On the charts, the DOW and S&P 500 are managing to hold above key support levels at 10,000 and 1,040, respectively, but not before closing below these key technical levels in the recent sessions.

The bears appear to be in control, while the bulls are trying to hang on and minimize the losses. The blue-chip DOW closed below 10,000 on August 26 for the first time since July 6, when the index fell to 9,686.48. In the previous decline, the DOW held below 10,000 for five straight days from June 29 to July 6, prior to rebounding. The DOW has broken below 10,000 in five of the last six sessions to August 31. In our view, the breaks are worrisome and could point to a more sustained move below 10,000.

With four months remaining in the year, stock markets are negative and under selling pressure. Stock markets have closed lower in 17 of the last 25 sessions to August 30. The bias is negative, as stocks search for a bottom. Until we see it reach one, the downside risk remains high. The overall bias at this time is down, as reflected by the current level of the indices below key moving averages and chart tops. The key will be the ability of markets to hold as we move forward. I continue to be cautious due to a fragile technical picture.

The near-term technical picture has turned more bearish with weakening Relative Strength as of August 31.

Markets continue to be on fragile ground and this should not be a surprise given that the key stock indices were unable to break or hold above some topping resistance on the charts. The failure to break higher was a red flag and a signal of further potential downside weakness to come. All four of the key stock indices are negative this year and are fighting to find some support. The Relative Strength is weak.

On the charts, the stock indices are trading at a crux, below the key 50-day moving average (MA) and 200-day MA, along with the tops on the charts as follows:

Russell 2000 — 675
NASDAQ – 2,320
DOW — 10,650
S&P 500 — 1,125

The S&P 500 failed to break its key 1,100 level on August 18 and is back below its 50-day and 200-day MAs. The Russell 2000 is below its 50-day and 200-day MAs.

While there is some decent support on the charts, I continue to see a “death cross” on the charts for all four stock indices. This is a situation in which the 50-day MA is below the 200-day MA. This is a dangerous bearish indicator. I’m not trying to scare you off, but just warning you to be on alert.

I continue to be cautious given that markets need to receive some oversold buying support at the lower supports. As I said, the recent failure to break above the chart tops is bearish.

Just because the crash of 2008 did not usher exactly the kind of depression experienced after the market crash of 1929 does not necessarily mean that we may not be heading that way anyway. How come? In essence, a depression is nothing more than a prolonged recession. How do you know you are in a depression? Simply, when economic growth remains minimal, when interest rates hit rock bottom, and when consumer spending all but disappears along with the credit supply. It is also quite depressing to know U.S. banks have about $1.3 trillion in cash, but are super reluctant to lend to the private sector, entrapped by a liquidity conundrum of their own making.

What causes a depression? Typically, a depression happens after one or more asset bubble explodes, while the credit supply implodes and dries out. In contrast, most recessions are the result of heightened inflationary pressures and overstocked manufacturing inventories. So, what do you think: are we repressed in a recession or depressed in a depression?

Consider one more argument that it may be the latter. Central banks all over the world, not just in the U.S., have dumped trillions of dollars into the global economy. With that much money in the global financial systems, world economic output should be tremendous. Yet it is not, far from it, which only proves that this is not just another recession and that it resembles more and more a bona fide depression.

All that is growing these days are the unemployment lines. True, there are no soup kitchens for the poor yet, but I suspect there wouldn’t be any just yet, as long as the government is mailing the checks each week for 99 weeks to the currently estimated over 10 million unemployed Americans. Whichever way you look at it, there is nothing simple or ordinary about this economic downturn.

How do things look in a depression? Things change. People change. How they perceive debt changes. How they behave in malls changes. Depressions leave much deeper scars than recessions. They leave people traumatized and take years to recover from, to forget foreclosures on beloved homes, to forget collection agencies’ calls, to forget the humiliation of not being able to provide for one’s family.

Perhaps this is why we are seeing home sales sliding to 15-year lows. Perhaps this is why bond markets are sounding every warning bell they have in their arsenal. Perhaps this is why yields on U.S. Treasuries have gone Japanese on us.

Here are some disturbing facts. The 1930s depression did not create declining economic output every quarter. In fact, during the first impact from 1929 to 1933, no more and no less than six quarters had produced increasing GDP data. On average, during these upturn quarters, the economic output growth rates were known to achieve eight percent on an annualized basis. However, since any growth, let alone an eight-percent GDP, was virtually unsustainable, no one in their right mind could declare the recession as over. Incidentally, stock markets flew into the stratosphere in the early 1930s, gaining 50% in the aftermath of the Great Crash simply because the confusing GDP data had lulled everyone into a beautiful illusion that the worst was over.

I’m tired of this emotional rollercoaster, too, of all the ups and downs, hopes inflating, hopes deflating. But if emotions are taken out of the equation and the equation viewed realistically, some harsh truths are undeniable. The Federal Reserve has cut the funds rate to zero, like Japan, and its balance sheet is in tatters. The U.S. budget deficit has swelled to nearly 10% expressed in relation to GDP, which is actually double the deficit vs. GDP ratio created during the 1930s, when Franklyn Delano Roosevelt was running the show. Finally, decades of easy money have left U.S. households, businesses and the government with $6.0 trillion of debt that has to be retired one way or another.

