Lombardi Publishing was originally established in 1986 as an investment newsletter publisher offering stock market guidance and analysis to readers. Today, we publish 25 paid-for investment letters most of which provide stock market guidance. Determining the over all direction of the stock market is very important—is it a bear market or a bull market—is first and foremost in our analysis. Profit Confidential is our daily free e-letter that goes to all our Lombardi Financial customers and to any investor who wishes to opt-in in to receive it. Written by Lombardi Financial editors who have been offering stock market guidance for year to Lombardi customers, Profit Confidential provides a macro-picture on where the stock market is headed. We start by determining if we are in a bear market or a bull market, based on that analysis, we look at what sectors are hot, what sectors to avoid. Our two most recent and popular calls were telling investors to bail from stocks in 2007 (the bull market was over and a bear market was setting in) and telling investors to jump back into the stock market in March of 2009 (a bear market rally was started).

In the classic nursery tale “Goldilocks and the Three Bears,” first put in written form by British author Robert Southey, Goldilocks ran when she came face to face with the bears. On the price charts, gold is also now facing a bear market; but will gold also run away and tank?

Looking at the chart of the June gold, the picture is extremely bearish following the recent break below $1,600 and the subsequent failure to hold at $1,550. In fact, it has been a big and steady decline since trading at a record contract high of $1,928.30 on September 6, 2011, and just below $1,800 in late February. With the decline, the June gold currently sits at 20.33% below its September price and officially in a bear market and trend reversal.

Gold failed to hold on to its base with support at $1,620 and has broken lower. Now the key is to watch if gold can hold at $1,500 to $1,525 on the extreme oversold technical condition.

The June gold is below its 200-day moving average (MA) of $1,701 and 50-day MA of $1,648. There is a bearish death cross on the chart, so there could be more weakness.

The threat now is the 11-year streak, as gold is down nearly two percent this year.

While gold is in a technical bear market, I’m not ready to give up, but then I would also be more careful in adding gold positions whether in physical gold or gold-based stocks. The reality is that the current technical picture is bearish and void of any buying interest.

The downside break at the base support was bearish. Recently, I suggested that a “further decline to $1,550 would represent an excellent buying opportunity for the metal.”

We are at that juncture and I’m not sure I would pull the trigger at this point, fearing there could likely be more downside risk ahead. The extremely weak Relative Strength will place a drag on prices. A break below the 13-week low of $1,526.70 would be bearish. A further move down to $1,511 if gold fails to attract any buying support could be in the works, with a breach of $1,500 a realistic possibility. We could soon see $1,400 gold again, last encountered in June 2011.

Looking at it from another angle, the fixed exchange rate between gold and silver was 15.5:1 in the 19th century, but it moved much higher to average 47:1 in the 20th century. The spot gold price was $1,549 on May 16, compared to $27.84 for spot silver. This equates to a current gold-silver ratio of 55.63, which means the price of gold could fall further to the average—implying a gold price of $1,308, down another 15.56%. Of course, silver prices could be undervalued based on this ratio and head higher.

On the plus, if the June gold can hold at its 52-week low of $1,482.50, we could see a rally based on what I view continues to be above average global risk, which I discussed in Global Market Risk: Is it Improving?

Given the current downward pressure, my advice is to adopt a wait-and-see approach.

Since 1945, Greek elections have swung back and forth between two parties, similar to the Republicans and the Democrats here in the U.S.—very predictable.

With the Greek unemployment rate at a record 21.7% in February and youth unemployment at an alarming 54%, the elections in Greece held earlier in May saw this 60-year political cycle come to an abrupt end.

The parties that support the European Union and the austerity measures—and the parties that traditionally held power for over 60 years—only garnered 34% of the vote. The other minority extreme right-wing and left-wing parties, which gained seats as a consequence, stand against the European Union and the austerity measures.

Greek law states that the minority party with the most votes must attempt to form a coalition government in order to run the country. The party in support of the European Union and the austerity measures was, of course, unsuccessful in forming a coalition government.

According to Greek law, the party with the second-most votes is next to try to form a coalition government. Although these extreme parties are against the European Union and the austerity measures, their ideals are so different that they were unable to form a coalition.

Now that this has failed, Greek law states that another election must be held in the hopes of finding a majority government. This new election should take place sometime in mid-June. Of course, there is no way that the pro-European Union groups will get elected. The question is: will the people of Greece provide either the more extreme left- or right-wing parties with enough seats to run the country?

