Eurozone unemployment has hit its highest level since the euro was introduced (1999). Among the 17 countries that make up the eurozone, December statistics show that 16.5 million people are seeking work, resulting in an unemployment rate of 10.4% (source: European Union’s Statistics Office).

 Sure, there are bright spots. German unemployment fell to 6.7%, while Austria holds the lowest jobless rate in the eurozone of 4.1%, with the Netherlands a close second at 4.9%.

But the good news stops there. The highest unemployment rate in the eurozone can be found in Spain at a staggering 23%, a level not visited since 1993. Spain itself, partly due to austerity measures, sees GDP contracting by 1.5% in 2012—as if the country didn’t have enough problems!

 Italy’s unemployment rate reached 8.9%, an eight-year high, as it institutes austerity measures. Greece’s unemployment rate stands at 19.2%, while Ireland’s latest January figures reveal a 14.2% unemployment rate. France’s unemployment rate reached a 12-year high of 9.3%, as the country continues to implement austerity measures.

 Despite these staggering numbers, the news get worse when December youth (ages 15-24) unemployment rates are extracted from the eurozone data:

 Spain: 51% youth unemployment rate

Greece: 47% youth unemployment rate

Italy: 31% youth unemployment rate

Portugal: 31% youth unemployment rate

Eurozone: 21% youth unemployment rate

 At the basic level, the question is: how is the next generation supposed to create families and do their part as consumers when they can’t find work? Dear reader, look at those numbers again and think of the implications for the countries listed. Out of necessity, children have to remain with parents well past their working age. Families are forced to live together under one roof because they can’t make ends meet. Growth and prosperity cannot be fostered in the eurozone in this type of environment.

 I understand Germany’s insistence for austerity measures in eurozone countries: in order to bring down government deficits and get government debt under control. However, don’t use the word “austerity” in the same breath as “growth.”

 Austerity measures have meant lost jobs and a reduction in wages for countries, which in turn reduce government revenue, which means governments cannot meet their budget targets imposed by the austerity measures, which in turn means deeper job cuts—a snake eating its own tail.

 The eurozone had better be careful, because these numbers reveal a breaking point. This level of unemployment could lead to social unrest; where the unemployed in Greece, Ireland, Portugal and Spain take to the streets and demand an exit from the eurozone and a return of their independence. With a recession in 2012, the situation will only worsen in the eurozone.

 In my opinion, saying the U.S. will escape the economic devastation in Europe is like saying the U.S. economy will not be affected by a fall in housing prices (as one Central Bank Chief said after housing prices started deflating in 2006). (See: Economic Slowdown for 2012 Will Be Worldwide.)

 Michael’s Personal Notes:

The U.S. Congressional Budget Office (CBO) just released its latest report on its projected budget deficits for the next 10 years.

 Under current laws and tax policies, it foresees a budget deficit in 2012 for the U.S. government of $1.1 trillion. This is based on GDP growth of two percent. In 2013, the CBO expects the budget deficit to shrink significantly to $585 billion; based on the assumption of GDP growth of just 1.1% (I’ll believe it when I see it).

 What is shocking is that we are going to have another trillion-dollar budget deficit this year, as government debt in this country continues to climb at an alarming rate. That means that the debt ceiling, right after the election, is going to have to be increased again.

 A ceiling of $16.394 trillion currently and counting!

 Furthermore, if we take the GDP forecasts from the CBO, which I believe could be optimistic, then how does the budget deficit supposedly shrink to just $585 billion in 2013 with GDP of just 1.1%? The answer is the expiration of tax provisions.

 If current tax breaks are eliminated, then Federal Tax Revenues are:

 $2,302 trillion—fiscal 2011 (actual)

$2,523 trillion—fiscal 2012 (estimate)

$2,988 trillion—fiscal 2013 (estimate)

 That means that, in just two short years, taxes in this country will increase 30%(?).

 I’m not criticizing the CBO. They are going by the laws currently in place, and projecting budget deficits accordingly. What I want to point out, dear reader, is that, with GDP growth of two percent this year and 1.1% next year, how is the current or newly elected administration going to allow these tax provisions to expire?

 With the average American in dire straits and the economy weak, will the Bush era tax cuts not be renewed? Will all of the other benefits that were enacted because of the financial crisis be allowed to expire—in spite of government debt—when we haven’t come out of this extended recession/depression?

 I’m contending that the U.S. is not Europe and that the current/new administration will continue past policies. I believe these tax breaks will not be allowed to expire. Should that be the case, we are going to face another trillion-dollar budget deficit in 2013.

 Time to raise the debt ceiling yet again…

 As if that were not dire enough, the CBO admitted that, even under its most conservative estimates, the costs of Medicare, Medicaid and other healthcare programs will double over the next decade to at least $1.8 trillion a year, placing an incredible strain on the budget deficit.

 The CBO itself warns that these costs, combined with Social Security, at current estimates, are not sustainable in the longer term. Revenues need to increase substantially to offset this government debt or the budget deficit will balloon out of control.

 Is it any wonder that the Federal Reserve took drastic steps just a few weeks ago, saying it will keep interest rates near zero until late 2014? The economy needs to grow again so that the tax breaks can be rescinded and tax revenues can grow again, thus resulting in shrinking budget deficits and government debt. Right now, this scenario is facing a steep, uphill climb, because growth is nowhere to be found.

Be wary of the recent stock market rise. We are witnessing a bear in sheep’s clothing. I continue to believe that the only viable insurance against the above numbers consists of gold bullion and the undervalued gold mining shares. (See: Gold Stocks: There’s Value in Them There Hills.)

 Where the Market Stands; Where it’s Headed:

 For the benefit of my new readers, here is where I believe we are with the stock market, the big picture:

 A 25-plus-year bull market in stocks ended in October of 2007. At that point, a secular (which means “long”) bear market was born. By March of 2009, Phase I of the bear market was over (bear markets have three phases), as stocks had fallen 55% from their October 2007 high.

 The bear market entered Phase II in March of 2009 and that’s where we are now. A Phase II bear market is a rally in the confines a secular bear market. It’s when stock prices rally from oversold levels. It’s when the bear market tries to lure investors back into stocks by giving investors the impression that all is well with the economy and stocks are safe again. Phase II bear markets tend to last three to four years.

 The next phase of the secular bear market is Phase III. That’s when investors are caught off guard because everything looks rosy, but stock prices start to decline. Phase III bear markets bring stocks back down to the level where the Phase I bear market started, in this particular case, 6,440 for the Dow Jones Industrial Average.

 That’s why I keep telling my readers: Enjoy this bear market rally while it lasts, because it’s not permanent.

 What He Said:

 “Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi in PROFIT CONFIDENTIAL, May 27, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

Under current laws and tax policies, it foresees a budget deficit in 2012 for the U.S. government of $1.1 trillion. This is based on GDP growth of two percent. In 2013, the CBO expects the budget deficit to shrink significantly to $585 billion; based on the assumption of GDP growth of just 1.1% (I’ll believe it when I see it).

What is shocking is that we are going to have another trillion-dollar budget deficit this year, as government debt in this country continues to climb at an alarming rate. That means that the debt ceiling, right after the election, is going to have to be increased again.

A ceiling of $16.394 trillion currently and counting!

 Furthermore, if we take the GDP forecasts from the CBO, which I believe could be optimistic, then how does the budget deficit supposedly shrink to just $585 billion in 2013 with GDP of just 1.1%? The answer is the expiration of tax provisions.

 If current tax breaks are eliminated, then Federal Tax Revenues are:

 $2,302 trillion—fiscal 2011 (actual)

$2,523 trillion—fiscal 2012 (estimate)

$2,988 trillion—fiscal 2013 (estimate)

 That means that, in just two short years, taxes in this country will increase 30%(?).

 I’m not criticizing the CBO. They are going by the laws currently in place, and projecting budget deficits accordingly. What I want to point out, dear reader, is that, with GDP growth of two percent this year and 1.1% next year, how is the current or newly elected administration going to allow these tax provisions to expire?

With the average American in dire straits and the economy weak, will the Bush era tax cuts not be renewed? Will all of the other benefits that were enacted because of the financial crisis be allowed to expire—in spite of government debt—when we haven’t come out of this extended recession/depression?

 I’m contending that the U.S. is not Europe and that the current/new administration will continue past policies. I believe these tax breaks will not be allowed to expire. Should that be the case, we are going to face another trillion-dollar budget deficit in 2013.

Time to raise the debt ceiling yet again…

As if that were not dire enough, the CBO admitted that, even under its most conservative estimates, the costs of Medicare, Medicaid and other healthcare programs will double over the next decade to at least $1.8 trillion a year, placing an incredible strain on the budget deficit.

 The CBO itself warns that these costs, combined with Social Security, at current estimates, are not sustainable in the longer term. Revenues need to increase substantially to offset this government debt or the budget deficit will balloon out of control.

 Is it any wonder that the Federal Reserve took drastic steps just a few weeks ago, saying it will keep interest rates near zero until late 2014? The economy needs to grow again so that the tax breaks can be rescinded and tax revenues can grow again, thus resulting in shrinking budget deficits and government debt. Right now, this scenario is facing a steep, uphill climb, because growth is nowhere to be found.

 Be wary of the recent stock market rise. We are witnessing a bear in sheep’s clothing. I continue to believe that the only viable insurance against the above numbers consists of gold bullion and the undervalued gold mining shares. (See: Gold Stocks: There’s Value in Them There Hills.)

 Where the Market Stands; Where it’s Headed:

 For the benefit of my new readers, here is where I believe we are with the stock market, the big picture:

 A 25-plus-year bull market in stocks ended in October of 2007. At that point, a secular (which means “long”) bear market was born. By March of 2009, Phase I of the bear market was over (bear markets have three phases), as stocks had fallen 55% from their October 2007 high.

 The bear market entered Phase II in March of 2009 and that’s where we are now. A Phase II bear market is a rally in the confines a secular bear market. It’s when stock prices rally from oversold levels. It’s when the bear market tries to lure investors back into stocks by giving investors the impression that all is well with the economy and stocks are safe again. Phase II bear markets tend to last three to four years.

 The next phase of the secular bear market is Phase III. That’s when investors are caught off guard because everything looks rosy, but stock prices start to decline. Phase III bear markets bring stocks back down to the level where the Phase I bear market started, in this particular case, 6,440 for the Dow Jones Industrial Average.

 That’s why I keep telling my readers: Enjoy this bear market rally while it lasts, because it’s not permanent.

 What He Said:

 “Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi in PROFIT CONFIDENTIAL, May 27, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

When Whirlpool Corporation (NYSE/WHR), the world’s largest appliance maker, cited higher material costs as one of the major factors that impacted its latest earnings report, you can see rising prices again. The company is focused on reducing costs and raising prices, in order to counteract this.

The Hershey Company (NYSE/HSY), a global leader in chocolate and sugar confectionery, released a strong earnings report. However, it wasn’t an increase in demand that spurred their earnings report; instead, the company was able to raise prices enough to offset the increase in the cost of its inputs.

The Proctor & Gamble Company (NYSE/PG), one of the world’s largest consumer products makers, lowered its 2012 estimates due to—along with foreign exchange rates—higher commodity costs. The company is attempting to offset these with multiple measures, including raising prices.

These blue-chip leaders are all citing rising commodity prices as putting pressure on their margins and earnings reports. And most of these blue-chips have been able to offset higher commodity prices, as detailed in their earnings report, by raising prices to the end consumer.

There are two trends happening here, my dear reader…

Since the Federal Reserve made its historic announcement last week that it would be keeping interest rates near zero until late 2014, commodity prices have resumed their rise. Mattel, as an example, believes that commodity prices will continue to rise in 2012, as indicated in its latest earnings report.

The other trend that is critical to highlight is that these blue-chip companies have been, by and large, able to maintain their margins by raising prices.

I’ve been talking about how strained the American consumer is. And since the blue-chips I’m talking about above are multinational companies, it is safe to say that European consumers are feeling the pinch as well, while even economies in Asia are slowing, pressuring their consumers.

As 2012 rolls along and the global economy continues to slow, will these blue-chip companies be able to pass along higher prices to consumers? I doubt it. But if they don’t, they’ll hurt their margins, earnings reports, and share prices. If they do raise prices, inflation will become a problem for the end consumer—who is squeezed already with no wage growth and no jobs. It’s a no-win situation.

Where the Market Stands; Where it’s Headed:

Yesterday was a nice start to the month of February. Since the beginning of 2012, the Dow Jones Industrial Average has risen 4.1%. Could we be getting close to that final blow-off for the bear market rally I’ve been waiting for? Maybe. After all, the Dow Jones is getting closer and closer to that magic 13,000 level.

We are in a bear market rally in stocks that started in March of 2009.

What He Said:

“We will wish Greenspan never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in PROFIT CONFIDENTIAL, April 27, 2004. Michael first started warning about the negative repercussions of Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.

The U.S. economy cannot recover unless the U.S. housing market recovers. As a past “real estate man,” (in my life), I’ve never seen an economic recovery unaccompanied by a real estate market recovery.

There was a lot of speculation going into 2011 that it would be a year for the U.S. housing market to find a bottom. Well, the U.S. housing market hit a “bottom” last year, but not one to build upon.

U.S. new home sales fell 2.2% in December, which closed out 2011 with 302,000 new homes during the year, down from 323,000 new home sales in 2010 (Source: U.S. Commerce Department). In terms of number of units sold, this makes 2011 the worst year on record for new home sales—since 1963. So much for a U.S. housing market recovery.

Even though mortgages are at historically low interest rates, the low rates are not translating into new home sales. Sure, fear of further price declines in the U.S. housing market is discouraging people from buying new homes and directing consumers to rent instead, which I’ve been talking about.

And although fear of further home price declines may play a role, I’m more inclined to believe that the stagnant jobs market and weak economy are resulting in the greatest fear: uncertainty. This is what is really driving more people to rent homes instead of buying homes.

There are those still forecasting a rebound in 2012 for the U.S. housing market, but as I’ve been talking about in PROFIT CONFIDENTIAL, government estimates for foreclosures are still high at 1.8 million homes to be foreclosed upon for each of 2012 and 2013 (source: Federal Reserve Bank of New York). That will place serious pressure on home prices and new home sales; builders are going to be very hesitant towards breaking new ground.

Another factor that will pressure the U.S. housing market is the typical consumer having to pay down those debts and save, after the consumer credit-induced spending spree that occurred late in 2011.

Over the last month, I’ve been talking about how consumer spending cannot be maintained at this pace, since it is based on credit—debt—and not an increase in wealth or an increase in wages (both of which have stowed away on a ship years ago and are lost somewhere in the middle of the ocean).

The Commerce Department just reported that personal income advanced at the fastest pace in nine months in December, probably due to year-end bonuses. Still, with the nice bump in wages, did the consumer take the extra money and spend? No. The savings rate increased to a five-month high, as consumers remained frugal.

If we look at the average family household with still-high debt levels, no wage growth, an uncertain economy, and high gas prices, how can the average American be expected to spend or go out with great confidence and say, I want to buy a home because the U.S. housing market is cheap?

Watch out for those homebuilder stocks that have been rising lately. And be suspicious of this past January’s stock market rally—it will not be a barometer of what’s ahead for 2012.

For the record: my prediction at the beginning of 2011 was for home prices in the U.S. to decline between five percent and 10% in 2011. Final actual figures have not yet been released yet. Once I get them, I will of course pass them on to my readers. For 2012, I’m predicting U.S. housing prices will fall again—about five percent this year.

Michael’s Personal Notes:

When the world’s largest toy company—Mattel, Inc. (NASDAQ/MAT)—raises prices in order to offset rising material costs (as detailed in their latest earnings report), one takes notice.

When Whirlpool Corporation (NYSE/WHR), the world’s largest appliance maker, cited higher material costs as one of the major factors that impacted its latest earnings report, you can see rising prices again. The company is focused on reducing costs and raising prices, in order to counteract this.

The Hershey Company (NYSE/HSY), a global leader in chocolate and sugar confectionery, released a strong earnings report. However, it wasn’t an increase in demand that spurred their earnings report; instead, the company was able to raise prices enough to offset the increase in the cost of its inputs.

The Proctor & Gamble Company (NYSE/PG), one of the world’s largest consumer products makers, lowered its 2012 estimates due to—along with foreign exchange rates—higher commodity costs. The company is attempting to offset these with multiple measures, including raising prices.

These blue-chip leaders are all citing rising commodity prices as putting pressure on their margins and earnings reports. And most of these blue-chips have been able to offset higher commodity prices, as detailed in their earnings report, by raising prices to the end consumer.

There are two trends happening here, my dear reader…

Since the Federal Reserve made its historic announcement last week that it would be keeping interest rates near zero until late 2014, commodity prices have resumed their rise. Mattel, as an example, believes that commodity prices will continue to rise in 2012, as indicated in its latest earnings report.

The other trend that is critical to highlight is that these blue-chip companies have been, by and large, able to maintain their margins by raising prices.

I’ve been talking about how strained the American consumer is. And since the blue-chips I’m talking about above are multinational companies, it is safe to say that European consumers are feeling the pinch as well, while even economies in Asia are slowing, pressuring their consumers.

As 2012 rolls along and the global economy continues to slow, will these blue-chip companies be able to pass along higher prices to consumers? I doubt it. But if they don’t, they’ll hurt their margins, earnings reports, and share prices. If they do raise prices, inflation will become a problem for the end consumer—who is squeezed already with no wage growth and no jobs. It’s a no-win situation.

Where the Market Stands; Where it’s Headed:

Yesterday was a nice start to the month of February. Since the beginning of 2012, the Dow Jones Industrial Average has risen 4.1%. Could we be getting close to that final blow-off for the bear market rally I’ve been waiting for? Maybe. After all, the Dow Jones is getting closer and closer to that magic 13,000 level.

We are in a bear market rally in stocks that started in March of 2009.

What He Said:

“We will wish Greenspan never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in PROFIT CONFIDENTIAL, April 27, 2004. Michael first started warning about the negative repercussions of Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.

There were 92 U.S. bank failures in 2011. Total assets of those banks were just over $36.0 billion. (Wonder why we didn’t read much about this in the news.)

Since the credit crisis began in late 2007 to the end of 2011, there were a total of 417 U.S. bank failures whose assets totaled about $680 billion (source: FDIC). The number of people that lost their jobs at these 417 institutions has obviously not helped job creation in this country.

What is more distressing, dear reader, is that the Federal Deposit Insurance Corporation (FDIC) reported that the number of current troubled banks rose to 111 in its latest quarterly report. That many distressed banks for a single quarter is at a 15-year high. The stresses on the financial systems are mounting and we may be talking about job losses, not job creation, in the coming quarters.

Total assets represented by those 111 banks are a stunning $180 billion…and that’s only one quarter’s worth!

There have been many articles written on the big banks that are “too big to fail” since the crisis erupted in 2008, but little has been written about the smaller banks, which, by and large, have not had the luxury of bailout money from the Fed. Small banks were once a big part of job creation. Not anymore.

What many fail to realize:

It is the smaller regional bank that lends to small businesses in its community and supports job creation, not the big banks. It is the smaller regional bank that helps support the local real estate market resulting in job creation, not the big banks.

There is no question that small businesses are an important source of job creation in this country.

The very high number of distressed U.S. banks point to a real estate market that is not recovering, and small businesses that are not borrowing, which implies little job creation.

Further evidence comes from some of the CEOs of the smaller banks themselves, which have recently indicated how little lending is occurring at the small business level, and how they see no recovery in the real estate market in their local communities (again no job creation).

Small-town America is in trouble.

The first thing you should do as an investor and consumer is to verify that your bank is on the distressed list. However, you should also be very careful as to your investment portfolio to ensure you do not own stocks in companies that have exposure to smaller U.S.  banks. Sure, the FDIC provides depositor insurance, but only to a set amount.

The above has been a grassroots look at what is happening in local communities and the smaller banks that are such a big part of these banks. The news isn’t good. If real estate and small businesses are under duress (and we know they are), then there can be no job creation, which means the GDP numbers will continue to come under pressure and job creation will be elusive…possibly resulting in a higher unemployment rate.

Small-town America is what made this country and it’s suffering big-time right now. Small businesses employee about half of all private employees in the U.S. (source: SBA). The government focus since the credit crisis began has been about Wall Street, the Big Banks, and “Too Big to Fail” companies.

There has been very little done to help the backbone of America, small businesses. And this is one of the main reasons the economy cannot get going in 2012 and why I’m predicting it will be a very difficult year for U.S. economic growth. Job creation will continue to elude us. (See: Recent GDP Numbers Confirm My Prediction.)

Michael’s Personal Notes:

The victim toll of the European Union’s recession is beginning to mount…

Spanair, Spain’s fourth largest airline, filed for voluntary bankruptcy on Monday. Unfortunately, I predict this will be the first of many victims to come, as the recession in the European Union takes hold.

The Barcelona-based firm stopped operating as of last Friday, canceling 200 flights and stranding thousands of passengers across the European Union.

Spanair, a key Spanish carrier that began operations in 1986, pinned its hopes on a merger with Qatar Airlines, but unfortunately talks fell through. Since 2009, as it continued to struggle with the weak economy, the regional government of Catalonia provided €150 million to the airline to help it get through difficult times.

The problem is, those difficult times never subsided, bur rather intensified. After talks with Qatar failed, the airline returned to the government of Catalonia for another undisclosed sum of money. The government refused, due to the severe budget cuts it needed to implement for the austerity measures imposed on it by the European Union.

With losses mounting and with debt of over €300 million, the airline felt it had run out of options and time, with bankruptcy being the only solution.