I’m risking the dubious honor of being called a “permabear.” But it is not as if I want to be über-pessimistic. Actually, on my off days, I’m quite an optimist, as well as a realist. Instead of looking for someone else to tell me if it’s raining outside right now, I prefer to open the window and see for myself. And the view from the window is telling me that there is no quick and easy way out and that I should read the market better within the still dismal macroeconomic context, not while blinded by short-lived stock market rallies.

China overtook Japan as the world’s second largest economy in the second quarter and, in about 15 years China is expected by pundits to become the world’s largest economy. In the second quarter, China reported GDP of $1.34 trillion versus $1.29 trillion for Japan, but far lower than the $15.0 trillion GDP in the United States. China is experiencing continued growth in its per-capita income and spending. Consumer spending only accounts for less than 20% of China’s GDP, compared to around 70% in the U.S. The Chinese need to spend and this is what domestic and foreign companies are hoping for to help drive some growth.

Clearly, in the emerging markets of Asia, it has become a tale of two cities. While China continues to report double-digit GDP growth despite increased concerns of some slowing, Japan reported a weak 0.1% rise in its second -quarter GDP and continues to be impacted by decades of stagnant growth.

In reality, while Japan has faltered over the past two decades, China has used the opportunity to put itsmassive cheap labor workforce to use and create colossal manufacturing capacity for the world’s manufacturers looking for cheap labor and lower costs to produce goods.

As we said, China’s GDP is predicted to slow to the high single digits. The country’s GDP is pegged at 9.2% in the third quarter on dwindling stimulus, according to The State Information Center. China could see two straight quarters of declining GDP, albeit the growth is still far ahead of the U.S. and Europe. In the first quarter, China reported impressive GDP growth of 11.9%, and 10.3% in the second quarter. Pundits estimate GDP growth of eight percent at the end of 2010.

Evidence of slowing in China was demonstrated by the slowest increase in industrial output in July of 13.4% year-over-year and a slower rate of Foreign Direct Investment (FDI) in July. The FDI still grew at a 26.2% year-over-year at $6.92 billion in July, but well off from $12.5 billion in June.

China is also working on reining in speculative loans that have driven up property prices to bubble-like conditions. The fear is that a real estate collapse could wreak havoc on the Chinese banks. While property prices jumped 10.3% in July, its 14th straight month of gains, the increase was slower.

For some, the reality of playing the Chinese capital markets involves excessive political and economic risk. However, as we have said, you need to be well-diversified, which would enable you to play some Chinese growth stocks, especially those of the small-cap variety.

Our Chinese stock recommendations, while losing some ground, continue to show some strong gains. We remain long-term bullish on China, but you should watch for the short-term volatility.

On the chart, the Shanghai Composite Index (SCI) rallied after declining to below 2,350 in early July. The chart looks more positive now than the same time last month. Since then, the SCI has broken above its 20-day moving average (MA) of 2,636 and 50-day MA of 2,550 on a rising MACD. The 20-day MA has also broken above the 50-day MA, which is bullish, but remains well below the 200-day MA of 2,912. The SCI is in a sideways channel between 2,575 and 2,700. A strong break above could drive the index towards the 200-day MA.

It continues to be risky investing in Chinese stocks, but we know that, in the longer term, patience will pay off for us. We continue to favor China for growth investors who have long-term views.

These are nervous times for traders and investors. Buying could leave you vulnerable for further downside moves, while sitting on the sidelines could see you miss rallies. My feeling is to remain prudent. Don’t worry about missing any rallies, as I’m not convinced that gains are sustainable at this point. This was demonstrated on August 21, when stock markets surged, but then foundered in the three subsequent trading days.

The stock indices remain below key technical levels. I feel that the key will be the ability of markets to hold as we move forward. As such, I continue to be cautious due to a fragile technical picture.

I do not sense any enthusiasm or interest in the market, as the trading volume continues to be muted. All eyes will be on the Durable Goods Orders on Wednesday and revised GDP on Friday. The Durable goods will be critical, as they indicate spending on non-essential goods, such as big-ticket items like furniture and appliances. Consumers feeling confident will tend to spend more on big-ticket items. Moreover, weakness in housing also pressures the demand for furniture and appliances, as homeowners will tend to not upgrade. The overall impact is on GDP.

Technically, the move below the key moving averages is worrisome in the absence of support. The Russell 2000 may test support at 600, as it precariously holds on pressure by economic concerns. The index fell as low as 601.69 on August 23.

Markets continue to be on fragile ground and this should not be a surprise given that the key stock indices were unable to break or hold above some topping resistance on the charts. The failure to break higher was a red flag and a signal of further potential downside weakness to come. All four of the key stock indices are negative this year and fighting to find some support. The Relative Strength is weak.

On the charts, the stock indices are trading at a crux below the key 50-day and 200-day moving averages (MAs) along with the tops on the charts as we discussed in our last visit.

The S&P 500 failed to break its key 1,100 level on August 18 and is back below its 50-day and 200-day MAs. The Russell 2000 is below its 50-day and 200-day MAs.