The European Union has already responded to this shift in Greek politics by saying that, if they don’t implement the austerity measures required of them, the country will not get any further bailout money. And if Greece does not receive the bailout money, it will be in default and will risk having to leave the European Union.

This situation is further complicated by the fact that certain interest payments on Greek bonds are due this week. Will Greece be able to pay for them? If the country doesn’t pay, it will be in default and could cause a cascade of events that may lead to Greece having to leave the European Union.

I can see the European Union holding together even if Greece leaves, as everyone has been painfully aware over the last few years that Greece will be unable to pay its massive debt.

However, besides Germany, there are not many other countries that are happy with the austerity measures. Therefore, will Greece leaving make Spain, Italy, Portugal, Ireland and now France take their leave of the European Union?

The other issue is that, if Greece defaults on its debt, well, someone is going to lose a lot of money. That someone could be a German or French bank. Also, the derivatives tied to Greece defaulting mean that someone will lose a lot of money. The European Union may need to step in and print who knows how much money to contain the crisis.

This mess is cloudier than trying to look through a body of water after an oil spill.

Compounding things…Ireland is holding a referendum at the end of May to vote on the austerity measures imposed on it by the European Union. Will Ireland indirectly vote to leave the European Union?

The situation in the European Union continues to erode. For the first time, one euro trades below $1.30 U.S. With so many U.S. S&P 500 companies having revenue exposure to Europe, is it any wonder the stock market has been in a free-fall as of late?

Michael’s Personal Notes:

When the competitors of Cisco Systems, Inc. (NASDAQ/CSCO) reported weaker first-quarter 2012 earnings, market participants bid up Cisco’s stock believing that Cisco was taking market share away from its competitors.

Polycom, Inc. (NASDAQ/PLCM), a videoconferencing company, reported weaker first-quarter earnings. This competitor to Cisco noted that lower government spending caused revenues to decline more sharply than anticipated.

The company also provided its earnings outlook for 2012. It noted that the economic landscape looked weak. It cited business in North America and in Asia as being weak. This earnings outlook flies in the face of those who say that the U.S. economy will remain strong, despite what the rest of the world is doing.

Juniper Networks, Inc. (NYSE/JNPR) is a major communications equipment maker, the main competitor of which is Cisco Systems. Juniper’s earnings outlook for 2012 was provided with a very cautious tone. The company believes that the slowing U.S. economy and the European debt crisis are preventing telecommunications companies from spending, which in turn will affect its bottom line.

Many traders thought it is easy to blame a weak U.S. economy and the European debt crisis on a weak earnings outlook when Cisco is taking market share.

Cisco System reported earnings last week, which were fine, but its earnings outlook for 2012 painted the picture of a very nervous business sector that was unwilling to spend on Internet gear and a weaker global economic environment.

Despite the cash large corporations have on their balance sheets, they are not spending. Cisco noted that the European debt crisis not only meant weaker consumer and business spending in Europe, but it is also preventing large corporations from spending here in the U.S. and in Asia because of the perception of a coming global economic slowdown.

Yes, business in Asia was strong in the quarter for Cisco, but the company is uncertain about its earnings outlook in Asia going forward. Cisco is considered a leader in the technology space and its earnings outlook is a barometer of how the economy is doing.

Cisco also noted that weak government spending in the U.S. and in Europe—with the European debt crisis—was also an issue that was going to persist in 2012.

Due to Cisco and other technology firms’ weak earnings outlook, Internet technology spending growth worldwide has been slashed by many forecasters and analysts for the remainder of 2012.

There are clear signs the U.S. economy is weakening considerably (see: The Missing Economic Recovery), especially when considering the earnings outlook for the remainder of 2012 from key companies within the S&P 500. (Also see: Many Public Companies Predicting Soft Earnings for Balance of 2012.)

Where the Market Stands; Where it’s Headed:

After a great start to the year, May is proving to be a terrible month for stocks. The Dow Jones Industrial Average has dropped 518 points since the beginning of May.

Corporate insider selling of stock is at a record high. I’ve written repeatedly about the recessions amongst European countries and about the slowdown in China. Now corporate America is pulling back on its corporate earnings forecasts for the remainder of 2012.