Spanair is a regional carrier that specialized in short-haul flights within Spain, and on medium-haul routes to parts of the European Union and North Africa. There is no question that the airline faced competition from low-cost carriers Ryanair and Easyjet. However, the recession in Spain reduced air travel significantly, which hurt the carrier’s bottom line.

Not only are Spanair’s 2,400 employees out of a job, but it is estimated that, through contractors, an additional 1,600 people could be affected. This is compounded by the fact that the unemployment rate in Spain stands at a staggering 23.3%, with that economy showing no signs of turning the corner, as austerity measures continue to hamper growth.

The regional government of Catalonia not only spent €150 million in taxpayer money to keep the airline afloat, but it also owns 24% of the airline, which means that it further stands to lose an estimated €349 million.

This, dear reader, could be a harbinger of things to come in the European Union and throughout the world. Companies in distress seek government aid to help them through tough economic times. There are no funds left to bail out these companies, especially when austerity measures enacted by the European Union need to be adhered to.

With the recession firmly in place in the European Union, and growth outside the European Union difficult to find, this leaves many firms with no choice but to declare bankruptcy.

As the strain in the European Union intensifies, this will affect growth here in the U.S. Welcome to 2012. Fasten your seatbelt tight, dear reader; the forecast calls for turbulent times ahead. (Also see: Half of the Eurozone Downgraded: Time to Start Worrying.)

Where the Market Stands; Where it’s Headed:

The numbers are in: the Dow Jones Industrial Average was up 3.4% for January—its best January in about 10 years. This is good and bad. It’s good if you believe in the January effect theory, which states that, if January is up, the remainder of the year is up (I don’t give much credit to the theory). The January rally is “bad” because, despite the Fed saying it will keep interest rates down until late 2014 and despite the government asking to increase the national debt by $1.0 trillion more (which means more spending), we really didn’t get much response from the stock market.

A bear market rally in stocks was born on March 9, 2009. That rally has lasted 34 months. It is common for such rallies to last three to four years. However, this rally is getting very old, very tired.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in PROFIT CONFIDENTIAL, April 8, 2004. Michael first started warning about the negative repercussions of then Fed Governor Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.

Spanair, Spain’s fourth largest airline, filed for voluntary bankruptcy on Monday. Unfortunately, I predict this will be the first of many victims to come, as the recession in the European Union takes hold.

The Barcelona-based firm stopped operating as of last Friday, canceling 200 flights and stranding thousands of passengers across the European Union.

Spanair, a key Spanish carrier that began operations in 1986, pinned its hopes on a merger with Qatar Airlines, but unfortunately talks fell through. Since 2009, as it continued to struggle with the weak economy, the regional government of Catalonia provided €150 million to the airline to help it get through difficult times.

The problem is, those difficult times never subsided, bur rather intensified. After talks with Qatar failed, the airline returned to the government of Catalonia for another undisclosed sum of money. The government refused, due to the severe budget cuts it needed to implement for the austerity measures imposed on it by the European Union.

With losses mounting and with debt of over €300 million, the airline felt it had run out of options and time, with bankruptcy being the only solution.

Spanair is a regional carrier that specialized in short-haul flights within Spain, and on medium-haul routes to parts of the European Union and North Africa. There is no question that the airline faced competition from low-cost carriers Ryanair and Easyjet. However, the recession in Spain reduced air travel significantly, which hurt the carrier’s bottom line.

Not only are Spanair’s 2,400 employees out of a job, but it is estimated that, through contractors, an additional 1,600 people could be affected. This is compounded by the fact that the unemployment rate in Spain stands at a staggering 23.3%, with that economy showing no signs of turning the corner, as austerity measures continue to hamper growth.

The regional government of Catalonia not only spent €150 million in taxpayer money to keep the airline afloat, but it also owns 24% of the airline, which means that it further stands to lose an estimated €349 million.

This, dear reader, could be a harbinger of things to come in the European Union and throughout the world. Companies in distress seek government aid to help them through tough economic times. There are no funds left to bail out these companies, especially when austerity measures enacted by the European Union need to be adhered to.

With the recession firmly in place in the European Union, and growth outside the European Union difficult to find, this leaves many firms with no choice but to declare bankruptcy.

As the strain in the European Union intensifies, this will affect growth here in the U.S. Welcome to 2012. Fasten your seatbelt tight, dear reader; the forecast calls for turbulent times ahead. (Also see: Half of the Eurozone Downgraded: Time to Start Worrying.)

Where the Market Stands; Where it’s Headed:

The numbers are in: the Dow Jones Industrial Average was up 3.4% for January—its best January in about 10 years. This is good and bad. It’s good if you believe in the January effect theory, which states that, if January is up, the remainder of the year is up (I don’t give much credit to the theory). The January rally is “bad” because, despite the Fed saying it will keep interest rates down until late 2014 and despite the government asking to increase the national debt by $1.0 trillion more (which means more spending), we really didn’t get much response from the stock market.

A bear market rally in stocks was born on March 9, 2009. That rally has lasted 34 months. It is common for such rallies to last three to four years. However, this rally is getting very old, very tired.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in PROFIT CONFIDENTIAL, April 8, 2004. Michael first started warning about the negative repercussions of then Fed Governor Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.

Manufacturing jobs have fallen steadily since the 1950s. Low-wage countries, especially China, have been the center of the movement of factory work and job creation out and away from the United States.

In the 1960s, manufacturer United States Steel Corporation (NYSE/X) employed over 225,000 factory workers, Westinghouse Electric, had 114,000, and General Motors Company (NYSE/GM) employed over 595,000 factory workers. The center of job creation in America was manufacturing.

Today, service companies in the U.S. dominate the economic landscape when it comes to job creation: United Parcel Service, Inc. (NYSE/UPS) employs over 400,000 people; Target Corporation (NYSE/TGT), 355,000; and Wal-Mart Stores, Inc. (NYSE/WMT) has 2,100,000 service employees on its payroll. From what I can see, job creation over the past three years has been in the service sector (with heavy emphasis on retail) and at the government level.

In his State of the Union address last week, the President was adamant about wanting manufacturing jobs to come back to America. It will probably be a major part of his re-election campaign, in a bid to spur job creation, which is sorely needed in this country. But how can it possibly happen? Isn’t it a pipedream that manufacturing jobs will return to America so the job creation engine will start running again?

China’s development and rapid job creation have led to wages rising at least 15% per annum in recent years, which means that, within five years, the cost savings to manufacturers of producing in China as compared to the U.S. will be minimal (source: Boston Consulting Group).

But manufacturers have a choice if labor gets too expense in China. They can simply move their factories to other less-developed economies where wages are rock-bottom and job creation is sorely needed. Why move back to America? The only way to stimulate job creation by creating manufacturing jobs here in the U.S. would be to revamp healthcare costs and our tax structure in order to make the U.S. an attractive place to invest.

The other major factor in determining a plant location for manufacturers is a weak currency. One cannot understate the importance of exchange rate currency costs in setting up a manufacturing plant. The reason China, India and other such developing countries were able to lure manufacturing jobs away in the first place, and so create the foundation for a surge in job creation was a favorable exchange rate to the once mighty U.S. dollar.

Have the tables turned?

Is it just a coincidence that, in the same week as the State of the Union address, the Fed came out with its policy directive of maintaining its almost-zero rate policy until 2014?

If the President is making manufacturing jobs part of his election campaign for job creation and the Fed has sent a clear message to the markets that it wants to stimulate the economy, then, in my opinion both, add up to a weaker U.S. dollar.

When the Fed announced its policy initiative last week, precious metals, commodities and stocks in general rose, while the U.S. dollar fell. Should more money printing be in the cards, you can bet that the U.S. dollar will continue to fall, as it did during QE1 and QE2.

So, dear reader, if the agenda is to lower the value of the U.S. dollar in order to revive job creation, then what will be the benefit in this market for investors to take advantage of?

Precious metals will benefit most, with gold bullion and gold mining stocks leading the way. It is my belief that gold mining stocks are cheap relative to gold bullion; but, at the very least, ensure that you have some of the shiny stuff in your possession. It will protect you from the loss of purchasing power that will come with a declining U.S. dollar. (Also see: Gold Stocks: There’s Value in Them There Hills.)

The following chart explains my words quite well.

(Source: Lombardi Financial)

Michael’s Personal Notes:

U.S. GDP numbers released Friday, a key indicator of economic growth, confirm what I have been saying for weeks…the U.S. economic growth is slowing, not growing.

Here are the full-year GDP numbers for the U.S. over the past three years:

GDP 2009: -2.4%

GDP 2010: 3.0%

GDP 2011: 1.7%

GDP (which stands for gross domestic product: the total market value of all the goods and services produced by a country in a given period) grew at a “lukewarm” 1.7% in 2011 over 2010. When compared to 3.0% growth in GDP in 2010 over 2009, the obvious question is: where is the economic recovery?

The picture becomes even more distressing when we look at fourth-quarter GDP numbers, because they point to a deceleration in growth.

On the surface, the 2.8% rise in fourth-quarter U.S. GDP was weaker than what Wall Street expected. When digging deeper into the numbers, we find that restocking of business inventories accounted for a whopping 1.94 % of GDP in the quarter. This is temporary boost to GDP.

If we remove inventory restocking from the numbers, we find that the U.S. economy grew at just a measly 0.8% in the fourth quarter of 2011, when compared to the third quarter’s 1.8% rise in GDP.

My feeling, looking at my regular economic gauges, is that there is a clear deceleration of growth as we head further into 2012.

Consumer spending, which accounts for 70% of GDP, came in 2.0% higher in the fourth quarter of 2011, missing estimates of 2.4%, but slightly better than the 1.7% pace of the third quarter. Keep in mind, dear reader, as I’ve been saying in PROFIT CONFIDENTIAL, the meager growth the U.S. economy is experiencing is on the back of sharply higher debt spending by consumers (especially over the holidays), which cannot be sustained going forward.

Let’s also keep in mind that gas prices have remained elevated thus far in 2012. With the continued escalation of tensions with Iran and the U.S. dollar falling in value against other major world currencies (except the euro), this will further dampen GDP growth going forward.

Corporate spending on capital goods rose in the fourth quarter of 2011 at the slowest pace since 2009. The corporate sector continues to be timid against the backdrop of slow worldwide economic growth, preferring to stockpile cash instead of inventory.

I’ve been talking about the terrible shape that local and state U.S. governments are in. Their budgets are stretched to the limit, with states like Illinois and California virtually bankrupt. It comes as no surprise that, in the fourth quarter of 2011, the government spending component of GDP shrank for a fifth straight quarter. Many state governments continue to struggle to get their finances under control.

Couple this with the fact that there are no major stimulus programs currently coming out of the White House and we can assume that government spending will continue to remain a drag on GDP growth in 2012.

This latest GDP report merely confirms the weak economic data that have been coming in of late. Not only does this key indicator put downward pressure on the U.S. dollar, but it also makes one wonder how the markets can continue to move higher under these economic circumstances. Eventually, slow or deteriorating economic growth will push down corporate earnings and, when corporate earnings decline, so does the stock market. (Also see: Last Bastion of Higher Stock Prices Turning Negative.)

Where the Market Stands; Where it’s Headed:

The score: What looked like a strong January for the stock market has dissipated. The Dow Jones Industrial Average starts this morning up a diminishing 3.6% for 2012.

Yes, the bear market rally that started in March of 2009 is alive and well. But it is also weak and tired, getting near the end of its cycle.

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.” Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.

Here are the full-year GDP numbers for the U.S. over the past three years:

GDP 2009: -2.4%

GDP 2010: 3.0%

GDP 2011: 1.7%

GDP (which stands for gross domestic product: the total market value of all the goods and services produced by a country in a given period) grew at a “lukewarm” 1.7% in 2011 over 2010. When compared to 3.0% growth in GDP in 2010 over 2009, the obvious question is: where is the economic recovery?

The picture becomes even more distressing when we look at fourth-quarter GDP numbers, because they point to a deceleration in growth.

On the surface, the 2.8% rise in fourth-quarter U.S. GDP was weaker than what Wall Street expected. When digging deeper into the numbers, we find that restocking of business inventories accounted for a whopping 1.94 % of GDP in the quarter. This is temporary boost to GDP.

If we remove inventory restocking from the numbers, we find that the U.S. economy grew at just a measly 0.8% in the fourth quarter of 2011, when compared to the third quarter’s 1.8% rise in GDP.

My feeling, looking at my regular economic gauges, is that there is a clear deceleration of growth as we head further into 2012.

Consumer spending, which accounts for 70% of GDP, came in 2.0% higher in the fourth quarter of 2011, missing estimates of 2.4%, but slightly better than the 1.7% pace of the third quarter. Keep in mind, dear reader, as I’ve been saying in PROFIT CONFIDENTIAL, the meager growth the U.S. economy is experiencing is on the back of sharply higher debt spending by consumers (especially over the holidays), which cannot be sustained going forward.

Let’s also keep in mind that gas prices have remained elevated thus far in 2012. With the continued escalation of tensions with Iran and the U.S. dollar falling in value against other major world currencies (except the euro), this will further dampen GDP growth going forward.

Corporate spending on capital goods rose in the fourth quarter of 2011 at the slowest pace since 2009. The corporate sector continues to be timid against the backdrop of slow worldwide economic growth, preferring to stockpile cash instead of inventory.

I’ve been talking about the terrible shape that local and state U.S. governments are in. Their budgets are stretched to the limit, with states like Illinois and California virtually bankrupt. It comes as no surprise that, in the fourth quarter of 2011, the government spending component of GDP shrank for a fifth straight quarter. Many state governments continue to struggle to get their finances under control.

Couple this with the fact that there are no major stimulus programs currently coming out of the White House and we can assume that government spending will continue to remain a drag on GDP growth in 2012.

This latest GDP report merely confirms the weak economic data that have been coming in of late. Not only does this key indicator put downward pressure on the U.S. dollar, but it also makes one wonder how the markets can continue to move higher under these economic circumstances. Eventually, slow or deteriorating economic growth will push down corporate earnings and, when corporate earnings decline, so does the stock market. (Also see: Last Bastion of Higher Stock Prices Turning Negative.)

Where the Market Stands; Where it’s Headed:

The score: What looked like a strong January for the stock market has dissipated. The Dow Jones Industrial Average starts this morning up a diminishing 3.6% for 2012.

Yes, the bear market rally that started in March of 2009 is alive and well. But it is also weak and tired, getting near the end of its cycle.

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.” Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.

The Price/Earnings (P/E) ratio takes the current market price of a stock or index and divides it by the earnings of that stock or index.

Historically, P/E ratios between five and 10 are considered undervalued and indicate a good time to invest in stocks, with the thesis being that corporate earnings have bottomed. When the range is 10 to17, the companies/indices are considered at fair value by most stock market analysts; 18-25 is overvalued; with anything above 25 being considered a bubble (the S&P 500 was well above 25 during the tech bubble of 1997 to 1999).

Personally, given the low-interest-rate environment of today, I see stocks as a bargain if the P/E ratio is between 10 and 12 and corporate earnings are not nose-diving.

It is said that the stock market is the most efficient valuation tool in the world for valuing companies. In 2010, the stock market knew 2011 would be a great year for corporate earnings, hence stock prices moved higher in anticipation of higher corporate earnings.

Even with the latest rise in the stock market, the S&P 500’s current P/E ratio stands at 15.13, while the Dow Jones Industrials’ P/E comes in at 13.77. This would be considered fairly valued.

Some would make the case that any upside surprise in the U.S. economy would result in strong corporate earnings, which would move such a fairly valued market much higher.

The problem with this rationale is the “E” in the P/E—corporate earnings per share. I noted just yesterday how blue-chip companies in the S&P 500 and abroad are struggling in this environment. Over the past month, I’ve been talking about how the recession in the eurozone is causing growth to slow sharply in both Asia and the U.S. (See: Half of the Eurozone Downgraded: Time to Start Worrying.)

In the U.S., this slow growth environment (which I believe could become a recession) means corporate earnings are going to come under extreme pressure. Already, companies are blaming the difficult global economic environment for their lowered 2012 corporate earnings forecasts.

I have a feeling that P/E ratios for both the S&P 500 and the Dow may challenge the undervalued levels closer to 12 or even 11 in 2012, as disappointing quarterly corporate earnings begin to pour in. The market may be undervalued at that point, but I don’t believe the market will perform well in such an environment.

Dear reader, at these fairly valued P/E levels, the S&P 500 and the Dow Jones Industrial Average do not look attractive. If you want to jump into stocks with the hope that corporate earnings will turn higher in 2012, it’s your choice.

Just keep in mind that that roar you hear in the background is the bear lurking in the shadows. I know I’m not buying into this market (except for gold-related investments); I’m just sitting back waiting for one final blow-off to the top for the bear market rally that started in the spring of 2009. (Also see: Official Numbers in: 2012 Not Looking Good.)

Michael’s Personal Notes:

The king of the hill no longer…and a good lesson:

It was not surprising to hear that the co-CEOs of Research In Motion Limited (NASDAQ/RIMM) had stepped down earlier this week amid a falling stock price, poor investor sentiment, falling corporate earnings growth, and increased shareholder pressure to find a way to compete with Apple Inc. (NASDAQ/AAPL) and Google Inc. (NASDAQ/GOOG), which have both been steadily eating away at smartphone market share.

It was not surprising either to hear that, amid the economic turmoil, International Business Machines Corporation (NYSE/IBM), or IBM, the world’s largest computer-services provider, not only beat fourth-quarter 2011 estimates with its corporate earnings, but also painted a strong picture for 2012, boosting investor sentiment.

The “BlackBerry” set the standard for the smartphone industry and provided Research In Motion with an enviable brand name that stood for quality and ease-of-use (sometimes referred to as “CrackBerry” by those so addicted to it), which propelled their corporate earnings and their stock price, amid positive investor sentiment. However, Apple and Google redefined the smartphone industry, turning the almost untouchable BlackBerry into an inferior smartphone; the king of the hill no longer.

In 2004, when IBM decided to sell its personal computer business to Lenovo Group Ltd. (Pink Sheets/LNVGY), some people were very surprised. IBM’s management team understood that the personal computer business had become a commodity business. Future corporate earnings growth would have to come from focusing on the services side of the business, leveraging the solid brand name that IBM had garnered.

Contrast IBM’s decision to Research In Motion’s. IBM’s management team was proactive and responded to the changing dynamics of its industry, as was eventually evidenced by the company’s spectacular corporate earnings. Research In Motion was late in responding to what competitors were doing, instead of taking the lead that it had, introducing new products or entering new market segments, leveraging its brand name.

For Research In Motion to succeed at this point, it needs to redefine the smartphone or improve its product line.

This is easier said than done, because now, Research In Motion’s once stellar brand has been tarnished. Had IBM remained simply a personal computer manufacturer, its brand name would have easily been reduced to “little blue,” reflecting stagnant corporate earnings, instead of the respect and positive investor sentiment it garners today with the brand name of “Big Blue.”

Other hardware makers followed IBM after realizing that business services were where the growth and margins would now come from. IBM was able to not only maintain its market share, but also grow it. Today, IBM is once again redefining itself. The company is focused on generating half of its corporate earnings from business software programs that will help businesses analyze and project trends.

There is a big lesson to be learned here from an investor’s point of view.

IBM’s management team is proactive, responsive to their market’s needs, and is constantly searching for the next opportunity to redefine their industry and increase corporate earnings. Research In Motion’s management’s team failed to take advantage of their lead and brand name in order to expand their market share and/or define other market segments they could have aggressively pursued for future growth.

Research In Motion is now in a reactive mode to what the market is already doing. The stock is a very risky proposition here, in my opinion, because the next stage is going to be a critical one. Investor sentiment is understandably at a “prove it” stage. If the company doesn’t execute, its once-elite brand will be reduced to the dustbin and, along with its stock price, corporate earnings growth will disappear.

When it comes to investing, yes, corporate earnings, dividends, and valuations are very, very important. But you cannot underestimate leadership. Steve Jobs put Apple in a position whereby it led the industry with new and exciting products. Thomas Watson, the “father” of IBM who was with the company for 42 years, was famous for simply focusing executives on THINKING.

I cannot stress how important leadership and ingenuity are for a company’s success. It’s something most investors fail to look at when buying the stocks of public companies.

Where the Market Stands; Where it’s Headed:

If today was the last trading day of January, the Dow Jones Industrial Average would be up 4.3% for the month. Let’s not celebrate just yet. We have two trading days left. I bring this year’s performance up to remind my readers that last January we also had a great start to the year for stocks—but the year in total ended up being almost flat for the stock market.

We are in a bear market rally in stocks that started in March of 2009. This rally is getting old and tired, but still has life left.

What He Said:

“A Stock Market’s Obituary: It is with great sadness that we announce the passing of the Dow Jones Industrial Average. After a strong and courageous battle, the Dow Jones fell victim to a credit crisis and finally succumbed on Friday, October 3, 2008, when it fell decisively below the mid-point between its 2002 low and its 2007 high.” Michael Lombardi in PROFIT CONFIDENTIAL, October 6, 2008. From October 6, 2008, to November 27, 2008, the Dow Jones Industrial Average experienced one of its biggest two-month losses in history.

It was not surprising to hear that the co-CEOs of Research In Motion Limited (NASDAQ/RIMM) had stepped down earlier this week amid a falling stock price, poor investor sentiment, falling corporate earnings growth, and increased shareholder pressure to find a way to compete with Apple Inc. (NASDAQ/AAPL) and Google Inc. (NASDAQ/GOOG), which have both been steadily eating away at smartphone market share.

