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.

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.

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.

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.

If we think back to early August of this year, we can remember several days in which the Dow Jones Industrial Average fell 400 to 500 points in a single day. As the stock market continued to deteriorate, stock advisors started throwing in the proverbial towel and turned big-time bearish.

At the beginning of October the Dow Jones Industrial Average hit a low of 10,404, a level not seen since September 2010. The stock market’s poor performance in the period from August to late September created the highest amount of stock advisor bears since March of 2009 (The Strongest Indication Yet That Stocks Are Short-term Oversold).

And, as usual, at the depth of pessimism, the Dow Jones Industrial Average turned up. Stocks moved higher; we are now in striking distance of Dow Jones 12,000. Hopefully, my readers followed the guidance here in Profit Confidential…we’ve been writing for weeks that the bear market rally that started in March of 2009 had yet to finish its business (Four Reasons Why Stock Prices Will Bounce Higher Now).

The action of the Dow Jones Industrial Average and the action of benchmark stocks (see “Michael’s Personal Notes” below) are often referred to as leading economic indicators. And this brings me to the “granddaddy” leading benchmark stock, Wal-Mart Stores, Inc. (NYSE/WMT), a component of the Dow Jones Industrial Average.

If we look at Wal-Mart’s stock today, we see that the stock is pennies away from breaking to a new price high for 2011. Wal-Mart’s benchmark stock is telling us that low-end retail sales are good in America. Why wouldn’t they be? With the unemployment so high, the middle-market retail stores are suffering as consumers cut their spending and shop the lower-end retail stores like Wal-Mart and Target Corporation (NYSE/TGT).

But if we look closer, we will see just how accurately Wal-Mart’s benchmark stock is predicting the future. The benchmark stock is telling us that sales at low-end retail are brisker than any other time this year; but if we look at the long-term price chart of Wal-Mart’s stock, we see the stock is far from hitting its all-time high reached back in early 2002.

For technical analysis junkies, Wal-Mart stock hit a high just under $65.00 a share in the first quarter of 2002, the peak in a classic head-and-shoulder pattern. In the fourth quarter of 2008, Wal-Mart’s stock made a run at its price high, but failed. The first shoulder was formed. Now, the stock’s making a second run at its price-high, which I believe will fail, and the second shoulder of the pattern will be carved out.

The action of Wal-Mart’s stock falls in squarely with the economy and my bear market prediction. The Dow Jones Industrial Average has been in a bear market since March of 2009. We won’t break to new stock market highs with this rally, but we will get high enough to lure more investors back into the stock market, which is exactly what the bear wants.

Michael’s Personal Notes:

Maybe the economy isn’t in that bad a shape after all…

Visa Inc. (NYSE/V), the world’s biggest consumer payment network, reported last night that its third-quarter profit beat analyst expectations. Visa reported a profit of $880 million for the three months ended September 30, 2011. Business is so good that Visa is buying back its own stock in addition to boosting its quarterly dividend by a whopping 47%.

Visa can be looked at as a benchmark stock that gauges economic growth. Benchmark stocks are the stocks of companies that are dependent on the sale of goods or services to either consumers or business. Common sense dictates that, when the world’s biggest credit-card company is seeing profits rise, it’s a good indication of economic growth, not contraction.

The more products or services consumers buy, the more profit for benchmark stock Visa—a good indication of economic growth.

I have written several times that stock advisors, equity analysts, and economists turned too bearish on the economy too fast when the stock market started to plunge this past August. They overreacted.

Yes, I’m personally bearish on the long-term outlook for the economy for the many reasons that I often write about on these pages. I believe the government and Federal Reserve are limited in their next moves should the economy start to contract again. But the economy isn’t collapsing today. The economy will slow over the next few months. Higher profits at benchmark stock Visa are proof that the economic growth isn’t coming to a halt…just quite yet.

Where the Market Stands; Where it’s Headed:

A few points here, a couple of points there, and all of a sudden the Dow Jones Industrial Average is up three percent for the year. Add a dividend yield of 2.5% and, presto, stocks have retuned about 5.5% in 2011—multiples of returns that investors are getting on 90-day U.S. T-bills.

But it’s not over yet. As I have been writing, the bear market rally will continue to move higher against the backdrop of extreme pessimism amongst investors and stock advisors and better-than-expected third-quarter corporate earnings.

The Dow Jones Industrial Average has inched up only 130 points away from 12,000 level—an important psychological point I believe the bear market rally will soon pass through.

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

While the stock market has seen some impressive gains from other key tech companies, Microsoft has been a laggard—but that could change soon. I’m not saying it will become one of the top stocks in the stock market, but Microsoft could become more attractive to the growth investor.

Whenever a company comes up with a new and potentially huge product, it does so with the help of many other companies. This is where Microsoft comes in, as it will be riding the coattails of Nokia Corporation (NYSE/NOK) while it rejuvenates itself to battle for smartphone and cell phone supremacy. Investors in Microsoft could be in for some fast and easy profits.

Just ask the early investors in Apple Inc. (NASDAQ/AAPL). I’m not saying Microsoft will be similar, but the alliance with Nokia may yet prove to be the trigger needed to jumpstart the stock.

Based on my past experience, I can say that not all of the companies involved will see an immediate boost, but often the stocks of these companies can make excellent long-term investments if purchased at the right price and time. And the time for buying Microsoft is now.

That’s exactly what I’ve found with this rebound opportunity. The stock market always provides opportunities and Microsoft appears to be one. However, note that this is not a specific buy recommendation; just an example of an opportunity out there.

Microsoft has seen its stock do absolutely nothing for the past decade in the stock market where it has been dead money for investors, while other stocks have made enormous returns.

But the time appears to be ripe for Microsoft to break out of its sleep as a boring, former high-flying technology stock that needs a kick to drive up the share price and attract buyers. The company needs to generate the excitement it once had when it showed up at trade shows. Selling its operating system is not enough, as PCs are becoming relics.

The big money is in the mobile market. Eventually PCs and laptops could be a thing of the past only found in museums for your kids or grandkids to see. Remember the typewriter? Take a trip to the Smithsonian and you’ll see one on display. The same could happen to PCs and laptops in less than a decade and even as early as a few years. The advent of the tablet computer is the first step towards the demise of the PC and laptop.

Microsoft took another step forward with its $8.5-billion acquisition of Skype, which was approved in the United States in June 2011 and is awaiting approval in Europe from the competition bureaus. The addition of Skype communication application will strengthen the product offering in the new Nokia “Windows” phone. Microsoft will provide the Windows software to develop a high-power, next-generation Nokia smartphone to compete against the likes of Apple, Research In Motion Limited (NASDAQ/RIMM), Samsung, and the recent acquisition of Motorola Mobility Holdings, Inc. (NYSE/MMI) by Google Inc. (NASDAQ/GOOG). Trust me, Google knows what it is doing, as it will flood the market with “Android”-powered Google-based Motorola phones. Doesn’t the Nokia-Microsoft alliance make more sense?

Just imagine the opportunities for Microsoft given the size of the global cell phone market. There are estimated to be over five billion cell phone users, according to the United Nations. That is a lot of phones, so the battle for market share will be intense.

The demand for smartphones will continue to grow rapidly, as we see more and more content and applications move to the mobile phone. Mobile broadband is becoming more significant. There are estimated to be over one billion broadband subscribers in 2010, according to the International Telecommunication Union. This is why smartphones are becoming more critical products and why Microsoft needs to be there.

In a few years, there’s a chance that Microsoft may become one of the top stocks for growth investors.

Another interesting stock in technology is China-based iSoftStone Holdings Limited (NYSE/ISS), which you can read about in Selective Tech Investing the Key to Success. Add it to your list of the top stocks to look into in this area.

Stocks may be looking to go higher, but you also need to be careful and make sure you have proper risk management in place. Read my How to Survive During This Economic Chaos article and out how you can protect your portfolio.

The stock market has punished Gap for its results. The competition is extremely high in Gap’s space and the company is beginning to become a dinosaur as far as popularity among the youth, who no longer want to wear Gap apparel, but instead wearing trendier clothes from the likes of Aeropostale, Inc. (NYSE/ARO), American Eagle Outfitters Inc. (NYSE/AEO), and Hollister.

For the five-week period ended October 1, Gap reported more disappointing results after a four-percent decline in its key same-store sales. With the debt crisis in Europe and jobs at risk in the U.S., there has been a decline in consumer demand. But, for Gap, it has more to do with the company no longer appealing to the youth crowd than the debt crisis and other problems.

Now with the third-quarter earnings, watch the retailers closely, especially what they say about what to expect during the holiday shopping season that traditionally begins with Black Friday on November 25, the day following Thanksgiving.

Yet, in spite of weak consumer confidence, which came in at a disappointing 48.5 in September, consumers are continuing to spend, albeit at an anemic rate.

The headline Retail Sales for September saw a rise of 1.1%, better than the 0.6% estimate, while the core number excluding autos surged an impressive 0.6%, well above the 0.3% expected. You have to feel somewhat encouraged that consumers are still spending in light of the issues. What we want to see is a rise in spending on non-essential goods and services, specifically big-ticket items.

My economic analysis leads me to believe that consumers will continue to think hard before spending. It will be really tough for retailers in Europe given the debt crisis, as consumers cut back on spending.

The S&P Retail ETF (NYSE/XRT) is around the midway point of its 52-week range, as the stock market stalls after upside moves.

In my view, it’s essential to look for same-store sales growth in retailers that sell non-essential goods. Increases here mean that consumers are spending on goods and services that are non-essential. These include electronics, appliances, furniture, autos, and other big-ticket items. Watch for the Durable Goods Orders report next Wednesday.

The best stocks in the retail space continue to be the discounters and big-box stores.

But, as I have said on numerous occasions, we need to continue to see jobs created and for the housing prices to halt their slide and reverse to the upside. The surge in housing prices was a catalyst in the consumer spending boom leading up to 2008, when homeowners borrowed heavily on their surging home values to spend excessively on travel, renovation, and other big-ticket items. Unfortunately, this is no longer the case, as home prices have plummeted and homeowners are fighting hard to keep their homes.

Retail growth will be more sustainable once jobs and housing recover.

I talked about the negative impact of weak consumer confidence on the stock market and the rest of the economy in Stock Market, Housing Market, GDP Growth: It’s All About Consumer Confidence.

The problem is that a country without strong jobs creation is very concerning, as I discussed in SOS—America Needs Help.

They likely haven’t bought gold investments yet and they are thinking it may be too late to get in. Or they have bought gold investments and they are wondering if they should by more at these prices. Or, like me, they take as many opportunities as possible to buy more gold investments each time the price of gold bullion pulls back.

What most investors fail to realize is that the last real correction in the 10-year gold bull market occurred back in 2009. This year, gold bullion reached a high price of $1,895 an ounce on September 5, 2011. By September 26, 2011, the metal had fallen back to $1,598 an ounce (London fixed closing day prices). Smart investors would have seized the opportunity to buy more gold investments when the metal fell below $1,600 an ounce (see Gold Bullion’s Price Action: Time to Separate the Men from the Boys).

From its 2011 price high of $1,895 an ounce, gold corrected down 16%. A healthy correction in a long-term bull market…but, yes, I would have liked to see more of a wash-out. I would have liked to see the weaker hands and speculators flee gold investments. But, on the other side of the equation, I feel that the “light” correction is an indication that the bull market in gold bullion is strong.

Yes, I would get into the gold bullion market at this time. But there is a caveat. I wouldn’t be surprised to see gold move to the low $1,500 level. If it happens, I would just seize that opportunity to buy more gold investments. But, at the same time, if gold never makes it back to the low $1,500 an ounce, you will have secured your entry into this gold market now.

Each time gold bullion hit a new price high, be it $500.00, $700.00, $1,000, $1,200, or $1,500 an ounce, I said to buy more gold investments. I’ve been right all the way up.

All this money printing by world central banks since the credit crisis hit in 2008 has greatly expanded the fiat money supply. The more fiat money in circulation, the greater the threat of inflation. In Britain, inflation hit a three-year high in September—inflation there is running at 5.2% annualized! Inflation is also a problem in the U.S., although it’s not really getting any media coverage.

Gold investments…still the best hedge against excessive fiat money printing, too much debt at various government levels, and future inflation.

Michael’s Personal Notes:

Want to now what really went wrong in Europe? My fellow analyst Robert Appel presents his “Top 10 Reasons Why the Eurozone Was Doomed to Fail and What Happens Now.” Well worth the read…

1. Prior to the formative eurozone vote, had you asked the residents of the various countries if they lived in a democracy, they would have unanimously said yes.
2. The actual eurozone, however, was created by politicians who did not consult their constituents. Think about that…
3. After the eurozone vote, had you asked the residents of the various countries if they lived in a democracy, they would have still unanimously said yes.
4. Was the eurozone needed? In hindsight, the only obvious beneficiaries were the (private) banks and the politicians who saw their “power” increased a thousand-fold. Notice we did not talk about money; we talked about power. Yes, there is a difference, and we used that specific word deliberately.
5. Was the eurozone a good idea? Well, if you think about it, major cultural and anthropological differences meant that the zone was doomed to fail from the beginning. And indeed still is. Is money earned the exact same way in Greece as in Germany? That is really the only question you need to ask. The answer is obvious.
6. How will the current mess take to resolve? Short answer: No one knows. Longer answer: The eurozone may dissolve. We doubt it. Or, Germany may step up the plate and use its hard-working citizens to bail everyone else out. Or, they may make a “2-tier” zone where certain countries are a little less equal than others. (Yes, we do get the irony of this solution—creating tiers is really a giant step backwards, since the continent was already tiered, was it not?)
7. What are the chances of dissolving it? Answer: While this makes some small sense on paper, clearly the politicians will do whatever it takes to kick the can down the road, so to speak, just as was done with the subprime mess. They perceive correctly that dissolving the zone might cost them their jobs. And, as we know, politicians today will sacrifice anyone and anything to save their own jobs.
8. Are we getting all the facts? Actually no. The fact is that the Spanish and Italian problems—which are not yet full disclosed—could dwarf the Greek issues (issues which, please note, have been delayed, and obfuscated, but not resolved). Major world banks, as you read this, are reducing exposure to French loans and experts have opined that the bizarre deal recently cut with Ireland is not sustainable.
9. Who benefits from the mess? The U.S., which ironically saw its bond sales rise (even at effectively negative rates) and its buck soar. Two counter-intuitive events, of course, which make little sense yet which happened anyway. Also the “anti-one-worlders” benefit, since the Europe mess is going to make it that much harder to bring Mexico, Canada and the U.S. into one zone next.
10. When will have an answer? No later than next summer, we suspect, because frantic work among the politicians over the last few days has (we think) managed to push the problem forward to that period. In the meantime, we expect stock markets to try to rally between now and then.

