, which you can read about in Get Ready America: All Signs Point to Trouble in Europe.

My top growth area going forward is technology. Read what I have to say in The Next Stock Market Winners: Technology’s the Place to Be.

The reality is that you made some nice profits on your investment portfolio, so my advice to you is to take some profits off the table. I’m seeing some optimism amongst the bulls, but I do not believe stocks can continue to rally much higher given the upper resistance and risk.

What I suggest you do is shield your profits by adopting strong risk management to protect your investment portfolio. The last thing you want is to watch your gains disappear.

One of my favorite strategies I like personally to protect an investment portfolio is the use of put options as a defensive hedge.

Under this scenario, you may be somewhat bearish or uncertain and want to protect the current gains against a downside move in the stock or the market with the use of index put options. By doing so, you are hedging your investment portfolio.

For those of you not familiar with options, a buyer of a put option contract buys the right, but not the obligation, to sell a specific number of the underlying instrument at the strike or exercise price for a specified length of time until the expiry date of the contract. After the expiry date, the particular option expires worthless and any responsibility is eliminated.

The buyer of the put option pays a premium to the writer of the option who gets compensated for assuming the risk of exercise. The writer of the put option is obligated to buy the stock from the holder of the put should it be exercised by the expiry date.

For the writer of the put option, the amount of premium received for assuming the risk is generally directly correlated to the volatility of the stock and market. The more volatile the stock, the higher the premium paid for the option. And low volatility translates into lower premiums.

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 for your investment portfolio.

Just take a look at the various indices that closely reflect your investment portfolio 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).

You can play an aggressive downward slide in technology via the Direxion Technology Bear 3X (TYP).

If your investment portfolio is heavily weighted in technology, you can buy put options in PowerShares ETFs (NASDAQA/QQQQ), a heavily traded put used for defensive purposes.

In this market, I still believe the risk is high. Safety is the key—your investment portfolio will benefit from you taking this stance.

A debt plan may be in place for Europe, but don’t forget about the debt and deficit problems at home that you can read about in America, Time to Talk About Our Debt.

Interested in learning about some of my favorite small mining stocks? Read Mining for Riches: Great Metals Stocks to Check Out.

The key Case-Shiller 20-city Index showed these three metropolitan areas experienced the largest decline in home prices in September. Also consider that 17 of the 20 cities in the index witnessed price erosion in the housing market. The index fell 3.6%. The housing markets in Atlanta, Las Vegas, and Phoenix are sitting at their lowest levels since the beginning of the subprime mortgage mess four years ago.

If you have been waiting for a resurgence in home prices, don’t hold your breath. I have long been negative on the housing market despite some intermittent improvements. Yes, some will point out that the index had reported a slight increase in home prices in at least half of the cities for five straight months to September. That’s great, but prices continued to be under pressure and the increases will be tiny and not deserving of any screaming optimism.

The weak September reading supports my view that the feeble housing market will continue to be a drag on economic renewal.

A strong housing market is critical for the retail sector, as home buyers will tend to get new furnishings, including many big-ticket items. This is not happening; home prices continue to decline, dragged down by continued high foreclosures and short sales, where homes are dumped below the mortgage value. The S&P report showed that homes sold under these distressed circumstances are selling at 20% below the actual value of the mortgage.

The reality is that foreclosures continue to drive the buying in the housing market and this does not reflect well for housing price appreciation. It may not be until 2013 that home prices will steadily rise.

Just go back to the August FOMC meeting in which the Federal Reserve said, “…household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.” The subprime mortgage and credit crisis killed the housing market and it could be several years before we see any sustained recovery.

Jobs, confidence, and higher home prices are needed to drive spending in the retail sector. Only under this scenario will there be sustained spending and economic growth.

With the unemployment rate expected to hold at nine percent in November and 15 million Americans still looking for work, don’t expect a rush to buy homes.

On the plus side, Consumer Confidence in November saw a surprise jump to 56.0, above the estimate of 42.5 and the revised 39.8 in October. The strong reading suggests that consumers may be feeling better or maybe they are happy that the year’s coming to an end. But again, it’s only one month, given that the reading fell for six straight months prior to November.

Let me put it another way. While 56.0 appears impressive, the feeling amongst economists is that a reading of 90.0 is needed to indicate a healthy economy, something that has not happened since December 2007 when the recession began. It looks like it will be some time until the confidence reading heads back towards the pre-recession reading of 90.0.

In the meantime, there’s no home sweet home for the housing market and I would not be buying homebuilder stocks just yet.

