The numbers coming out of the eurozone continue to point to a monumental new recession…something I’m very concerned will make its way over to America.

 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.

Here’s what investors know so far about the eurozone crisis:

Ireland, Portugal and Greece have all asked for a bailout. Spain and Italy are next. The governments of both Greece and Italy have toppled. However, the wild card that most investors fail to recognize is the second largest economy in the eurozone, France.

“But I thought France was getting its house in order being one of the first in the eurozone to announce austerity measures targeted at lowering the country’s debt?” Yes, France was quick to introduce austerity measures, but France’s present debt is not the issue.

The big problem is the French banks. French banks have too much exposure to Italy. Yes, French banks have plenty of “bad” Italian debt on their books. The stock prices of French banks have been taking a pounding on the CAC, the major French stock market.

The fear is that the French government will have to bail out its banks because of their exposure to Italian debt. This is what is causing interest rates on French-issued bonds to rise so quickly.

This morning, Moody’s Investors Services warned on French government debt. French bonds demand 200 basis points more than German bonds (10-year notes), a new eurozone spread high between the two countries.

Germany has been reluctant to let the European Central Bank simply print money and bail out the weaker eurozone countries, because Germany has experienced its fair share of hyper-inflation in the past due to over-printing money…and doesn’t want to go there again.

The alternative is for Germany to pull out of the eurozone.

The prospects for the euro continue to erode. It’s doomed either way: the $2.0-trillion round in money printing needed to bail out the eurozone will unleash rapid inflation and push down the value of the euro. If Germany pulls out of the eurozone, the euro is finished anyway. All hail gold!

(Also see: My Bold Prediction on How the Euro Crisis Will Play Out for America.)

Michael’s Personal Notes:

Surprise…surprise…

After years of heavy selling, central banks became net buyers of gold in 2010 for the first time in about 20 years. But that’s not the big news…

The World Gold Council reports that world central banks made their biggest purchases of gold during the third quarter of 2011 in over two decades, with a slew of central bank buyers entering the arena for gold for the first time in years.

If the buying continues, which I believe it will, world central banks could end up making 2011 the biggest year for gold central bank purchases in 40 years.

What’s fueling the purchases of gold by central banks? The answer is simple. The euro has proven to be a catastrophe and the U.S. is continuously failing to get its debt situation under control. With 70% of world central banks having adopted the U.S. dollar as their reserve currency, and given what looks like a continued devaluation of the greenback, foreign central banks are looking for an alternative…and they’ve found it with gold bullion. (Also see my Top Five Reasons Why Gold Prices Will Move Even Higher.)

Where the Market Stands; Where it’s Headed:

This week, traders will use the U.S. Debt Super-Committee’s lack of progress on a deal to see-saw the markets. The bigger the swings in the market, the more money traders can potentially make trading those swings.

The U.S. Debt Super-Committee was created when the debt ceiling of the U.S. government was raised this summer. The purpose of the 12-person committee is to dissolve a gridlock in Washington to get the government’s debt under control. If the committee doesn’t conclude with a deal, $1.2 trillion in government spending cuts is supposed to take effect in January 2013…the U.S. just kicks its debt time-bomb down the road again.

If the U.S. Debt Super-Committee doesn’t reach a deal, there is a chance that the credit rating agencies could downgrade the rating of U.S. debt again…but who cares? Standard and Poor’s cut the U.S. debt rating on August 5, 2011, and investors flocked to U.S. Treasuries, pushing the yield on the bellwether bond to near a record low!

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

What He Said:

“As a reader, you’re aware that I’m not a Greenspan fan. In the years that lie ahead, I believe we (and our children) may pay dearly for the debt bubble that Greenspan created during his tenure as head of the U.S. Federal Reserve.” Michael Lombardi in PROFIT CONFIDENTIAL, March 20, 2006. “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 out 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.

October was one of the best months for the stock market in history in spite of the market risk. Everyone was buying and it didn’t matter if it was technology, industrial, or some new never-heard-before-technology. Everything went up, which is why we are now facing some selling pressure.

Up we go, down we go. Traders are currently jittery following the strong October. The month ended on a ghoulish note on Halloween. November looks like it will also begin sour, with a jump in market risk.

European stocks got hammered. The FTSE 100 moved down over three percent, while other key European bourses plummeted as much as five percent. The selling was driven by a major surprise when the Greek Prime Minister said the country’s new bailout plan resulting from the debt crisis would have to pass a national referendum—adding more market risk and unknowns to the European and global situations. The reality is that there are revolts on the streets of Athens, as people are fighting to safeguard their previous benefits and lifestyles. I mean, why would you not fight to protect a cushy job with early retirement?

But, as I have said on numerous times in the past, Greece is not the only country in trouble. The other members of PIGS also add to the market risk. Speculation is swirling that Italy may be vulnerable to default. The country is undergoing their own austerity strategy, but I expect some surprises to pop up and this will prop up the market risk.

There is also the renewed concern towards the slowing in Asia, as China’s factory activity declined to its lowest level since February 2009. The economic weakness in Europe is negatively impacting exports in China and other Asian countries and adds to market risk.

Going back to the U.S., the key stock indices have each breached their respective 200-day moving average (MA), while the S&P 500 has moved back into the red for the year.