Where the Market Stands; Where it’s Headed:

What a coincidence…

The stock market, as measured by the Dow Jones Industrial Average, closed yesterday at the exact number it started at in 2011: 11,577. We’ve gone from a market that sells off on bad news (as we witnessed most of this summer) to a stock market that rallies on bad news—the true sign of a market that wants to move higher. The year 2011 is looking more and more like a repeat of 2010 for the stock market (see Today’s Stock Market: Making Money by Copying Last Year’s Action).

Since March of 2009, we have been in a bear market rally. This rally will serve to lure investors back into stocks before Phase III of the bear market sets in. As I have been writing since March 2009, I expect stock prices to continue trending higher (see The Strongest Indication Yet That Stocks Are Short-term Oversold). However, the easy stock market profits of 2009 and 2010 will not be repeated. Bear market rallies can last three to four years.

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.

Going “long” is easy; all investors need to do is buy stocks. And usually, when investors have a strong general consensus that the stock market will move higher, like they last did in October of 2007, stock prices go the opposite way and fall.

Going “short” is easy, too. Investors simply borrow stocks they do not own and promise to repay later. If the stock falls in price, the person shorting the stock keeps the difference between the price he/she borrowed the stock at and the price it is repaid at. Short selling is a huge function of the market.

Borrowed stock climbed to 11.6% of the market in August from 9.5% in July, according to Bloomberg. This is the biggest monthly increase in five years.

Let’s face the facts. The stock market took a big beating this summer. Worldwide, trillions of dollars were whipped off the value of equities. Investors thought the market was headed back to test the March 2009 lows and started selling stocks and shorting stocks.

But the bear market is too smart. He doesn’t make it easy. “Not so fast, I’m not finished the rally I started in March of 2009,” the bear market told investors as stocks started to rally late last week.

Historically, stocks have rallied when investors have taken a large short position in equities. I don’t see it being any different this time around. A recipe for higher stock market prices: lots of short sellers and lots of bears. We have both in the tent right now and it’s getting crowded.

Michael’s Personal Notes:

The Bank of England (BOE) is doing exactly what the Fed did, buying government bonds. And it’s doing it big-time!

The BOE has pledged to buy the most bonds since the depths of the 2008-started crisis, as the central bank races to stop the current euro-region debt crisis from pushing Britain back into recession.

To date, quantitative easing, which is what the Bank of England and Federal Reserve have done by buying their respective government’s bonds, has had no effect on job creation or economic growth. The action of buying government debt serves two purposes: 1) it insures there is a buyer for the debt (in case foreign investors, who buy most government bonds, get cold feet); and 2) it helps push domestic interest rates down.

However—and there is always a “however”—there is a big negative to central banks buying their own country’s government bonds. The money to buy the bonds needs to be created. In the old days, the printing presses would just print more fiat currency. These days, I believe the money supply is simply expanded electronically.

The problem with more and more money in the system is that the money being “printed” brings in more supply, and as per Economic Analysis 101, the more of something there is in supply, the lower the demand. In the case of fiat currencies, the more the supply, the more paper currency is needed to buy goods and services, and that’s how we get inflation. I believe this is exactly what the 10-year bull market in gold bullion has been telling us…rapid inflation ahead.

Where the Market Stands, Where it’s Headed:

Stocks are making their anticipated comeback from a state of being severely oversold.

I continue to believe we are in a bear market rally that started in March of 2009 and that this bear market rally will bring stock prices even higher before it’s over.

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.

The pipeline of Initial Public Offerings (IPOs) has essentially dried up. Those from China have evaporated in light of the increased scrutiny on Chinese stocks via reverse mergers.

An interesting IPO that just registered is Glori Energy Inc., which has an innovative process that uses biotechnology to release fossil fuels trapped in reservoirs.

Otherwise it has been quiet this year following a strong IPO stream in 2010. This should not be a surprise given the weaker stock market conditions prevalent this year. I expect the flow to rise as the market and economic conditions improve in 2012 and into 2013. The reality is that companies need to raise capital and, without strong demand from investors, many smaller companies will suffer.

In addition to the IPO pipeline, reverse takeovers continue to be a disappointment for investors as we approach the fourth quarter. This other pipeline is drying up, especially from China where there have been investigations and the surfacing of tighter rules for listing and reporting on U.S. exchanges. The near term will be poor for new reverse takeover stocks, but we should see better companies surface once the regulations are cleaned up.

This is a win-win situation.

The weakness of the reverse takeover stocks is evident from the poor performance of the Bloomberg Chinese Reverse Mergers Index (CHINARTO Index), which is a market capitalization weighted index that tracks China-based companies trading on U.S. exchanges following reverse takeovers.

As of October 11, the index is down 60.13% from December 2010, compared to the S&P Index decline of 5.01% during the same period. The results have been horrendous.

The non-weighted China Main Index (TCM) is down 73% from its inception in December 2009. The non-weighted China OTC Index (TCO) is down 96% from its inception in December 2009! These are horrible results, but I feel things will improve down the road.

At present, investors remain bearish towards reverse takeover stocks due to the enormous volatility in the share prices. The last few months have been a harvest season for the short sellers in Chinese reverse takeover stocks.

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

The IPO pipeline will get better, but it will take time for the market fundamentals to improve. The next big IPOs will be Facebook and Groupon, which could debut in 2012.

The risk?

Based on the budget plan the Governor signed into effect this past June, if revenue for the state falls $1.0 billion below projections, two universities, University of California and California State University, will see their budgets cut by $100 million each and community-college fees would rise $10 million.

If revenue falls by $2.0 billion in its fiscal year, the next step would be a seven-day reduction in the California public-school year. (You won’t have many happy parents under this scenario.) Based on current numbers, revenue shortfall has been an average of $235 million over the past three months. Extrapolate this number out and the tax revenue loss for the year is about $2.8 billion.

Unemployment in the “Hollywood” state sits at about 12%. When the State starts selling tax-exempt public works bonds later this week, it may find that it needs to offer investors a higher yield to attract attention to the bonds. When California sold $2.4 billion in general-obligations bonds last month, the bonds yielded 3.17%—compare that to a U.S. 10-year Treasury, currently yielding 1.95%!

The situation in California is characteristic of many states; not enough revenue coming in to pay the bills. Tax revenue will need to rise sharply or government spending cuts need to be deep—I see neither happening.

To me, it’s just a matter of more debt being piled up on old debt…a situation that cannot go one indefinitely…a situation that will ultimately have dire consequences unless action is taken.

The sovereign debt crisis in Greece…it could look like a proverbial “cake walk” compared to what lies ahead if state governments don’t get their financial houses in order.

Michael’s Personal Notes:

If there is one thing I find with stock market advisors and investors, it is that they are very fickle.

How many stock advisors jumped onto the bearish bandwagon this summer? How many investors pulled money out of the markets?

The answers: Last week the percentage of bearish stock market advisors was at its highest level since March of 2009. We all know what happened after March 2009; stocks went up 100%. Stock market investors pulled more money out of the stock market in August of 2011 than any other time since 2008. We all know what happened after investors pulled money out of stocks in late 2008…stocks rebounded strongly in 2009 and 2010.

Moving to PROFIT CONFIDENTIAL, if there is one thing I hope we achieve here, it is directing our readers through difficult market conditions…instilling a common-sense, longer-term approach…the “old buy low, sell high, don’t follow the herd mentality” rationale.

This summer, while most stock market advisors and analysts turned bearish, I was writing that the summer doldrums would blow over. At the end of September, I was telling my readers that the stock market of 2011 looked a lot like the summer stock market of 2010, when the market bottomed out.

Last Thursday I wrote, “Four Reasons Why Stock Prices Will Bounce Higher Now.” This morning, the Dow Jones Industrial Average opens at about the same level it started 2011. I’m happy to have helped my readers weather this summer’s market storm.

Where the Market Stands, Where it’s Headed:

We are in the final stages of a bear market rally that started in March of 2009. I believe this rally will bring stock prices higher before Phase III of the bear market settles in.

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.

Apple is the largest company in the world, with an astounding market cap in excess of $350 billion, which would rank it 29th on the International Monetary Fund GDP rankings for 2010. That’s impressive; but, at one point back in 1997, the stock was hemorrhaging at below $5.00, suffering a slow death and on the verge of collapse. Co-founder Steve Jobs came back to run Apple in 1997 to try to turn the ailing company around. Apple subsequently bounced higher, but fell back to the $7.00 range in 2002. Institutions and retail investors alike began to dump the stock, running for the exits.

Undeterred, Jobs introduced radical changes to Apple to re-invent the company via new and flashy desktops, laptops, and eventually leading to the “iPod,” “iPhone,” and “iPad.”

With this change in direction, Apple would ultimately become the darling of the investment community and techies worldwide. But what happened at Apple is not an aberration.

Companies do move up and down. The key is to look for companies such as Apple that are going through operational issues but where there is some hidden, core value. That was the case with Apple. Investors recognizing this great opportunity in 1997 have since made over 75 times their money. An investment of about $13,000 in Apple in 1997 would make you a millionaire today. A $100,000 investment is worth nearly $8.0 million!

Now, if someone would ask me, “What are the best stocks?” Apple would definitely be up there. The reality is that Apple is the “best of breed.” Just look at the iPad sales. Apple sold 9.2 million in the second quarter versus a mere 0.49 million for the equivalent “PlayBook” by Research In Motion Limited (NASDAQ/RIMM). For 2012, estimates call for the sale of 62.5 million iPads. Don’t be at all surprised to see Research In Motion (RIM) look at dumping its PlayBook, which is nice, but really not close to the iPad. RIM disappointed with third-quarter revenues and earnings per share falling short.

RIM did bounce over 14% on Wednesday on takeover speculation following a break below $20.00, its lowest level in nearly six years. Speculation is that Vodafone (London/VOD) may be looking at RIM.

While Apple is at the top, the company will need to continue to innovate going forward to brush off rivals without having Jobs around providing his extraordinary guidance and vision.

Clearly it will not be easy, but Jobs has entrenched his vision in Apple.

RIP Steve Jobs.

Making the debt crisis even worse in Greece is the fact that many taxpayers refuse to pay while the state continues to provide social services. This is obviously unsustainable and it’s also a reflection of policymakers’ unwillingness to accept and deal with the situation.

I actually think that a debt default in Greece would be the most useful strategy for that country in the medium and long terms. Sure, there would be turmoil in the short term, as financial markets figure out how to react to the situation. However, there is already a great degree of turmoil now and the fact of the matter is that, even with these bailouts (which are financed with debt anyway), the situation won’t improve until Greece dramatically changes the way it collects taxes and spends its money. Policymakers have to change over there and so does the view of the population in terms of the role of the state in their lives.

My favorite investment analyst is Jim Rogers, and for years he’s been advocating how wrong it is for countries and political policymakers to use central banks and debt to rescue already broken assets. He strongly advocates that the Federal Reserve’s bailout of Wall Street was an incorrect strategy. Instead, his view was that the weakest banks should have been allowed to fail, then the stronger financial institution would gobble up the leftovers and, in the long run, much healthier institutions would be created. This is what’s been happening at the consumer level with those who have mortgages that are now larger than the value of their home. Individuals can declare bankruptcy and are then able to walk away. Sure it’s painful, but the cycle of debt gets broken and people can move forward.

It is the age of austerity and this is going to be reflected in economic growth rates, incomes, spending, and corporate earnings. There is a big reckoning going on and it represents a return to living more closely to one’s means—both individually and at the country level. We’re lucky that interest rates are so low. If they were higher, the pain would be a lot worse.

Inflation in Europe is surging and this is a big concern for me.

But hold on a minute you say…isn’t economic growth in Europe coming to a quick halt with all the talk about Greece defaulting and Spain and Italy close to following in Greece’s footsteps?

Eurostat, the official statistics agency of the European Union, said that consumer prices in the 17-member eurozone rose three percent in the 12-months ended September 30, 2011, up from 2.5% for the 12 months ended August 30, 2011, and 25% above the European Central Bank’s target of two percent!

But oil prices dropped sharply in September, as did consumer and business spending in Europe. How can inflation be rising so fast?

There are many reasons why inflation could be rising so sharply inEurope, most of which have to do with producer prices. What I’m really concerned with, what I believe no one is focusing on inNorth America, is the possibility of rapid inflation here. Why is it such a big deal? Because higher inflation leads to higher interest rates—again, something no one is talking about.

Inflation can be a huge problem for us. Yes, I know many are concerned with the U.S. following in the footsteps of Japan’s lost decade of the 1990s, when deflation was the problem, not inflation. But during our crisis, the Fed greatly expanded the money supply—something the Japanese central bank did not do.

The proverbial “dollar printing press” in America has been running over time for more than two years now. A Fed with trillions of dollars in securities on its balance sheet…where did that money come from?

History has many examples of how governments with record-high debt levels (like the U.S. today) and the fiat currencies of those governments being greatly increased (like the U.S. today) are a lethal combination for inflation.

As crazy as it sounds, this is the real risk of what we face in the very near future. It’s also what the price of gold bullion has been telling us during its 10-year bull market: High risk of inflation ahead.

Michael’s Personal Notes:

The general consensus among economists now is that we are falling back into recession…something I’ve been writing about for months. I’m happy that so many latecomers are seeing the light.

I’d like to point out some important facts for my readers:

Firstly, the stock market is acting as if we are already in a recession. The dividend yields on many major American corporations are back up to four percent…in an environment where the 10-year U.S. Treasury is yielding 1.8%. The stock market is saying that it believes companies will cut their dividends. The bond market is saying that we are headed for years of no economic growth.

Secondly, for most unemployed Americans, we never left the first recession.

Thirdly, a “recession” is simply the official term for two consecutive quarters or more of declining Gross Domestic Product (GDP). The term “recession” serves no purpose other than to further dampen consumer confidence. Unemployment can be high, corporate profits can be soft, consumer demand could be weak—and we can be classified as not being in a recession if we don’t hit those two consecutive quarters of declining GDP.

The obvious point is that the economy is slowing. The not-so-clear question is: how deep will the second half of the recession hit? We’ll get the answer to that question over the next couple of months, as more economic data are released and analyzed. As always, we’ll do our best to prepare our readers for what we think lies ahead.