It was not surprising either to hear that, amid the economic turmoil, International Business Machines Corporation (NYSE/IBM), or IBM, the world’s largest computer-services provider, not only beat fourth-quarter 2011 estimates with its corporate earnings, but also painted a strong picture for 2012, boosting investor sentiment.

The “BlackBerry” set the standard for the smartphone industry and provided Research In Motion with an enviable brand name that stood for quality and ease-of-use (sometimes referred to as “CrackBerry” by those so addicted to it), which propelled their corporate earnings and their stock price, amid positive investor sentiment. However, Apple and Google redefined the smartphone industry, turning the almost untouchable BlackBerry into an inferior smartphone; the king of the hill no longer.

In 2004, when IBM decided to sell its personal computer business to Lenovo Group Ltd. (Pink Sheets/LNVGY), some people were very surprised. IBM’s management team understood that the personal computer business had become a commodity business. Future corporate earnings growth would have to come from focusing on the services side of the business, leveraging the solid brand name that IBM had garnered.

Contrast IBM’s decision to Research In Motion’s. IBM’s management team was proactive and responded to the changing dynamics of its industry, as was eventually evidenced by the company’s spectacular corporate earnings. Research In Motion was late in responding to what competitors were doing, instead of taking the lead that it had, introducing new products or entering new market segments, leveraging its brand name.

For Research In Motion to succeed at this point, it needs to redefine the smartphone or improve its product line.

This is easier said than done, because now, Research In Motion’s once stellar brand has been tarnished. Had IBM remained simply a personal computer manufacturer, its brand name would have easily been reduced to “little blue,” reflecting stagnant corporate earnings, instead of the respect and positive investor sentiment it garners today with the brand name of “Big Blue.”

Other hardware makers followed IBM after realizing that business services were where the growth and margins would now come from. IBM was able to not only maintain its market share, but also grow it. Today, IBM is once again redefining itself. The company is focused on generating half of its corporate earnings from business software programs that will help businesses analyze and project trends.

There is a big lesson to be learned here from an investor’s point of view.

IBM’s management team is proactive, responsive to their market’s needs, and is constantly searching for the next opportunity to redefine their industry and increase corporate earnings. Research In Motion’s management’s team failed to take advantage of their lead and brand name in order to expand their market share and/or define other market segments they could have aggressively pursued for future growth.

Research In Motion is now in a reactive mode to what the market is already doing. The stock is a very risky proposition here, in my opinion, because the next stage is going to be a critical one. Investor sentiment is understandably at a “prove it” stage. If the company doesn’t execute, its once-elite brand will be reduced to the dustbin and, along with its stock price, corporate earnings growth will disappear.

When it comes to investing, yes, corporate earnings, dividends, and valuations are very, very important. But you cannot underestimate leadership. Steve Jobs put Apple in a position whereby it led the industry with new and exciting products. Thomas Watson, the “father” of IBM who was with the company for 42 years, was famous for simply focusing executives on THINKING.

I cannot stress how important leadership and ingenuity are for a company’s success. It’s something most investors fail to look at when buying the stocks of public companies.

In its most recent Federal Open Market Committee meeting, which concluded yesterday, the Federal Reserve announced that it would extend its near-zero interest rates policy until at least the end of 2014—further down the road from its previous timeline of mid-2013.

What this means for investors like me and you…

This historic move by the Fed (I have a feeling I’ll be using the “historic move” line again in 2012) is a bid to help the U.S. economy, which is obviously in the doldrums regardless of what the statistics say.

Businesses and the average person have now been told that higher interest rates won’t be an issue for at least the next 35 months. The idea is interest rates that are low will spur consumers to borrow and businesses to initiate capital projects (to create jobs).

But, hold on a minute. With consumers hobbled with debt they can’t pay off and jobs being scarce, won’t consumer demand remain weak?

The Fed’s decision not to raise interest rates for 35 more months will not spur economic growth, as it is up to the White House, and not the Fed, to repair the structural issues with the U.S. economy.

The Fed has cut its economic growth forecast for 2012 to 2.2% from 2.7% (I predict a further downward revision), while predicting 2.8% to 3.2% growth for 2013 (highly unlikely). Remember that these low growth rates are predicted in a period where short-term higher interest rates are nonexistent.

Yesterday, the Fed described the unemployment rate as “elevated” and acknowledged that business investment has slowed (issues I’ve been talking about) and, in light of this, it predicts that the U.S.unemployment rate will only come down slightly.

Dear reader; short-term interest rates have already been kept near zero for almost four years. This is unprecedented. Over the last 40 years, interest rates have normally been in the four percent to five percent range, with the Federal Funds Discount Rate moving at least one half of one percent, up or down, at least every six months.

Over the last four years, with interest rates at historical lows and the Fed expanding its balance sheet with QE1 and QE2, economic growth has been in the two percent range, which is far below growth rates from normal recovery periods after a recession.

And, during a normal economic recovery period, interest rates rise—they don’t decline!

The immediate conclusion is that we have not experienced a normal recession; it was closer to a depression. Nor have we experienced any type of meaningful recovery, which is what I’ve been saying all along (and the reason why I believe we will fall back into hard economic times once more before this is all over).

Precious metals and gold mining stocks reacted to the news that the Fed has decided to keep interest rates at zero until late 2014 by moving significantly higher in price. Gold bullion jumped almost three percent to over $1,700 an ounce yesterday. Why? Because real interest rates continue to remain negative and the real rate of return on short-term bonds is negative (i.e. loss of purchasing power).

Ultimately, what the Fed announced Wednesday—that it will keep short-term interest rates at zero until late 2014—will lead to greater inflation. Furthermore, with the Fed acknowledging that economic growth is slowing significantly, if economic growth continues to fall (which I believe will occur), then more money printing will happen. (See also: Lower Rates and More Money Printing: Just What We Don’t Need.)

I’m telling you; gold mining stocks and precious metals stocks are the place to be in 2012.

Michael’s Personal Notes:

Now it’s the blue-chip leaders in the stock market warning of slow growth.

The stock market has experienced a 20%-plus rise since October, spearheaded by blue-chip names. But the party may not last for long…the bear market rally is showing cracks.

Many companies have been reporting their fourth-quarter numbers with their earnings outlook for 2012:

Kimberly-Clark Corporation (NYSE/KMB), a worldwide consumer products blue-chip leader, reported fourth-quarter earnings that disappointed Wall Street and issued an earnings outlook for 2012 that was anything but rosy. The company cited a slowdown in developed economies—the U.S. and Europe being the principal ones—as what is reducing demand.

LM Ericsson Telephone Company (NASDAQ/ERIC), the world’s largest maker of equipment for mobile phone networks, surprised the market with a 50% drop in quarterly profit. The results were even worse than the blue-chip firm had anticipated, with its 2012 earnings outlook very weak.

Siemens AG (NYSE/SI),Europe’s blue-chip engineering group, also reported weak earnings and a tepid earnings outlook, as delays in orders impacted revenue and profits. Siemens warned that Europe is facing a mild recession.

What was surprising was not so much the trouble from Europe, but the fact that orders from China slowed 17% in the quarter, a source of growth Siemens was banking on.

Siemens’ earnings outlook calls for a pickup in growth in the second half of 2012. With consumer demand flat on its back in both the U.S. and Europe, which in turn is affecting the export markets in Asia, it is difficult to see where the rise in consumer demand is going to come from.

Expect earnings outlook reports from the major eurozone blue-chip companies to be very negative in the weeks and months ahead. The stock market is a leading indicator; it trades based on the earnings outlook for companies that trade in the market.

The bear market rally that started in March 2009 is unraveling on several fronts. Economic growth will slow worldwide in 2012 (see: 2012 Economic Growth Slashed Across Most Countries). Blue-chip companies from Asia, to Europe, to America are delivering earnings outlooks for 2012 that are negative. The most accommodative monetary policy we have seen in our lifetime, a combination of money printing and multi-year zero interest rate policies, will eventually lead to rapid inflation, which will bring interest rates higher.

Earnings outlooks from blue-chip companies that are negative, rapid inflation, and higher interest rates…a lethal three-way combination for stocks! Rapid inflation will not happen tomorrow. Neither will higher interest rates. They will creep in. But, remember, the stock market is a leading indicator. The market will head down before these events start to happen.

Where the Market Stands; Where it’s Headed:

We are in a bear market rally in stocks that started in March of 2009. Yesterday, by attempting to spur economic growth by saying it would keep interest rates near zero until the end of 2014, the Fed gave its first shot in months at extending the rally.

The next silo, I believe, to be fired by the Fed is QE3. After that, there’s not much that can be done to stop the bear market rally from expiring. Enjoy it while it lasts.

What He Said:

“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi, in PROFIT CONFIDENTIAL, February 25, 2008. By the end of 2008, the rest of the world was realizing that the recession would be much longer and deeper than most had realized.

The stock market has experienced a 20%-plus rise since October, spearheaded by blue-chip names. But the party may not last for long…the bear market rally is showing cracks.

Many companies have been reporting their fourth-quarter numbers with their earnings outlook for 2012:

Kimberly-Clark Corporation (NYSE/KMB), a worldwide consumer products blue-chip leader, reported fourth-quarter earnings that disappointed Wall Street and issued an earnings outlook for 2012 that was anything but rosy. The company cited a slowdown in developed economies—the U.S. and Europe being the principal ones—as what is reducing demand.

LM Ericsson Telephone Company (NASDAQ/ERIC), the world’s largest maker of equipment for mobile phone networks, surprised the market with a 50% drop in quarterly profit. The results were even worse than the blue-chip firm had anticipated, with its 2012 earnings outlook very weak.

Siemens AG (NYSE/SI),Europe’s blue-chip engineering group, also reported weak earnings and a tepid earnings outlook, as delays in orders impacted revenue and profits. Siemens warned that Europe is facing a mild recession.

What was surprising was not so much the trouble from Europe, but the fact that orders from China slowed 17% in the quarter, a source of growth Siemens was banking on.

Siemens’ earnings outlook calls for a pickup in growth in the second half of 2012. With consumer demand flat on its back in both the U.S. and Europe, which in turn is affecting the export markets in Asia, it is difficult to see where the rise in consumer demand is going to come from.

Expect earnings outlook reports from the major eurozone blue-chip companies to be very negative in the weeks and months ahead. The stock market is a leading indicator; it trades based on the earnings outlook for companies that trade in the market.

The bear market rally that started in March 2009 is unraveling on several fronts. Economic growth will slow worldwide in 2012 (see: 2012 Economic Growth Slashed Across Most Countries). Blue-chip companies from Asia, to Europe, to America are delivering earnings outlooks for 2012 that are negative. The most accommodative monetary policy we have seen in our lifetime, a combination of money printing and multi-year zero interest rate policies, will eventually lead to rapid inflation, which will bring interest rates higher.

Earnings outlooks from blue-chip companies that are negative, rapid inflation, and higher interest rates…a lethal three-way combination for stocks! Rapid inflation will not happen tomorrow. Neither will higher interest rates. They will creep in. But, remember, the stock market is a leading indicator. The market will head down before these events start to happen.

Where the Market Stands; Where it’s Headed:

We are in a bear market rally in stocks that started in March of 2009. Yesterday, by attempting to spur economic growth by saying it would keep interest rates near zero until the end of 2014, the Fed gave its first shot in months at extending the rally.

The next silo, I believe, to be fired by the Fed is QE3. After that, there’s not much that can be done to stop the bear market rally from expiring. Enjoy it while it lasts.

What He Said:

“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi, in PROFIT CONFIDENTIAL, February 25, 2008. By the end of 2008, the rest of the world was realizing that the recession would be much longer and deeper than most had realized.

Gold mining stocks and precious metals stocks did not perform very well last year (compared to recent years), but that doesn’t mean there is no value in them. Usually, when a sector like this is beaten down or forgotten by the market in general, value players come in and buy it up (myself, when gold bullion prices dip, I try my best to buy gold-related investment to average down my overall investment cost).

Analysts who follow the mining sector and who have earnings forecasts for these gold mining stocks typically value them as if the price of gold bullion was trading well below its current level. This means that, not only are the gold mining stocks cheap, they are also trading on the assumption that the price of gold bullion will fall to within the range of $1,200-$1,500 an ounce in a few years. Why buy gold bullion when you can buy a quality gold mining stocks at a discount to the price of gold bullion?

It’s been a frustrating time for investors of the gold mining stocks, but if the value players are hesitant to jump in feet first, there are other players who will.

Pan American Silver Corp. (NASDAQ/PAAS), the world’s second-largest primary silver miner, has just offered $1.5 billion in combined cash and stock deal to acquire Minefinders Corp. Ltd. (ASE/MFN), a medium-sized silver producer whose primary assets reside in Mexico. The price tag is a 36% premium to where Minefinders traded last Friday.

This, in my opinion, is just one of the many mining deals that will take place in 2012. The larger mining companies like Barrick Gold Corporation (NYSE/ABX), sitting on $3.0 billion in cash, Newmont Mining Corporation (NYSE/NEM), with over $1.0 billion in cash, and Goldcorp Inc. (NYSE/GG), with almost $1.5 billion in cash, are always searching for ways to grow their businesses.

It is a very attractive proposition for the large miners to buy quality junior and medium-sized gold mining companies, who are trading very cheap in terms of the price of gold bullion today. If the large gold mining companies believe the price of gold bullion will trade much higher, then the acquisitions become even more inexpensive and the value of gold mining stocks that much more attractive.

Be careful, dear reader; the wheat truly needs to be separated from the chaff. There are many promising junior gold mining stocks that will, in the end, offer up just that; promises. The companies that have proven assets, in my opinion, will earn a rich premium for their gold mining stocks in a buyout as the large firms look to improve their growth rates.

In 2012, if the value players in the gold mining industry don’t buy the gold mining stocks aggressively, the large gold mining companies flush with cash will. This will spur other hedge funds and asset managers to take a look at the mining sector more carefully and, in my opinion, will cause a stampede into the gold mining stocks, driving their prices much higher.

Sometimes patience is required in a market. But if there is one thing I’ve learned, it’s that value has always produced winners in the end.

Michael’s Personal Notes:

Another startling statistic that gave me pause: government benefits are now required for nearly half of Americans.

In the latest census data, covering the period of the second half of 2010, 48.6% of Americans received social security, unemployment insurance or another type of government benefit payout (Source: Wall Street Journal).

This past recession has hit harder than most. Only seven percent of Americans who lost their jobs during this recession have attained their previous financial position (Source: Rutgers University).

Without government assistance, imagine where we would be. The fact that the government has to help so many people illustrates the damage that this great recession has caused America and shows how far we still need to climb to get ourselves back to where we once were.

Researching these statistics gave me an idea. What if we removed government benefits (government transfer payments) from personal income to see how the average working American is doing?

This is a more pure form of the data, because it calculates income from work—the jobs market—with government assistance excluded.

To give us some perspective, let’s go back to the 1960s and look at personal income excluding government transfer payments. During this period of economic growth, this measure gained anywhere from 10% to 25%—people enjoyed strong personal income growth in a strong jobs market.

How did people do during recent recessions? In the late 1970s recession, the personal income growth rate slowed to just six percent. In the recession of the late 1980s and early 1990s, the personal growth rate dropped to merely three percent, while the recession that visited us in the early 2000s saw a personal income growth rate of five percent in a very difficult jobs market.

How about today and since 2008? Here comes the shock-and-awe part. Not in 50 years has this statistic once showed negative personal income growth, despite having experienced four recessions in that span. Is it different this time? You bet.

In the middle of 2011, real personal income excluding government transfer payments fell 5.1%. Currently it stands at negative 3.6%. Translated, salaries for the average worker are 3.6% lower than they were in 2008. What jobs market?

So, dear reader, not only are close to half of Americas receiving some form of government benefit, but also real personal incomes for those working is actually falling, which means that the average working American is being squeezed by inflation (through higher food and gas prices), while purchasing power is being further eroded by salaries that are below 2008 levels in a stagnant jobs market.

In case we dare to look outside, this is 2012. So I ask, where is the growth in consumer spending going to come from if the average American is witnessing the first post-recession decline in personal income in 50 years?

Where the Market Stands; Where it’s Headed:

Joe Granville came out yesterday and said that the stock market is going to dive 4,000 points this year. (Can you believe he is past 80 years of age?) I’ve been reading other reports that say the bottom is about to fall out of stocks, because the market is oversold and volume is thin.

But when I look at the number of stock market advisors who are bullish vs. bearish (a reliable stock market indicator I follow), it’s not a frightening spread just yet.

We are in a bear market rally in stocks that started in March of 2009. This bear market rally has further upside potential.

What He Said:

“For the economy the message from retail stocks is quite clear: Consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like “drunkards” during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in PROFIT CONFIDENTIAL, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008.

In the latest census data, covering the period of the second half of 2010, 48.6% of Americans received social security, unemployment insurance or another type of government benefit payout (Source: Wall Street Journal).

This past recession has hit harder than most. Only seven percent of Americans who lost their jobs during this recession have attained their previous financial position (Source: Rutgers University).

Without government assistance, imagine where we would be. The fact that the government has to help so many people illustrates the damage that this great recession has caused America and shows how far we still need to climb to get ourselves back to where we once were.

Researching these statistics gave me an idea. What if we removed government benefits (government transfer payments) from personal income to see how the average working American is doing?

This is a more pure form of the data, because it calculates income from work—the jobs market—with government assistance excluded.

To give us some perspective, let’s go back to the 1960s and look at personal income excluding government transfer payments. During this period of economic growth, this measure gained anywhere from 10% to 25%—people enjoyed strong personal income growth in a strong jobs market.

How did people do during recent recessions? In the late 1970s recession, the personal income growth rate slowed to just six percent. In the recession of the late 1980s and early 1990s, the personal growth rate dropped to merely three percent, while the recession that visited us in the early 2000s saw a personal income growth rate of five percent in a very difficult jobs market.

How about today and since 2008? Here comes the shock-and-awe part. Not in 50 years has this statistic once showed negative personal income growth, despite having experienced four recessions in that span. Is it different this time? You bet.

In the middle of 2011, real personal income excluding government transfer payments fell 5.1%. Currently it stands at negative 3.6%. Translated, salaries for the average worker are 3.6% lower than they were in 2008. What jobs market?

So, dear reader, not only are close to half of Americas receiving some form of government benefit, but also real personal incomes for those working is actually falling, which means that the average working American is being squeezed by inflation (through higher food and gas prices), while purchasing power is being further eroded by salaries that are below 2008 levels in a stagnant jobs market.

In case we dare to look outside, this is 2012. So I ask, where is the growth in consumer spending going to come from if the average American is witnessing the first post-recession decline in personal income in 50 years?

Where the Market Stands; Where it’s Headed:

Joe Granville came out yesterday and said that the stock market is going to dive 4,000 points this year. (Can you believe he is past 80 years of age?) I’ve been reading other reports that say the bottom is about to fall out of stocks, because the market is oversold and volume is thin.

But when I look at the number of stock market advisors who are bullish vs. bearish (a reliable stock market indicator I follow), it’s not a frightening spread just yet.

We are in a bear market rally in stocks that started in March of 2009. This bear market rally has further upside potential.

What He Said:

“For the economy the message from retail stocks is quite clear: Consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like “drunkards” during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in PROFIT CONFIDENTIAL, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008.

So far this year, the S&P 500 has gained 4.6%—its best January start in 15 years! Market sentiment—how investors feel about the stock market—has shown a marked improvement.

The eurozone, through its Long Term Repo Operation (LTRO), has provided liquidity to the eurozone banks, which has improved market sentiment there for now. This solves the eurozone’s short-term liquidity problem (but does nothing to solve the mountain of debt on their balance sheets and on the balance sheets of the countries themselves—a crisis that will resurface in the not-too-distant future).

With the eurozone currently calm, U.S. Treasuries yielding close to zero, and market sentiment turning positive, money has found its way back into the equities market.

It sounds like an attractive proposition: China’s economy is slowing and their central bank has stated that it will ease monetary policy, providing more monetary liquidity. The eurozone is providing monetary liquidity. How could market sentiment not be improving?

Here in the U.S., the Fed is determined to hold rates low until 2013 and there have been no fewer than five Fed governors talking about the need to provide more support to the economy by buying more bonds, specifically, mortgage-backed securities—QE3. Should this occur, it is more money printing—liquidity. This will do wonders for market sentiment!

The problem with this story, as I have been documenting over many months, is that this liquidity hasn’t resulted in growth. In order for equities market to continue to perform well and market sentiment to remain positive, earnings are going to have to grow and, in order for that to occur, consumer demand is going to have to come back to life.

With almost every part of the world currently experiencing slow growth, and with the eurozone already most likely in a recession, I don’t see how consumer spending will improve. (See: 2012 Economic Growth Slashed Across Most Countries.)

Over the last few years, China and India have been the strongest growing economies in the world. However, as 2011 came to a close, their growth rates began to slow noticeably. These countries themselves have slashed their growth forecasts for 2012. Here in the U.S., anemic job growth and stagnant wages continue to pressure consumers.

With the consumer missing in action, and growth a fleeting mirage, investors should tread very carefully with this latest rise in market sentiment and corresponding rise in the equities market.

You shouldn’t see the sign of investors turning bullish on stocks as a positive. On the contrary, I believe the secular bear market is simply achieving its goal of luring more investors back into stocks during this phase of the bear market, a rally often called the “sucker’s rally”. (See: Exactly Where We Are in This Secular Bear Market.)