While there is some decent support on the charts, I continue to see a death cross on the charts for all four stock indices. This is a situation in which the 50-day MA is below the 200-day MA. This is a dangerous bearish indicator.

I remain cautious given that markets need to receive some oversold buying support at the lower supports. As I said, the recent failure to break above the chart tops is bearish.

Be careful, sit tight, and refrain from chasing gains, as I continue to question the sustainability of upside moves to the global market risk. Things should become clearer in mid-October, when the third-quarter earnings are due out.

Markets continue to be on fragile ground and this should not be a surprise given that the key stock indices were unable to break or hold above some topping resistance on the charts. The failure to break higher was a red flag and a signal of further potential downside weakness to come. All four of the key stock indices are currently negative this year and fighting to find some support.

On the charts, the stock indices are trading at a crux at the key moving averages (MAs), but below the tops on the charts as follows:

Russell 2000 — 675
NASDAQ —2,320
DOW — 10,650
S&P 500 — 1,125

The DOW has broken below its 50-day and 200-day MAs as of August 19, while the NASDAQ is below 2,200 and its 50-day and 200-day MAs. The S&P 500 failed to break its key 1,100 level on August 18, and it is back below its 50-day and 200-day MAs. The Russell 2000 is below its 50-day and 200-day MAs.

While there is some decent support on the charts, we are seeing a “death cross” on the charts for all four stock indices. This is a situation in which the 50-day MA is below the 200-day MA. This is a dangerous bearish indicator. I’m not trying to scare you off; I’m just warning you to be on alert.

My near-term technical assessment is as follows:

NASDAQ

The near-term technical picture is moderately bearish on weak Relative Strength (RS), so there could be more downside moves. The index needs to break 2,320 in order to gain ground.

The NASDAQ is holding below 2,200 and its 50-day MA of 2,229 and 200-day MA of 2,270. Be careful, as the 50-day MA remains below the 200-day MA. The index is oversold.

DOW

The near-term technical picture for the DOW is moderately bearish on weak Relative Strength. The DOW has broken below its 50-day MA of 10,302 and 200-day MA of 10,451.

Be careful, as the 50-day MA is below its 200-day MA. There is a bottom around 9,800 on the chart. The index is overbought.

S&P 500

In the broader market, the near-term technical signals for the S&P 500 are moderately bearish on weak RS, so there could be more downside moves. The S&P 500 is holding above the key 1,040 level, but is back below its 50-day of 1,089 and 200-day MA of 1,116. There is a top around 1,125. There is key support around 1,040 on the chart. Be careful, as the 50-day MA is below its 200-day MA. The index is overbought.

RUSSELL 2000

The near-term picture for the Russell 2000 is moderately bearish on weak RS, so there could be more downside moves. The index trades with the economy. The index has fallen below its 200-day MA of 644, as well as its 50-day MA of 642. Watch for key support at 600. There is some topping on the chart around 675. The index is overbought.

It looks like that downside protection for stocks is going to come in handy. The economic data are catching up with investors and stock prices are behaving accordingly. Given the fundamentals and the outlook, it’s time to start paying serious attention to large-cap stocks. The timing isn’t right yet; but, if we get another major stock market correction, then a good buying opportunity will present itself.

The good news in this market concerns the rest of the world. Germany’s economy is improving and China’s economy is still strong no matter what the headlines say. Australia’s economy is solid. The global economy is experiencing decent growth and this will help pull us out of the doldrums when the timing is right.

Of course, the economy still has to find a new equilibrium for itself. You can’t have that much speculative excess in the system (culminated in the housing crisis) without taking years for it to correct itself. And, speaking of excess, we keep coming back to the same issue about the current state of things — debt. It’s an ugly beast that, frankly, is keeping everyone down.

We’ve been seeing a new trend in economic data over the last couple of quarters, which is that people are choosing not to spend. If there is extra money around, it isn’t going towards excessive consumption. In the near term, yes, this does have a detrimental effect on the economy. Long-term, however, this is precisely what we need to have happen. At the government level, fiscal discipline is out of control. Individually, the age of austerity is becoming apparent. It’s my hope that this trend continues and consumers choose to invest in debt reduction and their savings accounts before considering a batch of new clothes. It’s a simple formula that, in the long run, this economy needs.

Getting back to stocks, what we’ve seen in the first half of this year is a tremendous performance from big companies that have managed to squeeze almost every dollar out of their cost structures. This, on balance, has allowed for an impressive earnings performance so far. If the broader market has further downside (which my gut says it does), then the next bottom is worth paying close attention to. The economic cycle is going to reverse. It’s only a matter of time.

At the beginning of this year, some analysts were predicting that U.S. interest rates would rise in the later part of 2010, early 2011. Those forecasts have simply been put on hold because the U.S. economy is recovering at a much lower growth rate than previously predicted.

I read one report this weekend from a well-known economist who believes that the Fed will not be able to raise interest rates until 2012. I see that as too far out. By 2012, U.S. government debt will be about $15.0 trillion. I doubt that investors will keep buying those T-bills at today’s current reduced interest rates as U.S. debt balloons.