While the probability of a U.S. recession is likely at less than 50%, there are increasing signals that a recession could emerge not only in the U.S. but in Europe as well. If this were to happen, it would be devastating for stocks and the jobless, and could sink America deeper into an economic cesspool characterized by further joblessness, declining home ownership, and turmoil.

The Federal Reserve just ordered additional stress tests for the largest U.S. banks to measure the impact if a recession were to surface. Last Tuesday, we saw soft third-quarter GDP of 2.0% versus the estimate of 2.5%. The positive is that the estimate for the Q4 GDP is around 3.0%, albeit there are many who believe the number is way too optimistic. I for one feel that three percent can only be achievable if consumers spend to drive up the critical post-Black Friday holiday spending season followed by a strong cyber Monday.

The reality is that the global economies are in trouble and the debt contagion could spread to non-PIGS countries, such as Italy, the Netherlands, England, and Austria. The eurozone grew a miniscule 0.2% in the third quarter, threatening to contract and drive another recession at a time when there is financial Armageddon in Europe.

The next big financial collapse could be in Italy where the 10-year Italian bond is yielding around seven percent. In addition, the Spanish 10-year bond yields are hovering around 6.5%. The fear is that the critical seven percent levels were the breaking point that triggered the move by Greece and Portugal to ask for emergency funding.

Portugal is in trouble. The country’s 10-year bond yields exploded upwards to 13.85% last Thursday. Fitch just downgraded the country’s credit rating to junk status, blaming the negative tone and move on large fiscal imbalances, high debts, and austerity risks. The problem is that the junk rating means it will be very expensive for Portugal to raise debt and the high carrying costs will be difficult to maintain on the books. Economists polled by Reuters predict that Portugal’s GDP will shrink by 2.9 % in 2012.

The key Markit monthly composite purchasing managers’ index came in at 47.2 in November and continues to signal a contraction in the eurozone. But should Germany and France fail to find any growth, the impact could be devastating for the eurozone and cause another recession. Of course, Greece is still entrenched in its initial recession.

Read what I have to say about the situation in the U.S. in Retail Sector—It’s Make or Break Time.

And you can read about the worsening situation in Greece in European Union, Global Investors…We’re All Fed up with Greece!

The headline each morning would talk about the European debt crisis. The fiasco in Greece was front page. There are also the rising bond yields in Italy and its debt of about $2.5 trillion, but what the debt and deficit in America?

The U.S. national debt recently broke above $15.0 trillion; the debt situation is worsening. Something needs to be done and soon or the country’s financial strength will go down the toilet!

As a requirement to allow the debt ceiling to be increased to over $16.0 trillion, the Obama administration had to agree to cut around $2.0-$3.0 trillion off the deficit over the next decade in order to reduce the national debt. Heck, we are lucky that interest rates are low now or the mounting interest charges on the debt, which already make up the fifth largest component of the debt, will rise at a much faster rate and weaken the country’s financial strength.

A super-committee has been in heated discussions to come up with some sort of bipartisan agreement to trim the deficit by $1.2 trillion by the November 23 deadline. This did not happen, so the budget is now facing automatic deficit cuts of $1.2 trillion over the next decade. The question is: where will the cuts be from?

Take a look at the breakdown of the debt. The top six budgetary areas are: Medicare/Medicaid, Social Security; Defense/Wars; Income Security; Interest on the Debt ($218.35 billion!); and Federal Pensions.

We know that President Obama will save money after announcing that would pull out American troops from Iraq by the year’s end. This will help, but I hope there is not another war or conflict around the corner, or we will be in real trouble.

Where I think there will be additional cuts will be Social Security and possibly Federal Pensions. The reality is that cuts and an austerity plan are required. Greece, Portugal, Italy and Ireland are cutting back on spending or risk default. The U.S. is no different. You cannot go on and just print money and hope the debt problem goes away.

The problem is that the U.S. economy is in the renewal phase, so it is clearly not the best timing for cuts, albeit if the debt and deficit are not dealt with now, we would likely see further problems around the corner and a potential cut in the U.S. credit rating from the current AA+. Moody’s and Standard & Poor’s recently suggested that another rate cut was possible if the debt and deficit situation is not resolved.

The bottom line is that everyone knows what needs to be done, so let’s do it.

Did you notice the lack of Chinese IPOs coming down the pipeline? Read my thoughts in Chinese Reverse Merger Stocks Taking More Hits.

Black Friday is this week and it will be critical for the U.S. economy, as I discussed in Retail Sector—It’s Make or Break Time.

The European debt crisis is keeping buyers on the sidelines and waiting for something magical to happen. The economic recovery is showing improvement here, but, with a high unemployment rate and declining home prices, it will continue to be a difficult path.

