The roots of America’s economic malaise can be traced back to 2006 when the U.S. housing bubble burst. This sent the dominos tumbling, and the United States into an economic meltdown in 2008. In spite of government intervention, the economy has sputtered and slipped into recession. The U.S. could be heading back that way in 2013.
The Federal Reserve has kept the economy alive the past four years by keeping the printing presses running overtime. The Fed can’t lower interest rates below zero. And, the more money the Fed prints, the greater the risk of inflation and the higher long-term interest rates will eventually move, stifling the economy.
The U.S. government has no money left to bail us out during the next recession. The government is over-extended—if it was a business, it would be bankrupt right now. The after-effects of the next leg of the bear market could be much worse than the Great Recession.
Since 2001, readers have turned to Michael Lombardi’s famous daily economic newsletter Profit Confidential for stock market guidance. Determining the overall direction of the stock market is very important—whether it’s a bear market or a bull market—is first and foremost in our analysis.
Profit Confidential is our free daily e-letter that goes to all our Lombardi Financial customers and to any investor who wishes to opt-in to receive it. Written by Lombardi Financial editors who have been offering stock market guidance to Lombardi customers for years, 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 and what sectors to avoid.
Profit Confidential also famously warned its readers to bail from stocks in 2007 (the bull market was over, and a bear market was setting in), telling investors to jump back into the stock market in March of 2009 (a bear market rally began).
Michael was one of the first to predict the U.S. economy would be in a recession by late 2007. On March 22, 2007, he warned, “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 our 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 fuelled the housing boom that peaked in 2005, has yet to arrive.”
At the same time Michael wrote that former Federal Reserve Chairman Alan Greenspan said, “The worst is over for the U.S. housing market, and there will be no economic spillover effects from the poor housing market.”
Michael also warned his readers in advance of the crash in the stock market of 2008. On November 29, 2007, Michael predicted, “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 reality 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 America.”
The Dow Jones 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. One year later, the Dow Jones Industrial Average was at 8,726.
Profit Confidential turned bullish on stocks in March of 2009 and rode the bear market rally from a Dow Jones Industrial Average of 6,440 on March 9, 2009 to 12,876 on May 2, 2011, a gain of 99%.
The two-year stock market rally is coming to an end. The start of a bear market doesn’t mean investors should run to the sidelines. In fact, the bear market will present investors with an unprecedented opportunity.
In 2013, Michael predicts that the devaluation of the U.S. dollar that started in early 2009 will accelerate as the U.S. economy deteriorates, that gold prices will continue to rise, and that the euro is done. Michael also predicts that inflation will be a big, big problem for the U.S.; probably for the rest of the decade. Finally, Michael believes that 2013 will be a poor year for stocks.
It’s not all doom and gloom, though. He also has ways investors can protect their holdings and even make money off the weak economy.
This past Friday, the Bureau of Labor Statistics reported 175,000 jobs were added to the U.S. economy in the month of February. (Source: Bureau of Labor Statistics, March 7, 2014.)
The way the media reported it…
“Friday’s jobs market report caught the market by surprise,” was what most media outlets were telling us via their untrained reporters. The expectation was an increase of 149,000 jobs in February (after a dismal December and January jobs market report) and so the usual happened—stocks went up and gold went down on a jobs market report that was only slightly better than what was expected.
The consensus, from what I read, is that the jobs market in the U.S. economy is getting better. Of course, I think of this as hogwash. And as I’ll tell you in a moment, this is the kind of misinformation that is characteristic of what happens in a bear market in stocks, not a bull market.
Within February’s jobs market report, we find:
The long-term unemployed (those who have been out of work for six months or more) accounted for 37% of all the unemployed in the U.S. economy. The longer a person is unemployed—likely because that person has not been re-trained for the jobs market—the less likely it is that person will eventually find work.
Today, once a person becomes unemployed in the U.S. economy, that person remains unemployed for an average of 37 weeks! This number remains staggeringly high. Before the financial crisis, this number was below 15 weeks. (Source: Federal Reserve Bank of St. Louis web site, last accessed March 7, 2014.)
When you have a … Read More
Back in late 2011, I created a widely circulated video that included six predictions. I hit it on the head with five of those predictions. But the winners are not what are important to my readers today; it’s the prediction I didn’t get right that’s vital now
Back then, I said the U.S. dollar was “dead” and wouldn’t go anywhere. I pointed out that if it were not for the continued crisis in the eurozone, the greenback would fall flat on its face. The dollar hasn’t gone anywhere since. And if it were not for investors taking their money out of European banks and moving them into U.S. dollars, our dollar could have collapsed.
My second prediction back then was that the euro would decline in value. And it has. Prediction three was that both interest rates and inflation would rise. The yield on the 10-year U.S. Treasury has risen about 50% since then. As for inflation, if we calculate it the way the Consumer Price Index (CPI) was calculated when Jimmy Carter was president, it would be almost three times the rate the government tells us it is today.
I compared the rally in stocks that started in 2009 to the period following the 1929 stock market crash (1934 to 1937) and warned that stock prices would eventually follow the same fate they did after the “fake” stock market rally that followed the 1929 crash. I still have that opinion today.
Since the announcement from the Federal Reserve about tapering off quantitative easing, the key stock indices have been showing increased selling pressures. Just take a look at the chart of the S&P 500 below.
Chart courtesy of www.StockCharts.com
The S&P 500 started 2013 with momentum to the upside. Investors bought in hopes that the index would continue to go higher, and by no surprise, it did reach its all-time high. As expected, after the Federal Reserve announcement, sellers took hold of the S&P 500, and it broke below its 50-day moving average for the first time this year (indicated by the black circle in the chart above)—a bearish indicator, according to technical analysts.
The last time the S&P 500 reached this far below its 50-day moving average was in October 2012. When that happened, the S&P 500 declined six percent, and it didn’t recover until December (as noted by the green circle in the above chart).
Note: other key stock indices like the Dow Jones Industrial Average and the NASDAQ Composite Index have also fallen below their 50-day moving averages.
Looking at this, I have to ask: is the bear market rally that lured investors into buying over?
The decline in the key stock indices has certainly proved my theory: money printing was a major factor in their flight to their all-time highs. Now, when we have hints that the Federal Reserve will be pulling back on its quantitative easing, the key stock indices are sliding lower.
Corporate earnings, one of the main reasons for the rise in the key stock indices, aren’t improving as expected either. As a matter … Read More
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