My personal opinion is that we should not be so cocky in expecting interest rates to be low for the next two years.

Look at these five important economic realities:

Interest rates are low in the Fed’s effort to get the economy going, accelerate job growth and help the anemic housing market. Low interest is also a bonus for a government saddled with record debt, like the U.S. is today.

But interest rates being low have a negative impact on the economy as well. A Federal Funds Rate of zero is artificial. The low-interest-rate, easy-money policy we have today tempers inflation. Because of economic uncertainty, especially following the Greek crisis of this spring, investors have been flocking to the U.S. dollar for safety. This will not last forever.

Eventually, as more debt is piled on by the government, the U.S. dollar will come under immense pressure against other world currencies. A lower valued U.S. dollar is ideal for us, but a dollar falling too rapidly could push foreigners away from the greenback, and the only way to stop that is via higher interest rates.

As the economy improves, large U.S. corporations, which are not borrowing right now, will re-enter the market with corporate debt. This will put U.S. Treasuries in competition with quality U.S. corporate bonds, pushing up interest rates, as more debt competes for the same takers.

Finally, why isn’t the U.S. stock market higher today than it is? The dividend yield on stocks is close to three percent and the yield on five-year Treasuries is less than half of that.

The yield on the popular 10-year U.S. Treasury is close to the dividend yield on stocks today. Could the stock market and the bond market both be wrong at the same time (stocks predicting higher interest rates ahead, long-term bond market predicting slower economic growth for years to come)?

Investors shouldn’t take today’s low-interest-rate environment for granted. Similarly, they should not expect these low rates to last for years. Interest rates will surprise on the upside quicker than the majority of today’s analyst and economists expect.

Yes, Japan needed to keep its interest rates low (near zero) for more than a decade, and there have been many comparisons of Japan’s “lost decade” to today’s fragile U.S. economy. But the yen was not the reserve currency of 70% of all central banks. And that makes a world of a difference.

Michael’s Personal Notes:

According to RealtyTrac Inc., lenders foreclosed on 92,858 U.S. homes in July, up nine percent from June and up six percent from July 2009. RealtyTrac expects over one million homes in the U.S. to be lost to foreclosure this year.

The above is obviously bad news. But, as I have been writing in these pages, the fall in U.S. home prices has tapered off. Prices have stopped falling, but obviously prices are not rising either, given the glut of foreclosed properties on the market.

The number of U.S. homeowners receiving their first default notice fell sharply in July, down 28% from July 2009. This is good news.

Good deals in the U.S. real estate market abound. But if you are planning to take the dive, for investment or vacation purposes, you will have to hold that property for years before you start to see any price appreciation.

Where the Market Stands:

The Dow Jones Industrial Average starts this week down two percent for 2010.

With the Dow Jones price/earnings multiple at 14 and the dividend yield at 2.7%, when compared to three-month U.S. Treasuries yielding 0.15% or five-year U.S. Treasuries yielding only 1.44%, I do not see stocks as expensive at this time.

I continue to believe that the bear market rally that started in March of 2009 is alive and well.

What He Said:

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

Monday was an impressive day for stocks with the S&P 500 and NASDAQ on a technical level, as both indices rallied back above their respective 200-day moving averages (MA) and the highest level in a month. All four of our key stock indices are now back above their respective 50-day and 200-day MAs and are positive on the year. While the indices continue to be down from their 52-week highs, between 5.61% for the DOW and 11.28% for the Russell 2000, the ability to rally and hold is encouraging. However, you need to be careful, as the 50-day MA remains below the 200-day MA with all four indices. Also watch, as there is some topping on the market charts. A strong break above on rising volume is critical.

The chart tops are as follows:

Russell 2000 — 675

NASDAQ — 2,320

DOW — 10,650

S&P 500 — 1,125

The trend of the NYSE new-high/new-low index had been edging higher, with 17 of the last 18 sessions bullish. The near-term trend is positive. In the technology area, investor sentiment on the NASDAQ is mixed, with only 17 bullish readings since May 6. 

NASDAQ

The near-term technical picture is bullish on above-average Relative Strength (RS), but the index needs to break 2,320 in order to gain ground.

The NASDAQ is above 2,200 and its 50-day MA of 2,225 and 200-day MA of 2,263. Be careful, as the 50-day MA remains below the 200-day MA.

DOW

The near-term technical picture for the DOW is bullish, with above average relative strength (RS), so there could be further upside moves in the near term. The DOW is holding above its 50-day MA and 200-day MA. Be careful, as the 50-day MA is below its 200-day MA. There is a bottom around 9,800 on the chart.

S&P 500

In the broader market, the near-term technical signals for the S&P 500 are bullish, with above average RS, so there could be more gains. The S&P 500 held above the key 1,040 level and rallied above its 50-day of 1,082 and its 200-day MA of 1,114. The upward break is positive. There is key support around 1,040 on the chart. Be careful, as the 50-day MA is below its 200-day MA.

RUSSELL 2000

The near-term picture for the Russell 2000 is moderately bullish on above-average RS, so the index could see upside moves. The index trades with the economy. The index is above its 200-day MA of 640 as well as its 50-day MA of 638. Watch for key support at 600. There is some topping on the chart around 675.