On the charts, the blue-chip Dow Jones Industrial Average breached below 12,000 and its 200-day moving average (MA) last Wednesday, but has managed to hold in positive territory for the year.

The NASDAQ and S&P 500 broke below their respective 200-day MAs and are back to the loss column. The S&P 500 is holding just above its 50-day MA of around 1,200.

The stock market risk is high especially since the charts continue to show a bearish “death cross,” with the 50-day MA below the 200-day MA. The stock indices need to hold at the critical 50-day MA; otherwise, there could be downside moves.

The light volume on up days is a red flag and indicates stock market risk. The buying has been associated with light volume, which does not support mass market participation. The end result is a bearish divergence forming between price and volume, and adds to the stock market risk.

An interesting fact is that the key stock indices have peaked on three successive upward moves, but the tops of the peak have been lower.

There is also stock market risk with the moving average convergence/divergence (MACD) indicator, which appears to be topping. The MACD on the NASDAQ looks the worst, with a minor sell signal emerging.

The NASDAQ could drift down towards the 2,400 level, which we last saw at the start of October, if sustained buying support fails to emerge.

In the commodities area, copper appears to have found some legs after its recent slide. Copper is playing off the prospects for the global economies after a bullish double bottom.

I continue to recommend adding some gold to your holdings as a counter to the stock market risk. Although at times the bullion has had a rough ride, prices have turned around significantly after first breaking above $400.00 and we believe the spot price of gold could take a run at $2,000 in 2012 should the global economies and stock market risk continue.

Silver is a trading commodity based on the economic recovery and demand for electronics and industrial applications. A strong break above $35.00 would be positive and could drive a rally to around $40.00.

The December WTI Oil remains bullish—breaking above $100.00 on November 16 after data showed a decline in U.S. oil supplies. The problem is that higher oil means higher gasoline prices, which could ultimately impact consumer spending and the stock market risk.

Whatever you are trading, the key is prudence; do not over-commit to any one area.

Given the risk, make sure you are hedged via put options, which you can read about in Protect Your Money Made From the Rally (PC103111).

Do you want to play China-listed stocks with less risk? Read How to Play China with Less Risk

I favor the metal plays and continue to smell opportunities, especially in the mining companies and junior gold miners, which have lagged the gold and silver rally.

On Wednesday, small-cap gold miner Jaguar Mining Inc. (NYSE/JAG) surged 45% on news of a potential $1.0-billion takeover bid from China-based Shandong Gold Group. If the deal pans out and is accepted by Jaguar, the price of JAG may still have some room to move higher, as the current market-cap is still below $700 million. Of course, if the proposed price includes the $247 million in debt on the balance sheet, then there is little wriggle room.

I’m not surprised with the bid, as Chinese mining companies have been buying foreign mining companies for years in an effort to increase the metal reserves the country controls. This is the reason why I like some of the smaller mining companies, especially those with a massive reserve of proven metals in the ground waiting to be developed.

If you want to play the small mining companies, there are hundreds of plays. While I do not guarantee that these stocks will be like Jaguar, you never know, which is why it’s speculative.

I have listed several small mining companies below that look interesting for the speculative trader. I’m not specifically recommending that you buy any of these stocks; just that you take a look at them.

Keegan Resources Inc. (AMEX/KGN, TSX/KGN) recently reported positive feasibility results. I like this stock as an aggressive small-cap play.

Another I like is Canada-based Taseko Mines Limited (AMEX/TGB), which mines for copper and gold in Canada. The small-cap has a market cap of $604 million and is profitable, with above-average price appreciation potential. The stock is interesting, as it is trading just above its 52-week low and well below its 52-week high of $6.38.

Take a look at small-cap Golden Star Resources Ltd. (AMEX/GSS). The gold company has operating mines in western Ghana and southwest Ghana, along with exploration properties in Ghana, Sierra Leone, Burkina Faso, Niger, Cote d’Ivoire, and Brazil. With the stock trading at 5.71X its 2012 earnings per share (EPS), I like the valuation and potential for long-term gains.

For gold traders, check out small-cap Nevsun Resources Ltd. (AMEX/NSU), which beat on EPS and revenues.

Within the non-precious metals mining companies, take a look at Thompson Creek Metals Company Inc. (NYSE/TC), a miner of molybdenum—a metal used for creating stainless steel and other applications, including the production of rare earth used in electronics

My advice to you is to buy a mixture of exploration-stage gold mining companies and small to large gold producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers.

One of my top large-cap mining plays is Newmont Mining Corporation (NYSE/NEM), which I recently discussed in Newmont Mining: A Class Act in Gold.