Where the Market Stands; Where it’s Headed:

Contrary to what most analysts are saying, I think the stock market has become severely oversold. I believe we will get a meaningful bounce from the depressed valuations of equities that we are currently witnessing. I also believe the bounce will be in the confines of the bear market rally I’ve been writing about.

We started a bear market rally in March of 2009. This rally, in my opinion, is not over yet. I see the stock market moving up further, one final blow-off to higher price levels, before the bear market rally finally retires and Phase III of the bear market sets in.

What He Said:

“Overbuilt, 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.

The plan, quickly dubbed by commentators as the “Twist,” will further flatten the yield curve; something the market itself has already started doing in recent months. The historical correlation of the slope of the yield curve to the stock market shows that flat yield curves have been bearish for stocks, while steep curves have been bullish for stocks.

To put it another way, the larger the difference between yields on long-term and short-term maturities of T-bills, the better the long-term outlook for the stock market, and vice versa.

The 30-year chart of the yield difference between 10-year and two-year U.S. treasuries demonstrates the above historical correlation. Regrettably, in the brave new world of perpetual zero interest rates on short-term treasuries and record-low yields on long-term treasury maturities, numerous time-tested fundamental and monetary indicators have lost some of their accuracy and relevance.

The Fed’s September 21 announcement (about buying long-term treasuries to bring down long-term interest rates) has completely failed to perk up the moribund stock market, already dazed from the long-running Greek tragicomedy, the global economic slowdown, a dysfunctional Washington, and the usual flood of economic data and expert opinions.

Lacking the necessary smarts to make much sense from this information overload, I need to rely on technical and sentiment data to come up with “educated market guesses.” My last guess—that the S&P 500 would mimic the downside breakout of a head-and-shoulders formation on the chart of 10-year treasury yield—has turned out to be on the money.

The breakout quickly brought the S&P 500 to the downside target of 1,140-1,150. Over the subsequent eight weeks the S&P 500 has traded within 10% of the range just noted. Now the big question, the million-dollar question, is: what will be the resolution of this narrow trading range?

A textbook resolution to the trading range, the first scenario, would see the S&P 500 rally towards the neckline of its H&S top to a level of 1,230. Nine percent above where the popular stock market index sits today,

But considering its slope, any textbook rebound should run out of steam in the 1,260-1,270 range, and be followed by a re-testing of the August 2011 low of 1,101. My guess is that the test will fail and the S&P 500 decline will meet the 20% rule-of-thumb definition of a bear market. This is something indices such as the Dow Jones Transports, the Russell 2000, the NYSE and Canadian TSX Composites have already met.

New 2011 lows by the S&P 500 would confirm the new lows already hit by the NYSE Common Stock AD Line and the NYSE Upside/Downside Line. To put a positive spin on such bearish musings, on numerous past occasions (i.e. 1987, 1990, 1998, 2002) the market bottomed out during the month of October.

My conclusion: October will not be a pleasant month for the stock market this year. But it could also mark a new temporary bottom for stocks prices, from which they will likely bounce.

Also notable late in the third quarter was the price correction in commodities. It only seems reasonable that reduced expectations for global economic growth should be felt commensurately in the prices for raw materials. The spot price of gold is mimicking the recent trading action of the stock market and it’s unclear when it might resume its upward trend.

However, I do think that the medium- to long-run upward price trend in gold is intact and this is due to a combination of fundamental factors that remain in force. And we can’t forget that, while the Main Street economy isn’t producing much growth, inflation is still out there stalking consumers’ ability to employ purchasing power.

I think the current environment is an opportune one to consider gold investments and other precious metals like silver. We’re now in the price correction that precious metals deserved. The top stocks for speculative investors remain gold miners and it’s the one industry that is generating double-digit growth in revenues and earnings.

Long-term, income-seeking investors can be buyers in this market; but, of course, expected returns have been reduced. I think a blue-chip investor would be lucky to receive a 10% return on investment in the age of austerity. It’s the new reality of the economy and it’s going to last for quite a long time.

If you want to see something interesting, pull up a five-year stock chart on SPDR Gold Shares (NYSEArca/GLD). This is the gold exchange-traded fund (ETF) that’s very popular with both individual and institutional investors. Looking at the chart, you’ll notice a very consistent and defined upward trend in the value of the ETF. You’ll also notice the recent spike to a record price high of $185.00 and the subsequent price correction to its current level of around $157.00 per share. In my mind, this price correction has now fully returned the SPDR Gold Shares ETF to its primary trend and is signaling a technical bottoming out for gold. Accordingly, now seems like an appropriate time to consider new positions in these kinds of assets.

The Dow Jones Industrial Average opened 2011 at 11,557 and opens this last trading day of September at 11,153, down 3.6% for 2011 so far.

At the beginning of 2010, the Dow Jones Industrial Average opened the year’s trading at 10,500. By September 30, 2010, the Dow Jones Industrials was trading at 10,000 after a rocky August and September—a decline of 4.8%.

In September of 2010, bearish sentiment amongst investors and stock advisors was at its lowest level of the year.

Today, bearish sentiment amongst investors and stock advisors is at its lowest level of 2011.

There’s a striking resemblance between 2010 and 2011 stock market action and I see this pattern continuing. Between September and December of 2010, the stock market rallied, ultimately leading to a 10% gain for stocks in 2010. On the backdrop of extreme bearishness, just like September of 2010, I believe stocks will rally from today’s level to end the year higher.

Yes, stocks could move 10% higher from where they are today to the end of 2011. Investors will have to gauge if the upside potential is worth the risk. Where do I see the greatest bargain? With gold bullion having corrected 15% from its recent price high, with the stocks of junior and senior gold mining down even more than 15%, I see the best bargains, the greatest upside potential, in the gold mining sector.

Michael’s Personal Notes:

Tomorrow, the longest-serving policymaker at the Federal Reserve, Kansas City Federal Reserve Bank President, Thomas Hoenig, retires.

In his last speech in office, Hoenig said that the Fed’s actions of trying to stimulate the economy by artificially keeping interest rates low will ultimately “buy problems.”

The Federal Reserve has kept short-term interest rates near zero for years now. The Fed has also bought more than $2.0 trillion in securities. Hoenig compared these actions to short-term bandages for the government’s failure to cut its debt to cut spending.

I’ve shared this opinion with my readers since the economic bust started: making the government bigger, having the government spend more at the cost of increasing the national debt, is not the answer. I’m happy an official such as Hoenig has the courage to speak his mind about what his contemporaries are doing…and why it isn’t working.

When President Obama leaves office, he will have increased our national debt by about $5.0 trillion—the greatest four-year increase in the national debt ever.

Where the Market Stands; Where it’s Headed:

A bear market rally in stocks started in March of 2009. This bear market rally that prevails today has the potential to take stock prices higher before the rally finally expires.

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 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 fueled the housing boom that 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.”

Paychex, Inc. (NASDAQ/PAYX) just reported earnings that beat the Street and this is another one of those benchmark companies whose business has a good pulse on the economy. Paychex is a well-known payroll and human resources company that’s made a serious amount of wealth for its shareholders.

The company just announced that its total revenues were $563.1 million for the three months ended August 31, 2011 (its fiscal first quarter of 2012), representing a solid increase of nine percent over the same quarter last year. Net income grew 13% to $148.9 million and diluted earnings per share increased 14% to $0.41 per share.

Paychex management cited that it is cautiously optimistic about its fiscal 2012 year, which is no surprise considering the domestic employment situation. Currently, the company anticipates top-line revenue growth of between seven percent and nine percent this fiscal year, with earnings growing five percent to seven percent. The kicker with this stock is that it’s about seven points below its 52-week high and yielding about 4.5%. As an investor, a 10% annual return would be a reasonable expectation, and that’s without much improvement in the economy.

Another well-known large-cap that just reported solid financial results is AutoZone, Inc. (NYSE/AZO). This auto-parts retailer seems to have its share price on autopilot—to the moon. The stock barely corrected during the financial crisis of 2009, and has more than doubled since then.

AutoZone is another great barometer on the retail economy, as it has over 4,600 retail stores in the U.S., Puerto Rico, and Mexico. The company reported net sales of $2.6 billion in its fourth quarter (16 weeks), ended August 27, 2011, representing a solid increase of eight percent over the same quarter last year. According to the company, domestic same-store sales, or sales for stores open at least one year, increased 4.5%. Net income increased $32.5 million, or 12%, over the same period last year to $301.5 million, while diluted earnings per share increased an impressive 27% to $7.18 per share, up from $5.66 per share in the same quarter last year.

For its fiscal year ended August 27, 2011, total sales grew 9.6% to $8.1 billion, while earnings per share increased 30% to $19.47 per share. The numbers solidly beat Wall Street consensus and AutoZone authorized another $750 million in new share buybacks. All this, and the stock is still trading for a reasonable valuation.

As we all know, the stock market’s been consumed by all the investment risk in the global economy. Sentiment has been overwhelmed by fear and uncertainty. While not every business is doing great, the numbers are now telling us that some have weathered the storm exceedingly well and are poised for further growth. If the European sovereign debt issue can be contained, an earnings-based stock market rally seems likely in the near future.

The reality is that the global climate continues to be favorable for metals given the U.S. deficit and the debt crisis in Europe (and the U.S.).

Yes, metals have been in correction mode, but I do not see this as fear. I smell opportunities, especially in the miners, which have lagged behind the gold and silver rally.

I like the smaller mining companies, especially those with a massive reserve of metals in the ground waiting to be developed.

The October Gold is hovering around the $1,600 level on oversold buying, but remains below its key 50-day moving average (MA) on weak Relative Strength. The golden cross on the chart remains, with the 50-day MA of $1,742 above the 200-day MA of $1,524.

Gold is extremely oversold. I feel that gold prices will hold and edge higher if the U.S. economy falters and another recession surfaces.

The SPDR Gold Shares (GLD) exchange-traded fund (ETF) is worth a look. For added risk and potential gains, take a look at the Direxion Daily Gold Miners Bull 2X Shrs (NASDAQ/NUGT)—an aggressive trade aimed at capitalizing on surges in gold at twice the normal rate.

The December Silver is around $30.00, but is facing selling. The next target is the 200-day MA at $36.05. The 50-day MA is at $39.95. The near-term view is bearish, but the chart is holding on to the bullish golden cross. With the selling, silver is extremely oversold.

While the downside risk is high, there are some opportunities. To play a bounce in silver, take a look at the iShares Silver Trust (NYSE/SLV).

If you want to play the small miners, there are hundreds of plays. I have listed several below that look interesting for the speculative trader.

Keegan Resources Inc. (AMEX/KGN, TSX/KGN) recently reported positive feasibility results.

In the mining area, Canada-based Taseko Mines Limited (AMEX/TGB) mines for copper and gold in Canada. The small-cap has a market-cap of $680 million and is profitable, with above-average price appreciation potential. The stock is interesting, as it is trading just above its 52-week low and well below its 52-week high of $7.23.

Take a look at small-cap Golden Star Resources Ltd. (AMEX/GSS). The gold company has operating mines in western Ghana and southwest Ghana, along with exploration properties in Ghana, Sierra Leone, Burkina Faso, Niger, Cote d’Ivoire, and Brazil. Trading at 8.05X its 2012 earnings per share, I like the valuation and potential for long-term gains.

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

My advice to you is to buy a mixture of exploration-stage gold miners and small to large gold producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large gold producers. Please note that the investments mentioned in this article are not specific recommendations, but are meant to serve as examples.

Moody’s questions whether the government’s past “too big to fail” position on the banks would change if a bank crisis situation similar to 2008 were to repeat itself. In a way, Moody’s is saying that, given how the public frowned upon the government bank bailouts of 2008, maybe the government won’t be a lender of last resort to the banks again should another crisis develop.

I’ve written before on these pages about my distaste for Bank of America. The stock has nosedived from $15.31 at the beginning of 2011 to a close of $6.16 last night—and I still don’t like the stock. Looks like Warren Buffett is the only one making money on this stock (his Berkshire Hathaway bought preferred shares last month in Bank of America, which pay a fixed return).

The banks are paying the price for their reckless lending during the boom real estate years that ended in 2005. American banks failed to show the restraint Canadian banks demonstrated during their real estate market boom. The American banks went for profits despite the big risks associated with aggressive lending.

My concern is that the stock market is telling us that more trouble lies ahead for the big American banks. Remember, the stock market is a leading indicator. The Dow Jones U.S. Bank Index is down 73% since the beginning of 2007—while most industries have recovered from the recession, the banking industry woes continue.

Bank stocks have been particularly hit this year; the Dow Jones U.S. Bank Index is down 38% from the beginning of this year! The stock market is telling us that U.S. banks are still in trouble. I don’t see any bargain buying among the U.S. bank stocks yet.

Michael’s Personal Notes:

New home sales in the U.S. fell to a six-month low in August.

It’s the same old story. Foreclosures are putting more homes on the market, home prices are falling, and, despite interest rates at record lows on the 30-year fixed U.S. mortgage, consumers are in no rush to buy houses.

The median price of a new home in the U.S. has fallen from $226,600 in August of 2010 to $209,100 in August of 2011, according to the U.S. Commerce Department.

As I’ve said before, the Fed can lower interest rates as much as it wants, but that will not spur home buying, because the banks have tightened their lending policies. Cash deals are accounting for about 30% of all transactions in the home resale market. How can we have a meaningful rebound in housing if the banks are being very difficult with regards to lending money?

On these pages, at the beginning of 2011, when I gave my forecast for housing this year, I predicted that U.S. housing prices would fall 7.5% in 2011. I’m sticking with that prediction.

Where the Market Stands; Where it’s Headed:

There’s no denying the facts.

We are only one day away from the end of this month—marking the 31-month anniversary of the bear market rally that started in March of 2009. Yes, that Phase II of the bear market, which brings investors back into stocks, has lasted 31 months. The 1934-1937 bear market rally lasted 35 months.

Depending on what happens with stocks today and tomorrow, stock prices will end September at about the same level they entered the month. It’s my opinion that we are in bear market rally that will take stock prices higher, but that the rally is getting old and tired.

What He Said:

“I see a deal when it’s a deal. And right now there’s a good “for sale” sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.00-an-ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi in PROFIT CONFIDENTIAL, March 14, 2007. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.

Last week, FedEx stock hit a two-year low. Yes, you can buy the stock of this excellently run company today for the same price it sold for in mid-2009. Why? FedEx reported last week that it would earn less this year than previously estimated, as FedEx saw its U.S. shipments fall for the second quarter in a row. The stock of United Parcel Service Inc. (NYSE/UPS), FedEx’s main competitor, is close to a two-year low as well.