The downside break is worrisome and could point to more weakness to surface on the charts, especially if the non-farm jobs reading this Friday are poor, as many expect them to be.

On the plus side, based on the seasonal trends, market risk may decline, as the months from November to April have resulted in the biggest gains for the DOW and S&P 500 in the past, according to the Stock Trader’s Almanac.

Technology has been better, with stocks advancing in eight months from November to June.

So, while there are the market risk and volatility, if you trade the historical patterns, ride the gains, but make sure you also take some money off the table.

I continue to recommend using put options or buying short-based exchange-traded funds (ETFs) as an offset to the weakness. It’s easy and cost-effective as a hedge.

Just take a look at the various indices that closely reflect your holdings or put options on individual stocks that you have a large position in. Index Puts include the SPY (S&P 500), QQQ (NASDAQ), or IWM (Russell 2000).

Take a look at what I had previously said about the global economy stalling in Stocks Facing Many Hurdles Ahead.

An area that has been under some pressure, but which I really like longer-term, is China’s travel sector; you can read about it in China’s Travel Market: Why It’s an Attractive Chance for Investment.

I want to stay on the topic of third-quarter corporate earnings for the simple reason that it is earnings season and the stock market is reacting positively to the numbers. Stock market investors are still reticent to go long the market in a meaningful manner, because of the investment risk inherent in the European debt crisis. With the main stock market averages’ breakout from their recent ranges, the technical perspective is improving. We’re not out of the woods yet, but stock market trading action is getting much better.

In the Industrial Goods stock market sector, there have been some real standouts on the earnings front. This is a sector that can be heavily influenced by interest rates and trends in the U.S. dollar. The Farm and Construction Machinery sub sector in particular is benefitting tremendously from the lower U.S. dollar trend and is harboring some serious moneymaking large-cap companies, the brands of which you most certainly are familiar with.

AGCO Inc. (NYSE/AGCO) has been a stock market darling since the March 2009 low, posting a gain of approximately 200% up until the stock market’s recent correction. The Duluth, GA-based agriculture equipment manufacturer (selling brands like “Challenger,” “Fendt,” “Massey Ferguson” and “Valtra”) is booming right now, posting third-quarter earnings that beat consensus by $0.12 per share. Revenues came in above Street analyst expectations and the company guided 2011 earnings per share and revenues above current visibility. The company is saying that higher grain prices are going to drive farm equipment sales higher through to the end of the year and that higher profit margins are expected across the board.

Another well-known equipment maker, which is one of my stock market benchmark companies, is Caterpillar (NYSE/CAT). In the previous quarter, stock market investors sold the stock all the way down to $70.00 a share from $110.00 after the company reported results that were just shy of consensus (see Stock Market Leaders Under Pressure—Dividends to Become the Market’s New Best Friend). The stock wasn’t helped either by terrible stock market conditions due to weak sentiment.

In its latest quarter, however, Caterpillar’s business picked up considerably and the company reported outstanding earnings growth of 44% to $1.14 billion. Third-quarter revenues grew 41% to $15.72 billion and the company increased its full-year view.

Caterpillar is one of the few large manufacturing companies that’s hiring (5,000 alone between June and September) and the company’s business is booming in developing economies that need construction equipment. Mature economies are now going through a replacement cycle, which is also helping the bottom line.

AGCO and Caterpillar are but two large equipment manufacturers that no doubt contributed to the surprise gain in the non-auto/aircraft portion of durable goods orders in September. The latest data showed a marked demand increase for computers, primary metals, fabricated metals, heavy machinery, and electrical equipment. All these industries are benefitting from interest rates that are low and a weaker U.S. dollar.

Both these companies make great products that are benefiting from a strong business cycle in agriculture, construction and mining on a global basis. A weaker U.S. dollar against a basket of world currencies is certainly helping the bottom line, but, on balance, I view these businesses as doing very well on their own.

Since June of last year, the U.S. dollar index (a measure of the value of the U.S. dollar versus a basket of foreign currencies) has been in a marked downtrend, fostered by a monetary policy of reduced interest rates and rising money supply. This is helping U.S. large-caps that have major international businesses and it’s contributing to the earnings outperformance with many of these companies. It’s pretty clear in my mind that a weaker U.S. dollar as a policy is helping corporations and that stock market investors should see some significant dividend increases in 2012. The primary U.S. dollar trend has been recently put on hold by the debt crisis in Europe, but once this is dealt with (hopefully sooner rather than later). I expect the U.S. dollar to resume its weakness, which will help domestic gross domestic product (GDP).

The stock market now has some positive momentum, which I think can produce a decent gain before the end of the year. In my view, monetary stimulus is beginning to work and a generally weaker U.S. dollar is being very helpful. I have no problem with the U.S. dollar continuing in a downward trend, as this will go a long way towards helping the manufacturing and export sectors, as well as stock market investors who have been sitting on the sidelines in an otherwise lackluster market.

It’s great to see big, brand-name U.S. corporations reporting great numbers. It’s a trend that I think will continue going into 2012, as long as interest rates and the U.S. dollar stay low. I hate to admit it, but Federal Reserve policy on the U.S. dollar seems to be working.