Is this the end of the bear market rally that started back in March of 2009? We’ll soon see, dear reader, we’ll soon see.

Note on Gold:

Reports in the media have it that investors are unloading their gold and running for the “safety of the U.S. dollar.” I don’t buy this at all. Firstly, central banks have been big buyers of gold bullion in 2012. Central banks just don’t turn around and dump gold they just bought.

Secondly, the only “security” in the U.S. dollar is the fact that it’s a currency backed by a central bank that will simply print more of it in the event more dollars are needed. Money printing is something Germany has held the European Central Bank back from.

So you tell me, dear reader. Would you rather own a currency that is limited in circulation or one that is issued by a country that just prints more of it as needed?

Finally, after years of rising gold bullion prices, we are seeing a meaningful correction in the gold market. Gold is up five percent from where it traded one year ago. It’s all in the way you look at it and where you see inflation and the U.S. dollar in the next two to three years out.

I’m in the camp that sees the glass as half-full. When I could, over the past decade, during the bull market in gold bullion, I have been buying gold-related investments as the price of the metal corrected. I believe this strategy has worked well for me.

What He Said:

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

The battle to tighten budget deficits has now reached a new level. Public employees are pushing back by taking their employers—the cities—to court.

In San Jose, California, the public unions are taking the city to court to contest the city’s attempt to force the public employees to either contribute more of their paycheck toward their pension or accept a reduced retirement pension plan (source: Reuters, May 8, 2012).

There are eight similar lawsuits nationwide!

I have discussed most of these troubled cities in these pages before the court dates were set. You know what I’m going to say now; this is just the beginning.

The San Jose Police Officers’ Association is ready to fight for years if it has to, to protect what it feels it’s entitled to for its service.

The City of San Jose attempted to explain to the police officers and the other city unions that, since the recession hit in 2008, the pension fund has lost money on its investments, which has widened the budget deficit. On top of this, with home prices falling and fewer people working, tax revenues to the city have declined, further exacerbating budget deficits.

And with interest rates near zero, it is proving very difficult for pension fund to generate any interest income to help fill the budget deficit hole.

The City of San Jose has to make cuts somewhere to make up the budget deficit. It has chosen to increase pension contribution rates instead of cutting basic services. Of course, if the battle in court continues, the city may have no choice but to cut essential services for the citizens of San Jose, because the cost of the case was not planned in the budget deficit.

I’ve talked about the plight of Detroit. Its budget deficit is enormous as the city’s home prices continue to languish. Just recently, the city outlined a severe plan to address the budget deficit. The City of Detroit is planning to cut 25% of its 10,000 workers—or 2,500 employees (source: Detroit Free Press, April 24, 2012).

The cuts are across the board, from public safety like police officers to healthcare workers. A citywide hiring freeze has also been put in place. The city doesn’t want to cut the fire department so it is asking the federal government for a grant to help retain 100 firefighters, because the city cannot afford to with its budget deficit.

San Jose and Detroit join the long list of municipalities that are cutting essential services to their citizens and are pushing the public unions to the point where disputes are now being handled in court.

The pushback will continue until the budget deficits get pushed from municipalities to the bankrupt states and eventually to the federal government. Where will the next round of bailout money come from?

And can you believe that economists thought earlier this year that the Fed would not delivery QE3? The audacity of thinking more money printing was not coming!

Michael’s Personal Notes:

A sign of things to come…

Outplacement firm Challenger, Gray & Christmas released a report last week illustrating that, for the month of April 2012, planned firings at corporations in America rose 11% from a year ago. From the month of March, planned firings were up 7.1%.

The report also expressed the opinion of its authors that, at the current level of demand for goods and services, companies in the U.S. don’t require additional workers to meet output; very bad news for May’s upcoming job numbers report.

Sure, this means the U.S. economy is weak. Without sufficient demand from the consumer, which is 70% of GDP, companies will not hire new workers, which is going to stall jobs growth. This is a bad sign that May’s job numbers could be worse than April’s.

This is further confirmed by the fact that the biggest sector of the economy that cut the most jobs thus far in 2012 has been the consumer products companies. If consumers are not spending, then the companies that make and sell consumer products will not lead jobs growth, but instead lead in layoffs.

The report also highlighted that layoffs at the government level—led by education—continued to increase, which is something I’ve been talking about in these pages.