 Michael’s Personal Notes:

A stronger sign of inflation headed our way…

Late last week, the U.S. Treasury sold $15.0 billion in 10-year Treasury Inflation Protected Securities (more commonly known as “TIPS”) at a negative yield (interest rate), for the first time in its history. Demand for this issue was strong from bond investors.

TIPS are instruments that are purchased by bond investors from the U.S. Treasury as a hedge against inflation.

TIPS are tied to the Consumer Price Index (CPI). This means that, should inflation rise, TIPS would pay the bond investor the interest plus the change in inflation that occurred over the previous year. Should there be deflation, however, the bond investor would lose money on his/her investment.

For the first time, bond investors paid a negative yield, which means bond investors paid extra to purchase these TIPS from the U.S. Treasury.

This, dear reader, tells me two things. On the surface, if we look at this (bond investors buying Treasuries with negative returns), we think investors are finding fewer and fewer places to park their money safely—they are sacrificing profit for the actual return of their money. But there is more to it.

With the eurozone crisis unresolved and global growth slowing significantly around the world, which I’ve been writing a lot about lately, investors are looking for safety. Right now, the safest of currencies to be in is the U.S. dollar…and maybe only because it is the reserve currency of the world.

When bond investors buy TIPS with a negative return, it really tells me that bond investors are worried about inflation. Why pay more for something unless you are fairly confident it will appreciate in value in the future?

As I’ve been writing since the credit crisis started, the Fed is trying desperately to generate inflation. Bond investors are telling the market that they think the Fed will be successful. Combine this with the Fed governors indirectly continually talking about QE3 and the argument for buying TIPS from the U.S. Treasury becomes that more attractive to bond investors.

In my opinion, if you are going to buy an inflation hedge, gold-related investments are really the best plays. TIPS are fine, but not at a negative yield and not when they pay out in dollars. Should the Fed continue to expand the money supply aggressively (i.e. printing money), then the value of those U.S. dollars will continue to fall, which means a bond investor would be paid back in the future with dollars that are worth less than today—evaporating any return earned by the bond investor from higher inflation.

Gold offers protection from currency depreciation, since historically, it rises when currencies depreciate. History has repeated itself over the last 10 years. As the dollar depreciated in value, gold embarked on its bull run.

This is why gold has been a store of value for thousands of years. It can’t be printed, its supply is limited, and it is very difficult to mine.

Inflation is coming. The recent action in the TIPS market is just another sign of that. But if you want to protect yourself against inflation, the best vehicle, in my opinion, is still gold-related investments.

Where the Market Stands; Where it’s Headed:

You have to hand it to this market. Quietly, without much fanfare, January is turning out to be a banner month for the Dow Jones Industrial Average. With seven more trading days in the month still to go, the market is up four percent for 2012 already.

I’ve been writing for months that the bear market rally that started in March of 2009 is alive and well. We’ve been seeing the proof since the beginning of October. But each time the market moves higher, more investors and stock advisors enter the bullish camp. Nothing alarming yet, but once enough people are in the bullish camp, that’s when we will see the bear market rally finally run for the exit gate.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S.peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we began experiencing in 2008 long before anyone else.

Late last week, the U.S. Treasury sold $15.0 billion in 10-year Treasury Inflation Protected Securities (more commonly known as “TIPS”) at a negative yield (interest rate), for the first time in its history. Demand for this issue was strong from bond investors.

TIPS are instruments that are purchased by bond investors from the U.S. Treasury as a hedge against inflation.

TIPS are tied to the Consumer Price Index (CPI). This means that, should inflation rise, TIPS would pay the bond investor the interest plus the change in inflation that occurred over the previous year. Should there be deflation, however, the bond investor would lose money on his/her investment.

For the first time, bond investors paid a negative yield, which means bond investors paid extra to purchase these TIPS from the U.S. Treasury.

This, dear reader, tells me two things. On the surface, if we look at this (bond investors buying Treasuries with negative returns), we think investors are finding fewer and fewer places to park their money safely—they are sacrificing profit for the actual return of their money. But there is more to it.

With the eurozone crisis unresolved and global growth slowing significantly around the world, which I’ve been writing a lot about lately, investors are looking for safety. Right now, the safest of currencies to be in is the U.S. dollar…and maybe only because it is the reserve currency of the world.

When bond investors buy TIPS with a negative return, it really tells me that bond investors are worried about inflation. Why pay more for something unless you are fairly confident it will appreciate in value in the future?

As I’ve been writing since the credit crisis started, the Fed is trying desperately to generate inflation. Bond investors are telling the market that they think the Fed will be successful. Combine this with the Fed governors indirectly continually talking about QE3 and the argument for buying TIPS from the U.S. Treasury becomes that more attractive to bond investors.

In my opinion, if you are going to buy an inflation hedge, gold-related investments are really the best plays. TIPS are fine, but not at a negative yield and not when they pay out in dollars. Should the Fed continue to expand the money supply aggressively (i.e. printing money), then the value of those U.S. dollars will continue to fall, which means a bond investor would be paid back in the future with dollars that are worth less than today—evaporating any return earned by the bond investor from higher inflation.

Gold offers protection from currency depreciation, since historically, it rises when currencies depreciate. History has repeated itself over the last 10 years. As the dollar depreciated in value, gold embarked on its bull run.

This is why gold has been a store of value for thousands of years. It can’t be printed, its supply is limited, and it is very difficult to mine.

Inflation is coming. The recent action in the TIPS market is just another sign of that. But if you want to protect yourself against inflation, the best vehicle, in my opinion, is still gold-related investments.

Where the Market Stands; Where it’s Headed:

You have to hand it to this market. Quietly, without much fanfare, January is turning out to be a banner month for the Dow Jones Industrial Average. With seven more trading days in the month still to go, the market is up four percent for 2012 already.

I’ve been writing for months that the bear market rally that started in March of 2009 is alive and well. We’ve been seeing the proof since the beginning of October. But each time the market moves higher, more investors and stock advisors enter the bullish camp. Nothing alarming yet, but once enough people are in the bullish camp, that’s when we will see the bear market rally finally run for the exit gate.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S.peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we began experiencing in 2008 long before anyone else.

On the surface, consumers are getting themselves into trouble by taking on more debt. However, a closer look reveals something more disturbing.

Loans taken from retirement saving accounts (dipping into your savings) rose 20% in 2011, across all demographics. Among lower income earners, this number jumped by as much as 60%! A large sample of 150,000 people with 401(k)s was taken to gauge how Americans with 401(k)s were faring.

The study revealed that close to 33% of people have loans outstanding against their 401(k)s (source: Aon Hewitt). The economic contraction that started in 2007 has caused havoc for retirement savings accounts.

Almost all of the people in the sample initiated their loans against their savings to pay for essentials like day-to-day bills, car repairs, and student loans. I must admit, dear reader; this gave me pause…33% of people with a retirement plan borrowing money against it…this reveals how deep this economic contraction really is.

Many Americans have given up on trying to plan for retirement; people are just trying to survive day-to-day after the economic contraction we experienced from 2007 to 2008. The rising costs of food and energy were also cited as sapping money away that would otherwise have gone toward paying other bills.

Lower income families spend more than half of their earnings on essentials compared to the middle class. It is no surprise that, combined with little job growth and rising food and energy costs, 60% of lower income individuals have been forced to dip into their retirement accounts to make ends meet. The economic contraction was most devastating to the lower income families.

Not only do these statistics reveal a crisis, but they also highlight the fact that, unless we exit this economic contraction with significant job creation and real wages climbing considerably over real inflation, a comfortable retirement will allude—or actually become an impossibility for—most Americans.

Speaking of retirement, how are those aged 50 and over adapting to the economic contraction? In one recent survey for 2011, the results hit a new low.

Almost 28% of people over 50 are having difficulty paying their monthly bills, with 15% of these respondents quite certain they will have to work until the age of 70. Roughly 20% of respondents cut the number of doctor appointments per year, while just over 20% changed their prescriptions, all in a bid to save money (source: Economic Benefit Research Institute).

These are truly troubling statistics. With this backdrop, and a continued lack of job growth, and keeping in mind that 70% of our GDP comes from consumer spending, I believe the surprise for most economists in 2012 will be just how quickly economic growth converts to economic contraction again.

Michael’s Personal Notes:

The World Bank has finally come out and said what I’ve been saying to my readers for weeks: Europe is most likely already in a recession.

The World Bank has chimed in with their latest semi annual forecast for world economic growth. They are calling for a 0.3% contraction of GDP growth for the 17 members of the eurozone in 2012 (recession).

The institute is convinced that the U.S. will not be able to escape the global economic slowdown (which I’ve been warning my readers about as well) and, as a consequence, cut America’s growth rate down to 2.2% from 2.9% for 2012. I personally believe that even 2.2% is going to be out of reach!

The biggest downside risks to its forecast are the evolving sovereign debt crisis in the eurozone, which will accelerate the economic slowdown, and the tensions in the Middle East, which could result in a spike in oil prices, destroying any hope of escaping a recession.

The reason for the biggest downward revision in the World Bank’s growth forecast in three years is plain and simple: the eurozone. The World Bank sees the eurozone recession causing an economic slowdown in the developing nations that trade with it—China, Brazil, and India—and this is in turn affecting countries like Japan and the U.S. I’ve been warning my readers that this is already happening.

No country was spared from a cut in GDP growth rates in light of the global economic slowdown. Aside from the eurozone, the largest engines of growth,China and India, were also cut significantly. For 2012, the World Bank estimates growth of 8.4% for China (which would be China’s slowest growth rate in a decade) and has India penciled in at 6.5%, down from 8.4%.

Due to the debt crisis in the eurozone, the Institute also cites the possibility of a global freezing-up of the markets causing a global crisis similar to what took place in 2008, which would plunge much of the world into a recession.

I’ve been warning readers that in this precarious environment, one event—like the failure of a large eurozone bank—will result in a chain-reaction that will freeze up the system. I don’t usually quote the forecasts of other think-tanks, but I find that the World Bank has been a quite reliable economic predictor over the past few years.

The world is littered with land mines of too much debt and banks that are teetering on a cliff thanks to a customer confidence crisis, especially in the eurozone. Couple this with an economic slowdown, which depresses bank and government revenue, and we’ll easily see financial pressures building.

Where the Market Stands; Where it’s Headed:

Little by little, the Dow Jones Industrial Average inches towards the 13,000 level. We experienced multiple days of minor advance by the world’s most watched stock market index, with the Dow Jones Industrial Average now up 3.3% for 2012 so far.

This bear market rally is doing an excellent job of luring investors back into the stock market. Positive economic news over the next couple of months will add credence to the belief that the economy has turned around. It will be exactly at that point that the bear will take the chips off the table again.

What He Said:

“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major home builder will go bankrupt in 2008.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. WCI Communities, the largest U.S. luxury home builder at that time, filed for Chapter 11 protection on August 4, 2008.

The World Bank has chimed in with their latest semi annual forecast for world economic growth. They are calling for a 0.3% contraction of GDP growth for the 17 members of the eurozone in 2012 (recession).

The institute is convinced that the U.S. will not be able to escape the global economic slowdown (which I’ve been warning my readers about as well) and, as a consequence, cut America’s growth rate down to 2.2% from 2.9% for 2012. I personally believe that even 2.2% is going to be out of reach!

The biggest downside risks to its forecast are the evolving sovereign debt crisis in the eurozone, which will accelerate the economic slowdown, and the tensions in the Middle East, which could result in a spike in oil prices, destroying any hope of escaping a recession.

The reason for the biggest downward revision in the World Bank’s growth forecast in three years is plain and simple: the eurozone. The World Bank sees the eurozone recession causing an economic slowdown in the developing nations that trade with it—China, Brazil, and India—and this is in turn affecting countries like Japan and the U.S. I’ve been warning my readers that this is already happening.

No country was spared from a cut in GDP growth rates in light of the global economic slowdown. Aside from the eurozone, the largest engines of growth,China and India, were also cut significantly. For 2012, the World Bank estimates growth of 8.4% for China (which would be China’s slowest growth rate in a decade) and has India penciled in at 6.5%, down from 8.4%.

Due to the debt crisis in the eurozone, the Institute also cites the possibility of a global freezing-up of the markets causing a global crisis similar to what took place in 2008, which would plunge much of the world into a recession.

I’ve been warning readers that in this precarious environment, one event—like the failure of a large eurozone bank—will result in a chain-reaction that will freeze up the system. I don’t usually quote the forecasts of other think-tanks, but I find that the World Bank has been a quite reliable economic predictor over the past few years.

The world is littered with land mines of too much debt and banks that are teetering on a cliff thanks to a customer confidence crisis, especially in the eurozone. Couple this with an economic slowdown, which depresses bank and government revenue, and we’ll easily see financial pressures building.

Where the Market Stands; Where it’s Headed:

Little by little, the Dow Jones Industrial Average inches towards the 13,000 level. We experienced multiple days of minor advance by the world’s most watched stock market index, with the Dow Jones Industrial Average now up 3.3% for 2012 so far.

This bear market rally is doing an excellent job of luring investors back into the stock market. Positive economic news over the next couple of months will add credence to the belief that the economy has turned around. It will be exactly at that point that the bear will take the chips off the table again.

What He Said:

“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major home builder will go bankrupt in 2008.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. WCI Communities, the largest U.S. luxury home builder at that time, filed for Chapter 11 protection on August 4, 2008.

But I’m taking a break today from reporting on the stock market, economy, precious metals, the eurozone, and everything else I usually write about on these pages.

The events surrounding the Costa Concordia (the ship that went aground on the Island of Giglio in Italy) have been heavily reported in the media. Sure, accidents happen. But what bothers me about this incident is the lack of integrity and character surrounding the actions of the ship’s captain, Francesco Schettino.

Schettino could face charges of manslaughter and abandoning ship. I wonder what this man was thinking. Where is his character, his integrity? The captain should be the last person off a sinking ship or airplane, not one of the first. But it’s deeper than that. Integrity, in my opinion, has become a rare trait amongst people today. I see it in business and government every day: People say things they are going to do that they never do.

Costa Concordia is owned by the world’s largest cruise ship operator, Carnival Corporation (NYSE/CCL). Carnival’s CEO and major shareholder is Micky Arison. This weekend, I just happened to be in the Port of Miami when someone pointed out Arison’s yacht to me. It’s definitely longer than my house…maybe a few times longer…one of the biggest yachts I’ve seen.

If I were a shareholder of Carnival, I would have liked to see the CEO of my company go to Italy and get personally involved with the search and rescue mission. This would have shown character on the part of the individual at the top of the organization. I believe it would be something the great CEOs of our time, like the late Steve Jobs, would have done.

(Arison also owns the Miami Heat, a very popular basketball franchise right now. The fellow at the ticket counter told me Tuesday night that the only good seats available for Tuesday night’s game were about $300 each, so I passed.)

I’m not one to bash other people. That’s not my character. I stick to my knitting, which is analyzing the stock market and economy.

I wrote this “character piece” today to get this point across, as I tell my children all the time: There are two ways to deal with any crisis situation; the one that is morally correct, which displays a person’s integrity, and the cowardly, shallow way.

Remember in 2009 when US Airways Flight 1549 went down in the Hudson River in New York? The captain of the plane became an overnight hero. He was the last person off the plane (which really became a ship). He left once all the passengers and crew were off safely. The entire crew of Flight 1549 was later awarded the Master’s Medal of the Guild of Air Pilots and Air Navigators. The captain of Flight 1549, Captain Chesley Sullenberger, showed the utmost integrity and became a hero, a leader, a perfect example for other airline captains.

I believe the credit crisis of 2008, which ultimately resulted in millions of people losing their jobs and their means to support their families, could have been avoided if some key people in business and government showed some integrity by taking leadership and dealing with the U.S. housing and mortgage bubble before it got too big.

The older I get, the more I invest in businesses, and the more I realize it’s all about people. Dedication, integrity and leadership have always been of utmost importance to me in respect to the people I want to be associated with. My children; take note.

Michael’s Personal Notes:

I’ve been critical of quantitative easing (i.e. money printing), because most of the money was funneled to help shore up the balance sheets of the banks, without finding its way to the person who needs it most: the average American, who can spur the economic recovery.

There are exceptions, which include some infrastructure spending that could have long-lasting economic benefits. Another creative measure, called the “bonus depreciation,” is set to disappear early in 2012. This tax break was enacted in 2009, as part of a tax incentive package to spark the economic recovery back to life.

The measure allowed businesses to write off 100% of certain capital expenditures, in the year of purchase, instead of spreading out that write-off over a five-year period. Think of it as a type of cash-for-clunkers for businesses. It saves them a lot of money upfront on their taxes, which gives them the incentive to go out and purchase capital goods and/or services, because this incentive reduces the actual cost of the item significantly.

This tax break has had three positive impacts on economic recovery. It incentivized companies to spend on capital goods, which kept capital goods manufacturers and service providers busy and employees employed, and could have resulted in job creation from the increased demand. Secondly, it boosted the country’s productivity, since the companies that purchased the capital goods and/or services became more efficient. Thirdly, a more efficient firm improves sales, as it offers products/services at more competitive prices, either around the world or in their own backyard (which keeps their employees employed, possibly expands job creation and spurs economic recovery). (See: December U.S. Job Numbers Disappoint.)

It is a real shame to me that, to date, Congress has dropped this incentive from their tax holiday bill. Associations are fighting hard to have the incentive reinserted into the bill, and so extended through 2012, with no luck thus far. The associations argue, and rightly so in my opinion, that it impacts businesses directly and, in turn, job creation, and so the economic recovery.

Here is a measure that actually supports the average businessperson, and so the average American, in sustaining and bettering their businesses and their jobs. This country needs all the help it can get in its attempt to ratchet up its economic recovery and, even if this measure helps just on the margin, we should take it. With unemployment remaining stubbornly high, any measure that results in some job creation is a measure worth keeping.

It’s not like the economic recovery has turned the corner so the incentive can be dropped. There is no doubt that 2012 will continue to be a struggle for the economy. Getting rid of the accelerated depreciation measure at this point in the economic recovery pushes us in the wrong direction; we want to move toward economic recovery, not contraction.

Where the Market Stands; Where it’s Headed:

Only three weeks into January and the Dow Jones Industrial Average is up three percent for 2012. If you’re a firm believer in the January Effect (the old adage that says if the stock market goes up in January, it is up for the remainder of the year), things are looking good for you!

I don’t put much credence in the January Effect theory. I believe that we are in a bear market rally that could be making its last run to the top before it finally fades and we get down to the real business of the bear: bringing stock prices down again. (See: Official Numbers in…2012 Not Looking Good.)

What He Said:

“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.

There are exceptions, which include some infrastructure spending that could have long-lasting economic benefits. Another creative measure, called the “bonus depreciation,” is set to disappear early in 2012. This tax break was enacted in 2009, as part of a tax incentive package to spark the economic recovery back to life.

The measure allowed businesses to write off 100% of certain capital expenditures, in the year of purchase, instead of spreading out that write-off over a five-year period. Think of it as a type of cash-for-clunkers for businesses. It saves them a lot of money upfront on their taxes, which gives them the incentive to go out and purchase capital goods and/or services, because this incentive reduces the actual cost of the item significantly.

This tax break has had three positive impacts on economic recovery. It incentivized companies to spend on capital goods, which kept capital goods manufacturers and service providers busy and employees employed, and could have resulted in job creation from the increased demand. Secondly, it boosted the country’s productivity, since the companies that purchased the capital goods and/or services became more efficient. Thirdly, a more efficient firm improves sales, as it offers products/services at more competitive prices, either around the world or in their own backyard (which keeps their employees employed, possibly expands job creation and spurs economic recovery). (See: December U.S. Job Numbers Disappoint.)

It is a real shame to me that, to date, Congress has dropped this incentive from their tax holiday bill. Associations are fighting hard to have the incentive reinserted into the bill, and so extended through 2012, with no luck thus far. The associations argue, and rightly so in my opinion, that it impacts businesses directly and, in turn, job creation, and so the economic recovery.

Here is a measure that actually supports the average businessperson, and so the average American, in sustaining and bettering their businesses and their jobs. This country needs all the help it can get in its attempt to ratchet up its economic recovery and, even if this measure helps just on the margin, we should take it. With unemployment remaining stubbornly high, any measure that results in some job creation is a measure worth keeping.

It’s not like the economic recovery has turned the corner so the incentive can be dropped. There is no doubt that 2012 will continue to be a struggle for the economy. Getting rid of the accelerated depreciation measure at this point in the economic recovery pushes us in the wrong direction; we want to move toward economic recovery, not contraction.

Where the Market Stands; Where it’s Headed:

Only three weeks into January and the Dow Jones Industrial Average is up three percent for 2012. If you’re a firm believer in the January Effect (the old adage that says if the stock market goes up in January, it is up for the remainder of the year), things are looking good for you!

I don’t put much credence in the January Effect theory. I believe that we are in a bear market rally that could be making its last run to the top before it finally fades and we get down to the real business of the bear: bringing stock prices down again. (See: Official Numbers in…2012 Not Looking Good.)

What He Said:

“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.

S&P downgraded France’s AAA credit rating one notch to AA+ late Friday, and the bad news didn’t stop in France.

S&P maintained its outlook as negative for the country, which means that there is a one in three chance of a further credit rating downgrade in 2012 or 2013, should France’s situation continue to deteriorate.

Considering the continued economic weakness in the eurozone, as I’ve been detailing, the challenges facing France are daunting. The country’s response to the credit rating downgrade is to announce reforms (austerity measures) by the end of the month.

The problem is that—as with any reform—there is short-term economic pain as the measures are implemented. Considering the economy is probably already in a recession, any reform threatens to exacerbate economic weakness.