Finally there’s some good news on the corporate revenue front. A lot of big companies reported solid earnings growth in the second quarter, but revenues haven’t been inspirational. The Dow Chemical Company (NYSE/DOW) just reported very solid numbers and this is a good sign for the industrial economy.

The company reported that its revenues in the second quarter this year grew to $13.6 billion, representing a solid 26% increase over the same quarter last year. Dow Chemical experienced a seven-percent increase in sales volume and a 19% increase in prices. This combination of sales and price growth is a good indicator for the industrial economy.

Dow Chemical experienced double-digit sales gains in all geographic areas (31% in North America), and the company expects a sustained global economic recovery led by Asia.

The company’s numbers actually fell short of consensus estimates just slightly. But, in this market, who cares? A 26% gain in sales for the largest chemical company in the U.S. is big news as far as I’m concerned.

We are experiencing an uneven economic recovery and not all industries are participating. It won’t be until the housing sector really stabilizes and all the foreclosures are worked through the system that the economy will be on solid footing for growth. The good news is that monetary policy is still onside and that interest rates remain low.

It would seem that investor sentiment has had a change for the better recently. While investors have been more willing to forgive less-than-stellar economic news, we can’t fool ourselves about the trading action. The broader market rallied in June, and then pulled back sharply. Also keep in mind that trading volume isn’t very robust. I don’t know where sentiment is going to take the current equity market but I’ve learned never to cry wolf. 

A company like Dow Chemical is a benchmark stock to follow. E.I. du Pont de Nemours and Company (NYSE/DD), better known as DuPont, also reported very good second-quarter numbers and cited volume growth along with increasing prices as reasons for its improvement. Most economists, however, expect the U.S. economy to slow in the second half and, while economists are usually proven wrong, the consensus seems probable.

If there wasn’t growth in Asia, then I think U.S. corporations wouldn’t be reporting the kind of numbers we’ve seen this second quarter. We’re definitely on the right track, but we’ve got a long way to go before we can say things are back to normal.

With the first half of 2010 behind us, here’s an update on where I see things headed for the remainder of 2010, and where I believe my readers can make some money:

Stocks:

The surprise in stocks for the immediate term is on the upside. People are still very worried about the economy. National debt is out of control. Employment is high. Retail investors are staying away from the stock market. But corporate earnings are beating analyst expectations.

If you were to ask me about the short term, which would include 2011, I would tell you I am very bearish. I’m bearish because our dollar cannot sustain its value on the great amount of debt we have accumulated. National debt of $20.0 trillion by the end of this decade (we’re at over $12.0 trillion today) will place immense pressure on the U.S. dollar, which will eventually result in higher interest rates.

Higher interest rates may also be required as a deterrent to rapid inflation, which has historically been a problem for America after a prolonged period of easy money. But, for the months ahead, the Fed cannot raise rates because the economy is fragile. A low-interest-rate environment combined with rising corporate earnings is what the stock market loves. So I’m bullish for the immediate term, bearish going into 2011.

Like I’ve said all along, the bear market rally will suck more investors in before its next leg downward. And the best way to suck investors in is to move the market higher so investors feel that all is well again.

Gold:

I bought more gold last week, because I believe we are getting close to a bottom for the traditionally soft summer months for gold prices. If gold moves closer to $1,100 U.S. an ounce, I will buy more.

Because of my fears about the ramifications of ballooning U.S. debt, the concern about inflation and the longer-term worry about the status of the U.S. dollar as the world’s reserve currency, gold looks like an ideal investment to me for the years ahead. As absurd as it sounds, I’m expecting gold in the $2,000-to-$3,000-per-ounce range as time passes.

Real Estate:

The period 2009 to 2011 will go down as the bottom for real estate prices in the U.S. Banks and sellers have caved in to accepting “what the market is” and are thus accepting the lower prices they would not accept in 2007 and 2008.

I’m visiting Florida this week to see where I can come up with some bargains. The states that got hit the hardest by the real estate crash (Florida, Nevada, pockets of California and Arizona) offer the best values. Just because prices have bottomed for real estate, don’t expect them to rise for years. But remember: in real estate investing, money is made on the buying, not the selling. What this means is that buying at depressed prices is most important.

The Economy:

The people from small- and medium-sized business I speak to are telling me that the demand for their products and services is slowly starting to come back. Through the innovation of America’s businessmen and businesswomen, costs have been cut, ingenuity is prevailing, and the “machine” is starting to work again.

Please don’t get me wrong. Many businesses are still having trouble. Our manufacturing base has been eroded for good. But most businesspeople will tell you that 2010 is looking better than 2008 or 2009. The light at the end of the tunnel is getting brighter, but, unfortunately, it has been at the cost of lost American jobs. Profits are returning more as an outcome of slashed costs rather than rising revenues.

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 began talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

One thing you can’t do in the stock market is control the amount of returns you can generate. Dividends from solid companies provide a level of security, but look at what happened to BP. Anything can happen to any big company at any time. If you are invested in stocks, you are taking a big risk.