As municipalities continue to cut the expenses to meet their budget deficits, jobs growth will be nonexistent at the state and municipal levels. And the monthly job numbers will continue to display the effect of this reality.

Challenger always prefaces its report by saying that a corporation’s intention to lay off will change if the economy improves, which will lead to improved job numbers. Given all of the economic headwinds I’ve detailed in these pages recently, like weak U.S. durable goods orders, weak job numbers and weak retail sales, the economy will most likely not improve.

Many are saying that April’s job numbers report was not the start of a downtrend in job numbers. I beg to differ.

Where the Market Stands; Where it’s Headed:

I believe the stock market has been putting in a huge top for months…what technical analysts call the right shoulder of a “head and shoulder” pattern.

The bear market knows that worldwide economic growth is declining rapidly…that Recession Part II is not far behind. It just doesn’t want investors to know, so they keep putting money into the stock market so the bear can take it away again!

What He Said:

“A low savings rate was eventually blamed for the length of the Great Depression. Consumers just didn’t have enough money to spend their way of the Depression. With today’s savings rate being so low, a recession could have a profoundly negative effect on overextended consumers.” Michael Lombardi in PROFIT CONFIDENTIAL, March 26, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

Wow; 57.9 tons of gold bullion is a lot of gold.

And that’s exactly what they bought.

In March 2012 alone, 57.9 tons of gold bullion was purchased by world central banks. To give some perspective on this number, in 2011, central banks bought just under 440 tons of gold bullion, a rate of 37 tons a month (source: World Gold Council).

The International Monetary Fund (IMF) just reported that, in March, central banks took advantage of the lower prices in gold bullion to buy significant amounts of the metal.

Should the current rate of buying by central banks continue at this pace, central banks will purchase a staggering 700 tons of gold bullion in 2012!

As I’ve been writing in these pages, the gold demand from central banks does not include the largest central bank buyer: the People’s Bank of China. The Chinese are not reporting their gold-buying numbers to the IMF, but we know they are accumulating a staggering amount of gold bullion to back their currency, the yuan.

Over the last decade, the supply of gold bullion mined out of the ground has been fairly constant: 2,500 tons per year (source: World Gold Council). The fact is that gold bullion is difficult to find under the earth’s crust.

In 2010, central banks barely bought any gold bullion, while supply remained at 2,500 tons. In 2011, central banks bought 440 tons, with supply remaining relatively constant at roughly 2,500 tons. In 2012, at their current buying pace, central banks are on track to buy 700 tons of gold. And, if the People’s Bank of China continues to accumulate all it can, it is safe to say roughly half of the gold bullion supply will be picked up by central banks in 2012.

With supply steady and central bank buying increasing at a fast rate, gold bullion prices will have to move higher to satisfy other investor demand around the world. (See: Two Major Countries Join in China’s Quest for Gold.)

The reason central banks are buying gold bullion is that Japan’s weak economy may once force Japan to resort to money printing. The European Union is in crisis and will need to resort to money printing. The U.K. is now officially in a recession, which means it may be just a matter of time before it returns to money printing, as it has in the past in its attempt to resuscitate its ailing economy. (See: Money Printing by Any Other Name.)

As I’ve detailed in recent issues of Profit Confidential, the U.S. economy is not as strong as news headlines would suggest. As soon as the stock market starts to tank, QE3 will be announced.

With money printing seemingly the only solution to the world’s economic growth problems, central banks have decided to protect themselves by buying more gold bullion than ever before.

I suggest that my dear readers follow the example of world central banks and use weakness in the 10-year-old gold bull market as an opportunity to make gold-related investments. I would urge you to take a hard look at the senior gold mining companies; they are trading at historically low levels when compared to the current price of gold bullion.

Michael’s Personal Notes:

A perfect contrarian indicator may now be telling us that it is getting close to the time to sell stocks.

Alan Greenspan, who began the low interest rates policy at the Federal Reserve, said this week that stocks look very cheap to him, citing a low price-to-earnings (P/E) ratio for the stock market as the key reason.

He stated that stock prices will rise, as low interest rates provide few alternatives for income investors—so buy stocks now while they’re cheap.

Of course, he forgot to mention that the rate of corporate earnings growth has been decelerating at a very rapid rate. He also forgot to mention that artificially low interest rates, which he jump-started, make P/E ratios look better than they really are.