All in all, FedEx’s recent earnings results and earnings forecast for the entire year are better than expected. FedEx is reporting U.S. shipments declined on three percent in its latest quarter.

Given the continued conservatism of businesses, the backlash from the delayed increase in the government spending limit by Congress, the economic woes in Europe, and general pessimism amongst American consumers, FedEx’s business activity report is actually encouraging.

No, I wouldn’t run out and buy this stock. At a dividend yield of less than one percent and a price/earnings multiple of over 15, this stock is still too expensive for me.

But what’s encouraging is that this bellwether company is telling us that the U.S. economy isn’t crashing. What I can tell from FedEx’s reports is that there is no economic growth in the U.S. and that business is slowly deteriorating, not collapsing.

Based on FedEx’s forecasted earnings, retail sales in the U.S. will not crash this year. More than likely, retail sales in the U.S. will pull back this holiday season below last year’s numbers. Hence, I wouldn’t be rushing out to buy any retail stocks either.

The bottom line in this economic analysis: the economy is not crashing as last week’s stock market mini-crash indicated. On the other hand, despite the trillions thrown at the economy by the government, economic activity is slowly declining, as opposed to improving.

Michael’s Personal Notes:

Since President Obama took office, the sales of firearms have soared in America.

Gun sales have hit record numbers each year Obama has been President; this year on track for 15 million guns to be sold for the first time (Source: Bloomberg 9/11/11).

Why is this happening?

There are three possible reasons gun sales are soaring. First, gun enthusiasts fear that the poor economy will set off more crime. Second, citizens could fear political upheaval or riots over possible austerity measures that may be introduced eventually (like in Greece and other European countries). Finally, some believe President Obama may move to ban the sale of more aggressive guns (like assault weapons) to citizens.

Ironically, the soaring gun sales in America, extremely low consumer confidence levels, and surveys that show a high percentage of American expect us to enter a depression within the next 12 months bode well for the bear market rally. The stock market loves nothing more than to climb a wall of worry when all expect it to fall. Pessimism is reaching record high levels.

Where the Market Stands; Where it’s Headed:

As I had been writing, the stock market was oversold and ready for a rebound, and that’s exactly what we got. Since the Dow Jones Industrial’s big one-day sell-off last Thursday, the Dow Jones has bounced back about 5.6%. It’s been quite a seesaw summer for stocks and we’re not that far away from breakeven for 2011.

I’m making a bold prediction: stocks will end this year higher than they started 2011. Why? Because there is too much bearish consensus around; because the Fed and the government remain very accommodative; because there are not many alternatives to stocks.

Yes, we’re still in a bear market rally…and this could be the final year for that rally. But don’t underestimate the strength of this rally. The bear would like nothing better than to take more investors into the market before turning south again.

What He Said:

“There is no mixed signal about this: Foreclosures in the U.S. will continue to rise, the real estate market will get weaker, and the U.S. economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi in PROFIT CONFIDENTIAL, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.

In another good sign for this earnings season, the largest drugstore chain in the United States, Walgreen Co. (NYSE/WAG), reported excellent earnings that beat consensus, but also showed a solid improvement in revenues. This is a positive sign for the retail economy.

According to the company, its earnings were 792 million dollars, or $0.87 per share, in its latest quarter ended August 31, 2011. This compares to earnings of 470 million dollars, or $0.49 per share. Excluding a one-time gain, Walgreen’s adjusted earnings were $0.57 per share, topping Wall Street expectations of $0.55 per share. The company’s revenues grew just over six percent during the quarter to 17.96 billion dollars. Revenues from stores open at least a year grew 4.4%.

Another very positive earnings report came from office furniture maker Herman Miller, Inc. (NASDAQ/MLHR), which reported very good financial results that also beat the Street. The company announced fiscal first-quarter revenues, ended September 3, 2011, of 458.1 million dollars, representing a solid increase of 20% over the same quarter last year. Company management cited that its gross margin improved 120 basis points, as the business was able to increase its prices without affecting demand. This went straight to the bottom line, as earnings grew to 24.6 million dollars, or $0.42 per diluted share, compared to earnings of 16.1 million dollars, or $0.22 per share, for an impressive gain of 91% on a per-share basis.

Of course, not all industries are doing well and it’s pretty obvious that the slow economy is hitting small businesses the most. But the general trend in corporate earnings is still very positive and, from my perspective, it makes the current stock market somewhat undervalued.

The S&P 500 Index has been experiencing a correction since July of this year. The Index dropped from approximately 1,350 to its current level around 1,200. That’s a meaningful correction and fits into the medium-term trend from the market low in March of 2009.

If the Europe sovereign debt crisis can be abated, then I think the probability of stocks experiencing a solid rally will increase significantly. All this market needs is confidence—confidence that the euro currency won’t come apart and that the U.S. economy is stabilized and poised for improvement.

With corporate earnings expected to be strong once again, stocks should jump smartly on any good news on the economic front, however small. The caveat is Europe. If confidence in European sovereign debt can be improved, stocks could move much higher over the near term. If confidence deteriorates, all the good earnings results won’t mean a thing.

When consumer confidence is low, you know consumers will likely be more hesitant to spend and hold back on major purchases such as homes, vehicles, furniture, appliances, and travel, to list a few. This will impact spending, GDP growth, and the ability of companies to expand their businesses and hire. This continues to be my concern.

Consumer Confidence continues to be weak. September was another disappointment, with a dismal reading of 45.4, below the estimate of 46.6 and the revised 45.2 in August. The reading is near the lowest level in April 2009 and clearly indicates nervous consumers.

To tell you how bad the readings are, economists say a reading of 90 indicates a healthy economy, something that has not happened since December 2007 when the recession began. It looks like it will be some time until the confidence reading heads back towards the pre-recession readings of 90. In my economic analysis, the situation is not good.

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

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

A strong housing market is also critical, as homeowners tend to buy new furnishings, including many big-ticket items. This is not happening, as home prices continue to decline, dragged down by continued high foreclosures and short sales (when homes are dumped below the mortgage value). The key Case-Shiller 20-city Index shows that prices on averaged declined another 4.11% in July across the 20 largest U.S. cities, better than the negative 4.5% estimate and the negative 4.4% in June. These are not good metrics.

The reality is that foreclosures continue to drive a good part of the buying and this does not bode well for housing price appreciation. It may not be until 2013 until prices steadily rise.

And with jobs being a key driver of the housing market, I’m not confident. We need jobs and security in order to give buyers the confidence to assume a mortgage and not worry about losing their jobs and missing payments.

We need to see confidence and the willingness to spend and not worry about money. Only under this scenario, will there be sustained spending and economic growth. Unfortunately, there is little reason for us to get excited at this juncture.

Watch the S&P 500 as it nears a critical support level of 1,125 and the four-week low at 1,114. A break could send the index down to below 1,100.

Small-caps are getting hammered, with the Russell 2000 down over 26% from its high and now technically in a bear market.

Watch over the next few days to see if oversold buying emerges.

There is nowhere to hide. Even gold and metal plays are being dumped despite gold being a safe-haven play. Investors are clearly dumping everything.

This could be an opportunity to buy on weakness; but, without a firm base, there could be additional downside moves.

Watching your asset value decline is not great, but you can minimize the effect.

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

Don’t be put off by options. They are a great risk-management tool that is more than often overlooked by the retail investor or trader, but used often by the pro traders and institutions. The SPY index option that tracks the S&P 500 is a top trader on the CBOE.

You can buy puts for stocks and sectors.

Take a look at your holdings and break them down according to the sector, whether they’re technology, industrial, small-cap, large-cap, etc.

The second step is to take a look at the various indices that closely reflect your holdings.

If you are heavily weighted in technology, you can buy put options on the PowerShares ETFs (NASDAQ/QQQ), a heavily traded ETF in technology.

Or let’s say you have benefited from the run-up in gold and silver to record historical highs, a strategy may be to buy put options on the Philadelphia Gold & Silver Sector (NASDAQ/XAU), which tracks 16 major gold stocks and silver stocks.

To play the near-term downside weakness in small-caps, you could buy the ETF ProShares UltraShort Russell 2000 (NYSE/TWM).

Alternatively, if you hold a large position in several stocks, you can buy put options on these individual stocks and help protect against a major downside move.

Be careful and remember that maintaining your capital will allow you to trade longer-term.

With the upside limited at this point, you may also want to write some covered call options to generate premium income and reduce the average cost base of your positions. But be careful, as an oversold rebound could take out your position at the call strike price. Make sure you are comfortable with the upper strike price of your covered call. Make sure it’s above the key resistance of the stock.

The key now is prudence and protecting your assets.

Since the beginning of the bull market in gold, we’ve seen an often repeated pattern: gold bullion prices advance sharply, profit taking comes in, the “weak hands” (as I call them) dump their gold as the price for bullion falls, prices bottom out, and the bull market continues. This pattern has been repeated for 11 years now.

After reaching an all-time record high of $1,921 an ounce on September 6, 2011, gold bullion prices have fallen back to $1,630 an ounce this morning. Could gold prices fall further? Sure they could. A 20% correction in the price of gold bullion could bring the metal down to $1,536 an ounce.

But is it the end of the bull market in gold bullion? Of course not! But remember, gold is up $333.00 an ounce over the past 12 months—26%—so it has plenty of room to give back some dollars and still be in a bull market.

We’ve been down this route many times before. The human memory is very short-term in nature. In early 2003, the price of gold bullion fell 16%; in the summer of 2006, the price of gold fell 21%; from the spring to the fall of 2008, gold prices fell 28%; in the spring of 2009, gold prices fell 15%—and each time the price of gold bullion recovered and moved higher by the year’s end. In fact, for 11 years running, the price of gold bullion has closed each year higher in price than it started the year.

Separating the men from the boys—that’s what corrections in bull markets are all about: seizing the moment as an opportunity, as opposed to panicking and selling one’s holdings. This time is no different.

Michael’s Personal Notes:

An icon has moved closer to becoming a casualty of the Internet.

In its heyday, Eastman Kodak Co. (NYSE/EK), often referred to as just Kodak, was a company to be reckoned with. Founded by George Eastman in 1892, the company’s name became synonymous with the word “film.”

But, as the years passed, and technology advanced, Kodak’s business suffered. People take pictures with their mobile phones today. Or they take pictures with cameras and download the images onto their personal computers or Facebook page as opposed to printing the pictures.

This year, Kodak is headed for its sixth annual loss in seven years. In 2010, the company lost $678 million. Most disturbing for me, last week the 131-year-old company drew down $160 million from its revolving bank credit line—not a good sign.

Where the Market Stands; Where it’s Headed:

The stock market is severely oversold and due for a bounce. For the four days ended September 22, 2011, the Dow Jones Industrial Average experienced its biggest four-day drop since 2008. About $1.1 trillion in value was wiped from stocks last week.

I believe that a bear market rally in stocks that started in March 2009 continues to preside.

What He Said:

“If I had to pick one stock exchange that would rank as the best performer of 2007, it would be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canad are mainly very low and they are not expected to rise anytime soon. Americans looking to diversify their portfolios, both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should consider the TSX. Most brokers in the U.S. can buy stock on this exchange.” Michael Lombardi in PROFIT CONFIDENTIAL, February 8, 2007. The TSX was one of the top-performing stock markets in 2007, up just under 20% for the year.

The stock market is in bear market territory for small-caps with the collapse on Thursday. There were several technical breaks materializing on the broad-based heavy selling. The small-cap Russell 2000 is a mess, down 17.89% this year and 25.46% from its 52-week high. The S&P appears to be heading towards support at 1,100. The downside risk is extremely high given the death cross on the stock index charts. When stocks traded at this level before, we saw buying support surface. Watch to see if it happens this time around.

There was a negative reaction following the Fed’s widely anticipated “Operation Twist” strategy, which was as expected and really nothing to get that excited about. The Fed expressed serious concern towards the U.S. economy, and this is obviously not good. We have known that the U.S. economy was in deep trouble. How can you not when the unemployment rate is over nine percent and there is only about one job for every four applicants?

The Fed will try to influence the longer-term financing rate by shifting its bond holdings. Operation Twist will see the selling of short-term bonds, replacing them with around $400 billion of long-term debt to try to drive down financing rates and help the housing market.

I’m not convinced that this will work and feel that the economy will continue to face hurdles, including soft jobs creation. The Fed admits that the economy is in serious trouble and is clearly scrambling to jumpstart activity. Interest rates are expected to stay low until at least mid-2013. The reality is that mortgage rates have been low for some time and this latest move will likely not make a lot of difference.

The U.S. could possibly move into another recession. Investment guru George Soros believes that the U.S. is already in a double-dip recession. In addition, the global economies are also at risk, especially in the damaged European economies with their massive debt. Greece will default if it cannot convince lenders to advance it a second round of capital.

And in Asia, China’s manufacturing sector contracted for the second straight month. Slowing in the U.S. and Europe is driving down the demand for Chinese-made goods.

A sector that is in significant trouble is the banking industry. Moody’s just downgraded the Bank of America Corporation (NYSE/BAC), Wells Fargo & Company (NYSE/WFC), and Citigroup, Inc. (NYSE/C). Banks in Italy have also been cut. The International Monetary Fund also warned on European banks. This is not a good sign given that banks have traditionally provided leadership.

Bellwether FedEx Corporation (NYSE/FDX) cut its full-year estimate due to the global slowing. FDX is a play on the global economies, so this is not good.

And now as the end of the third quarter nears, the upside for stocks will likely be limited unless there are new catalysts surfacing to drive the buying.

Gold and silver continue to be the places to have money, especially the miners that have trailed the superlative upside move in gold towards $2,000. Buy the miners.

At this point, you should hold steady and avoid chasing any stocks. Buy put options to help hedge against more potential losses. You can buy the SPX or SPY for broad market protection or can focus on tech with QQQ and small-caps with the ProShares UltraShort Russell 2000 ETF (TWM).

Be careful and remember that maintaining your capital will allow you to trade longer-term.

You’ll read a lot today about the Federal Reserve’s statement yesterday that it will buy long-term treasuries in an effort to bring down long-term interest rates. That’s a mistake in my opinion. It’s counter-productive.

Sure, the argument will be that lower long-term interest rates will be good for the real estate market. But we must realize that consumers are not interested in buying homes. The 30-year mortgage rate was already at a 30-year low before yesterday’s announcement and consumers were not buying homes. You can bring long-term interest rates to two percent and consumers will not move to buy houses, because they have no faith that housing will move up in price!