Risk isn’t only the other side of the equation; it’s also a factor that you can help control by choosing your investments carefully. I know a lot of people with a lot of money and I can tell that, once they accumulate a lot of wealth, risk-avoidance becomes a top priority. The problem is that it’s difficult to beat the rate of inflation without taking on some risk with your investments. And when you have a lot of money, you have a lot of salespeople calling you trying to sell you things.

Probably, the single best wealth-creating opportunity for individual investors in the past has been real estate. The recent housing crisis aside, you likely won’t find a wealthy investor whose portfolio doesn’t include some real estate.

Investing in real estate is a numbers game. You need population growth, an attractive location, and attractive financing. The cost of building and renovating will continue to go up, and building codes will increase. There’s little you can do to control your risk in real
estate, except not being overleveraged and owning the right asset in the right location. Time, of course, is always your greatest asset in this sector. And we may soon be getting to that time when real estate is a good value again.

Getting back to stocks, if you look at the long-term charts of the main index averages, it’s quite apparent that the actual periods of significant capital appreciation in stock prices are short and few. Most of the time, the market is trading in mediocrity. This makes it very difficult to be a consistent winner at speculating in stocks.

We’ve been talking more and more in this column about having some portfolio insurance for your equity holdings. Some exposure to gold is a good start. This should already exist. The way the market is trading lately, I think a short position would be a wise option to
consider. I like the fact that the technology and railroad industries are saying that business is getting better. The problem is that investor sentiment is not.

If the Dow Jones Industrial Average breaks 10,000 in a meaningful way, then I think we’re in for real trouble. Right now, decent earnings are holding the index above this level. I get a sense in the marketplace that investors are anticipating an all-or-nothing type of outcome for the rest of year. Either the market’s going to tank or it’ll recover to Dow 12,000. Michael Lombardi has been writing a lot about the bear market rally still having life left. Combine that with my thoughts and maybe the market can do both: rally close to 12,000 and then come crashing down again.

I admit; I love it when President Obama feels on top of the world. Last week, he passed into law what is considered the most comprehensive overhaul of lending and high finance rules and regulations since the Great Depression. Its goal is simple. Wall Street should never again have the power to set off a recession. Or, as Obama put it, “Because of this law, the American people will never be asked again to foot the bill for Wall Street’s mistakes.”

The new law is complex, but Washington insisted it also be translated in pocketbook terms, giving emphasis to safeguards for borrowers against manipulative and dishonest lenders. The lawmakers claim that this historic piece of legislation will be “the strongest financial protection for consumers in the nation’s history.”

It came with the price, though. Obama has lost quite a bit of public support in the heated discussions leading to last week’s passing of the bill into law. Republicans also disagreed, viewing the bill as an unnecessary burden on small banks and small companies relying on banks’ help to keep their credit lines and doors open for business. Stifling this symbiotic relationship, the opposition argued, could cost the U.S. economy even more jobs.

Obama counteracted, stating, “Wall Street’s near collapse was a crisis born of a failure of responsibility from certain corners of Wall Street to the halls of power in Washington.”

Of course, Washington can drag this particular horse only halfway to the water. The financial sector and market regulators will have to go the rest of the distance by rewriting their own regulations to meet the requirements of the new law, which could open a whole other can of Wall Street lobbying worms. Even Obama is aware of the dangers ahead that could pull teeth right out of his financial reform bill. He warned, “Regulators will have to be vigilant.”

What has angered those opposing the bill? After billions of dollars have been poured into the financial systems at the height of the credit crisis to soothe the markets and provide at least an illusion of stability, at the same time the ordinary taxpayers failed to grasp why they would have to be the ones left paying the tab for big banks. Almost two years later, Obama’s new law gives financial institutions’ regulators the authority to liquidate weak firms, regardless of how big they are and how interconnected they might be.

“There will be no more tax-funded bailouts, period,” said Obama.

Bold words, by any account, although the bill leaves the little back door open. The Federal Deposit Insurance Corporation, for example, is allowed to borrow from the Treasury, in effect borrowing from the U.S. taxpayers, to help with costs of winding down a failing large financial firm. The good news is that large firms that remain standing will have to pay the Treasury back, not the taxpayers.

Of course, Wall Street spent some serious man hours poring over the huge bill, trying to find where it will hit and hurt the most. As I wrote on Monday, credit rating firms, for example, are not likely to allow issuers of securities backed by debt, like mortgages, to put their ratings into public offering documents. The reason lies in the provision of the law that allows aggrieved investors to sue rating agencies more easily. In other words, credit agencies will think twice before they rate something and post it for everyone to see. They can no longer escape unscathed if they rate something inadequately.

This is not where the law stops, far from it. It has also created within the Federal Reserve an independent and powerful consumer financial protection bureau, which will be responsible for writing and enforcing new regulations dealing with lending and credit practices in the U.S. The umbrella of this bureau will be large enough to capture obscure markets that have previously escaped regulatory oversight, such as subprime lending. Shadow economy no more. If there are firms or market segments threatening everyone else, it will no longer be difficult to simply dismantle them.