I also think gold will again challenge the $2,000 level in 2012. Read my thoughts in Debt Crises & Economic Fragility Around the World: Is There a Better Reason to Buy Gold Right Now?

I have often talked about Europe and particularly the eurozone and the massive hurdles the region faces going forward. The grave situation overseas is real and is not going away anytime soon. This will impact trading here and add to the overall stock market risk.

We’ve seen the departures of both the Greek and Italian leaders, but it’s going to take a lot more to resolve the European debt crisis. There is talk now that policymakers in Europe are warning that the European debt crisis is spreading to the larger eurozone countries and will pose significant dangers to not only Europe, but also the other global economies.

We have Germany and France—the two biggest funders of emergency capital for the European debt crisis—debating on the role of the European Central Bank. This should not be a surprise, as Germany and France have watched their economies tank while focusing on the weaker members of the eurozone.

At this juncture, the eurozone is on the verge of another potential recession. The probability of another recession in the eurozone is 40%, according to a poll conducted by Reuters.

Growth in the eurozone was a dismal 0.2% for the third quarter, as the European debt crisis is clearly impacting growth. Factories in the eurozone have contracted for three straight months. The Flash Markit Eurozone Services Purchasing Managers’ Index (PMI) is contracting at 47.2 in October, down from a 48.8 reading in September, and short of the estimate of 48.5.

The rising bond yields are a sign of trouble ahead, which will make it more difficult to sell debt and pay back loans given the European debt crisis.

For instance, the yield on the Italian 10-year bond is above seven percent. Where is Italy going to find the money to pay these high yields? But the yields are high, as investors have to receive higher yields to compensate for the higher risk of carrying the bonds. When Greece was near default, the yield on its one-year bond was over 90%.

Then we have Spain bond yields at around 6.22%. France, the Netherlands, and Austria are also seeing higher yields, an indication that the European debt crisis is spreading.

Remember that, when bond yields broke above seven percent in Greece, Portugal and Ireland, it indicated trouble and eventually resulted in an emergency bailout.

This is not to suggest that Italy and Spain are in the same boat, but if the muted growth in the eurozone continues and the European debt crisis spreads, it could happen. What is disturbing is that Italy and Spain are major eurozone and global countries based on their respective GDP.

My view is that the debt crisis, deficit, and stalling growth issues cannot continue much longer; otherwise Europe will falter and fall into a deeper or new recession.

Given the downside risk, you should hedge via put options, as I discussed in How to Survive During This Economic Chaos.

In technology, I continue to feel that Apple Inc. (NASDAQ/AAPL) is the “best of breed” in spite of the recent passing of Steve Jobs. You can read my thinking in Apple Is Shining Bright…RIM, Not So Much

While gold and gold stocks have provided some of best performing stocks, I continue to feel that technology will be the place to be as an investment opportunity for growth investors going forward.

The third-quarter earnings season is drawing to a close with only 46 S&P 500 companies to report as of November 11. For the third quarter, the blended earnings growth rate was a healthy 17.7%, up from 13.1% as of October 3, according to Thomson Reuters. Of the 454 S&P 500 companies that have reported, 70% exceeded estimates, with 20% falling short. These results are slightly off from the Q3 in 2010, in which 71% of S&P 500 companies beat estimates and 19% fell short. For the fourth quarter, the blended earnings growth rate is expected at around 10.5%.

The reality is that earnings have been made to look better via cost cuts and control. The guidance going forward has been nothing spectacular. Yet, where we are seeing some impressive revenue growth is the technology area, which I feel will be a top investment opportunity going forward.

Technology will see the best chance for investment opportunity. The NASDAQ has been stronger, having broken back above its 200-day moving average (MA) and is positive for the year.

I continue to believe that technology will be a critical area for investment opportunity, since this sector has provided much of the leadership over the last several years.

The area to watch for the best investment opportunity is the area of mobility applications for tablets and smart phones, as users shift away from the more cumbersome PCs and laptops. Apple is the “best of breed” in my view. A wildcard investment opportunity could be Microsoft Corporation (NASDAQ/MSFT), as it gets set to launch its new smartphones with Nokia Corporation (NYSE/NOK).

Big-name technology continues to look positive, but for higher gains, you need to look in the small-cap area for a really big investment opportunity.

For instance, famed investor George Soros’ Quantum Fund China owns this Chinese information technology (IT) stock as a top five holding to play China’s growth. The stock must be good to satisfy Soros and could make a great investment opportunity.

Beijing, China-based iSoftStone Holdings Limited (NYSE/ISS) provides IT services to clients and globally. Services include consulting & solutions, IT services, and business process outsourcing.