Now look at the repercussions of bringing long-term interest rates down:

• Seniors dependent on long-term bond income will have less income, which means they will spend less, actually hurting the economy.
• The rate of inflation will not outstrip the return on long-term bonds, making the dollar less valuable…any investor buying bonds today is losing the purchasing value of his/her money, as inflation outstrips investment returns.

Many economists said yesterday that the Fed’s attempt to lower long-term interest rates will not provide any significant stimulus. In fact, three Fed officials voted against the move.

You’ll hear news today that the stock market is going down because the Fed indicated yesterday that there is “significant downside risks” to the economy. Stocks are not going down because of this. The market and investors already know the economy is fragile; after all, the stock market is a leading indicator!

The stock market is going down today because the traders need to make money and they make big money on big market shifts. Banks don’t make much money on lending anymore; hence they need to figure out other ways to make money, and day trading is a great way to do it. Remember, big banks like Goldman Sachs make money—big money—on at least 90% of the trading days.

Michael’s Personal Notes:

Is there something wrong with this picture?

The European Union (EU) and the International Money Fund (IMF) will only inject money into Greece if the Greek government meets certain fiscal goals. Fair enough. But the targets are unreasonable; they don’t make sense.

Greece is pledging to reduce its deficit to about 7.5% of its gross domestic product (GDP) this year. To give you an idea of how over the top this is, last year the U.S. deficit was equal to about 11.4% of GDP.

In order to meet the hefty fiscal goals set by the EU and IMF, Greece has accelerated its austerity measures. Just look at some of these new measures:

• A 20% cut to pensions of more than 1,200 euros a month (so much for a retirement plan)
• A 40% cut to pensions paid to those younger than 55 for amounts exceeding 1,000 euros
• A cut to the wages of 30,000 state employees

There will more riots in Greece over these new austerity measures. But what is Greece to do? Lenders are demanding cuts to government spending prior to delivering a much-needed cash injection due to Greece next month.

If we ever pull out from this economic malaise, some of these smaller European countries will come out financially stronger than ever.

Where the Market Stands; Where it’s Headed:

We are in phase II of a bear market, which started in October of 2007. Phase I brought stock prices steeply lower in the period of October 2007 to March 2009. Phase II of the bear market, which we are presently in, brings stock prices back up so that investors are lured back into the stock market under a false sense that the economy has improved or is improving. Since March of 2009, the Dow Jones Industrial Average is up 73%. Phase III of a bear market brings stocks back to the point where the Phase II started (6,440 on the Dow Jones Industrials).

My opinion is that the current Phase II of this bear market—the “rebound rally,” as it’s often referred to—is not over yet. Pessimism prevails, not optimism. Bear market rallies top out on investor optimism—something we don’t have today.

What He Said:

“Home sales down 8.4%, could be the bottom,” read the headline in last Friday’s USA Today. What do they know that I don’t? They know what realtors and their associations tell them and that’s about it. Unfortunately, the real estate news is predominately written by reporters—not real estate investors with years of experience to share. The hard facts about the real estate market in the U.S. are truly scary. How can the U.S. economy escape the hard landing in U.S. home prices? As we’ll soon find out, it simply can’t!” Michael Lombardi in PROFIT CONFIDENTIAL, January 31, 2007. While the popular media were predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for the worst of times ahead.

Oracle Corporation (NASDAQ/ORCL) beat consensus with its latest numbers and guided its next quarter higher on surprisingly strong software sales to corporate customers. This is very good news for the entire technology sector and an important signal from such a large, benchmark company.

Also providing some good news to the technology sector was Adobe Systems Incorporated (NASDAQ/ADBE), which beat on earnings by one cent per share and guided its upcoming fourth quarter higher, surprising Street analysts.

These two companies show very good strength in corporate software sales and an improvement in retail-level software demand. It’s a very good way to begin this earnings season.

We also had some positive news from Microsoft Corporation (NASDAQ/MSFT), which announced that it was increasing its dividend by 25%. This is the company’s largest dividend increase in its history and the sixth time it’s done so. Microsoft isn’t the growth company it used to be; but, by offering more income to shareholders, it should begin to entice a new class of investor who previously didn’t consider it.

So while the Main Street economy continues to experience virtually zero growth, the corporate world seems to be doing just fine. This has been a trend for the last several quarters where large companies have been able to report very solid financial results (considering the state of the domestic economy) and a big improvement in balance sheets. The corporate world is seemingly in very fine shape and valuations on the stock market continue to improve with growing earnings.

This early good news from the technology sector is a real boost, as far as I’m concerned. The Street has been looking to the technology industry to report some good news, but the industry hasn’t been able to do so over the last few quarters. It’s still early days in this reporting period, but I think that, at the very least, we can say that we’re off to a decent start.

This is a stock market that is still fraught with higher-than-normal investment risk. It’s easy to make the case that a lot of stocks are undervalued at this time; but with sentiment so fragile and the potential for big shocks (as in country debt defaults), it’s understandable why investors are sitting on the sidelines. What we need in this market are stability and an improvement in confidence. Only then will investors be buyers of equities. Slow economic growth is now the expectation going into 2012, so this reality is fully priced into stocks. We’re almost at a point where we could get a solid stock market rally; but the market needs reassurance that the euro currency won’t come apart before buying the strength in corporate earnings. Any good news hitting the wires should be well received by the marketplace. We’ve had the correction and are almost finished with the consolidation.

Oracle beat slightly on its fiscal Q1 revenues and earnings per share (EPS), but fell a whisker short of the EPS estimate—by $0.03. Revenue growth year-over-year was slight at best and this does not suggest strong demand for technology. We are seeing a potential lag in tech spending, especially with the bigger brand-name tech companies.

And now with the third quarter drawing to an end, investors want to see results for a reason to drive up the stock market. As was the case in the second quarter, there are some high hopes of seeing revenue growth in addition to earnings acceleration as the U.S. economy recovers.

In my view, the key in the third quarter and beyond will continue to be the ability of companies to report higher revenues, which is what you want to see during an economic recovery, as it indicates increased spending.

The reality is that earnings can be made to look better via cost cuts and control. In addition, watch for guidance going forward, as this will also be a key factor.

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

Technology will continue to see the best growth opportunities. The NASDAQ has been stronger, having broken back above its 50-day moving average (MA), but it failed to hold.

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

The area to watch for in technology will be mobility applications for tablets and smartphones, as users shift away from the more cumbersome PCs and laptops. As I’ve mentioned, Apple Inc. (NASDAQ/AAPL) is the “best of breed” in my view. The maker of the “iPhone” and “iPad” traded at a record high of $422.86 on Tuesday.

Big-name technology continues to look positive; but, for higher gains, you need to look in the small-cap area.

For instance, famed investor George Soros’ Quantum Fund China owns this Chinese information technology (IT) stock as a top-five holding. The stock must be good to satisfy Soros.

Beijing, China-based iSoftStone Holdings Limited (NYSE/ISS; Market Cap: $586 million) provides IT services to clients around the world. Services include consulting & solutions, IT services, and business process outsourcing.

What impresses me about iSoftStone is its global reach. Sales at the end of June were to clients in China (56.8%), the U.S. (26.3%), Europe (7.7%), Japan (6.9%), and other (0.3%).

The client industry breakdown at the end of June was: technology (30.4%); communications (39.1%); banking, financial services and insurance (20.7%); energy, transport, and public (4.0%); and other (5.5%).

The valuation at 13.64 times its projected 2012 earnings per diluted share is reasonable.

The five-year estimated annual earnings growth rate is 38%. The price/earnings to growth ratio of 0.50 is attractive if the company can deliver on its earnings.

iSoftStone is just one example of the numerous small-cap tech plays that don’t immediately jump out at you, but is a stock that is interesting.

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

This index is only about 160 points away from achieving its 50-day simple moving average and this is another illustration of the resilience of the stock market. Several of the large railroad companies look like good values in this market and their yields are becoming quite attractive. Like the rest of the market, however, expectations for the future have been reduced. You’ll find that virtually all of the North American railroad companies have seen a reduction in Wall Street’s earnings estimates, this year and next. For quite some time, the railroad stocks were really leading the broader market. Now they are consolidating after the market’s correction.

It is difficult to be a buyer of stocks in this market, whether it’s for short-term speculation or long-term investment. The earnings picture is still looking decent for the bottom half of this year. But, without the expectation for growth in gross domestic product (GDP) in the first half of next year, it’s difficult to imagine much in the way of capital appreciation in share prices. This is why so many investors are sitting on the sidelines. There isn’t a lot of reason to be a buyer of equities, other than for yield if you’re a long-term investor.

I know lots of retirees who are not expecting much of anything from their equity holdings other than their quarterly dividends. Ever since the subprime mortgage meltdown and the stock market’s almost total collapse, a lot of individual investors have chosen not to participate in equities and this is why cash balances in brokerage accounts have been skyrocketing. Bonds and money market funds pay very little and the stock market’s been extremely volatile. It’s certainly no surprise that investors (and corporations) have been moving to cash. There’s not much out there other than investing in real estate and expected returns in this sector have also been dramatically reduced.

The common theme throughout the recent financial crisis and the current state of things is debt. Whether it’s mortgage debt, personal debt, or national debt and deficits. Economies, countries and individuals are experiencing their own consolidation of finances and, without question, this will adversely affect economic growth in all Western economies. We very well could be in a slow GDP environment for the rest of this decade.

Importantly, I believe that policymakers should take a hands-off approach in trying to manage the economy and thereby let the system correct itself over time. The hands-on approach would be helpful in getting a firm hold on sovereign finances. Naturally, less debt-induced government spending would adversely affect Main Street economic growth. But, short-term thinking has only proven to put us in the current pickle that we’re all experiencing. It’s time for some thoughtful, long-run austerity to get the entire system back to solid footing.

Global stock market investors want short-term monetary action from central banks, but, at the end of the day, this kind of thinking is a big part of the reason why we’re in the current bind.

I rarely read or hear a report talking about today’s rising prices or the hyperinflation we may sustain in the years ahead. We all know prices are rising—only housing prices have remained low. Inflation is real and it is here now.

The U.S. consumer-price index (CPI) increased 0.4% in August. That’s an annual inflation rate of 4.8%! Why are we not hearing and reading more about this? The only vocal entity on inflation has been gold bullion. The rise in the price of gold is shouting, “Inflation ahead!”

By keeping interest rates so low, by increasing the money supply, the Fed is spurring inflation. And that’s what we all want: inflation, not deflation. So the Fed has us pointed in the right direction. The trick for the Fed will be eventually bringing interest rates up ever so gently when inflation starts to get out of control.

Unfortunately, consumers are suffering from inflation today. Retirees who will not accept risk with their investments are stuck with 10-year Treasuries paying a measly two percent. With inflation at 4.8%, consumers’ money is losing 2.8% of its value over 12 months.

Inflation is a problem today, my dear readers, and it will be a bigger problem tomorrow. Keep the gold investments. They’ll be even more valuable as time passes and inflation really takes hold in this country.

Michael’s Personal Notes:

Jobless claims rose by 11,000 to 428,000 last week—the highest level since June, according to the U.S. Labor Department. Wow! Jobs continue to be a big economic problem in this country. Bank of America (NYSE/BAC) is the latest large company to announce major layoffs plans.

Until employment in this country gets back on track, the housing market will not recover. And until the housing market recovers, the economy will continue to be anemic. That’s simple economic analysis.

I’ve been thinking more and more about Obama’s American Jobs Bill and I don’t believe it’s the answer. It will just add billions to our debt burden.

The answer, my dear reader, the answer to creating old-fashioned jobs in this country, is capitalism and entrepreneurship. That’s what created this great country in the first place.

Drastically lowering taxes will create jobs. A flat tax across the board—say 20% or 25%—with a valued-added sales tax on the purchase of items, like they have in countries such as Canada, is the only way to really get the economy going and to create jobs. Unfortunately, the Obama administration has never put forth any such proposal.

Where the Market Stands: Where it’s Headed:

We are in a bear market rally that started in March of 2009. While 30 months’ old and tired, this bear market rally has more life left in it. I believe that the rally will push stock prices even higher, as the bear lures more investors back into the stock market.

What He Said:

“As investors, we need to take a serious look at our investment portfolios and ask, ‘How will my investments be affected by an American-grown recession?’ You should take what precautionary steps you can right now to protect yourself from a recession in 2007. Maybe you need to cut your own spending or maybe you need to sell some stocks that will take a beating during a recession. You know what tidying up you need to do. Don’t procrastinate…get to it now. And please remember: Recessions can happen quickly, stock markets don’t go up during recessions, and the longer the boom before the recession, the longer the recession. Just based on my last point, we have plenty to worry about in 2007.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

In this country, there are crippling debt levels and deficits. Some cities across the nation are shutting down to save money. The once-powerful U.S. economic engine continues to show cracks and is stalling at this most critical time for the country.

Over in Europe, we have the PIGS (Portugal, Ireland, Greece, and Spain) sucking money from the European Union and International Monetary Fund and taking away from any focus on growth. Greece is trying to avoid a debt default. The focus on the debt crisis of the PIGS is taking away from any attempt to jumpstart the eurozone. Moody’s downgraded two French banks. Remember; Moody’s along with the other major rating agencies was partly responsible for the U.S. credit collapse after questionable rating practices that downplayed the credit problems. I continue to be quite cautious towards the situation in Europe.

We are also seeing some economic fragility in the BRICS countries (Brazil, Russia, India, China, and South Africa). Brazil, India, and China are seeing some stalling in their economies and stock markets.

Gold has edged higher in each of the past 10 years.

Buying has been driven by a combination of speculative trading in physical gold and gold exchange-traded funds (ETFs), and buying as a safe-haven investment.

Lombardi Financial initially turned bullish in 2002-2003 and has remained so ever since. Although at times the bullion has had a rough ride, metal prices have turned around significantly after first breaking above $400.00. We believe the spot price of gold will take a run at $2,000 by 2012 should the global economies and risk continue.

For starters, world governments have committed trillions of dollars to various bailout packages. Those bailouts will have also left a debt trail of gigantic proportions.

The Federal Reserve has pumped hundreds of millions of dollars into the U.S. financial sector in an effort to create liquidity, encourage lending, and entice consumers to start spending again. Of course, after two rounds of quantitative easing, part three is now needed.