The bill has been pushed off the jumping board into delicate and unpredictable political waters, with many fractions hating it simply on face value, that it is being one of Obama’s swan songs. Republicans are howling about jobs and what this bill will potentially do to the labor market. Many business leaders believe that Washington is not listening to their woes. Ordinary Americans are losing faith in almost everything, including Obama’s policy initiatives.

I think the White House has been too aggressive in trying to make this law broadly appealing. I also think that such eagerness wasn’t necessary. Those who don’t understand the need for financial reform have learned absolutely nothing from the Great Recession. Financial reform is not about politics; it should transcend bipartisanship. What it is about is risk management and financial prudence, which is why I couldn’t care less which party has put it in place. Sure, I’m all for constructive criticism, but I haven’t seen much of that. What I’ve seen has mostly been vocal partisan parlance without any real supporting arguments. Yet, oddly, many critics of the bill managed to show up at the bill signing ceremony.

The bulls are in control, but you have to wonder how long it will last. The DOW recorded its third straight session of triple-digit gains on Monday and, in the process, rallied above 10,500 on a broad market rally. More importantly, the S&P 500 also closed above its 200-day moving average (MA) after recently managing to hold above the critical 1,040 level, which was a key development.

With the gains, all of the four key indices are trading in positive territory on the year, quite a reversal from just recently when the Russell 2000 was in a technical bear market, but is now down only 10.74% from its 52-week high. All four of the key stock indices have rallied above the 50-day and 200-day MAs — a bullish sign. Now we will see if the gains are sustainable. The market will need to see continued strong earnings and economic news to hold and advance higher. I expect some profit-taking given the overbought condition and hesitant Relative Strength, and based on the recent trading pattern.

As far as investor sentiment is determined by the new-high/new-low ratio (NHNL). The trend of the NYSE NHNL had been edging higher, with 13 straight sessions bullish from June 10 to June 28, prior to a dip to neutral, but 12 of the last 13 sessions were bullish. The near-term trend is positive. In the technology area, investor sentiment on the NASDAQ has been edging lower, with only 13 bullish readings since May 6, but the last two sessions were bullish.

NASDAQ

The near-term technical picture is moderately bullish on above average Relative Strength (RS), so there could be additional upside moves in the near term.

The NASDAQ is eyeing 2,300 and is above its 50-day MA of 2,228 and its 200-day MA of 2,260. Be careful, as the 50-day MA remains below the 200-day MA, but it has been edging higher. Watch to see if the index can hold, as the downward channel appears to be in place. The index is overbought, so watch for some near-term selling pressure.

DOW

The near-term technical picture for the DOW is moderately bullish with above average RS, so there could be additional upside moves in the near term. The DOW is above both its 50-day MA of 10,181 and 200-day MA of 10,402. Be careful, as the 50-day MA is below its 200-day MA. The index is overbought. There is a bottom at around 9,800 on the chart.

S&P 500

In the broader market, the near-term technical signal for the S&P 500 is moderately bullish, with above average RS, so there could be additional upside moves in the near term. The S&P 500 held above the key 1,040 level, and it has rallied above its 50-day and 200-day MAs of 1,083 and 1,113, respectively. There is key support around 1,040 on the chart. Be careful, as the 50-day MA is below its 200-day MA. The index is overbought.

RUSSELL 2000

The near-term picture for the Russell 2000 is moderately bullish on above-average RS, so the index could see more upside moves. The index trades with the economy. The index is above its 200-day MA of 639 as well as its 50-day MA of 639. The index is overbought. Watch for key support at 600.

Yet it’s not clear sailing by any means. Be careful, as the price trends on the indices are down and, unless there is a steady upside move, the trend will remain intact with additional downside moves going forward.

One of the best companies to follow is E.I. du Pont de Nemours and Company (NYSE/DD), more commonly known as DuPont. This 208-year-old company is perhaps the greatest economic barometer due to its diversified global operations. If you want to know what’s happening in the industry, then all you have to do is follow DuPont.

The company just reported great second-quarter earnings and the numbers handily beat consensus estimates. This is a real accomplishment in this economy.

DuPont reported outstanding sales growth of some 26% to $8.6 billion in the second quarter. At a time when most large companies are struggling to generate any sales growth at all, this is a tremendous performance. Not only did the company experience higher selling prices in most of its markets, total volume of products sold grew a solid 21%. And the good news is that the company’s domestic U.S. operations experienced solid growth. Total U.S. sales grew 18% to $3.6 billion. Asia Pacific operations grew 47% to $1.8 billion.

Naturally, this strong performance translated right to the bottom line. Net income tripled to $1.2 billion, compared to 400 million dollars in the same quarter last year. And, to top it all off, DuPont increased its earnings guidance for all of 2010 to between $2.90 and $3.05 per share, up from the previous estimate of $2.50 to $2.70 per share.

I always make a point of following DuPont and its financial results. I don’t own the stock, but what the company says about its operations is telling because of all the businesses it operates: chemicals; agriculture; electronics; and automotive.

But, for all the good news at this particular company, the equity market isn’t much enthused. Investors are caught in a funk, just like consumers. We’re in a bear market and sentiment just isn’t strong enough to carry good news. That’s why some downside protection in this market is a must.