What impresses me about iSoftStone as an investment opportunity is its global reach. Sales at the end of September were China (59.2%), U.S. (24.8%), Europe (7.3%), Japan (8.3%), and other (0.4%).

The client industry breakdown at the end of September was technology (27.7%), communications (40.3%), BFSI (banking, financial services and insurance, 19.4%), Energy, Transport, and public (6.1%), and other (6.5%).

The valuation at 14.27 times its projected 2012 earnings per diluted share is reasonable. .

The five-year estimated annual earnings growth rate is 38%. The price-earnings growth (PEG) ratio of 0.48 is attractive if the company can deliver on its earnings.

iSoftStone is just one example of numerous small-cap tech plays that don’t immediately jump out at you, but that are interesting. Note that we’re not recommending any of the stocks mentioned here as “buys” right now; they’re just examples of what to look for in the promising tech sector.

The key to tech investing is to look away from just brand-name stocks; make sure you are diversified so as to minimize the total portfolio risk.

I feel that the market risk is high, as discussed in Stock Market Risk Just Keeps Climbing Higher.

And be careful with Chinese IPOs and stocks; read all about them in Chinese Reverse Merger Stocks Taking More Hits.

The small-cap Russell 2000 had been down over 26%, but with the stock market rally over since the beginning of October, small-cap stocks have rebounded out of their bear market, minimizing the decline to around four percent as of last Wednesday. Despite the rally, small-caps continue to trail blue-chip and big-cap stocks.

Even during the chaos, I continue to favor small-cap stocks as the valuations are more attractive and may be worth a look for aggressive long-term investors.

And, while I view the holding of large-cap stocks as an integral part of your portfolio for added overall portfolio returns, you need to add small-cap stocks. These stocks add to the risk component of your portfolio, but you are compensated by a higher overall expected return from your investments.

Basic modern portfolio theory tells us that you can increase the expected return of a portfolio by simply adding more risk. This is the advantage of adding small-cap stocks.

A standard and simple measure of stock risk versus the market is called “beta”—a quantitative measure of systematic or market risk that cannot be diversified away and is generally in relation to the S&P 500 or another market/benchmark.

A beta of less than one implies that a stock has less risk than the market and hence less expected return, whereas a beta of greater than one implies a higher comparative risk versus the market, meaning possibly higher expected returns.

An example as far as small-cap stocks is semiconductor company Kulicke and Soffa Industries, Inc. (NASDAQ/KLIC). The stock has a beta of 3.09 versus the S&P 500. This means that KLIC incorporates greater risk than the S&P 500 and will tend to move in correlation to the broader market, but at a faster rate.

In theory, should the S&P 500 move up, KLIC would move up by 3.09 times the move of the index, and should the S&P 500 move down, KLIC would move lower by 3.09 times.

When markets rally, high beta stocks will tend to fare better. But a note of warning: buying only higher beta stocks does not necessarily translate into higher returns, as it also results in greater volatility and downside risk when the broader market declines.

To increase the overall risk of your holdings, you need to increase the expected return. The most important fact to understand is that you can increase the risk-reward profile of your portfolio by adding small-cap stocks and/or sectors that have higher growth potential.

If the global economies settle down and show renewed growth, look to small-cap stocks to outperform.

In the mining area, I like some of the smaller miners versus the large-cap producers. Read what I say in Why You Might Want to Look at Buying the Miners.

Within the small-cap area, I favor the technology group, which I discussed in Selective Tech Investing the Key to Success.

The perennial question for any gold investor is whether to buy gold bullion or gold mining stocks. I favor gold stocks over the higher risk of other commodity options.

While generally favoring gold stocks, I view Newmont Mining Corporation (NYSE/NEM) in particular as a strong example of the type of stock that should bring value to your portfolio for years to come.

Without a doubt, for those investors looking to hedge their portfolios with gold exposure, Newmont Mining deserves to be at the top of the list. This company stands out among other players for two reasons: 1) size; and 2) low production costs, even in the rising price environment.

Over the years, Newmont has grown rapidly through mergers and acquisitions, as well as the development of its existing reserves. This strategy resulted in the company’s diversified risks; namely, unlike junior producers, Newmont doesn’t depend on one or two of its mines for its future and it is certainly not exposed to politically unstable regions.

In that regard, the risk is spread out, as the company continues to maintain an aggressive worldwide exploration program and is actively participating in and taking advantage of the ongoing industry consolidations.