The simple truth is that gold is a trustworthy and realistic investment instrument that should be in every investor’s portfolio. Gold’s traditional role as a safe haven has made it the underdog in the world markets. It is an investment that people turn to only when stock or bond markets aren’t performing well, or when monetary policies are running amok. Yet there is a sense that gold may be increasingly seen as a credible and realistic investment vehicle and not just as a safe-haven instrument for parking capital.

In the current climate, gold represents the best bet, while silver continues to be a trading commodity based on the economic recovery and demand for electronics and industrial applications.

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

The broader market is very fairly priced at its current level and reduced expectations for future growth are now factored into share prices. Accordingly, I think we’re seeing a new base developing for the broader market and, unless third-quarter earnings are bad or there’s a major shock to the system (like a sovereign debt default) I think stocks can build upon this base.

Still, it’s pretty difficult to imagine a new bull market developing right now. However, I do think that the stage is being set for the resumption of an upward trend (since the March low of 2009), as earnings expectations are generally good. Eventually investors will step up to the plate to purchase earnings growth and, when there’s some good news from the economic data, we could have the makings of a solid stock market advance. When this scenario might play out is the big question. Sentiment isn’t strong enough right now. It could happen later in the fourth quarter. We might have to wait until next year. As an optimist, I’m siding with Warren Buffett’s view that the economy will get better—it’s just going to take more time.

While I’m seeing more value in this market, I do want to reiterate my view that investors don’t need to be in any rush to take on new positions in stocks. There are always good trades out there; but, generally speaking, this is a market that isn’t poised to go far at this time.

Quite consistently, corporate earnings have been very good over the last four quarters and so have corporate balance sheets. While big companies aren’t spending on new plant and equipment, or on new workers, they have been able to increase their selling prices without affecting demand. This is a good sign and it especially reflects better business conditions in the industrial, enterprise-level economy. Things are less robust at the retail, Main Street level.

One sector that Wall Street is looking for leadership in this upcoming earnings season is technology. Large technology companies disappointed so far this year, as analysts were expecting more growth from the big players. Those companies with large, retail operations—excluding Apple Inc. (NASDAQ/AAPL)—didn’t produce good enough numbers. And that’s why you have Hewlett-Packard Company (NYSE/HPQ) wanting to get out of the retail computer business.

Over the very near term, it’s continued choppy trading action. There is, however, something to be said for how well the main stock market indices are holding up.

And this brings me to today’s very important issue.

I follow several services that gauge the sentiment of consumers, investors, and stock advisors. And from 30 years of investing experience, I can tell you that the stock market usually does the opposite of what the consensus believes it will do.

As an example, in March of 2009, at the depth of market pessimism, when investors and stock market advisors were at their most negative consensus in years, the stock market took off. In October of 2007, when investors and advisors were at an extreme bullish level, stocks started to crash.

My news today is that, over the past couple of weeks, the number of stock advisors who have turned bearish on the stock market has reached a level not seen since the fall of 2010 (Source: Investors Intelligence).

Stock advisors have left the bullish camp in droves and have jumped onto the bearish bandwagon. Wherever I look, I see blatant negativity. The bears are aggressively outnumbering the bulls, and when I see this kind of action…the stock market usually rallies. Investors pulled big money out of the stock market in August. A recent CNN-sponsored poll says that almost half of all Americans expect a depression within the next 12 months. Negativity is at extreme levels.

What I’m saying today is that there is sufficient bearishness among investors and stock advisors for the stock market to give us a meaningful rally from here. If I were to short the stock market right now, I’d be covering my shorts.

Michael’s Personal Notes:

“Is silver still a good buy?” This is a question I regularly hear from precious metals investors these days.

The simple answer is that I believe silver prices have gotten a little ahead of themselves. Yes, I like the long-term prospects for most precious metals, but silver prices have already enjoyed a spectacular run-up and are due for a correction.

This morning, it takes 45 ounces of silver to buy one ounce of gold bullion—the high-end of the historic price relationship between the metals. At the end of 2008, it took 80 ounces of silver to buy one ounce of gold—silver prices have come a long way.

If we look over the past 12-month period, gold bullion prices have risen 42%, while silver prices have soared more than double that—silver has risen in price 96% in the past 12-month period.

I believe that, after spectacular run-ups, both gold and silver prices are headed for a correction. I won’t sell my gold—as prices move lower, I will use that opportunity to buy more gold investments. But to make silver a screaming buy for me once again, either the price of the metal has to decline or the price of gold has to rise to close the gold/silver price ratio gap.

Where the Market Stands: Where it’s Headed:

Stocks are closing the gap on their loss for 2011. After yesterday’s 140-point rally by the Dow Jones Industrial Average, stocks are down 2.7% for 2011.

The stock market continues to climb the proverbial “wall of worry.” I believe that the market will move higher from here, as the bear market rally that started back in March of 2009 continues its advance.

What He Said:

“What group of stocks are next to fall in light of the softening U.S. housing market? The stocks of companies that sell retail products to the American consumer, I believe, are next on the hit list. Many retail stocks are already reporting soft sales. In my opinion, they haven’t seen anything yet in respect to weaker sales.” Michael Lombardi in PROFIT CONFIDENTIAL, August 30, 2006. According to the Dow Jones Retail Index, retail stocks fell 42% from the fall of 2006 through March 2009.

U.S. mortgage rates have fallen to their lowest level on record—since Freddie Mac started keeping records of mortgage rates back in 1971.

A 30-year fixed U.S. mortgage can be had today for 4.12%. But instead of consumers taking advantage of the low rates, mortgage applications actually fell five percent last week, according to the Mortgage Bankers Association.

Consumers are still not interested in purchasing homes. And who can blame them?

About 12.9% of all U.S. home mortgages are 30 days or longer past due on their payments. That’s 6.3 million mortgages that are late. And many banks have pulled back on their foreclosure process, as they deal with claims from various States that lenders improperly foreclosed on homes.

American consumers are not stupid. With the glut of foreclosures overhanging the market, with banks soon or later needing to restart their rapid pace of new foreclosures, with the underemployment rate in this country at 16.2%, consumers are rightfully looking for better deals ahead. (The under-employment rate includes part-time works who want full-time jobs and people who have given up looking for work.)

Yes, some analysts have been saying that the big U.S. new-homebuilder stocks have bottomed out and that these stocks might be a buy today. But I think it’s still too early.

Somewhere down the road, the stocks of new homebuilders will undoubtedly present investors with a tremendous and classic “buy low” opportunity; it’s just not time yet. Why buy an investment and hold it, waiting for it to go up? I like to buy when prices hit bottom and start to rise…and we’re not just there yet with the homebuilder stocks.

Michael’s Personal Notes:

It was a very emotional weekend in the Lombardi household. As a general rule, I don’t watch TV unless it’s a documentary of interest or current event. But we were glued to the TV Sunday morning for the 9/11 10th anniversary ceremony…tears in our eyes as we watched.

The designers and architects that decided on the memorial at Ground Zero did a spectacular job. The cascading water, the names of those who passed during the terrorist attacks engraved on the sides of the water structures, the trees…truly beautiful.

Yes, the horrifying memory lives on. For my generation, there will always be two “where were you when” moments: when President Kennedy was shot and when the planes hit the Twin Towers.

The human being is an exceptional animal…especially in how we are able to rebound from adversity and disaster. New York, a city my family truly loves, is more gracious, stronger, safer, and more welcoming today than ever.

Surprisingly, the best speech of the day, I believe, was Vice President Joe Biden’s speech at the Pentagon ceremony. In case you didn’t see it, you can see it on YouTube here: http://www.youtube.com/watch?v=MqUBjhLWrKs.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this second week of September down 5.1% for 2011. While there is pressure on the markets this morning related to the renewed fear of a Greek default, I believe that the market discounted the Greek crisis long ago.

My opinion is that we are still in a bear market rally that started in March of 2009. From March 9, 2009, to this past Friday, this bear market rally has brought stocks 71% higher.

What He Said:

“I see the coming recession being deep and difficult because U.S. consumers do not have the savings to spend their way out of the recession. The same thing happened in Japan. The Japan example proved that when consumer confidence is shattered, even zero percent interest won’t spur consumer spending. The same thing could happen here.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

There are over 15 million Americans looking for work and the number is likely much higher, as millions have given up looking. The problem is that there are less than three million available jobs. And companies continue to cut jobs to save money. Unfortunately, Bank of America Corporation (NYSE/BAC) is looking at cutting about 40,000 jobs. Not great timing.

Last week, Fed Chairman Ben Bernanke said he would do anything to grow the economy and add jobs. One problem—he failed to say how! I assume Bernanke will use the two-day September Federal Open Market Committee (FOMC) meeting to do just that. At least, I hope so.

It became clear that the Fed is quite nervous about the condition of the economy and where it is heading. The Fed admitted that the economy is growing at a slower pace than hoped for. Hey no surprise here. We realized it, and so did the Fed, but they held it back as long as possible.

The Fed’s Beige Book pointed to modest growth, but also to weakening. The Fed said that the current slowing is similar to a “recession.”

This may increase the chance for additional stimulus at the September FOMC meeting.

How about the unemployment rate at over nine percent? The Fed feels that jobs will be an ongoing issue going forward with the Unemployment Insurance (UI) rate holding at around nine percent for the short to medium term. Job creation continues to be stagnant, and has worsened according to the Fed.

We saw a dismal non-farm jobs reading, with the creation of only 17,000 private jobs in August, well below the estimate of 110,000. The headline non-farm payrolls reading was below 1,000, which is horrible and well below the estimate of 70,000 and the downward revised 85,000 in July. The results were much worse than I expected and point to a distressed jobs market.

The federal government will need to do something fast; otherwise, the impact of less jobs will affect spending and gross domestic product (GDP). The reading is further evidence of the problems plaguing America. In his speech on Thursday, President Obama introduced a $447-billion plan to drive job creation. While there is no guarantee that the plan will work to drive longer-term job creation, it’s a start; but it will be a difficult path to economic recovery.

The national debt is already over $14.7 trillion and will continue to grow with the recent $2.1-trillion increase to $16.4 million. And can you imagine when interest rates rise?

The problem, as I have been saying, is that the U.S. economy is not faring well and is below expectations of what President Obama had hoped for after shelling out nearly a trillion dollars in infrastructure spending along with QE2.

I sense that things could get worse before they get better.

It seems highly unlikely that we’ll see the stock market advance in any meaningful way over the near term. There’s no catalyst or good enough news for institutional investors to pile into stocks, even though they have the money to do so. There is selling going on, as evidenced by the main stock market averages, but equally as important is the absence of buyers. Investor confidence is not very strong at all and Wall Street is reflecting the mood on Main Street.

As I’ve written previously, I don’t feel there’s a lot of action to take in this kind of environment if you’re an equity investor looking to do something. Predicting the future of share prices is a fool’s game, but because the broader market is so well valued and the earnings picture is quite decent, I don’t think we’re going to see a total breakdown. Instead, I expect more range-bound trading around current levels.

With current expectations for the economy and the stock market, it’s no wonder that cash balances are bulging at the seams. Of course, I’m not referring to the bank accounts of individuals, but those of corporations that are afraid to invest with such a cloudy future. Someday, all this cash is going to be put to good use, but the fundamentals for the economy will have to improve first, not the other way around. With corporations unwilling to spend on new plant, equipment and workers, it’s fair to expect zero GDP growth for the rest of the year.

There are good buys in this market due to valuations, but you have to have a long time horizon for investment and you have to have dividends in order to beat inflation. Well-managed companies like PepsiCo, Inc. (NYSE/PEP), E.I. du Pont de Nemours (NYSE/DD) and Johnson & Johnson (NYSE/JNJ) are well off their highs and their dividend yields reflect this. Of course, you can’t expect much as an equity investor, because the economic outlook (even internationally) is so mediocre. Your only return on investment in this kind of market might just be the dividend payment and this begs the question: is it worth investing in equities with all the risks out there and the expectation for little capital gains?

The best strategy going forward is all about protecting yourself with assets that outperform in turbulent times. These include cash, gold, some silver, and very carefully selected dividend-paying, blue-chip stocks. Financial markets can and do get carried away with price extremes. In the end, however, prices of securities come to reflect the underlying value of their assets. Right now, the stock market is trading at a level that reflects current expectations for the economy. Until those expectations change, there’s no rush to do anything.

Maybe I’m the only one who doesn’t get it. Maybe these politicians are all smarter than me. I see something very wrong.

Each time the President gets up to say a speech in front of Congress and Americans via television, I see all these people in the chamber smiling, hugging each other, shaking hands, clapping—these people look very happy to me.

But what’s there to be happy about? They are all failing miserably at their jobs. They’ve failed to revive the pathetic American economy. They’ve created a huge debt for our children. They’ve managed to get the U.S.’s once-stellar debt credit rating downgraded. The underemployment rate in this country is 16.2%, and these people sitting with Obama are all happy? Most companies would have fired them by now.

So President Obama is asking Congress for another $447 billion in spending initiatives and tax cuts to stimulate the economy. We were told this new stimulus package would be “paid for,” but we need to wait until a week from Monday to find out how. We did get a clue—taxes are going up for the “rich.”

Obama talked about Warren Buffett in his speech and how Buffett is “asking” to be taxed more.

Here’s how I see it:

Warren Buffett’s salary from Berkshire Hathaway is just $100,000 per year. Increasing the tax rate on “rich” Americans would not affect Buffett at all, since most talk in the past on raising the marginal tax rate has been directed at Americans with a salary of $200,000 or more a year.

By increasing taxes on the rich, those who have taken the risk to build businesses that employ people, you are basically “taking from Paul to pay Peter.” Most of America’s wealthiest people are business owners. Taxing them for taking the risk to achieve the American Dream will give them less incentive to build their businesses and start news ones…which ultimately results in job growth. Personally, why would I take more risks if I just need to pay more tax on the money I could make?

Much of Obama’s proposal will have a difficult time getting past the Republican-controlled Congress. I don’t think I saw Republican House Speaker John Boehner smile even once last night.

While my math might not be perfect and while it may be approximate, since Obama took office, the official national debt has increased about $5.0 trillion. And we really don’t have much to show for that 50% increase in the national debt. Now Obama wants to up the ante another half-a-trillion? He wants to take us in the same direction that hasn’t worked yet?

The stock market wasn’t impressed at Obama’s proposal. As I write this, stock market futures are down.

What it means:

More debt equals more pressure on the U.S. dollar. More pressure on the greenback results in rising precious metals prices, especially gold. Short the U.S. dollar. Hold on to your gold investments.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning down 2.2% for the year. I continue to believe that a bear market rally in stocks that started in March of 2009, although it’s tired, presides.