S&P didn’t stop there. The rating agency downgraded Italy’s credit rating two notches to BBB+ and kept its outlook negative for the already struggling country. S&P cut the credit ratings of Portugal and Spain, and stripped Austria of its AAA credit rating as well.Germany kept its AAA credit rating, with its outlook as stable.

In total, of the 17 member eurozone countries, more than half—nine—were downgraded. Only four countries survived the carnage to retain their AAA credit rating:Germany, the Netherlands; Finland; and Luxembourg. Sounds like a great place to invest, doesn’t it?

The immediate problem is that these countries will have to pay more interest on their debt. Like a household, when it is time to renew your mortgage, if interest rates are now seven percent when you were paying three percent previously, then you need to cut spending somewhere else in order to make up the difference.

Considering how weak economic growth is (most likely a recession) and considering how the austerity measures are hurting the average person, this extra interest cost is the last thing these countries need as they desperately try to rein in their debt.

To add more fuel to the raging crisis, many countries need to “renew their mortgages” or roll over a significant amount of debt in 2012. For the entire eurozone, roughly €700 billion needs to be rolled over in 2012, with roughly €200 billion alone in the first quarter (source: Bloomberg). This will be a task that’s easier said than done.

Since these higher interest rates intensify an already difficult situation, many countries are going to look to roll over their debt with the European Central Bank (ECB), so they can pay lower rates than what the market would force them to pay (e.g. in keeping with the example, paying three percent instead of the market rate of seven percent).

Luckily, the ECB has created the €440-billion European Financial Stability Facility (EFSF) where countries can go directly to roll over their debt at lower rates. The ECB was hoping to use their combined clout to create an AAA EFSF that would help countries pay lower rates.

However, of the 17 nations of the eurozone that contributed to EFSF, France was the second largest contributor, which naturally resulted in S&P downgrading the credit rating of the EFSF to AA+ from AAA.

The takeaway from these latest developments is that, try as they might, the troubled countries in the eurozone are looking at paying higher interest rates in 2012, which will only weaken their economies further. This will translate into a drag on growth in both China and the U.S, not to mention Germany, which exports to these countries.

This exacerbates the issue in another way, dear reader. Please follow me here.

European banks and governments own European debt (so do U.S. banks). This latest downgrade of European credit ratings means that the European debt that the banks and governments are currently holding is now worth less in the market’s eye: you own an asset that has now depreciated in value (like a car after a few years of use). This is another consequence of the credit rating downgrade that will continue to depress the economic growth of eurozone nations, because, today, they are worth less than they were yesterday.

Michael’s Personal Notes:

As if the big U.S. banks didn’t have enough trouble.

Besides the large U.S. banks’ exposure to Europe and to the derivatives on their balance sheet (off-balance sheet items, which is why no one can evaluate what they’re really worth), there is another issue—a lawsuit—that could cost the big banks billions of dollars and negatively impact their corporate earnings in a significant way.

There is a private antitrust lawsuit that has a staggering five million retailers against Visa Inc. (NYSE/V), MasterCard Incorporated (NYSE/MA), and 13 of the big banks, including Citigroup, Inc. (NYSE/C) and JPMorgan Chase & Co. (NYSE/JPM)—15 major financial institutions in total that could see corporate earnings plummet if this antitrust suit gains traction.

The plaintiffs—the retailers—are accusing the 13 big banks and the credit card companies of colluding to charge fees for credit card transactions that are much higher than a competitive market would command.

Not only are the retailers demanding compensation for overpaying for these fees—dating back to 2004—but they are also probably seeking a permanent fee reduction going forward. The defendants argue that MasterCard and Visa are public firms, which immediately implies they compete with each other for business, outside of the oversight of the big banks. There go the corporate earnings of MasterCard and Visa (if this suit progresses).

The plaintiffs believe they have a very strong case to show that this is one club—the credit card companies and the big banks are intertwined into one. As such, there really is no competition, forcing retailers to pay whatever the fees demanded are.

It is estimated that, in 2009, industry-wide, the fees amounted to some $40.0 billion (source: JPMorgan). Taken over a period of eight years, one can immediately see that the fees amounted to a few hundred billion, which means that even a small settlement with this lawsuit can potentially translate into billions of dollars of losses for each of the big banks’ corporate earnings.

Some banks, in their regulatory filings, have acknowledged the lawsuit and cited some possible implications for their corporate earnings, with Citigroup having gone a step further, detailing its portion of the possible costs of the lawsuit to its corporate earnings at $254 million.

A ruling, expected very early in 2012, will determine if the case can move forward as a class-action lawsuit. Although it is impossible to determine how this case will turn out, it presents yet another risk to owning big banks—impacting their corporate earnings in a major way. Despite the fact that many of the big banks are already down in price, this lawsuit provides yet another reason why the big banks should be avoided in 2012.

Those big bank stocks…no matter how cheap they’ve become…I’m still negative on them.

Where the Market Stands; Where it’s Headed:

It’s actually amazing. Yesterday, the Dow Jones Industrial Average sneaked in another small gain. All these small, ride “the wall of worry” gains have put the market up two percent for the year.

As I have been saying for months, we are in a bear market rally in stocks that started in March of 2009. I’m waiting for the final blow-off on the upside before this bear market rally throws in the towel.

What He Said:

“When I look around today, I see falling stock prices…I see falling house prices…and prices for retail goods stores declining. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S. economy and to the Fed in 2008 is deflation. You can bet the Fed will expand the money supply and drop interest rates aggressively as deflation starts to rear its ugly head.” Michael Lombardi in PROFIT CONFIDENTIAL, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.

Besides the large U.S. banks’ exposure to Europe and to the derivatives on their balance sheet (off-balance sheet items, which is why no one can evaluate what they’re really worth), there is another issue—a lawsuit—that could cost the big banks billions of dollars and negatively impact their corporate earnings in a significant way.

There is a private antitrust lawsuit that has a staggering five million retailers against Visa Inc. (NYSE/V), MasterCard Incorporated (NYSE/MA), and 13 of the big banks, including Citigroup, Inc. (NYSE/C) and JPMorgan Chase & Co. (NYSE/JPM)—15 major financial institutions in total that could see corporate earnings plummet if this antitrust suit gains traction.

The plaintiffs—the retailers—are accusing the 13 big banks and the credit card companies of colluding to charge fees for credit card transactions that are much higher than a competitive market would command.

Not only are the retailers demanding compensation for overpaying for these fees—dating back to 2004—but they are also probably seeking a permanent fee reduction going forward. The defendants argue that MasterCard and Visa are public firms, which immediately implies they compete with each other for business, outside of the oversight of the big banks. There go the corporate earnings of MasterCard and Visa (if this suit progresses).

The plaintiffs believe they have a very strong case to show that this is one club—the credit card companies and the big banks are intertwined into one. As such, there really is no competition, forcing retailers to pay whatever the fees demanded are.

It is estimated that, in 2009, industry-wide, the fees amounted to some $40.0 billion (source: JPMorgan). Taken over a period of eight years, one can immediately see that the fees amounted to a few hundred billion, which means that even a small settlement with this lawsuit can potentially translate into billions of dollars of losses for each of the big banks’ corporate earnings.

Some banks, in their regulatory filings, have acknowledged the lawsuit and cited some possible implications for their corporate earnings, with Citigroup having gone a step further, detailing its portion of the possible costs of the lawsuit to its corporate earnings at $254 million.

A ruling, expected very early in 2012, will determine if the case can move forward as a class-action lawsuit. Although it is impossible to determine how this case will turn out, it presents yet another risk to owning big banks—impacting their corporate earnings in a major way. Despite the fact that many of the big banks are already down in price, this lawsuit provides yet another reason why the big banks should be avoided in 2012.

Those big bank stocks…no matter how cheap they’ve become…I’m still negative on them.

Where the Market Stands; Where it’s Headed:

It’s actually amazing. Yesterday, the Dow Jones Industrial Average sneaked in another small gain. All these small, ride “the wall of worry” gains have put the market up two percent for the year.

As I have been saying for months, we are in a bear market rally in stocks that started in March of 2009. I’m waiting for the final blow-off on the upside before this bear market rally throws in the towel.

What He Said:

“When I look around today, I see falling stock prices…I see falling house prices…and prices for retail goods stores declining. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S. economy and to the Fed in 2008 is deflation. You can bet the Fed will expand the money supply and drop interest rates aggressively as deflation starts to rear its ugly head.” Michael Lombardi in PROFIT CONFIDENTIAL, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.

Another U.S. debt ceiling hike has been formally requested of Congress.

While last fall’s soap opera on increasing the official U.S. debt ceiling still lingers in investors’ minds, last Thursday, President Obama put in his formal request to Congress to raise the U.S. debt ceiling limit by another $1.2 trillion. Congress has 15 days to vote on the request. This would raise the U.S. debt ceiling from the current $15.194 trillion to $16.394 trillion.

(Legislation calls for the President to place his formal request with Congress when the U.S. debt ceiling limit comes within $100 billion of being breached.)

Let’s keep in mind that, although the final figures have yet to be released, U.S. GDP for 2011 will be in the area of $15.0 trillion, less than the current U.S. debt ceiling. This means that the national debt has reached 100% of what our country produces (GDP).

It’s funny how numbers like this are not shocking people. Nothing to worry about; the U.S. debt ceiling keeps increasing each passing year, our national debt now equals our GDP, but everything is fine? In my opinion, the proverbial alarm bell should be ringing when a country’s debt-to-GDP level hits 100%.

We in America are fortunate that, in spite of the ever-increasing U.S. debt ceiling, this land is still perceived as the safe harbor of the world to park one’s money—in U.S. Treasuries—during these uncertain times. Because of this “safe harbor” mentality, the interest rates the U.S. government is paying on its debt are at historically low levels, from almost zero on short-term interest rates to under two percent for longer-term rates.

If rapid inflation rears its ugly head—as I expect it to—then interest rates will move higher, which obviously means that the cost of servicing the country’s debt (the interest payments on the debt) increases…possibly by hundreds of billions! Increases in the U.S. debt ceiling will have to come faster if inflation and higher interests prevail.

And we’re already at 100% of GDP!

The estimated U.S. budget deficit for fiscal 2011 was $1.3 trillion. The Office of Management and Budget is forecasting that, in its current fiscal year, the U.S. budget deficit will reach $956 billion. Let’s put aside the fact that, most of the time, these projections are wrong (that’s why they call them “projections”). Let’s also put aside that this estimate is based on the U.S. economy growing by 2.6% in 2012 and the unemployment rate remaining steady (good luck with that).

Please follow me for a moment…

If we take the $15.194 trillion in current U.S. debt and add $956 billion (the official current year’s U.S. budget deficit estimate), we get a total national debt of $16.15 trillion, which means that the current U.S. debt ceiling request will last roughly until the end of the government’s current fiscal year (September 30, 2012), and will easily pass 105% of GDP.

In 2013, the White House is hoping that the U.S. budget deficit will continue to fall from its $956-billion projection for 2012. This, however, is based on continued growth in GDP and interest rates remaining at historically low levels! What about inflation? Forget that…it was a 1980s issue, right?

Dear reader, please don’t forget that Greece’s problems began when its debt reached 130% of GDP. By my estimates, if government spending isn’t cut or taxes are not raised, the U.S. will hit a national debt equal to 130% of GDP in 2015—that’s three years from now…three consistent years of raising the U.S. debt ceiling!

That’s only if nothing goes wrong: no natural catastrophes, no new wars, no spike in inflation, and no spike in interest rates…things we all know can happen very quickly. And I didn’t even mention a worldwide slowdown in economic activity (see: Economic Slowdown for 2012 Will Be Worldwide).

If someone were to ask me today where I see the next bubble, I would say the bubble is in U.S. Treasuries. We keep increasing the U.S. debt ceiling and we are racing to the same debt/GDP ratio many eurozone countries hit before they faced a debt crisis. The writing is on the wall.

Michael’s Personal Notes:

Despite what the popular media may be preaching now, the U.S. housing market is more than just upside down.

The American dream, at least as I remember it, always included owning one’s own home. It’s where the family would experience their fondest memories.

Until the credit bubble began in 2001-2002, the U.S. housing market was also a stable place to invest money, as it appreciated in the low single digits on average annually over the prior decades. Like owning a long-term government bond: consistent and reliable.

Since the now infamous housing bust of 2007, things have changed dramatically. With the U.S. housing market, the persistent environment of falling prices and home foreclosures has shifted people over to renting instead.

The apartment vacancy rate in the U.S. fell to 5.2% in the fourth quarter of 2011, a 10-year low, and the lowest level in 10 years! This in turn sent the average monthly rent up 2.3% in 2011, to an average of $1,009 nationally (source: Reis Inc.).

Rising home foreclosures have forced families into renting, and stricter mortgage-lending standards have forced those who would rather have a home, to rent as well. No one wants to experience home foreclosure.

Some private-equity and hedge-fund money has found its way to the courthouse steps of the home foreclosures auctions. These companies buy these homes on the cheap, contact the owner of the foreclosed home, and negotiate a rental agreement with the family. In most cases, it’s a win-win for everyone involved. The firm makes money and the family remains in the home, albeit as a renter instead of an owner. This is one way to stabilize the U.S. housing market.

The idea has gained traction. In the first week of the New Year, the Federal Reserve outlined how such a program could work for Fannie Mae and Freddie Mac. Considering that the Federal Reserve Bank estimates that home foreclosures in the U.S. could rise to 1.8 million homes in each of the next two years, Fannie and Freddie could launch pilot programs as early as February in order to help stabilize the U.S. housing market.

For the second year in a row, the stocks of the self-storage companies were the best performing sector of the real-estate investment trusts (REIT). According to the Dow Jones All REIT Equity Index, which was up eight percent for 2011, the self-storage stocks climbed 35.4% in 2011.

Companies like Extra Space Storage, Inc. (NYSE/EXR) and Public Storage (NYSE/PSA) increased their rental rates and experienced few empty storage units. The increase in business over the last two years was due to the rise in home foreclosures in the U.S. housing market, which has forced families to downsize into smaller rental housing.

I believe the U.S.real estate market will continue to be a very difficult place to be in 2012, save possibly for the self-storage companies. However, you should be careful; they’ve had a tremendous run already.

Who would have thought, even 10 years ago, that the American Dream would be reduced to renting your home and stuffing the balance of your memories in a storage locker?

My personal opinion is that the U.S. housing market is dead for years to come. Why don’t I believe it’s bottoming out? My concern—and what no one is talking about—is rising interest rates.

The mass home foreclosures in the U.S. to this point are the result of home prices declining and the mortgages on those homes being worth more than the homes. My concern is that, after a 25-to-30-year down cycle on interest rates, inflation will push interest rates higher in the next cycle. We are at the bottom of the interest rate cycle. The next multi-year cycle of interest rates is in the opposite direction—up. This will devastate any recovery in the fragile U.S. housing market. (See also: 2012 U.S. Housing Market Price Forecast.)

Where the Market Stands; Where it’s Headed:

For stock traders, 2012 has started off terribly. The Dow Jones Industrial Average is up 1.7% for the year so far. If we look at the stock market’s action during January, we note that the Dow Jones Industrial Average has been confined to a trading range of 200 points since the beginning of the year. Traders make money during big market swings, not during narrow trading ranges like we have experienced so far this year.

For average investors like myself and my readers, thus far, it’s been mediocre for 2012; the bear market rally lingers on, although tired.  A massive top is being put in for stocks. But the bear market rally that started in March of 2009 still has some leg left.

What He Said:

“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us that housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi in PROFIT CONFIDENTIAL, December 4, 2007. That devastation started happening in the first quarter of 2008.

The American dream, at least as I remember it, always included owning one’s own home. It’s where the family would experience their fondest memories.

Until the credit bubble began in 2001-2002, the U.S. housing market was also a stable place to invest money, as it appreciated in the low single digits on average annually over the prior decades. Like owning a long-term government bond: consistent and reliable.

Since the now infamous housing bust of 2007, things have changed dramatically. With the U.S. housing market, the persistent environment of falling prices and home foreclosures has shifted people over to renting instead.

The apartment vacancy rate in the U.S. fell to 5.2% in the fourth quarter of 2011, a 10-year low, and the lowest level in 10 years! This in turn sent the average monthly rent up 2.3% in 2011, to an average of $1,009 nationally (source: Reis Inc.).

Rising home foreclosures have forced families into renting, and stricter mortgage-lending standards have forced those who would rather have a home, to rent as well. No one wants to experience home foreclosure.

Some private-equity and hedge-fund money has found its way to the courthouse steps of the home foreclosures auctions. These companies buy these homes on the cheap, contact the owner of the foreclosed home, and negotiate a rental agreement with the family. In most cases, it’s a win-win for everyone involved. The firm makes money and the family remains in the home, albeit as a renter instead of an owner. This is one way to stabilize the U.S. housing market.

The idea has gained traction. In the first week of the New Year, the Federal Reserve outlined how such a program could work for Fannie Mae and Freddie Mac. Considering that the Federal Reserve Bank estimates that home foreclosures in the U.S. could rise to 1.8 million homes in each of the next two years, Fannie and Freddie could launch pilot programs as early as February in order to help stabilize the U.S. housing market.

For the second year in a row, the stocks of the self-storage companies were the best performing sector of the real-estate investment trusts (REIT). According to the Dow Jones All REIT Equity Index, which was up eight percent for 2011, the self-storage stocks climbed 35.4% in 2011.

Companies like Extra Space Storage, Inc. (NYSE/EXR) and Public Storage (NYSE/PSA) increased their rental rates and experienced few empty storage units. The increase in business over the last two years was due to the rise in home foreclosures in the U.S. housing market, which has forced families to downsize into smaller rental housing.

I believe the U.S.real estate market will continue to be a very difficult place to be in 2012, save possibly for the self-storage companies. However, you should be careful; they’ve had a tremendous run already.

Who would have thought, even 10 years ago, that the American Dream would be reduced to renting your home and stuffing the balance of your memories in a storage locker?

My personal opinion is that the U.S. housing market is dead for years to come. Why don’t I believe it’s bottoming out? My concern—and what no one is talking about—is rising interest rates.

The mass home foreclosures in the U.S. to this point are the result of home prices declining and the mortgages on those homes being worth more than the homes. My concern is that, after a 25-to-30-year down cycle on interest rates, inflation will push interest rates higher in the next cycle. We are at the bottom of the interest rate cycle. The next multi-year cycle of interest rates is in the opposite direction—up. This will devastate any recovery in the fragile U.S. housing market. (See also: 2012 U.S. Housing Market Price Forecast.)

Where the Market Stands; Where it’s Headed:

For stock traders, 2012 has started off terribly. The Dow Jones Industrial Average is up 1.7% for the year so far. If we look at the stock market’s action during January, we note that the Dow Jones Industrial Average has been confined to a trading range of 200 points since the beginning of the year. Traders make money during big market swings, not during narrow trading ranges like we have experienced so far this year.

For average investors like myself and my readers, thus far, it’s been mediocre for 2012; the bear market rally lingers on, although tired.  A massive top is being put in for stocks. But the bear market rally that started in March of 2009 still has some leg left.

What He Said:

“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us that housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi in PROFIT CONFIDENTIAL, December 4, 2007. That devastation started happening in the first quarter of 2008.

We all know consumer spending in the U.S. accounts for 70% of Gross Domestic Product (GDP).

If the U.S. economic recovery is to gain any traction in 2012, the U.S. consumer is going to have to play a major role. However, the latest retail sales figures for the month of December rose just 0.1% (Source: U.S. Commerce Department), which was weaker than analysts expected. But this is only the headline number!

If purchases of cars are excluded from the retail sales numbers, then retail sales actually fell 0.2%, which is the first month-over-month decline in retail sales since May 2010. Let’s keep in mind that this drop occurred during what is traditionally a great month for retailers: the holiday season. The so called “economic recovery” isn’t there!

Digging deeper—again keeping in mind that this was during the holidays—consumer spending at electronics and appliance stores fell 3.9%, while department stores sales slipped 0.2%. What economic recovery?

This is an ominous sign that retail sales and economic recovery will continue to be challenges in 2012.

Of course, there can be no improvement in retail sales if we don’t have jobs.

Remember those “glowing” job reports from the last two months: 120,000 jobs created in November 2011 and 200,000 in December 2011? Temporary hiring by retailers for the holiday season boosted those numbers. Now that the holiday season is behind us, guess what? Unemployment claims jumped by 24,000 in the first week of January. So much for that economic recovery hope we had from the December job numbers. (Also see: December U.S. Job Numbers Disappoint.)

As if this weren’t bad enough, these numbers occurred during a time when U.S. consumer credit continued to grow, in November of 2011. The U.S. consumer borrowed $20.4 billion more in November, which was the biggest month-over-month jump since November of 2001.

Granted, $14.8 billion of this money went to finance educational loans, and loans for cars and mobile homes, but, without a doubt, a large part of the remaining $5.6 billion went towards holiday purchases.

So let’s add this up. We have consumers borrowing at a very fast pace; yet, despite this, retail sales were down in December (when one excludes automobiles from the numbers). Unemployment claims for December were higher than originally thought, and those temporary workers are now being laid off. There is no economic recovery.

Obviously, consumers can’t continue to borrow at such a rapid rate to maintain their spending habits. What does that mean for retail sales going forward in 2012? Not an equation for a U.S. economic recovery.

Combine this with fewer full-time jobs and more layoffs, and that theory about the U.S. recovery being able to hold in spite of the woes in Europe becomes more and more tenuous with each passing day.

U.S. retail stocks…I’m staying away from them this year.