In terms of costs, Newmont enjoys an overall favorable cost structure, although the recent quarter painted a very bleak picture when it came to capital expenditures. Its South American operations are the major factor in keeping the company’s costs down. This is particularly true with the Yanacocha property in Peru, where cash costs are in the lowest-per-ounce price range.

The company’s diversified portfolio of low-cost mines allows it to remain profitable, even during prolonged weakness in the gold bullion market. In the past 10 years, Newmont has posted net losses three times, yet each year it has generated positive operating cash flows.

Over the past five years, Newmont’s investment rate has been around 60% (investment rate is the percentage of profits the company has returned back to its business operations).

This strategy is consistent with what most producers do; return every dollar earned, and then some, back into the operations. However, with Newmont, it seems to come with ease, adding further to its attractiveness, as it can grow even during periods of depressed gold prices and at a lower investment rate.

Newmont’s cash flows are highly sensitive to the price of gold, because the company remains largely unhedged, thus exposing itself to the whims of the gold market. However, market data and the current economic environment suggest that the gold market is dancing with the bulls, so the company’s unhedged strategy promises profits, as the price of gold rises further.

This is the stock that saw its market price go up double percentage points over the past three years and its sales double every three years. The company is growing aggressively—both internally and by acquisitions—and has sufficient cash in the bank to finance that growth.

Newmont Mining appears to be the perfect choice for investors looking for a company with excellent fundamentals, a proven track record, and experienced and knowledgeable management. This is not a recommendation necessarily to buy the stock right now, but definitely take a look at it.

Newmont is a leader in gold. In technology, a company that has fallen on hard times, but that I feel is set for fresh growth is Microsoft Corporation (NASDAQ/MSFT), which you can read about in Microsoft May Be Set for Prime Time.

Stocks are currently vulnerable to the downside selling that I recently discussed in Economic Analysis: Upward Moves Positive, But Resistance Will Be Difficult. So keep an eye on that with any stock you’re considering.

Stocks dove on more uncertainties in Europe, specifically with the European debt issue continuing to drive the hourly trading here on the higher stock market risk.

We have discussed the financial mess in Greece. Now there is heightened concern about who will lead Italy after the pending resignation of Italian Prime Minister Silvio Berlusconi. Consider the fact that the yields on the 10-year Italian bond have surged to over seven percent. This may foreshadow more bad news to come. The speculation is that, when bond yields in the Greece, Portugal, and Ireland 10-year bonds surpassed seven percent; a bailout was triggered, as these countries did not have the ability and means to pay high yields. So now Italy appears to be in trouble, but I have talked about this quite often in my commentaries.

You need to be aware of the stock market risk at this stage. Yes, the recent upward moves in stocks were encouraging for the bulls, but you need to have your guard up.

The fact is that we have had an average earnings season and the debt situation in Europe remains problematic with Greece and the other PIGS countries. There are also domestic issues, namely jobs, housing, deficit, and the economic renewal, which add to the stock market risk.

I have talked about the technical analysis of the charts and the fact that a bearish death cross was still in place, despite the recent five-week rally. I’m cautious, as the trading volume has been relatively light on the four recent up days, which suggests a bearish divergence between price and volume. A death cross is when the 50-day moving average (MA) is below the 200-day MA, indicating high stock market risk.

While the key stock indices are holding at the 50-day MA, the DOW, S&P 500, and NASDAQ broke back below their respective 200-day MAs last Wednesday. With the decline, the S&P 500 fell back into the red for the year, while the NASDAQ is just barely holding on.

The key now is to be aware of the stock market risk.

I have suggested taking some profits off the table during the recent rally. At this stage, you should ride the gains, unless we see a chart reversal; but also make sure that you use put options or buy short-based ETFs as a hedge against the stock market risk.

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), and IWM (Russell 2000). You can play an aggressive downward slide in technology via the Direxion Technology Bear 3X (TYP).

Be careful given the stock market risk and remember that maintaining your capital will allow you to trade longer-term.

Gold remains a favorite area of mine given the added risk, which you can read about in That Gold Chart’s No Fluke.

I continue to avoid European markets for obvious reasons (see A European Recession: Will There Be One?).

The major focus has been on reverse mergers originating from China, which has resulted so far in numerous scams. As a result, the flow of Chinese stocks trying to list via reverse mergers has dissipated and I do not sense a return to the recent years when Chinese IPOs came to U.S. markets by the hundreds. There have been only 11 Chinese IPOs this year.

The flow of reverse mergers has plummeted by about 50% in the third quarter compared to the previous year, largely due to the decline in IPOs from China.

In addition, the demand for IPOs and reverse mergers has been negatively impacted by the higher global risk that is impacting the interest in speculators wanting to buy.