What He Said:

“I’m getting very worried about the state of the U.S. housing market and its ramifications on the economy. The U.S. could be headed for its first outright annual decline in home prices on record, adjusted for inflation. And I really believe this could be a catastrophe for the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, August 2, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

Gold stocks are performing tremendously well right now. The big producers like Barrick Gold Corporation (NYSE/ABX) and Newmont Mining Corporation (NYSE/NEM) just hit new, all-time record highs on the stock market. And, it’s not just the big producers that are making money for shareholders; junior mining companies are experiencing tremendous share price appreciation as well.

Small, but growing producers like New Gold Inc. (AMEX/NGD), Richmont Mines Inc. (AMEX/RIC) and Avion Gold Corporation (TSX/AVR) are just a few examples of junior mining companies whose share prices are creating outstanding wealth for shareholders.

It begs the question, however: what are the best stocks to consider right now as a new investor? My answer is almost nothing. Gold stocks are doing exceptionally well and the right ones are making money for shareholders hand over fist. But, I know from experience that it’s difficult for new investors to buy a stock that’s already gone up. If there were a broad-based correction in the spot price of gold and gold shares, then I’d say buy gold stocks across the board. Whether this correction will happen (which I think would be healthy for the long-run price trend in gold) is indeterminable.

The price of gold should continue to be strong for the rest of the year, so buying high and trying to sell higher would be a valid strategy. Currently, I see value in other resource plays, like oil and gas. Speculators wanting a position in gold (or silver) could easily consider an exchange-traded fund (ETF) that mimics the spot price of the underlying commodity. You can even choose from ETFs that have some leverage to precious metal prices.

In the large-cap space, higher-dividend-paying stocks are the most attractive. For equity speculators, it would seem that the resource-related play still holds the most promise. I don’t see a lot of reasons for investors to be making any bold moves in this market. Sentiment is so choppy that the main indices can turn on a dime.

Now is a time for gold investors to be reaping from their exposure to this sector. The trend isn’t over in gold, but it certainly is due for a correction.

There is talk that Greece may need to leave the European Union due to its failure to satisfy financial targets set in place as a condition for receiving emergency capital from its European neighbors. I thought this could be a possibility given that I did not believe that the stronger nations of Germany and France would want to continue to fund the poor countries. The reality is that growth in both Germany and France has suffered with the focus squarely on saving the PIGS (Portugal, Ireland, Greece, and Spain).

In my global economic analysis, this trend cannot continue much longer or Europe will falter and fall into a deeper or new recession. The problem is that ousting Greece would not be viewed as a positive signal to the rest of the world, as it could signal a domino effect that could lead to other countries also leaving, which is not what you want to see.

The European Central Bank (ECB) maintained its benchmark lending rates at 1.50% at the Thursday meeting. But the situation is cloudy in the eurozone, after the ECB cut its gross domestic product (GDP) growth forecast. Of course, this is not a surprise given the recent downgrades in Europe.

Morgan Stanley cut its global GDP forecasts for 2011 and 2012 and added that the U.S. and the eurozone were “dangerously close to a recession.”

UBS and Citigroup cut the forecast for global and domestic GDP growth, but added that another recession was unlikely. Please note that “unlikely” still means it could occur.

While Europe tries to sort out its mess, which could take some time, there are also issues in Asia. Any major issue there could devastate global stock markets.

In Asia, Fitch Ratings warned that it may downgrade the credit rating of China within two years, as the Chinese economy faces high inflation, stalling growth, and financial system risk.

UBS cut China’s GDP to nine percent this year from the previous 9.3% and to 8.3% in 2012 from nine percent. While the cuts are not major, it does indicate stalling in the massive Chinese economic engine. This is something that we do not want to see, as weakness in China will impact Chinese exports. Slowing also indicates less foreign demand for Chinese goods, suggesting slowing global demand.

Japan was also mentioned as a possible downgrade due to its massive debt load and an economy that has been comatose for several decades. The country’s credit rating was just downgraded to Aa3 from Aa2 by Moody’s due to slow growth and credit issues.

So not only do we have to deal with the U.S. debt and deficit, but also the impact from slowing European growth and potential problems in China and Japan make the current situation worrisome.

The Chinese auto sector had been sizzling, even overtaking the U.S. as the biggest car market in the world. With a middle class of over 300 million in a rapidly expanding Chinese economy, buying a car is paramount to the Chinese. However, the growth has been on the decline this year, as the government ended its tax incentives and jacked up taxes in order to streamline the number of new cars hitting the already clogged Chinese roads.

The Chinese car market grew 32% in 2010, but is estimated to falter to a mere three to five percent this year, according to the State Information Center.

So, while the Chinese auto sector will stall, it is clearly not dead. The demand for cars continues to be extremely high, as income levels continue to rise.

The key in China will be the rapid growth of the country’s middle class. Credit Suisse predicted that the household wealth in China will double to $35.0 trillion by around 2015 based on achieving sustainable GDP growth at or near the current growth rate.

I have been a big supporter of the Chinese auto sector. Yes, the sector has slowed, but the massive potential is just too great to ignore. If you are patient, you need to have some capital in some of the Chinese auto-parts stocks or a play via U.S. automakers.

A lower-risk play on China’s auto sector is General Motors Company (NYSE/GM). (Note that this is not a recommendation to buy the stock, but just an example to give you an idea of your options in this area.)

If you want to play via an U.S. automaker for less risk, General Motors is the top auto seller in China. GM and its Chinese partners (SAIC Motor and FAW Group) sold 2.35 million vehicles in 2010, well above the company’s U.S. sales. The automaker is focusing its growth in China, as it feels the steady rise in the middle class will drive the demand for cars. GM will invest a minimum of $5.0 billion in China to try to reach a sales target of five million vehicles by 2015.

There is clearly some slowing in the Chinese auto market, but I view dips as an opportunity to buy for those with a longer-term view.

Consider that only about 41 in 1,000 Chinese own vehicles, according to some industry pundits. There is clearly ample room for growth, especially as the income levels continue to rise. This fact will drive vehicle sales going forward to the point where China will likely remain the top auto market in the world.

There are numerous ways to play the Chinese auto sector. You can buy an auto company on an American stock market with exposure to China, such as the major global automakers, as I discussed. Alternatively, you can buy Chinese auto-parts makers. Some interesting Chinese auto plays include China Automotive Systems, Inc. (NASDAQ/CAAS), Wonder Auto Technology, Inc. (NASDAQ/WATG), and SORL Auto Parts, Inc. (NASDAQ/SORL). Again, these are examples, not buy recommendations.

Investors want to be buyers of stocks, but they lack the visibility necessary to pull the trigger. This lack of hope is a reflection of the Main Street economy and this sentiment should stay present for a quite a while longer, as the economy still tries to find itself a new equilibrium after the subprime mortgage meltdown. The housing market, jobs, incomes, and spending all require more time to correct themselves. The stock market now reflects the Main Street reality.

The spot price of gold is arguably due for a correction and I think this would be a healthy development for the long-run trend. I still see no reason why gold can’t hit $2,000 an ounce this year, and a little retreat in the spot price would be technically significant.

Agricultural commodities are trading on the weather and they can be considered to be robust price-wise with a solid outlook. The big unknown is the spot price of oil, which is now trading like a barometer on the global economy. The price of oil goes up if the economic news is good. But, just like interest rates, a lower oil price is directly stimulative to spending and the economy. Brent Crude oil is still trading at a significant premium to West Texas Intermediate mainly because of supply issues and the unrest inLibya. Predicting the future price of commodities is a very tough game, but I’d keep silver on your radar screen. It’s as good a bet on global economic recovery as anything.

In just over three weeks, the third quarter will be at an end and equity investors will turn their attention to what corporations are saying about their businesses. My read from second-quarter earnings season is that most companies are anticipating a solid bottom-year performance. There haven’t been any major earnings warnings for the upcoming third quarter, and that’s a positive development.

Right now, there’s no rush for investors to take any new bold action in stocks. I think we’ll continue to have this range-bound trading until earnings news hits the wires. There is good value out there, but I’d mostly wait for the latest information (including fourth-quarter visibility) before committing to some major new positions. The best stocks right now are the ones that pay dividends. It’s the only real return on investment with staying power.

Yet this does not mean we should all run way from Chinese stocks. There are numerous strong Chinese companies with a worldwide presence. For instance, to take advantage of the country’s massive cell phone market of over 800 million users, I like China Mobile Limited (NYE/CHL).

For some added risk and reward, you can look at some of the small-cap Chinese stocks, but be careful if they were formed via reverse mergers due to the surfacing of numerous cases of fraud. Chinese reverse-merger stock Sino-Forest Corp. (SNOFF.PK) was found to have recorded millions of dollars of revenues from another Chinese company. The problem was that the other company had no business at all in operation.

The flow of reverse mergers has declined significantly, especially those from China. According to the Public Company Accounting Oversight Board (PCAOB), about 159 companies from the China region listed on U.S. stock exchanges by engaging in reverse mergers between January 2007 and March 31, 2010. But, as a result of the announcements on Chinese companies being involved in fraud, the activity in reverse mergers has been negatively impacted.

Only 37 reverse mergers were completed during the second quarter of 2011 (down 50% from the same quarter last year), according to the “Reverse Merger Report.” To be clear, the drop is not only due to the decline in the activity in Chinese deals, but also the non-China deals. During the first half of this year, only three Chinese Alternative Public Offerings (APOs) were completed, each raising about $4.0 million.

The weakness of the reverse-takeover stocks is also evident from the poor performance of the Bloomberg Chinese Reverse Mergers Index (CHINARTO Index), which is a market capitalization weighted index that tracks China-based companies that trade on U.S. exchanges following reverse mergers. In mid-August, the index was down 50% since December 2010, compared to the S&P Index decline of 6.3% during the same period. The other indices, TCM and TCO, are down roughly 47% and 73%, respectively. In terms of valuations, CHINARTO is trading at a Price-to-Earnings (PE) of 4.9X and a Price-to-Book (PB) of 0.6X, which are cheaper than the S&P’s PE of 12.3X and PB of 1.8X. But the risk is extremely high in Chinese reverse mergers.

At this juncture, investors are bearish towards equities, especially reverse-merger stocks due to the enormous volatility in the share prices. The last few months have been a harvest season for the short sellers in the Chinese reverse-takeover stocks and this didn’t require one to be a guru in selecting which ones to short.

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

The key is to buy small amounts and diversify with more conservative investments.

When an investment is rising in price (bull market), there are usually dips and corrections on the way up. Just look at the long-term secular bull market in stocks that started in the early 1980s and ended in 2007—there were many times stocks “took it on the chin” during that 25-year bull market run.

On the other side of the equation, not a single investment goes straight down either during a bear market. Just look at the U.S. new-home-builder stocks.

As these stocks started collapsing in 2006 with the real estate market, there were many rallies in the prices of home-builder stocks, as the new long-term downtrend in these stocks entrenched itself. Investors lacking experience would have bought on these rallies thinking that the home-builder stocks were showing life again. Most investors fail to realize the strength of a long-term bull or bear market.

And that brings me to gold bullion.

Long-term readers know I’ve been a big believer in gold investments since late 2001, when gold traded at about $300.00 per ounce. Each time that gold prices pulled back (five percent to 10% corrections); I would suggest dollar cost averaging down—buying more gold investments on price weakness of the metal.

Over the past 12 months, gold bullion has risen an astonishing $611.00U.S.per ounce—up 49%. The rise from $1,700 to $1,800 to $1,900 an ounce has been too swift and quick for me.

I’m warning my readers to expect a correction in the price of gold bullion. That correction could bring the metal back to $1,600, even $1,500 an ounce. However, I would view a pullback in the price of gold bullion as an opportunity…an opportunity to buy more gold investments at lower prices. My investing in gold preference would be the stocks of junior and senior gold-producing companies.

I believe we are in a long-term bull market in gold that will eventually see the metal at $2,500, even $3,000 per ounce. I’ve had this opinion for years and I continue to view any price correction in the long-term bull market in gold as an opportunity.

Michael’s Personal Notes:

Should you follow Warren Buffett and make an investment in Bank of America Corporation (NYSE/BAC)?

Bank of America common stock has collapsed from $15.31 in January of this year to $7.91 today, a drop of 48%. The nation’s biggest bank was experiencing a vote of non-confidence from investors. In my opinion, it brought on Buffett as a big investor in the bank to show “a vote of confidence” in the stock and the bank.

But the average investor cannot get the deal Buffett received for his $5.0 billion. Buffett’s Berkshire Hathaway investment was in preferred stock of Bank of America. These preference shares will pay Berkshire Hathaway six percent per annum. An investor buying the common stock of Bank of America gets a dividend yield equal to less than one-tenth that.

As an inducement, Buffett can buy another 700 million common shares of  Bank of America at $7.14. The stock sits at $7.91 today. Buffett is already “in the money.” Regular investors will not be able to get this deal in the open market.

Finally, Bank of America can give Buffett back his $5.0 billion at any time…but they will have to pay a “goodbye fee” of $250 million to get rid of him.

Personally, I’m not a big fan of Bank of America stock. I believe the company has plenty of problems. It could take years to turn it around.

Buffett’s recent investment in Bank of America makes sense for him. The average investor can’t get the same deal Buffett did. And I notice Buffett didn’t buy any of the common shares.

Where the Market Stands; Where it’s Headed:

The stock market sits today at about the same place it started 2011. Investor and stock advisor sentiment is quite negative. Monetary stimulus continues to be expansive. The yields on stocks are attractive compared to government bond yields. These three factors alone provide a positive backdrop for stocks.

However, economic conditions are very fragile. Consumers, worried about the economy, are increasing their savings as opposed to spending. The depressed housing market continues to be a drag on the economy. Jobs are difficult to create in a country that has lost its manufacturing base.

The immediate-term market conditions remain favorable to stocks and that’s why I believe the bear market rally will bring stocks higher. However, the short-term to long-term outlook is quite negative, hence why I continue to believe that all we’ve really been experiencing since March 2009 is a rally within the confines of a general bear market.

What He Said:

“The proof the party is over in the U.S. housing market could not be clearer to me. The price action of the new-home-builder stocks is telling the true story—these stocks are falling in price daily (and the media is not picking it up). Those who will hurt the most when the air is finally let out of the housing market balloon will be those buyers that bought in late 2005. In fact, the latecomers to the U.S. housing market may end up looking like the latecomers to the tech-stock rally that ended so abruptly in 1999.” Michael Lombardi in PROFIT CONFIDENTIAL, March 1, 2006. 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.