Michael’s Personal Notes:

On the topic of economic recovery, let’s check in on how the economies of China and the remainder of the world are faring.

To be blunt, as if Europe wasn’t enough to worry about, news out of Asia is pointing to at least an economic slowdown in the region’s rate of growth.

China reported that, due to the global economic crisis, its export growth slowed sharply in the final quarter of 2011. Is there a pattern developing?

In 2010, Chinese exports rose 31.3% from the previous year. In 2011, Chinese exports rose 20.3% from the previous year. In 2012, Chinese exports are expected to rise just 11% from the previous year, according to Lombardi Financial. This looks like and smells like an economic slowdown.

A senior government researcher in China believes that GDP could rise just 8.5% in China this year, which would be the lowest reading since 2001. This on the heels of news that China’s manufacturing output fell for the first time in almost three years in November, with December showing only a slight improvement. Yes, there is an economic slowdown going on in China.

In the meantime, China’s imports slowed markedly in 2011 from 2010, as consumers in China spent less. This means that, if the world is looking for Chinese consumers to pick up some of the slack from European and U.S. consumers, don’t hold your breath. The economic slowdown in China has already hit consumer spending there.

Although the official numbers have not yet been released, it looks like economic growth in Singapore (a star performer in 2010) will come in at the four percent to seven percent range for 2011, down from 14. 5% in 2010! For 2012, the Prime Minister of Singapore is expecting economic growth in the one percent to three percent range only. There’s an economic slowdown going on in Singapore, too!

For 2012, the central bank of South Korea has already cut its growth forecast to 3.7% from 4.6%, and we just started the year! Stop me if you’ve heard this before, but the revision is blamed squarely on the global economic crisis. Economic slowdown in South Korea, too!

Central banks around the world—not only Asia—tend to be more optimistic about economic prospects, so what are the odds that economic growth forecasts will continue to be cut as 2012 rolls along? I believe the odds are very high.

There can be no doubt that the export-led economies in East Asia that depend on Europe and the U.S. for their growth are witnessing a contraction. I’m calling it economic slowdown for now in Asia; it could easily become an economic contraction.

The cause and effect scenario is simple. Asia depends on U.S. and European consumers for its export growth. However, European countries are importing less, because demand is being restrained by the austerity measures implemented throughout the region. The U.S. is showing signs of slowing as well and so, with waning consumer demand, imports from Asia will inevitably drop. An economic slowdown worldwide in 2012 is inevitable. (Also see: Payback Time: Europe to Export a Recession to America.)

This is turning into a vicious spiral: weak job growth in the West leads to weak consumer demand in the West, which results in fewer imports required, hurting the exporting nations of Asia, whose consumers then lose their jobs.

Large corporations, which are hoarding billions of dollars in cash, are reluctant to invest in major project initiatives—an important source of job growth—because they don’t see where demand is going to come from.  Any wonder I’m calling for a worldwide economic slowdown this year?

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average inched out another small gain yesterday, pushing stocks up 2.1% so far for 2012.

I’ve said it a thousand times before: We are in a bear market rally in stocks that started in March of 2009. Phase II bear market rallies can go on for three to four years. This rally still has life left, albeit limited.

What He Said:

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

To be blunt, as if Europe wasn’t enough to worry about, news out of Asia is pointing to at least an economic slowdown in the region’s rate of growth.

China reported that, due to the global economic crisis, its export growth slowed sharply in the final quarter of 2011. Is there a pattern developing?

In 2010, Chinese exports rose 31.3% from the previous year. In 2011, Chinese exports rose 20.3% from the previous year. In 2012, Chinese exports are expected to rise just 11% from the previous year, according to Lombardi Financial. This looks like and smells like an economic slowdown.

A senior government researcher in China believes that GDP could rise just 8.5% in China this year, which would be the lowest reading since 2001. This on the heels of news that China’s manufacturing output fell for the first time in almost three years in November, with December showing only a slight improvement. Yes, there is an economic slowdown going on in China.

In the meantime, China’s imports slowed markedly in 2011 from 2010, as consumers in China spent less. This means that, if the world is looking for Chinese consumers to pick up some of the slack from European and U.S. consumers, don’t hold your breath. The economic slowdown in China has already hit consumer spending there.

Although the official numbers have not yet been released, it looks like economic growth in Singapore (a star performer in 2010) will come in at the four percent to seven percent range for 2011, down from 14. 5% in 2010! For 2012, the Prime Minister of Singapore is expecting economic growth in the one percent to three percent range only. There’s an economic slowdown going on in Singapore, too!

For 2012, the central bank of South Korea has already cut its growth forecast to 3.7% from 4.6%, and we just started the year! Stop me if you’ve heard this before, but the revision is blamed squarely on the global economic crisis. Economic slowdown in South Korea, too!

Central banks around the world—not only Asia—tend to be more optimistic about economic prospects, so what are the odds that economic growth forecasts will continue to be cut as 2012 rolls along? I believe the odds are very high.

There can be no doubt that the export-led economies in East Asia that depend on Europe and the U.S. for their growth are witnessing a contraction. I’m calling it economic slowdown for now in Asia; it could easily become an economic contraction.

The cause and effect scenario is simple. Asia depends on U.S. and European consumers for its export growth. However, European countries are importing less, because demand is being restrained by the austerity measures implemented throughout the region. The U.S. is showing signs of slowing as well and so, with waning consumer demand, imports from Asia will inevitably drop. An economic slowdown worldwide in 2012 is inevitable. (Also see: Payback Time: Europe to Export a Recession to America.)

This is turning into a vicious spiral: weak job growth in the West leads to weak consumer demand in the West, which results in fewer imports required, hurting the exporting nations of Asia, whose consumers then lose their jobs.

Large corporations, which are hoarding billions of dollars in cash, are reluctant to invest in major project initiatives—an important source of job growth—because they don’t see where demand is going to come from.  Any wonder I’m calling for a worldwide economic slowdown this year?

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average inched out another small gain yesterday, pushing stocks up 2.1% so far for 2012.

I’ve said it a thousand times before: We are in a bear market rally in stocks that started in March of 2009. Phase II bear market rallies can go on for three to four years. This rally still has life left, albeit limited.

What He Said:

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

In 2011, Canadian stocks trailed U.S. equities by the most in three years. The European debt crisis coupled with the slowdown in China sent investors fleeing out of commodity stocks in late 2011.

Since energy- and commodity-related companies make up 47% of Canadian stocks, it is no wonder the TSX (the Canadian equivalent of the NYSE) fell 12% last year, while the Dow Jones Industrial Average was up for 2011.

As a matter of fact, commodity stocks fell more than the prices of commodities themselves in 2011, reflecting a belief that slow growth worldwide will damper demand for commodities. Should commodity prices stabilize or rise even slightly, commodity stocks could take off, hence the buying opportunity.

In my view, the escalating tensions with Iran, which are pitting Russia and China against the U.S. and Europe, will continue to support higher energy prices. Should there be a war (let’s hope not, but realistically, we know the possibility is significant), then energy prices will jump even higher. And, of course, gold bullion prices will boom.

This presents a nice buying opportunity for energy and precious metal stocks on the main Canadian stock exchange.

Many major gold stocks (a buying opportunity in themselves right now) call the TSX home and, as the price of gold bullion continues to rise, then those precious metals mining companies should reflect the upward move in gold bullion with higher share prices.

There is also the strong possibility that Europe and/or the U.S. will embark on more money printing in 2012. Should that occur, you can bet that commodity prices will rise significantly, just as they have in the recent past, whenever the printing presses have been cranked up, giving more credence to my belief that TSX resource stocks, especially the senior gold mining companies, are a buying opportunity.

It is important to note as well the shift in China’s policy as of December. China, for most of 2011, went from fighting inflation by raising interest rates to lowering interest rates as of December in response to a slowing economy.

Should inflation remain subdued, and should the Chinese economy continue to slow in 2012, China has made it clear that it will follow the central banks of the world and cut interest rates to stimulate growth. Since China is one of the most important buyers of commodities worldwide, this would have a positive effect on commodity prices and commodity stocks, hence the buying opportunity I see on the TSX.

Let’s put aside the fact that the shares in Canada might be cheaper for no other reason than they don’t trade in the U.S., which on its own is worth looking at as a buying opportunity.

The most important reason to buy Canada is the Canadian dollar itself, another buying opportunity.

Canada has the lowest debt-to-GDP ratio among the G7 members (in the mid-30% range, far lower than most other countries). And guess what? Canada has not started up the printing presses since the crisis began in 2008. Wait, I think that point needs repeating: Canada has not printed any money since the 2008 crisis began.

This puts the country in better fiscal shape than the U.S. and Europe. If there are shocks to the global economic system (think the European debt crisis), then Canada has the flexibility to print money to help its people and its economy.

Diversification is a great thing. Not only, dear reader, should you look at the TSX as a buying opportunity because commodity stocks are trading low, but it is also great to own a currency that should weather the storm should an adverse event hit the world, like it did in 2008. (Also see: Payback Time: Europe to Export a Recession to America.)

Michael’s Personal Notes:

My forecast that the eurozone is in a recession right now are showing up in the numbers.

Germany, the stronghold of the eurozone, says that its economy probably shrank by about 0.25% in the fourth quarter of 2011 when compared to the third quarter of 2011.

The technical definition of a recession is two consecutive quarters of negative GDP. This means that, should German growth decline in the first quarter of 2012, technically, Germany will be in a recession.

Can the rest of eurozone be far behind? I believe they are already there…in a recession.

Germany managed to grow three percent in 2011, down from 3.7% in 2010. Obviously, growth was affected by the eurozone debt crisis. What is critical to note is that this drop in growth was the largest since German’s reunification, over 20 years ago.

What is surprising is that Germany’s own central bank—the Deutsche Bundesbank—is predicting that growth will be an anemic 0.6% in 2012, with a bounce to 1.8% in 2013.

Germany is almost admitting that it is on the edge of a recession.

Any slight deviation from this forecast will tip the main economic engine of the eurozone. Clearly, if fourth-quarter growth was slightly down, the pressures are building for a challenging first quarter of 2012.

Germany is hoping that the eurozone debt crisis will stabilize, since much of Germany’s exports stay in the eurozone. Considering the turmoil in the eurozone, that stabilization is looking like a bad bet.

A perfect example is Spain’s Industrial Production; it fell seven percent year-over-year in November, the worst decline in 24 months. A large portion of England’s exports is destined for the eurozone, but England’s exports dropped 1.5% in the month of November!

There is momentum in these statistics, but unfortunately that momentum is to the downside, as the eurozone debt crisis continues to worsen.

The austerity measures implemented in the eurozone due to the eurozone debt crisis are squeezing the average person, which is naturally reducing consumer consumption.  As consumption falls, countries need to import less, which is being reflected in the above statistics.

This is further evidenced by the European Central Bank’s own cut in its growth forecast for 2012, to just above the zero line: 0.3%.

As I’ve been saying all along, the eurozone is probably already in a recession. The just-released data are pointing to the fact that growth will be an elusive shadow in 2012. The big question becomes: how much of the eurozone’s recession will be imported into the United States?

Any statement to the effect that the eurozone recession will be limited to the eurozone is like saying the U.S. housing bust of 2006 would be restricted to the real estate sector.

Where the Market Stands; Where it’s Headed:

We are in bear market rally in stocks that started in March 2009. This rally is getting old and tired, but still has life left in it. When this bear market rally ends, Phase II of the secular bear market that started in October 2007 will be over. Phase III of the bear market, the phase I’m predicting is headed to us next, will be devastating for the market and investors. (Also see: Exactly Where We Are in This Secular Bear Market.)

What He Said:

“As for the stock market, it continues along its merry way, oblivious to what is happening to homebuyers’ wealth. [Since 2005, I have been writing about how the real estate bust would be bigger than the boom.] In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. A dire prediction that came true.

In 2008, the now infamous bust of the U.S. housing market placed extreme pressure on U.S. banks and it created a credit crisis in America. A homegrown U.S. recession was then quickly exported to Europe.

Now it’s Europe’s turn to return the favor.

The debt crisis in the eurozone is causing European banks to quickly lose confidence in each another. Should one eurozone bank need to be restructured (or, dare I say, even go bankrupt), the repercussions would be felt by large U.S. banks, as U.S. banks hold many shares, derivatives and sovereign bonds from across the pond. (See: There Once Was a Bank.)

Take a Lehman moment. Remember how that went down?

Of concern today…there is one indicator flashing red…saying that the situation is extreme with eurozone banks. Let me tell you about it.

Banks perform a common operation amongst each other of overnight lending and deposits. If one eurozone bank has requests for withdrawals by its clients along with other short-term obligations for cash, they traditionally borrow the money from other eurozone banks for 24 hours and promise to pay it back. (It’s like asking a family member for money for pressing bills that are due, with the promise to pay him/her back upon receiving your next paycheck.)

When the system functions normally, eurozone banks do lots business with one another, with only a few overnight operations taking place at the European Central Bank (ECB). The ECB is equivalent to the Fed here in the U.S. It is the backstop for the banking system in Europe.

To put some perspective on this, throughout most of the first half of 2011, the ECB received between €30 billion and €100 billion in overnight deposits from eurozone banks. In August of 2011, as the eurozone crisis worsened, banks erred on the side of caution and funneled more of their overnight operations through to the ECB.

The overnight money deposits at the ECB jumped to €150 billion in August, and continued to soar to €340 billion in December. The overnight money deposited with the ECB by eurozone banks has now reached a record €482 billion and counting.

Not even during the crisis of 2008 did eurozone banks feel the need to deposit this much money with the ECB. What this means, dear reader, is that the European crisis is turning into a eurozone banking crisis. The banks don’t trust each other to be around the next day and so they are parking their money with the sure thing, the ECB, instead of lending the money out.

Here in the U.S., the Fed recapitalized—or should I say pumped money into—the U.S. banks to prevent them from collapsing during the credit crisis of 2008. That has not happened with the eurozone banks because of Germany’s unwillingness to let the eurozone print money (i.e. expand the money supply).

If a single eurozone bank fails, and I believe one will, the repercussions will be felt here in the U.S. just like our credit crisis of 2008 impacted the European stock and bond markets and the European banking system. Payback time. (See also: Break-up of Eurozone a Foregone Conclusion?)

Michael’s Personal Notes:

Ominous signs about the economy have started early in 2012…

A high-end retail sector company that weathered the 2008 and 2009 financial crisis quite well is now buckling under the pressure of a slowing economy in both Europe and the U.S.

Tiffany & Co. (NYSE/TIF), the world’s second-largest luxury jewelry retailer and a major player in the U.S. retail sector, has already cut its earnings and sales forecast for 2012, citing a pull-back in consumer spending on the part of its well-heeled customers, as demand for fine jewelry in both its U.S. and European outlets fell short of expectations during the holiday season.

The news sent the Tiffany retail sector shares down just over 10% Tuesday. The company’s stock price has fallen from $80.00 in late October 2011 to under $60.00 yesterday. Ouch.

We all know that if the U.S. economy is going to deliver a meaningful rebound, the U.S. consumer (especially within the high-end retail sector) is going to have to pick up the pace of spending. Remember, consumer spending in the U.S. accounts for 70% of GDP!

I’ve been saying that 2012 is going to be a difficult year (many thanks to imported woes from Europe). Tiffany’s warning on its retail sector profit and revenue this year is just the first of many signs I believe we will get that the U.S. economy is slowing.

The wealthier consumers continued to spend in 2010 and for the better part of 2011 at the retail sector level. Something has changed, however, which has them reining in their spending. Confidence is everything in the retail sector. Tiffany’s early warning shows that even the wealthy don’t feel confident about their situations and the direction the economies in both the U.S. and Europe are headed.

Granted, this is only a small sign coming from the retail sector, but it further highlights my argument that the U.S. economy cannot grow with the problems in Europe gaining momentum. Retail sector company Tiffany noted in its report that Asian shoppers also pulled back on purchases during the holiday season, as their economies are cooling.

Introduce a slowing Chinese economy into the equation and it is almost impossible to see the U.S. escaping the slow economic grind it will face, as economic growth in both Europe and China erode.

Back to those high-end retail sector stocks…I liked them for most of 2010 and 2011. For 2012, I’m not sure I want to be in them.

Where the Market Stands; Where it’s Headed:

Not much for investors to complain about. Less than two weeks into the New Year and the Dow Jones Industrial Average is up two percent for 2012. The bear market rally that started in March of 2009 continues along its merry way.

Dear reader, we know better: a huge top is being put into place for the major market indices.

What He Said:

“Any way you look at it, the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. A dire prediction that came true.

A high-end retail sector company that weathered the 2008 and 2009 financial crisis quite well is now buckling under the pressure of a slowing economy in both Europe and the U.S.

Tiffany & Co. (NYSE/TIF), the world’s second-largest luxury jewelry retailer and a major player in the U.S. retail sector, has already cut its earnings and sales forecast for 2012, citing a pull-back in consumer spending on the part of its well-heeled customers, as demand for fine jewelry in both its U.S. and European outlets fell short of expectations during the holiday season.

The news sent the Tiffany retail sector shares down just over 10% Tuesday. The company’s stock price has fallen from $80.00 in late October 2011 to under $60.00 yesterday. Ouch.

We all know that if the U.S. economy is going to deliver a meaningful rebound, the U.S. consumer (especially within the high-end retail sector) is going to have to pick up the pace of spending. Remember, consumer spending in the U.S. accounts for 70% of GDP!

I’ve been saying that 2012 is going to be a difficult year (many thanks to imported woes from Europe). Tiffany’s warning on its retail sector profit and revenue this year is just the first of many signs I believe we will get that the U.S. economy is slowing.

The wealthier consumers continued to spend in 2010 and for the better part of 2011 at the retail sector level. Something has changed, however, which has them reining in their spending. Confidence is everything in the retail sector. Tiffany’s early warning shows that even the wealthy don’t feel confident about their situations and the direction the economies in both the U.S. and Europe are headed.

Granted, this is only a small sign coming from the retail sector, but it further highlights my argument that the U.S. economy cannot grow with the problems in Europe gaining momentum. Retail sector company Tiffany noted in its report that Asian shoppers also pulled back on purchases during the holiday season, as their economies are cooling.

Introduce a slowing Chinese economy into the equation and it is almost impossible to see the U.S. escaping the slow economic grind it will face, as economic growth in both Europe and China erode.

Back to those high-end retail sector stocks…I liked them for most of 2010 and 2011. For 2012, I’m not sure I want to be in them.

Where the Market Stands; Where it’s Headed:

Not much for investors to complain about. Less than two weeks into the New Year and the Dow Jones Industrial Average is up two percent for 2012. The bear market rally that started in March of 2009 continues along its merry way.

Dear reader, we know better: a huge top is being put into place for the major market indices.

What He Said:

“Any way you look at it, the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. A dire prediction that came true.

A 25-year bull market in stocks ended in October of 2007. The bull market was the result of a great period of leveraging by consumers and businesses, as interest rates fell for 25 years.

In October of 2007, a great bear market was born, as a period of de-leveraging started. Phase I of the bear market brought stocks to a 12-year low by March 2009. From there, we entered Phase II of the bear market; that’s when the bear market sucks investors back into stocks under the false pretense that the economy is improving.

When this current phase of the bear market ends—the phase often referred to as the “suckers’ rally”—Phase III of the bear market will come into play, ultimately bringing stocks below the original bear market low point. Remember that number…6,440 on the Dow Jones Industrial Average. (I know…I know. People think I’m crazy predicting that the Dow Jones Industrial Average will fall that low again. But I’ve made crazier predictions that have come true!)

Without getting too much into it, analysts like me look at two groups of indicators to determine where the stock market is headed: technical and fundamental. The technical indicators can be quite complicated. We look at the support and resistance levels of stock indices to try to determine stock price direction. The fundamentals are quite easy. We look at the economy, corporate earnings, monetary policy, and investor sentiment to determine stock market direction.

Investor sentiment is important, as this has proven to be correct so many times. The theory goes like this…

If investors and stock advisors, in the majority, feel that stocks are going up, they usually go down. Similarly, if investors and stock advisors, again in the majority, feel that stocks will fall in price, they usually rise.

And this brings me to today’s point…

In 2011,U.S. stock mutual funds had their second-worst year for redemptions on record. Last year, investors pulled about $130 billion out of U.S.equity mutual funds (Source: Investment Company Institute). The year 2011 was the fifth consecutive year that investors pulled money out of U.S. mutual funds that invest in U.S. stocks.

A general negative investor attitude for stocks, as evidenced by so many investors pulling money out of U.S. equity funds, is good for stocks…helps them ride that “wall of worry” higher. That’s the silver lining in this market.

Mark my words: by the time this current phase of the bear market—the bear market rally—is done, investors will be won over to stocks. That’s when the bear market will pull the rug out from under the feet of investors again.

Michael’s Personal Notes:

This is a problem…

Factory orders in Germany dropped the most in three years in November (Source:Economy Ministry,Berlin).

Economic growth forecasting companies and institutes are quickly lowering their GDP forecasts for Germany this year. The weak November factory orders for Germany and new forecasts that GDP growth will fall sharply in 2012 give credence to my belief that the eurozone is already in recession (See: Eurozone in Recession, According to Popular Financial e-Letter).

In 2011, I started writing more on the eurozone as my concerns for the region heightened. I traveled to Europe twice last year to see firsthand how the poor economic conditions are hampering Europeans. I didn’t like what I saw. The debt crisis in the eurozone is hitting European citizens very hard. Economically, 2012 will be a challenge for the eurozone and it will spill into the U.S.