The flow of IPOs is continuing to suffer, as many issuers hold off due to the negative environment for new stocks.

Reverse-merger-based IPOs continue to be a disappointment for investors, as we approach the fourth quarter. The near term is poor for new reverse merger stocks, but I believe there could be better companies once the regulations are cleaned up.

The weakness of the reverse merger stocks is evident from the poor performance of the Bloomberg Chinese Reverse Mergers Index (CHINARTO Index), which is a market capitalization weighted index that tracks China-based companies trading on U.S. exchanges following reverse mergers. As of November 8, the index is down over 50% from December 2010, compared to the S&P 500 rise of about 0.32% during the same period. The results have been horrendous; but, over the past month, there has been some improvement, as the CHINARTO Index is up about seven percent.

The non-weighted China Main Index (TCM) tracks 40 profitable U.S.-listed Chinese small-cap growth stocks. Yet, despite these companies having profits, the performance has been dismal; down 65.7% from its inception in December 2009.

At present, investors continue to be nervous towards IPOs via reverse mergers due to the enormous volatility in the share prices and the higher risk in the broader market.

The majority of reverse merger stocks have taken a hit following the U.S. Securities and Exchange Commission (SEC) announcement irrespective of the strength and growth prospects of the business, solid financial performance, and clean reputation of the management. This gives an opportunity to investors to be selective and invest in such firms, and earn higher returns.

If you want to play Chinese stocks, but with less risk, take a look at an example of how to do this with an exchange-traded fund (ETF) in How to Play China with Less Risk.

And I still believe the landing in China will be fine, as I discussed in China’s Economic Landing: Hard or Soft?

The key Christmas shopping season could be a struggle for the retail sector, as we know retailers are nervous about the ability of consumers to want to spend. How consumers spend will likely tell us how the economy will fare in 2012. With consumer spending accounting for about 70% of the GDP growth in this country, it will be critical.

As we found out last week, job creation continues to be a struggle. The non-farm payrolls showed the creation of 80,000 jobs in October, below the 85,000 estimate and the upwardly revised 158,000 (+55,000) in September. While the new jobs were the lowest in four months, a positive was the upward revision and a drop in the unemployment rate to nine percent.

My concern is that the lack of jobs negatively impacts consumer confidence, spending, and growth in the retail sector. When consumers feel less optimistic, there is a tendency to cut back on spending, specifically on major purchases such as homes, vehicles, furniture, appliances and travel, to name a few.

Consumer Confidence continues to be extremely weak. October saw another weak reading at 39.8, well below the estimate of 46.0 and the revised 46.4 in September. The subpar readings clearly indicate the nervousness of consumers and cannot be good for the retail sector.

To give you an idea of how bad the readings are, economists say that a reading of 90 indicates a healthy economy, something that has not happened since December 2007, when the recession began. It looks like it will be some time until the confidence reading heads back towards the pre-recession level of 90.

Moreover, add in the fact that the U.S. housing market remains in a mess after prices declined to below the lows of 2006, and you’ll understand my concerns going forward for the retail sector.

To drive the economy, consumers need to spend. We have interest rates at historic lows and quantitative easing. It is working, but not as fast as I would like to see.

A strong housing market is also critical for the retail sector, as homeowners tend to buy new furnishings, including many big-ticket items. This is not happening, as home prices continue to decline, dragged down by continued high foreclosures and short sales where homes are dumped below the mortgage value. The key Case-Shiller 20-city Index show that prices on average declined another 3.80% across the 20 largest U.S. cities in August, following a 4.21% decline in July. The reality is that foreclosures are driving the buying and this does not bode well for housing price appreciation. It may not be until 2013 that prices steadily rise.

Jobs, confidence, and higher home prices are needed to drive spending in the retail sector. Only under this scenario will there be sustained spending and economic growth.

I continue to sense that stocks will face difficult resistance and remain vulnerable to a downside reversal, but you can protect via put options, as I discussed in Today’s Stock Market: Managing Your Risk.

While spending is an issue domestically, the Chinese continue to spend, as I talked about in The Chinese Economy: What You Need to Know Right Now.

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.

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 to Greece’s debt crisis.

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 and continuing debt crisis. 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.

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.

You have probably made some nice profits on your investment portfolio, so my advice to you is to take some profits off the table. I’m seeing some incredible euphoria amongst the bulls, but I do not believe stocks can continue to rally without some sort of market adjustment. I have discussed this belief numerous times in past commentaries.

If the economy doesn’t deliver jobs this week, your investment portfolio could retrench. The key now is to protect your profits by adopting strong risk management to protect your hard-earned capital. The last thing you want is to watch your gains disappear.