A friend said he was looking at investing in Japan and felt the country could return above-average returns along with moderate risk. He asked my opinion. Quickly, before he was able to finish his question, I said “China” without any hesitation. Buy Chinese stocks I said.

In my view, China is a far superior choice for capital than Japan.

China over took Japan as the world’s second largest economy and, in about 15 years, the Chinese economy is expected by pundits to become the world’s largest economy. Clearly, in Asia, it has become a tale of two cities. While China continues to report near double-digit gross domestic product (GDP) growth in spite of some stalling, Japan is struggling along and unable to grow.

And while Japan has faltered over the past two decades, China has caught the world’s imagination and used its massive cheap labor workforce to develop the world’s largest manufacturing landscape opened for business for global manufacturers looking for cheap labor and lower cost to produce goods. Go and rent a movie called “Manufactured Landscapes,” directed by Jennifer Baichwal, and you will be left astounded by China’s manufacturing sector.

China is a dominant world economic power as well as a basin for incredible and sustained growth across many sectors, from industrial, to mining, to technology. If it is saleable and in demand, then you know that China has the consumer market for it.

China has a population of about 1.3 billion people; about five times the size of the United States. The size of the middle class is over 300 million and is expected to grow exponentially, as migrant workers have more disposable income. Presently, only a small fraction of China’s GDP is driven by consumer spending compared to about 70% in the U.S. China wants to drive consumer spending long-term.

The World Bank estimates that, within five years, there will be 542 million middle-class consumers in China. I have heard estimates of up to 700 million!

Gartner Research estimates that China will represent 72% of the world’s growth within the next 20 years. According to the Carnegie Endowment for Peace, China’s economy will surpass the United States by 2035 and grow to be twice as large by 2050.

To grow, China will continue to spend money. With over $2.5 trillion in reserves, cash is not an issue.

I feel that the fiscal spending on infrastructure in China will continue to be increased by the government as the country grows. China will remain the top growth region going forward, while numerous other global economies are contracting, such as Europe and the U.S.

I firmly believe that China’s need and desire to build up its infrastructure to modern standards and beyond will drive the demand for raw materials over the next decade and more.

Over the next five years, there will be a massive build-up of infrastructure as China comes in line with the rest of the industrialized world.

According to China’s Transport Ministry, about $732.25 billion has been earmarked over the next three to five years for roads, waterways and ports. The country is also spending significant funds in the railroad sector. In addition, there is $710 billion for the country’s rail system. China is building the largest high-speed rail system in the world.

The country’s high-speed rail (defined as trains travelling with an average speed of over 120 mph) infrastructure is expanding rapidly. As of January 2011, the country’s high-speed rail network is comprised of about 5,193 miles, according to chinatourmap.com. According to the plan, the country’s high-speed network will expand to 8,123 miles by the end of 2011 and 16,000 miles by the end of 2015.

China will also spend $40.0 billion over the next two years on its new third-generation and fourth-generation mobile communications networks, according to the Ministry of Industry and Information Technology. In addition, China will spend on its electricity grid, as it brings power to over 1.3 billion people, along with the incredible industrial base.

So, do you invest in China or Japan? Isn’t it obvious?

The Federal Reserve’s annual symposium in Jackson Hole, Wyoming, always a closely watched event, was of extra interest to the financial markets this year. But Fed Chief Ben Bernanke’s vague speech on Friday revealed nothing that was not already heard in recent weeks.

While no another quantitative easing (QE) was mentioned during Bernanke’s speech, he did say that the Fed has a range of tools available to provide additional monetary stimulus, as appropriate, to promote stronger economic recovery. The intraday price swings in equity, bond and commodity markets during Bernanke’s speech on Friday ended up with all markets up on the day. In that respect, the symposium has proven a great success, at least for the markets, on that one day.

The below chart is the update of the chart I previously featured in April 2011. At that time, I had thought that the June 30 ending of QE2 was a bearish factor and the market was likely to sell off well ahead of June 30. My guess that the odds of the market adage, “Sell in May and go away,” were likely to pay off this year has turned out to be on the money.

The benefits of the two QE programs have been dramatically more evident in financial and commodity markets than in the economy. The money the Fed pumped out flooded the markets, with only a trickle left to help where it was needed most—the economy.

Though the Fed may credit the two QEs for the huge two-year gain in stock prices, it remains to be seen if the same monetary tool will be used in the upcoming months. After all, what benefit can the Fed buying more U.S. Treasuries bring to the economy when treasury yields of all maturities and classes are currently at their all-time lows?

Over the past few weeks, institutional investors panicked by the deteriorating economy and deepening crisis in Europe stampeded into the U.S. Treasury market leaving it grossly over-bought and ripe for a setback (higher yields).

Should the direct correlation between stocks and the yields on U.S. Treasuries continue to hold, the S&P 500 could rebound towards the neckline of the recently completed head-and-shoulders top, currently in the 1,260-1,270 range on the S&P 500 (in simple language, stocks could rally here). That would represent a 61.8% retracement of the May 5 to August 8 decline of 19.6% on the S&P 500.

However, if the stock market does not rediscover its ability to “climb the walls of worry,” a downside breakout would likely turn into a full-grown grizzly bear with downside potential as low as 890 to 900 on the S&P 500. On the whole, even though the market is severely oversold, I do not believe that this is as big a buying opportunity as March 2009 was.

My global economic analysis is that problems are brewing globally and there is a real possibility that the stalling will impact global growth and perhaps lead to another recession.

In Europe, Greece is in a major sinkhole and expects its recession to worsen. Heck, after two bouts of emergency funds, Greece may have to ask for more money down the road. This cannot be good for Europe. The situation in Europe continues to focus on the debt and growth, along with the funding. And until it settles down in Europe, markets will likely continue to be shaky on this side of the Atlantic.

The concern towards Germany’s sluggish growth is conjuring up fears of another potential recession if the top country cannot reverse its growth. France is also slowing. There are also concerns that the major European banks with exposure to bad debts within the weaker European countries will be in trouble, which could trigger a financial crisis.

Several moves to cut global gross domestic product (GDP) are a red flag.

Morgan Stanley cut its global GDP forecast for 2011 and 2012 and added that the U.S. and the Eurozone were “dangerously close to a recession.” Not exactly an endorsement.

On Thursday, UBS and Citigroup cut the forecast for global and domestic GDP growth, but added that another recession was unlikely. Are they sure?

Citigroup cut its global GDP forecast to 3.1% for this year from 3.4% and to 3.2% in 2012 from 3.7%. For the advanced economies, GDP was cut to a miniscule 1.4% in 2011 from 1.8% and down to 1.7% in 2012 from 2.2%.

Over in China, the Chinese economy is facing higher interest rates and inflation.

UBS cut China’s GDP to nine percent this year from the previous 9.3% and to 8.3% in 2012 from nine percent. While the cuts are not major, they do indicate stalling in the massive Chinese economic engine. This is something that we do not want to see, as weakness inChinawill impact Chinese exports. Slowing also indicates less foreign demand for Chinese goods, suggesting slowing global demand.

The impact from the slowing in foreign markets will impact growth domestically and this is not good given that America is still trying to dig itself out of the credit and deficit mess.

The reality is that the next several years will not be easy and will be littered with more obstacles. And if the U.S. cannot manage its debt, the global situation will worsen.

As we all know, we’re in a rising commodity price cycle. It started with oil, moved to precious metals and is now at the cusp of a major new price trend in agriculture. The weather’s been hard on crops this year and demand for cash crops is rising along with incomes in developing countries. Add in cheap money, a weaker U.S. dollar and a finite amount of productive land and it’s pretty easy to see that the agricultural economy is about to experience another boom.

Because the vast majority of people don’t see farming and agriculture in their daily lives, they don’t think of it as a stock market sector in which to invest. Yet, some of the best agriculture-related businesses are now generating record financial results—that’s right, record financial results in an economy that’s in the doldrums.

Consider for a moment a company called Potash Corporation of Saskatchewan Inc. (NYSE/POT). This company is the world’s largest fertilizer company by capacity and produces the three main nutrients needed to make fertilizer for farmers: potash, nitrogen and phosphate. In this economy, it’s difficult to imagine a business that’s booming, but this one is. The company just announced record second-quarter profits of $840 million (up from $480 million in the same quarter last year), while revenues grew enormously to $2.33 billion, up almost a full billion from revenues of $1.44 billion in the comparative quarter last year.

The company experienced higher prices for all three of its nutrient products, as well as higher demand. That’s the best of both worlds for an enterprise. Third-quarter net income per share is expected to be between $0.80 and $1.00. Potash Corporation recently increased its full-year earnings guidance to between $3.40 and $3.80 per share. Other companies within the industry are also generating record financial results and raising guidance.

Owning gold has been an obvious trade for a number of years now. While the spot price of gold is likely to correct, its long-term trend seems intact, as governments keep trying to re-inflate their economies. Now the commodity price cycle is migrating into the agricultural sector, which, along with mining, is going to experience a renaissance, likely for the rest of this decade. Accordingly, it’s a stock market sector that’s worth looking into.

In the aftermath of our economic crisis, the U.S. government and Federal Reserve pulled out all the stops.

God bless our politicians and our government. Not knowing what to do, most having never been in the situation before, once the U.S. economy collapsed in 2008 our government threw all kinds of money at the economy. They bailed out companies, they bailed out Wall Street, they saved the banks, and they tried desperately to create jobs.

Sure, some will say the government went too far and saved the wrong people, but we are not talking about a bunch of people with economics degrees and years of experience running businesses. They did the best they could. At least they did something.

The Federal Reserve did all it could do, too. Ben Bernanke is an extremely intelligent person. He has studied the Great Depression and Japan’s “lost decade.” During the crisis, the Fed came up with ideas I would had never thought of. They increased the money supply drastically. They bought U.S. Treasuries. They bought distressed securities…they took drastic action. What else can you ask for?

So, if the government and Fed have done all this, why hasn’t our economy turned around? It’s a simple answer; human emotions have gotten in the way, big-time. The U.S. consumer has had the fear of God put in them. Many of them have lost their homes, their jobs. We all know someone who either lost their home or their job (or both) during the Great Recession. Consumers have fear in them and, until that fear goes away, the economy will not improve.

U.S. consumer sentiment sits today at its lowest since 1980, according to a Thomson Reuters/University of Michiganconsumer confidence index. Consumers are running scared.

Gross domestic product (GDP) in the U.S. is expected to increase an anemic 2.4% in 2012, according to a Bloomberg survey, down from a projected 2012 GDP of three percent only a month ago.

Our economy could be in serious trouble if consumer sentiment towards it does not improve. For years, U.S. consumers did not have any savings. Today, the personal savings rate in this country is approaching the “unheard of” level of five percent. And it is starting to affect consumer spending. According to the U.S. Commerce Department, consumer spending in June dropped for the first time in nearly two years.

But it’s not just consumers holding back; it’s big corporations, too. American companies are sitting on their biggest cash balances on record. In total, corporate America is sitting on over $1.0 trillion in cash and they are not spending. Instead of investing heavily in plants, equipment and expansion, companies are hoarding their cash, as they too are fearful of more difficult times ahead.

According to the Commerce Department, consumers are sitting on $620 billion in savings. Back in 2005, this number didn’t exist. There were no savings. At the rate things are going, and the rate at which fear has been setting in, by the end of this year, consumers and businesses in America will be sitting with $2.0 trillion in savings—money sucked out of the economy. Obama and the Fed can fight the economic downturn all they want, but with consumers and businesses pulling money off the table at such an alarming pace, we are blowing in the wind.

We are no longer dealing with an economic crisis. It has become a confidence crisis. And, until the confidence of consumers—who make up 70% of the economy—returns, the economy will just continue to deteriorate.

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: the lower-interest-rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in PROFIT CONFIDENTIAL, June 22, 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.

My thoughts are that the upside moves in the stock market will be met with increased selling resistance and, unless there is a major catalyst and less risk, the upside gains will be limited.

The reality is that the economy here with weak jobs and housing remains an issue. There is a lot of pressure on the Federal Reserve to introduce another stimulus plan. The Fed will need to do a Q3 to help us avoid a recession.

We also have the global risk factors.

Japan’s credit rating was downgraded to Aa3 from Aa2 by Moody’s.

Over in Europe, Greece expects its recession to worsen. This cannot be good for Europe. The situation inEuroperemains focused on the debt and growth, along with the funding. And, until it calms down in Europe, markets will likely continue to be shaky on this side of the Atlantic.

The market sentiment continues to be extremely bearish, with a pick-up in the number of new 52-week lows. Over the last four sessions to Tuesday, there have been a combined 19 new highs and 750 new lows on the NYSE. Sentiment readings for the NASDAQ are similar.

The overall market is trending lower. As of August 23, only 7.12% of all U.S.-listed stocks were above their respective 50-day moving average (MA), well down from 57.89% a month earlier. About 15.36% of U.S. stocks were above their respective 200-day MA, compared to 59.77% a month ago. These are not good metrics and indicate a stock market in trouble.

The near-term technical view remains bearish, as the key indices trade well below their respective 50-day MA and 20-day MA on relatively weak Relative Strength.

The NASDAQ, S&P 500, and Russell 2000 continue to display a bearish “death cross” on their respective charts, an indication of potential additional losses.

The S&P 500 rallied above its critical level of 1,132, but this may be temporary.

I continue to sense that gains will not be sustainable. The volume was average on the bounce on Tuesday, but well below what we saw during the down days. This indicates a lack of buying support. And, until there is firm buying and a base formation, it may be worthwhile to buy after a big dip and sell on a bounce. In other words, trade the current volatility.

Gold and silver continue to be the places to have money, especially the miners that have trailed the superlative upside move in gold towards $1,900.

On the chart, the October Gold surged to a record $1,896.50 on Monday and may be set to break $1,900. Contracts further out have traded at over $1,900.

The October Gold is bullish on strong Relative Strength. There is a Golden Cross on the chart with the 50-day MA of $1,614 well above the 200-day MA of $1,476. I feel that gold prices will continue to edge higher, especially if the U.S. economy falters and another recession surfaces.

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

As far as the overall stock market goes, the best strategy for risk-averse traders is to protect via put options.

Again, you may want to be careful when buying on the current weakness. To be safe, stay on the sidelines.

Be cautious and remember that maintaining your capital will allow you to trade longer-term.