In the third quarter of 2011, corporate earnings growth, year-over-year, was 17% for the S&P 500. In the fourth quarter of 2011, year-over-year, corporate earnings growth was only 5.5%, even though interest rates remained at historic lows.

The corporate earnings numbers for the first quarter of 2012 are not all out yet, but they point to a continuation of a decelerating corporate earnings growth trend.

In my opinion, Greenspan, while Chairman of the Federal Reserve, kept interest rates at artificially low levels for a prolonged period of time after the economy had gained some traction in 2003 and 2004. Had he raised interest rates, he would have slowed the housing market, thus helping prevent the housing market from reaching bubble levels, and then crashing.

Greenspan argues in his best-selling book that the Federal Reserve is not as independent as people believe. He notes that there is huge political pressure on the Federal Reserve to keep the economic growth engine running at a fast pace.

Does this mean he is excusing himself for keeping interest rates artificially low because he had to bend to political will?

The focus when Greenspan was in office should have been on the real economy, which, as a consequence to this “political pressure,” allowed low interest rates and lax regulation to lead to the real estate crash and what is being dubbed the “Great Recession,” which we have yet to recover from here in America.

We are all entitled to an opinion. I was never a fan of Greenspan or his initial low interest rate policies. On the other hand, I’m a big fan of current Fed Chairman Ben Bernanke. I believe Bernanke saved this country from the Great Depression Part II.

As for Greenspan, when the housing market started to fall in 2006, I still remember him saying that the housing market contraction would be confined and would not affect the remainder of the economy!

Through the years, Greenspan has become a contrarian indicator for me. Just do the opposite of what he says and you’ll do fine. And if Greenspan is saying now is a good time to buy stocks, I know it’s getting close to the time to unload stocks.

Where the Market Stands; Where it’s Headed:

We are in a long-term secular bear market. Phase I of the bear market was completed when the Dow Jones Industrial Average fell from 14,164 in October of 2007 to 6,440 in March of 2009.

Phase II of the bear market started in March of 2009 and continues today. The purpose of a Phase II bear market (often referred to as a “sucker’s rally”) is to lure investors back into the stock market under the false pretense that the economy is improving.

Phase III of the bear market, the next phase, will bring stocks back down again.

What He Said:

“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings, is a recipe for a financial catastrophe.” Michael Lombardi in PROFIT CONFIDENTIAL, September 7, 2005. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

The U.K. has joined the double-dip recession club in 2012. More members will be dragged into the club; kicking and screaming all along the way.

Officially, a recession is defined as two consecutive quarters of negative gross domestic product (GDP) growth. In the fourth quarter of 2012, the U.K. economy—GDP growth—shrank by 0.3%. In the first quarter of 2012, GDP growth contracted by 0.2% (source: The Telegraph, April 26, 2012).

This is the first double-dip recession the U.K. has experienced since 1975, and the citizens are not too pleased.

Since many countries within the European Union are the U.K.’s main trading partners, one area that brought down the U.K.’s GDP growth was exports to the European Union. From the fourth quarter of 2011 to the first quarter of 2012, exports of goods from the U.K. to the European Union fell 1.2%, while exports to the rest of the world were actually up (source: The Guardian, April 26, 2012).

Year-over-year, from the first quarter of 2011 to the first quarter of 2012, exports to the European Union were down 3.3%, while exports to the rest of the world were slightly higher. As a result, the U.K. manufacturing sector contracted, dragging down GDP growth.

Construction spending and retail sales were also weak in the first quarter of 2012, which illustrated the fact that the citizens of the U.K. were unable to push GDP growth figures higher.

The U.K. is attempting to implement its own version of austerity measures to reduce its level of debt. Now many are asking the government to relax its stance to focus on growth instead in order to help consumers and hopefully spur GDP growth.

Naturally, should GDP growth continue to contract, U.K. citizens would want a further reduction in interest rates and more money printing. Yes, the Federal Reserve is not the only central bank that is printing money in order to boost GDP growth. (Also see: Next European Country to Default: Why it Means More Money Printing.)

However, reducing interest rates and printing more money is an issue, because rapid inflation remains stubbornly high. The latest U.K. Consumer Price Index (CPI) reading came in at 3.5%.