One of my favorite strategies I like personally to protect an investment portfolio is the use of put options as a defensive hedge.

Under this scenario, investors may be somewhat bearish or uncertain and want to protect the current gains against a downside move in the stock or the market with the use of index put options. By doing so, you are hedging your investment portfolio.

For those of you not familiar with options, a buyer of a put option contract buys the right, but not the obligation, to sell a specific number of the underlying instrument at the strike or exercise price for a specified length of time until the expiry date of the contract. After the expiry date, the particular option expires worthless and any responsibility is eliminated.

The buyer of the put option pays a premium to the writer of the option, who gets compensated for assuming the risk of exercise. The writer of the put option is obligated to buy the stock from the holder of the put should it be exercised by the expiry date.

For the writer of the put option, the amount of premium received for assuming the risk is generally directly correlated to the volatility of the stock and market. The more volatile the stock, the higher the premium paid for the option. And low volatility translates into lower premiums.

You can buy puts for stocks and sectors. If your investment portfolio is heavy in technology, you can buy puts on the NASDAQ. Or let’s say your investment portfolio has benefited from the run-up in gold and silver to record historical highs; a good strategy may be to buy put options on The Philadelphia Gold & Silver Index, which tracks 10 major gold and silver stocks.

If your investment portfolio is heavily weighted in technology, you can buy put options in PowerShares ETFs (NASDAQA/QQQQ), a heavily traded put used for defensive purposes.

It’s that easy. Just take a look at the various indices that closely reflect your holdings or put options on individual stocks that you may have a large position in.

In this market, safety is the key and your investment portfolio will benefit from it.

An area that I continue to like given the strength of metals is that of mining stocks. You can read about it in Why You Might Want to Look at Buying the Miners, where I list three examples of interesting mining stocks.

One of my favorite technology stocks continues to be Apple, Inc. (NASDAQ/AAPL), which you can read about in Apple Is Shining Bright…RIM Not So Much.

My Chinese stocks I cover in my newsletter China Investment Letter are struggling, but I continue to be long-term bullish on China and the Chinese economy. However, watch for the short-term volatility.

Playing Chinese stocks and capital markets involves great political and economic risk. However, as I have said, a well-diversified portfolio will enable you to play Chinese stocks, especially those of the small-cap variety.

The Chinese economy continues to grow at over nine percent, but it’s down from over 10% in 2010. This does not mean that the Chinese economy is set for a hard landing as some pundits would want you to believe, but this amount of growth is impressive.

The risk for many of you is to minimize the risk of buying small Chinese stocks. You can do this by buying exchange-traded funds (ETFs).

In the funds area, I like the Dreyfus Premier G China (DPCRX) mutual fund and the PowerShares Golden Dragon Halter USX China (AMEX/PGJ) ETF. The Dreyfus and PowerShares have strong small-cap Chinese stocks components.

If you are looking for more of a blue-chip focus to play the growth of the Chinese economy, take a look at the iShares FTSE/Xinhua China 25 Index (NYSE/FXI). The fund holds the top major companies in China. Holding this fund allows you to own large blue-chip Chinese companies that will benefit from the Chinese economy, which you would otherwise would unable to easily get access to unless you trade Asian markets.

The ETF is based on the Xinhua 25 Index, consisting of 25 of the largest and most liquid Chinese stocks. The FXI ETF is a relatively conservative play on Chinese stocks.

The FXI ETF has a large-cap focus and would be more suited to conservative investors, albeit even more speculative investors should have some large-cap holdings in their portfolios for diversification purposes.

The FXI ETF contains no technology stocks, but focuses on companies that benefit from a growing Chinese economy. The four top sectors as of September 30 include financial services (46.17%), energy (19.04%), telecommunications (19.41%), and basic materials (13.69%). The top four holdings have been the same since the start of 2010, so you get a sense of what areas the fund likes. The large financial portion presents a higher-risk element, especially given the decision to slow down lending in the Chinese economy.

The fund started out strong, but has been struggling. Based on the net asset value (NAV), the FXI ETF has a five-year return of 4.50% versus 8.08% for the group. Year-to-date, the fund is underperforming, down 27.29% versus -12.19% for its peer group.

If the fund can turn its fortunes and the Chinese economy doesn’t tank, the FXI ETF may work for more conservative investors looking for some blue-chip Chinese stocks.

If you want to know why I do not believe a hard landing is in store for China, read China’s Economic Landing: Hard or Soft?

Read about why Chinese reverse merger stocks are dead but could improve with the move towards cleaning up the listing process in Market Risk Dries up IPO and Reverse Mergers Pipelines.