Very large American businesses derive substantial sales from the eurozone. Just skimming annual reports, we find that McDonald’s Corporation (NYSE/MCD) gets more than a third of its total sales from Europe; Kraft Foods Inc. (NYSE/KFT) is about the same. About one-quarter of the sales of Apple Inc. (NASDAQ/AAPL) come from Europe. According to the International Business Times, a full 14% of all sales generated by the 500 companies making up the S&P 500 come from Europe!

Finally,U.S. banks have huge exposure to the debt crisis in the eurozone. Several research reports have been circulated about U.S. bank exposure to the eurozone debt market. With combined direct lending and credit default swaps, the estimate of U.S. banks’ exposure to the eurozone are in the $500-billion to $1.0-trillion range.

Germany’s economy slowing could be the final nail in the coffin for the eurozone this year. Is it any wonder that the stock prices of so many American banks are so depressed?

The problems in the eurozone could have a big impact on American companies (especially the banks) and the stock market in 2012. This is one area I will be watching very closely for my readers throughout the year.

There are only three choices in dealing with the eurozone debt crisis: China bails them out (not likely, as China’s economy is slowing now, too); the euro is dissolved (would wreak havoc on the smaller eurozone countries); or Germany finally gives in and lets the European Central Bank start printing money at an accelerated rate (here comes inflation). The alternatives don’t look good. (See also: Break-up of Eurozone a Foregone Conclusion?)

Where the Market Stands; Where it’s Headed:

With one week behind us, the Dow Jones Industrial Average is up 1.2% for 2012. All eyes are on Alcoa, Inc. (NYSE/AA), the first company in the Dow Jones Industrial Average to report fourth-quarter 2011 earnings. Alcoa will do so after the close of the bell today. Traditionally, Alcoa’s earnings set the early tone for each quarter’s earnings and how the markets react to them.

We are getting close to the third anniversary of the bear market rally that started in March of 2009. The government and the Fed have fought the bear tooth and nail, hence why this rally has lasted so long. But signs that the bear market rally is getting old and tired are obvious: 2011 was the worst year for stocks in three years,U.S. corporate earnings growth in the fourth quarter of 2011 was the slowest quarterly earnings growth in two years.

What He Said:

“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures, and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

Factory orders in Germany dropped the most in three years in November (Source:Economy Ministry,Berlin).

Economic growth forecasting companies and institutes are quickly lowering their GDP forecasts for Germany this year. The weak November factory orders for Germany and new forecasts that GDP growth will fall sharply in 2012 give credence to my belief that the eurozone is already in recession (See: Eurozone in Recession, According to Popular Financial e-Letter).

In 2011, I started writing more on the eurozone as my concerns for the region heightened. I traveled to Europe twice last year to see firsthand how the poor economic conditions are hampering Europeans. I didn’t like what I saw. The debt crisis in the eurozone is hitting European citizens very hard. Economically, 2012 will be a challenge for the eurozone and it will spill into the U.S.

Very large American businesses derive substantial sales from the eurozone. Just skimming annual reports, we find that McDonald’s Corporation (NYSE/MCD) gets more than a third of its total sales from Europe; Kraft Foods Inc. (NYSE/KFT) is about the same. About one-quarter of the sales of Apple Inc. (NASDAQ/AAPL) come from Europe. According to the International Business Times, a full 14% of all sales generated by the 500 companies making up the S&P 500 come from Europe!

Finally,U.S. banks have huge exposure to the debt crisis in the eurozone. Several research reports have been circulated about U.S. bank exposure to the eurozone debt market. With combined direct lending and credit default swaps, the estimate of U.S. banks’ exposure to the eurozone are in the $500-billion to $1.0-trillion range.

Germany’s economy slowing could be the final nail in the coffin for the eurozone this year. Is it any wonder that the stock prices of so many American banks are so depressed?

The problems in the eurozone could have a big impact on American companies (especially the banks) and the stock market in 2012. This is one area I will be watching very closely for my readers throughout the year.

There are only three choices in dealing with the eurozone debt crisis: China bails them out (not likely, as China’s economy is slowing now, too); the euro is dissolved (would wreak havoc on the smaller eurozone countries); or Germany finally gives in and lets the European Central Bank start printing money at an accelerated rate (here comes inflation). The alternatives don’t look good. (See also: Break-up of Eurozone a Foregone Conclusion?)

Where the Market Stands; Where it’s Headed:

With one week behind us, the Dow Jones Industrial Average is up 1.2% for 2012. All eyes are on Alcoa, Inc. (NYSE/AA), the first company in the Dow Jones Industrial Average to report fourth-quarter 2011 earnings. Alcoa will do so after the close of the bell today. Traditionally, Alcoa’s earnings set the early tone for each quarter’s earnings and how the markets react to them.

We are getting close to the third anniversary of the bear market rally that started in March of 2009. The government and the Fed have fought the bear tooth and nail, hence why this rally has lasted so long. But signs that the bear market rally is getting old and tired are obvious: 2011 was the worst year for stocks in three years,U.S. corporate earnings growth in the fourth quarter of 2011 was the slowest quarterly earnings growth in two years.

What He Said:

“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures, and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

Today, the “little” bank that has roots dating back 500 years operates in 22 European countries, has 9,500 branches and employs 160,000 people. Comparatively, Bank of America Corporation (NYSE/BAC) has less than 6,000 branches worldwide. With total assets of about $1.3 trillion, UniCredit S.p.A (IT/UCG), the bank I’m talking about, is the 14th largest bank in Europe.

Why bring up an Italian bank today? To give you an idea of just how terrible things are in the eurozone. UniCredit withstood much during its 500-year history. What it is facing in eurozone today could be its darkest hours.

The debt crisis in the eurozone has become a banking crisis. There is no confidence in eurozone banking sector. Rumors of the breakup of the euro currency are sending the stock prices of major eurozone banks into a tailspin. As I reported yesterday, I believe the eurozone is already in a recession (see: Official Numbers in…2012 Not Looking Good).

Dear reader; please remember back to 2008 and Bear Sterns. This financial institution didn’t fail because it lacked capital. Bear Sterns failed because of a lack of investor confidence in the institution. This is what will happen to the big eurozone banks.

Yesterday, to everyone’s surprise, UniCredit announced that it would need to raise capital through the issuance of stock. The bank said it would sell stock at 40% below the stock’s trading price of Wednesday. What happened? Obviously, the stock price collapsed yesterday.

Only a year ago, UniCredit’s stock sold at $20.25. Yesterday, it closed at $4.48—that’s an even worse one-year performance than Bank of America’s stock!

How would you feel this morning if you had your savings in UniCredit Bank? I know I wouldn’t feel good. I’d probably take the money out and move it to a stronger eurozone bank.

Italy does not have the money to bail out UniCredit if it fails. Hence, UniCredit become a takeover target for other large eurozone banks. However, the majority of other eurozone banks have their own problems. Why add to them?

Dear reader, the crisis in the eurozone is real and getting worse each passing day. Leaders of eurozone countries have been talking for two years now about fixing the problem. They remind me of that CEO who talks a lot, but never executes. Please don’t be fooled by what you read or hear. There will be repercussions in America from the eurozone crisis.

Michael’s Personal Notes:

Don’t be fooled by the U.S. job numbers for December released this morning…

Economists were rejoicing about the job numbers report released by the U.S. Labor Department on Friday morning; 200,000 jobs were created in the U.S. in December, bringing the unemployment rate down to 8.5%.

Below, my dear reader, you will find my contrarian view to the job numbers report released today:

Unemployment rate down to 8.5%: The official unemployment rate is not a true gauge of employment, as it excludes people who have given up looking for work and part-time workers who want full-time jobs but can’t get them. The underemployment rate, which includes the two important categories noted above, stands at 15.2%. That is the true unemployment number. In that respect, the job numbers report does not impress.

U.S. employers added 1.64 million jobs in 2011: After the trillions of dollars the government has thrown at the economy over the past three years, after the unprecedented actions of the Federal Reserve to jump start the economy, only 1.64 million jobs were created in 2011—that’s only 19% of the 8.75 million American jobs lost during the recession. Again, in this light, the December job numbers do not impress.

As you can see, I’m not too impressed with the December job numbers report. But, more importantly, forgetting what I think, what did the stock market, a leading indicator of the economy, think of the December job numbers report?

The market yawned. The Dow Jones Industrial Average fell 40 points just after the market opened Friday morning. That’s funny. You’d think the stock market would jump on the better-than-excepted December job numbers. Maybe the market sees it the same way I do:

It might be a crude calculation, but here’s how I see it:

A $5.0-trillion increase in government debt over four years and 2.58 million jobs created in 2010 and 2011. That equates to $1,937,984 in debt created for every new job. How can anybody be happy with these numbers?

Where the Market Stands; Where it’s Headed:

The first week of 2012 is almost behind us and it looks like a good one for stocks. I’m not a big believer in the “January effect” (an adage that says if stocks rise in January, they will be up for the year), but there is no doubt that a good January sets the stage for the year.

The bear market is achieving its goal of luring investors back into the stock market under the pretense that the economy is improving. If you’ve never lived through a secular bear market, you’re seeing one right now. Phase II of the bear market, the rally that lures investors back into stocks, has been underway for almost three years now.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard-pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.

Economists were rejoicing about the job numbers report released by the U.S. Labor Department on Friday morning; 200,000 jobs were created in the U.S. in December, bringing the unemployment rate down to 8.5%.

Below, my dear reader, you will find my contrarian view to the job numbers report released today:

Unemployment rate down to 8.5%: The official unemployment rate is not a true gauge of employment, as it excludes people who have given up looking for work and part-time workers who want full-time jobs but can’t get them. The underemployment rate, which includes the two important categories noted above, stands at 15.2%. That is the true unemployment number. In that respect, the job numbers report does not impress.

U.S. employers added 1.64 million jobs in 2011: After the trillions of dollars the government has thrown at the economy over the past three years, after the unprecedented actions of the Federal Reserve to jump start the economy, only 1.64 million jobs were created in 2011—that’s only 19% of the 8.75 million American jobs lost during the recession. Again, in this light, the December job numbers do not impress.

As you can see, I’m not too impressed with the December job numbers report. But, more importantly, forgetting what I think, what did the stock market, a leading indicator of the economy, think of the December job numbers report?

The market yawned. The Dow Jones Industrial Average fell 40 points just after the market opened Friday morning. That’s funny. You’d think the stock market would jump on the better-than-excepted December job numbers. Maybe the market sees it the same way I do:

It might be a crude calculation, but here’s how I see it:

A $5.0-trillion increase in government debt over four years and 2.58 million jobs created in 2010 and 2011. That equates to $1,937,984 in debt created for every new job. How can anybody be happy with these numbers?

Where the Market Stands; Where it’s Headed:

The first week of 2012 is almost behind us and it looks like a good one for stocks. I’m not a big believer in the “January effect” (an adage that says if stocks rise in January, they will be up for the year), but there is no doubt that a good January sets the stage for the year.

The bear market is achieving its goal of luring investors back into the stock market under the pretense that the economy is improving. If you’ve never lived through a secular bear market, you’re seeing one right now. Phase II of the bear market, the rally that lures investors back into stocks, has been underway for almost three years now.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard-pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.

The Dow Jones Industrial Average made 2012 an up year, as I predicted. (See: Stock Market: Where it Will End 2011.)

For 2011, the Dow Jones Industrial Average officially rose 5.7%, excluding dividends. In case you don’t have these important numbers. Here they are. They tell an important story:

The Dow Jones Industrial Average…

Started 2009 at 8,776 and ended 2009 at 10,428; up 18.8% for 2009.

Started 2010 at 10,428 and ended 2010 at 11,557; up 10.8% for 2010.

Started 2011 at 11,557 and ended 2011 at 12,217; up 5.7% for 2011.

We don’t have to look very closely at the numbers to discover the true trend. The Dow Jones Industrial Average returned 57% in 2010 of what it returned in 2009. The Dow Jones Industrial Average returned 53% in 2011 of what it returned in 2011. If the world’s most widely followed stock market index returns 53% to 57% in 2012 what it returned in 2011, the return for the Dow Jones Industrial Average for 2012 will be meager at best. This is consistent with my theory that the bear market rally that started in 2009 is getting near the end of its life.

Let’s look at it this way, my dear reader. The Obama administration took office in January of 2009. When its first (and maybe only term) is over, the Obama people will have increased the national debt by about $5.0 trillion.

Since 2008, the Federal Reserve has increased its balance sheet by approximately $2.0 trillion. Combined, this is an increase of $7.0 trillion in government debt and an increase in the size of the Fed’s balance sheet. If it were not for this $7.0 trillion, the U.S. would be in a depression; the stock market would be down sharply.

I don’t believe the government can increase its debt another $5.0 trillion over the next four years, as the public outcry would be too great, the damage to the U.S. dollar too severe. And I don’t believe the Fed can increase its balance sheet another $2.0 trillion, as such an action would be overly inflationary.

Yes, the Dow Jones Industrial Average can move higher from here. The bear market rally still has some steam left, but it’s getting old and tired.

Michael’s Personal Notes:

I’m going to be the first to make the call…

The eurozone is in recession.

The “official” number won’t reflect this for another three to six months, but I believe the eurozone has already entered a recession.

Total GDP of the 17-member eurozone is about $12.5 trillion, with Germany accounting for about 26.4% of that number, Italy 16.9% and Spain 9.7% (Source: Lombardi Financial). The economies of Italy and Spain combined are just slightly larger than the economy of Germany. As I wrote yesterday, the respective third and fourth largest economies in the eurozone, Italy and Spain, are already in recession (See: Two Major Eurozone Countries to Fall Back into Recession in 2012.)

Germany’s economy, clearly, is the sole growth engine in the eurozone. But Germany’s economy alone will not be able to save the eurozone.

What we have is a spiral effect. The eurozone countries like Greece, Italy and Spain introduce severe austerity measures to reduce the amount of money they need to borrow. Austerity measures result in citizens spending less money, which in turn reduces economic growth. History has proven that the greater the austerity measures; the more consumers tighten their belts and close their wallets.

As Greece, Italy and Spain pay higher interest rates on their debt, several things happen: (1) each country’s debt becomes greater; (2) the austerity measures savings have less effect on the national debt; and (3) the risk to other eurozone banks that bought the debt (banks in France have large exposure to Italy and Spain) becomes greater. It’s a domino effect on the eurozone.

Will Germany finally give in and allow the European Central Bank to really turn on the money printing press? We know such action would be inflationary for the eurozone, hence, why Germany is saying no to more money printing. The other alternative is either abandonment of the euro or a two-tier system where the weaker countries have a secondary euro monetary system (a cheaper euro).

Either way, 2012 will prove to be a very difficult year for the eurozone. So much so that I already believe the eurozone is in recession.

Where the Market Stands; Where it’s Headed:

On March 9, 2012, the bear market rally will celebrate its third anniversary—a 36-month-long bear market rally. Yes, dear reader, this has been a long rally. But, remember, the government (by taking on so much debt) and the Federal Reserve (by making monetary policy so accommodative) have fought the bear “tooth and nail,” as they say.

But no matter how much the government and Fed both try to fight the bear, the natural forces of bear market will eventually play themselves out. Enjoy the bear market rally while it lasts, because it won’t last forever.

Only two trading days into 2012 and the Dow Jones Industrial Average is up 1.6% so far for 2012.

What He Said:

“I’ve been writing to my readers for the past two years claiming that the decline in the U.S. property market would not be the soft landing most analysts were expecting, but rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most may realize today.” Michael Lombardi in PROFIT CONFIDENTIAL, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worse times ahead.

The eurozone is in recession.

The “official” number won’t reflect this for another three to six months, but I believe the eurozone has already entered a recession.

Total GDP of the 17-member eurozone is about $12.5 trillion, with Germany accounting for about 26.4% of that number, Italy 16.9% and Spain 9.7% (Source: Lombardi Financial). The economies of Italy and Spain combined are just slightly larger than the economy of Germany. As I wrote yesterday, the respective third and fourth largest economies in the eurozone, Italy and Spain, are already in recession (See: Two Major Eurozone Countries to Fall Back into Recession in 2012.)

Germany’s economy, clearly, is the sole growth engine in the eurozone. But Germany’s economy alone will not be able to save the eurozone.

What we have is a spiral effect. The eurozone countries like Greece, Italy and Spain introduce severe austerity measures to reduce the amount of money they need to borrow. Austerity measures result in citizens spending less money, which in turn reduces economic growth. History has proven that the greater the austerity measures; the more consumers tighten their belts and close their wallets.

As Greece, Italy and Spain pay higher interest rates on their debt, several things happen: (1) each country’s debt becomes greater; (2) the austerity measures savings have less effect on the national debt; and (3) the risk to other eurozone banks that bought the debt (banks in France have large exposure to Italy and Spain) becomes greater. It’s a domino effect on the eurozone.

Will Germany finally give in and allow the European Central Bank to really turn on the money printing press? We know such action would be inflationary for the eurozone, hence, why Germany is saying no to more money printing. The other alternative is either abandonment of the euro or a two-tier system where the weaker countries have a secondary euro monetary system (a cheaper euro).

Either way, 2012 will prove to be a very difficult year for the eurozone. So much so that I already believe the eurozone is in recession.

Where the Market Stands; Where it’s Headed:

On March 9, 2012, the bear market rally will celebrate its third anniversary—a 36-month-long bear market rally. Yes, dear reader, this has been a long rally. But, remember, the government (by taking on so much debt) and the Federal Reserve (by making monetary policy so accommodative) have fought the bear “tooth and nail,” as they say.

But no matter how much the government and Fed both try to fight the bear, the natural forces of bear market will eventually play themselves out. Enjoy the bear market rally while it lasts, because it won’t last forever.

Only two trading days into 2012 and the Dow Jones Industrial Average is up 1.6% so far for 2012.

What He Said:

“I’ve been writing to my readers for the past two years claiming that the decline in the U.S. property market would not be the soft landing most analysts were expecting, but rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most may realize today.” Michael Lombardi in PROFIT CONFIDENTIAL, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worse times ahead.

Spain, the eurozone’s fourth largest economy, will fall back into recession in early 2012, according to a statement made by its Economy Minister.Spainhas the highest unemployment rate in the eurozone at a staggering 21.5%.Spainand its citizens are in real trouble.

Italy, the third largest eurozone economy, will also be technically in a recession in the first half of 2012. Italian consumer confidence sits at its lowest level in 16 years. We can see this in retail sales, which were at a 10-year low this holiday season (source: Codacons web site).Italyand its citizens are in real trouble.

Dear reader, I’m sure you’ve heard enough about woes in the eurozone in 2011. But here’s why it’s important to us here inNorth America:

Firstly,ItalyandSpainare respectively the third and fourth largest economies in the eurozone. These economies cannot fall back into recession without affecting the other 17 member countries. The biggest risk (a country that could fall back into recession as well) I believe is France, the second largest eurozone member.

Secondly, banks in the United Stateshave major exposure to eurozone countries. Hence, the risks that weak, or defaulting, eurozone countries represent are high for large American banks. Between the eurozone exposure andU.S. residential real estate bust, it’s no wonder to me that the stock prices of big American banks have yet to recover.

Thirdly, while there has been plenty of talk regarding fixing the eurozone countries with the largest debt exposure, there has been no execution.Germanycontinues to balk at idea of the European Central Bank (ECB) printing more money. (Our central bank; they wouldn’t think twice about printing more money to save the economy.)

Finally, both Spain and Italy have introduced severe austerity measures. New Italian Prime Minister Mario Monti was able to secure final passage on austerity measures that will put a tax on luxury goods (Italy is well-known for high-end luxury good items), increase gas prices, and create a new tax on primary residences. Sure, the austerity measures bring down government debt, but they also stifle consumer spending further.

The year 2012 will be a very difficult one for the eurozone. Please don’t think for a moment that: 1) it won’t affect the west and; 2) the same thing couldn’t happen here.

Where the Market Stands; Where it’s Headed:

We are entering 2012 fully entrenched in a bear market rally that started in March of 2009. I will be the first to admit: I didn’t believe the bear market rally would last so long. The government and the Fed have fought this bear market “tooth and nail,” extending the rally.

Shortly, the Obama administration will ask Congress to increase the federal government borrowing ceiling by another $1.2 trillion, at which point the government debt ceiling will be raised to $16.4 trillion. The Fed; it’s on track to keep interest rates near zero for five years while having expanded the money supply by trillions of dollars.

Sure, what I described in the above paragraph will eventually come back to haunt us. But, in the meantime, it will keep the bear market rally moving higher. (See also: Exactly Where We Are in This Secular Bear Market.)

What He Said:

“If the U.S.housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure—these are the bank stocks I wouldn’t own.” Michael Lombardi in PROFIT CONFIDENTIAL, May 2, 2007. From May 2007 to November 2008, the Dow Jones U.S. Bank Index of the world’s largest bank stocks was down 65%.

2000 – $273.00      2006 – $638.00
2001 – $279.00      2007 – $838.00
2002 – $348.00      2008 – $884.00
2003 – $416.00      2009 – $1,092
2004 – $438.00      2010 – $1,405
2005 – $520.00      2011 – $1,530

To answer the question, “Will 2012 be another up year for gold?” (I tell you right now it will), we need to understand why gold bullion rises in price.

Historically, gold bullion prices have risen for three reasons:

1) as a store of wealth during times of questionable fiat (paper) money;

2) as an inflation hedge; and

3) as a commodity (jewelry).

Let’s work backwards. India has over taken China as the world’s biggest consumer of gold jewelry. I was in India this summer. People in that country love gold. Those who can afford it, flaunt it. With India’s economy close to booming, as more people enter the middle class in India, demand for gold jewelry will rise in India, pushing gold bullion prices higher.