Rising food and clothing prices are the main culprits behind the persistence of rapid inflation in the U.K. The government believes the rapid inflation is transitory and should come down to its two-percent rapid inflation target by the end of the year. Hmm…sounds familiar.

The problem in the U.K., link in the U.S., is that incomes are increasing at rate that is substantially below the inflation rate. In the U.K., inflation-adjusted personal income is falling by 2.4% annually.

With many countries in the eurozone in recession, with the U.K. now in recession, while China’s GDP growth rate is falling at an accelerated rate, the recession “ship” could be headed straight for the shores of the U.S. economy.

Michael’s Personal Notes:

Orders for U.S. durable goods fell 4.2% in March from February’s level, representing the largest falloff in three years (source: Department of Commerce)!

The durable goods report is an important gauge of an economic recovery, because it focuses on big-ticket items that are purchased by businesses and consumers, which are meant to last at least three years; a sign of longer-term business and consumer spending and confidence.

Last month, I presented a chart in these pages to highlight the record amount of durable goods inventory being created in this country. Well, the record inventory levels continued into March, making it the 27th consecutive month of inventory increases. There had better be a strong economic recovery or someone will be stuck with $375.1 billion in durable goods on inventory-stacked shelves.

As my readers know, to get a better gauge of how consumer spending is faring in this economic recovery, I like to use the new orders numbers, which remove defense spending and aircraft orders out from the durable goods numbers reported. In March, non-defense capital goods excluding aircraft contracted by 0.8%, while economic expectations were for a one-percent gain.

This clearly does not bode well for consumer spending and the economic recovery in this country.

There are serious other forces at work.

U.S. durable goods by their very nature must be manufactured here in the U.S—they are goods after all. In 2010, manufacturing contributed to 1.2% to GDP growth. In 2011, manufacturing contributed only 0.5% to GDP growth (source: Bloomberg, April 25, 2012), denting the GDP numbers and economic recovery. The trend has continued thus far in 2012, with manufacturing slowing. Obviously, this is a reflection of a weak economic recovery and weak consumer spending here in the U.S.

The largest manufacturers here in the U.S. are experiencing reduced demand from China. Caterpillar Inc. (NYSE/CAT) beat analyst estimates with their first-quarter earnings report, but then noted that, for 2012, their previous forecast of five percent to 10% growth from China has now been changed to a decline (source: Financial Times, April 29, 2012)!

Luckily, they see growth in the U.S. Not from an actual economic recovery, but from the fact that construction companies need to replace their very old machinery.

E.I. du Pont de Nemours and Company (NYSE/DD) was stunned to report that, while Latin American earnings grew 23% in the first quarter, revenues from Asia fell two percent.

3M Company (NYSE/MMM) cited a considerable slowdown in both Japan and China that could impact its earnings in 2012.

For the first quarter of 2012, United Technologies Corporation (NYSE/UTX) reported 20% growth in Brazil, India and Russia, but was stunned when Chinese orders dropped by 15%.

(Also see: Many Public Companies Predicting Soft Earnings for Balance of 2012.)

Should the recessions in the eurozone continue (and they will), it will affect China, because Europe is China’s largest export market. If China experiences no economic recovery as a consequence of Europe continued economic contraction, it will affect the U.S. manufacturers that sell into China, jeopardizing the U.S. economic recovery.

Not only will the U.S. economic recovery be affected by weak U.S. consumer spending, but also exports could fall because of China. So if you want to buy this stock market rally on the hopes that the recession in Europe and the slowdown in China don’t matter to the U.S., then by all means…

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning at approximately 1,000 points below its record high set in October of 2007. Quite a feat? Not really.

A multi-year history of artificially low interest rates, a 50% increase in government debt in five years, and trillions of dollars in newly printed money are the real reasons the stock market is up. Take these three factors away and corporate America would be in real trouble.

But the bottom line is that borrowing and money printing cannot go on for years, as both events cause inflation, which pushes interest rates higher. I still believe there is life left in the bear market rally that started in March of 2009, albeit limited life. Trend carefully, dear reader.

What He Said:

“When property prices start coming down in North America, it won’t be a pretty sight, because consumers are too leveraged. When consumers have over-borrowed so much that they have no more room in their credit lines to borrow more, when institutions start to get tight on lending, demand for housing will decline and so will prices. It’s only a matter of logic, reality and time.” Michael Lombardi in PROFIT CONFIDENTIAL, June 23, 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.