Looking at inflation, I have written many times in 2011 that I believe rapid inflation will become an end result of the Federal Reserve’s expansive monetary policy. If the Fed keeps short-term interest rates near zero until mid-2013, like it has said it will, interest rates will have been at near zero for five years. In American history, we’ve never had a period of zero interest rates for five years.

And this brings me to the third reason gold bullion prices rise: too much fiat money in the system. In its effort to expand the money supply to save the economy from a second Great Depression, the Fed “flooded” the system with money. The Fed went through two series’ of quantitative easing (a fancy way to say creating more money) and I believe QE3 could be on the way in 2012. In order to finance its activities (including buying U.S. government treasuries), the Fed expanded its balance sheet by trillions of dollars. That money didn’t come out of thin air; it was created. Historically, too much money in the system has resulted in higher gold bullion prices.

If you believe demand for jewelry in countries like India and China will dissipate…if you believe there aren’t too many U.S. dollars in the system…if you believe inflation will not be created as a result of a five-year interest rate policy of zero and trillions of newly created dollars…then you shouldn’t be in gold bullion-related investments.

But, if, on the other hand, like me, you believe that the demand for jewelry will rise in India and China, that inflation will become a real problem for America in the years ahead and that there are too many dollars in the system, you can bet on gold bullion prices rising again in 2012. The depressed junior gold mining companies…that’s where the best deals are today. (See: This Morning I Bought a Basket of Gold Stocks.)

Michael’s Personal Notes:

Two big eurozone countries are headed back to recession this year.

Spain, the eurozone’s fourth largest economy, will fall back into recession in early 2012, according to a statement made by its Economy Minister.Spain has the highest unemployment rate in the eurozone at a staggering 21.5%.Spain and its citizens are in real trouble.

Italy, the third largest eurozone economy, will also be technically in a recession in the first half of 2012. Italian consumer confidence sits at its lowest level in 16 years. We can see this in retail sales, which were at a 10-year low this holiday season (source: Codacons web site).Italy and its citizens are in real trouble.

Dear reader, I’m sure you’ve heard enough about woes in the eurozone in 2011. But here’s why it’s important to us here in North America:

Firstly,Italy and Spain are respectively the third and fourth largest economies in the eurozone. These economies cannot fall back into recession without affecting the other 17 member countries. The biggest risk (a country that could fall back into recession as well) I believe is France, the second largest eurozone member.

Secondly, banks in the United States have major exposure to eurozone countries. Hence, the risks that weak, or defaulting, eurozone countries represent are high for large American banks. Between the eurozone exposure and U.S. residential real estate bust, it’s no wonder to me that the stock prices of big American banks have yet to recover.

Thirdly, while there has been plenty of talk regarding fixing the eurozone countries with the largest debt exposure, there has been no execution.Germany continues to balk at idea of the European Central Bank (ECB) printing more money. (Our central bank; they wouldn’t think twice about printing more money to save the economy.)

Finally, both Spain and Italy have introduced severe austerity measures. New Italian Prime Minister Mario Monti was able to secure final passage on austerity measures that will put a tax on luxury goods (Italy is well-known for high-end luxury good items), increase gas prices, and create a new tax on primary residences. Sure, the austerity measures bring down government debt, but they also stifle consumer spending further.

The year 2012 will be a very difficult one for the eurozone. Please don’t think for a moment that: 1) it won’t affect the west and; 2) the same thing couldn’t happen here.

Where the Market Stands; Where it’s Headed:

We are entering 2012 fully entrenched in a bear market rally that started in March of 2009. I will be the first to admit: I didn’t believe the bear market rally would last so long. The government and the Fed have fought this bear market “tooth and nail,” extending the rally.

Shortly, the Obama administration will ask Congress to increase the federal government borrowing ceiling by another $1.2 trillion, at which point the government debt ceiling will be raised to $16.4 trillion. The Fed; it’s on track to keep interest rates near zero for five years while having expanded the money supply by trillions of dollars.

Sure, what I described in the above paragraph will eventually come back to haunt us. But, in the meantime, it will keep the bear market rally moving higher. (See also: Exactly Where We Are in This Secular Bear Market.)

What He Said:

“If the U.S. housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure—these are the bank stocks I wouldn’t own.” Michael Lombardi in PROFIT CONFIDENTIAL, May 2, 2007. From May 2007 to November 2008, the Dow Jones U.S. Bank Index of the world’s largest bank stocks was down 65%.

A phase I bear market (often referred to as the first down-leg) brings stock prices crashing down. From its high of 14,164 in October 2007, the Dow Jones Industrial Average crashed to 6,440 by March 2009—a 55% drop. This phase of the secular bear market is behind us.

A phase II bear market (often referred to as the “rebound,” “bounce” or “sucker’s rally”) started in March of 2009. The Dow Jones Industrial Average has risen 89% since March 9, 2009. The bear market has been doing an excellent job during this current phase of luring investors back into the stock market. Phase II bear markets give investors the false impression that the economy has turned the corner, that stocks are a safe bet again. This phase of the secular bear market is still upon us.

Given that 2012 is a Presidential election year in the U.S., given that the government and the Fed have fought the natural forces of the bear market tooth and nail, the bear market rally, the “bounce” in this secular bear market, has been long.

Phase III of the secular bear market is when stock prices come crashing down again, bringing stock prices down to the point at which the phase I bear market started or lower—in this case, 6,440 on the Dow Jones Industrial Average, about 50% below where the stock market sits today.

Yes, I’m sure many of my readers are sitting there, reading this, and saying, “Michael, this can’t happen. Our economy would crash again.” I also understand that I’m one of the few stock market analysts out there with this opinion. But history is history. What I have explained above, the stark reality of where we are with the stock market, is how a secular bear market works.

The government can take on as much debt as it likes (which is actually a terrible thing for the economy in the long term) and our central bank can increase the money supply as much it wants (another terrible exercise, as inflation and higher interest rates are always the end result of too much money printing). The natural forces of a secular bear market will eventually play themselves out.

Michael’s Personal Notes:

What will happen to the U.S. housing market in 2012?

As we close out 2011, we will have experienced the fifth consecutive year that home prices in the U.S. have declined. According to the popular S&P/Case-Shiller Index,U.S. home prices are down 31% from their mid-2006 peak.

Several reports have been circulated stating that the bottom for home prices is in or will be in sometime in 2012. And there are still those who expect 2012 to be the sixth consecutive year that home prices fall. A recent report from Freddie Mac says that home prices will fall one percent in 2012 and rise in 2013. Other analysts and economists have been more negative saying that home prices will fall up to seven percent in 2012. However, the majority do expect a bottom in 2012 or 2013.

As I have written before, home buyers can get a 30-year fixed mortgage in theU.S.today for 3.91%—the lowest interest rate on a 30-year fixed in 41 years! The problem is that the majority of would-be buyers can’t get qualified, because lending conditions have tightened.

There are several structure issues hindering the U.S. housing market:

A huge inventory of foreclosed homes overhangs the sector. For 2011, foreclosures by lenders of U.S. homes have consistently been in the 200,000 units per month range.

About one in four homes in the U.S. that have a mortgage are worth less than the mortgage.

The attitude toward home-ownership has changed. The rental market is booming in many states. Consumers don’t want to get burned again or, in many cases, they simply don’t have the down payment or creditworthiness to qualify for a mortgage to buy a home.

The tight lending practices of banks have not loosened. And I personally believe there are hundreds of thousands of defaulted home mortgages on the books of the big banks that have yet to enter the foreclosure process.

My prediction is for U.S. home prices to fall in the three percent to five percent range in 2012, with a comparative loss in 2013. But here’s where I differ from most economists on housing: I do not believe thatU.S. home prices will move up this decade.

The biggest creation of money that the U.S. central bank has ever undertaken—we are talking a money supply that has been increased by trillions of dollars—will eventually lead to rapid inflation. That inflation will lead to higher interest rates.

Home prices do not rise when interest rates rise—home prices have an inverse relationship to housing. I sincerely believe that we are near the beginning of a new 30- to-40-year uptrend in interest rates. The U.S. housing market will not recover for years and years. (See also: So They Say the U.S. Housing Market Is Getting Better? Read This.)

Where the Market Stands; Where it’s Headed:

“Inch by inch,” the bear market rally moves towards making 2011 another up year for stocks. As of this morning, the Dow Jones Industrial Average is up 5.3% for 2011. Add in an average dividend of 2.5% and, in spite of the markets’ whipsaw since May 2, stocks have returned a respectable 7.8% this year.

We are in bear market rally in stocks that started in March of 2009. The rally, a giant rebound from a stock market that basically crashed from December 2007 to March 2009, has been prolonged by the efforts of government to increase its debt and by an overly accommodative central bank. (See: Stock Market: What You Can Expect From It in 2012.)

What He Said:

“Over-built, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

As we close out 2011, we will have experienced the fifth consecutive year that home prices in the U.S. have declined. According to the popular S&P/Case-Shiller Index,U.S. home prices are down 31% from their mid-2006 peak.

Several reports have been circulated stating that the bottom for home prices is in or will be in sometime in 2012. And there are still those who expect 2012 to be the sixth consecutive year that home prices fall. A recent report from Freddie Mac says that home prices will fall one percent in 2012 and rise in 2013. Other analysts and economists have been more negative saying that home prices will fall up to seven percent in 2012. However, the majority do expect a bottom in 2012 or 2013.

As I have written before, home buyers can get a 30-year fixed mortgage in the U.S.today for 3.91%—the lowest interest rate on a 30-year fixed in 41 years! The problem is that the majority of would-be buyers can’t get qualified, because lending conditions have tightened.

There are several structure issues hindering the U.S. housing market:

A huge inventory of foreclosed homes overhangs the sector. For 2011, foreclosures by lenders of U.S. homes have consistently been in the 200,000 units per month range.

About one in four homes in the U.S. that have a mortgage are worth less than the mortgage.

The attitude toward home-ownership has changed. The rental market is booming in many states. Consumers don’t want to get burned again or, in many cases, they simply don’t have the down payment or creditworthiness to qualify for a mortgage to buy a home.

The tight lending practices of banks have not loosened. And I personally believe there are hundreds of thousands of defaulted home mortgages on the books of the big banks that have yet to enter the foreclosure process.

My prediction is for U.S. home prices to fall in the three percent to five percent range in 2012, with a comparative loss in 2013. But here’s where I differ from most economists on housing: I do not believe that U.S. home prices will move up this decade.

The biggest creation of money that the U.S. central bank has ever undertaken—we are talking a money supply that has been increased by trillions of dollars—will eventually lead to rapid inflation. That inflation will lead to higher interest rates.

Home prices do not rise when interest rates rise—home prices have an inverse relationship to housing. I sincerely believe that we are near the beginning of a new 30- to-40-year uptrend in interest rates. The U.S. housing market will not recover for years and years. (See also: So They Say the U.S. Housing Market Is Getting Better? Read This.)

Where the Market Stands; Where it’s Headed:

“Inch by inch,” the bear market rally moves towards making 2011 another up year for stocks. As of this morning, the Dow Jones Industrial Average is up 5.3% for 2011. Add in an average dividend of 2.5% and, in spite of the markets’ whipsaw since May 2, stocks have returned a respectable 7.8% this year.

We are in bear market rally in stocks that started in March of 2009. The rally, a giant rebound from a stock market that basically crashed from December 2007 to March 2009, has been prolonged by the efforts of government to increase its debt and by an overly accommodative central bank. (See: Stock Market: What You Can Expect From It in 2012.)

What He Said:

“Over-built, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

As for consumer goods, food prices were up sharply in 2011. So much so, even McDonald’s Corp. (NYSE/MCD) needed to raise prices. Our neighbors to the north, Canada, just announced that their inflation rate rose 2.9% in November from a year ago. Other countries are reporting sharply higher inflation. Buyers of government-issued bond in the Western world are seeing their capital erode, as the inflation rate is higher than the return on the bonds!

During the year, I have written about how the Federal Reserve’s actions of artificially keeping short-term interest rates at zero for five years (the Fed said it would keep interest rates low until 2013) and the $2.0-trillion increase in the money supply are extremely (almost critically) inflationary.

Investors and consumer who believe that interest rates will be kept low indefinitely are in for a rude awakening. Sure, only few believed me in 2005 when I said the U.S. housing market would crash and create havoc for the U.S. economy. And few believed me in 2006 when I said we were entering a recession.

My most important message this year, dear reader, is a warning about higher inflation and higher interest rates coming our way much faster than we expect. And you should prepare yourself for this.

The last time interest rates fell so low for such a prolonged period was 1935 to 1940. Interest rates went up for 40 years after that. It’s the same old story: Each time the economy collapses, interest rates are brought near to zero. Inflation is then created by interest rates being so low and by fiat money printing; interest rates then unexpectedly spike higher. It will be no different this time around, my dear reader.

The rise in interest rates fueled by sharply higher inflation will catch the majority of investors—not including my readers—off guard.

Michael’s Personal Notes:

A tale of two cities…

I was in Manhattan this weekend and have to report to my readers, I’ve never seen it so busy. The city is booming. Walking on 5^th Avenue after 11:00am is difficult because of the sea of people (forget even trying it at about 3:00pm). The most popular restaurants are full (9:30pm first sitting for a good place) and hotels have jacked-up prices as hotel occupancy is high.

The line-up at well-know toy store FOA Swartz at Central Parkstarts around the block. You’ll have to wait a long time to get into the Apple Store next door, as well. Home prices in Manhattan are going through the roof once more. Soho is booming with shoppers walking the streets, hands full of bags from their favorite retail stores.

9/11 and the Great Recession of 2008? No sign of the economic after-affects in New York City. Just getting a cab in this town is a chore.

Last night, I returned from Miami. In what is suppose to be the beginning of the “Season” for heavily traveled vacation destination; hotels are lowering prices to attract customers. Any of the popular restaurants I frequent, no problem getting in, lots of empty tables. The strip plazas and malls, plenty of empty stores. It’s like the Great Recession of 2008 is only starting to end here.

Home prices in the Miami condo market? Still a glut of home foreclosures on the market. Home prices are not rising; great deals can still be had. The further away from the ocean, the better the home prices.

The rude and elementary importance real estate makes in a local economy”

The biggest real estate condo boom the world has ever seen came to a crash in Miami in 2006. The crashing real estate market has severally affected the economy in Miami; home prices are no where near recovering in Miami. In New York City, home prices never crashed; there is nothing to recover from.

The benefits of the Fed’s policy of zero short-term interest rates and an aggressively expanded money supply can easily be seen in New York City. In Miami, crashing home prices have been too severe for the Fed’s extraordinary measures to take any desired affect. (Also see: “Why We Can’t Have a Sustained Economic Recovery.”)

Where the Market Stands; Where it’s Headed:

With six trading days left in the year, the Dow Jones Industrial Average opens this first day of winter up 4.8% for 2011 excluding dividends…about 50% short of last year’s 10.8% stock market gain.

In case you didn’t see the numbers…

The Dow Jones Industrial Average gained 18.8% in 2009, 10.8% in 2010 and 4.8% so far in 2011. It’s not a co-incidence the market’s advance has been declining about 50% per year. It’s simply the sign of an aging bear market rally. (See: “A Few Numbers That Say a Thousand Words About 2012.”)

We continue to trade in a bear market rally that started in March of 2009.

What He Said:

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

I was in Manhattan this weekend and have to report to my readers, I’ve never seen it so busy. The city is booming. Walking on 5^th Avenue after 11:00am is difficult because of the sea of people (forget even trying it at about 3:00pm). The most popular restaurants are full (9:30pm first sitting for a good place) and hotels have jacked-up prices as hotel occupancy is high.

The line-up at well-know toy store FOA Swartz at Central Parkstarts around the block. You’ll have to wait a long time to get into the Apple Store next door, as well. Home prices in Manhattan are going through the roof once more. Soho is booming with shoppers walking the streets, hands full of bags from their favorite retail stores.

9/11 and the Great Recession of 2008? No sign of the economic after-affects in New York City. Just getting a cab in this town is a chore.

Last night, I returned from Miami. In what is suppose to be the beginning of the “Season” for heavily traveled vacation destination; hotels are lowering prices to attract customers. Any of the popular restaurants I frequent, no problem getting in, lots of empty tables. The strip plazas and malls, plenty of empty stores. It’s like the Great Recession of 2008 is only starting to end here.

Home prices in the Miami condo market? Still a glut of home foreclosures on the market. Home prices are not rising; great deals can still be had. The further away from the ocean, the better the home prices.

The rude and elementary importance real estate makes in a local economy”

The biggest real estate condo boom the world has ever seen came to a crash in Miami in 2006. The crashing real estate market has severally affected the economy in Miami; home prices are no where near recovering in Miami. In New York City, home prices never crashed; there is nothing to recover from.

The benefits of the Fed’s policy of zero short-term interest rates and an aggressively expanded money supply can easily be seen in New York City. In Miami, crashing home prices have been too severe for the Fed’s extraordinary measures to take any desired affect. (Also see: “Why We Can’t Have a Sustained Economic Recovery.”)

Where the Market Stands; Where it’s Headed:

With six trading days left in the year, the Dow Jones Industrial Average opens this first day of winter up 4.8% for 2011 excluding dividends…about 50% short of last year’s 10.8% stock market gain.

In case you didn’t see the numbers…

The Dow Jones Industrial Average gained 18.8% in 2009, 10.8% in 2010 and 4.8% so far in 2011. It’s not a co-incidence the market’s advance has been declining about 50% per year. It’s simply the sign of an aging bear market rally. (See: “A Few Numbers That Say a Thousand Words About 2012.”)

We continue to trade in a bear market rally that started in March of 2009.

What He Said:

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

Jim is in the boardroom talking to his three young analysts about where the mutual fund they manage should place its billions of cash, as the firm recently exited some equity positions.

“Where are we going to park those couple of billion we have raised?” Jim asks of the young analysts.

Bobby says, “Let’s not buy bank issued CDs. Banks really haven’t come clean with all their bad loans yet.”

Sammy says, “And let’s keep it out of the eurozone government bonds…they are paying good returns, but if they default, we will never get our money back.”

Joey finally gets up and says, “I’ve been studying the 10-year U.S. Treasury market and can’t believe funds like ours are pouring billions into 10-year U.S. Treasuries paying a paltry 1.9%. Everyone knows the U.S. government has the biggest debt load in the world…that our debt will be close to 150% of U.S. GDP in eight years…that our debt crisis is really bigger than the eurozone debt crisis.”

All faces look to Jim for an answer, “Where do we put our billions in cash?” Jim answers the question quickly by directing that all the cash they have be put into the 10-year U.S. Treasury.

Joey stands up again and says, “Sir, in all due respect, I’m not sure that is such a good idea. I’ve read articles that say the 10-year U.S. Treasury market is a bubble of its own.”

“Sit down Joey,” Jim starts. “Do you know why we don’t buy Italian or French bonds? It’s because we don’t know if we will get our money back. Those Germans don’t want the eurozone countries printing any more money. If a government can’t print money to back its debt, how can a debt-holder like us ever get paid back? Now, 10-year U.S.Treasuries…they are issued by a government that just prints more money when it’s payback time.”

“We live inAmerica, Joey. Land of the free. Our government just prints more money when it comes time to pay back debt. And that’s what we want—a government that doesn’t hesitate to print money to pay back its debt! Look, even the Fed has bought U.S. Treasuries!”

Dear reader, the above may be a fictional account of a conversation between analysts, but I believe it explains why investors throughout the world are flocking to the ironic “security” of the 10-year U.S. Treasury. Fortunately, I’m not one of them.

Michael’s Personal Notes:

My, how industries have changed, how times have changed, how the industries best performing stocks in play have changed.

Yesterday, the iconic 64-year-old Saab Automobile Company said that it was filing for bankruptcy in Sweden. A total of 3,400 jobs are at risk. The company lost $260 million in the first half of 2011. Saab, which was once owned by General Motors Company (NYSE/GM), couldn’t find a solid buyer; not even the Chinese would step in to save it.

Meanwhile, on the other side of the globe, we learn that Saudi Arabia’s Prince Alwaleed bin Talal has invested $300 million in San Francisco-based Twitter Inc., valuing the company at $8.4 billion. Yes, a company with $145 million in expected revenue this year is valued at 58 times its sales!

Saab made cars: machines people use to transport themselves and others from point A to point B. At one time, about 100 years ago, automobiles were considered a breakthrough technology. At the beginning of their industrial life, automaker stocks were the best performing stocks on the market. Today, car stocks are no longer the best performing stocks; they are the market laggards.

Twitter is a social media company that enables its users to send messages of 140 words maximum in length to other members. Twitter has 100 million active users. Social media is part of the Internet, the breakthrough technology of our generation. Social media stocks are now the best performing stocks on the market, selling at huge multiples to sales.

Cars transport people. Social media connects people. Today, the automotive business is crowded and competitive; they are no longer the best performing stocks. Ford Motor Company (NYSE/F) can be had for only six times earnings. Tweeting, seeing what the Kardashian sisters have to say or what Demi Moore just said about her break-up from her boyfriend—now that is “important” and that’s what made Internet/social media the best performing stocks of 2011. But what is even more important is how social media is changing the world.

Didn’t Twitter play a big role earlier this year in citizen uprisings? There is no doubt. Tweeting was used as an “outlet” for dissidents during the various demonstrations in the East in 2011…organized demonstrations that resulted in several dictators being removed after decades in power.

Twitter brought power to the p