I’m worried about after earnings season, when equity investors will have to rely solely on economic data. Sentiment is already fragile and the stock market seems only willing to act mostly on bad news while ignoring any good news. We’re getting technical bounces in stock prices, but I think we’re still in for this large trading range around Dow 10,000. If corporate earnings aren’t good in the third quarter, then we could be talking about a new consolidation around Dow 8,000. It’s a bear market, so anything could happen.

The new “Wall Street Reform and Consumer Protection Act” is a brick of a law at 2,300 pages. Being a mammoth, no wonder it had spawned a few unintended consequences, one being a just what is meant by credit agencies being held more responsible when providing their ratings. The panic was substantial to the point that the Securities and Exchange Commission had to act as a go-between, calming the markets and even invoking a reprieve of sorts from its own regulations.

For almost 80 years, credit rating agencies such as Standard & Poor’s and Moody’s have enjoyed a comfy and protective legislative cushion, whereby, if their ratings turned out to be completely off their rocker, the agencies couldn’t be sued. Nice, right? But the new financial reform legislation has taken that protective cover away in lieu of assigning the highest ratings to toxic assets that have both triggered and caused the Great Recession.

In other words, this means that credit rating agencies will be for the first time in history actually legally liable for their ratings. Trying to pull back the protective covers, S&P and Moody’s are now prohibiting their ratings from being used in offering documents, effectively creating a Catch-22 situation. Meaning, firms trying to raise capital by issuing debt backed by assets, such as mortgages or car loans, for example, can no longer disclose credit ratings of asset-backed securities, yet they are required to do so by other legislation.

The ripples already spread out last week. According to “The Wall Street Journal,” Ford’s financing unit has had to delay issuing bonds backed by its car loans because not a single credit rating agency showed up for the “ratings party.”

This is when Ben Bernanke had to step in, advising the SEC to deal with the situation as soon as possible. Bernanke’s concern is that all this pulling and tugging is placing undue pressures on the credit markets in an environment where it is still difficult for many companies to borrow money from distrustful lenders.

What the SEC did was issue a sort of an amnesty, but not to credit rating agencies. In last week’s statement, the SEC has allowed Ford to issue unrated asset-backed securities for a period of six months. The reprieve stems from the SEC guidelines addressing the distribution of asset-back securities under Regulation AB.

Meredith Cross, director of the SEC’s corporate finance division, stated, “Although there are currently few issuers in the registered asset-backed securities market, we understand from some issuers that they cannot currently obtain credit ratings in these Regulation AB filings. This action will provide issuers, rating agencies and other market participants with a transition period in order to implement changes to comply with the new statutory requirement, while still conducting registered AB offerings.”

It remains to be seen if this transition period will be sufficient to calm both debt and credit markets. But I’m not so concerned with issuers having difficulty peddling their asset-backed offerings. What I’m really concerned about are credit rating agencies. Don’t you find it curious how now, when their legal safety net has been removed, rating agencies are suddenly reluctant to do their jobs, which is to rate debt issues? Makes you wonder what they have been doing before.

We already have serious doubts about their rating methods and consider credit agencies to have gloriously boondoggled ratings of toxic assets. They were supposed to be one of the watchers. It seems that the watchers may have been asleep for eight decades with the public being none the wiser had it not been for the credit crisis. They are now awake and there are no doors and windows to protect them, which seems to be the reason they don’t want to be the watchers anymore. But what else are they good for, then?

07/19/10 — The economic health picture in the U.S. is getting worse month after month. The choppy U.S. recovery has spawned many conversations at the Federal Reserve about potentially unleashing another emergency bailout. Such conversations are not exactly jiving with the recent G20 sentiment necessitating the pull-back from extraordinary measures implemented to fight the worst recession in a generation. However, recent evidence has the Fed worried that the country simply will not have enough momentum to turn the corner and might again spin out of control back into the recessionary down spiral.

For the time being, the Fed chairman Ben Bernanke has cut estimates for the U.S. GDP, realizing the country’s dismal labor market and sinking into the jaws of deflation could be permanently arresting economic growth. In addition, the Fed is keeping its main interest rate near zero for who knows how long.

On the balance of things, the Fed did not feel that the concern was sufficiently urgent to actually introduce new measures, at least not yet. However, simply talking about additional measures indicates that the U.S. central bank is worried about the recovery’s snail pace
and the limited impact that existing measures and policies have had on the labor market, consumer confidence, and the credit markets.

What additional measures exactly is the Fed discussing? Nothing we haven’t seen before. Potential additional measures could range from moderating market sentiment through wording of the announcements to keeping interest rates at absolute rock bottom for the near future. The wording from last week’s minutes, for example, went something along these lines: “[We] will consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably.” Furthermore, the Fed has openly acknowledged in the minutes that the outlook has already “softened” quite a bit.

As an unintentional preamble, only hours before the release of the FOMC minutes, three separate economic reports further proved just how soft the outlook really is. Retail sales continued to slide in the U.S. and that is reason all unto itself to worry about the economy,
because consumer spending is what fuels about 70% of it. Furthermore, import prices continue to spin down the toilet to lows not seen since early 2009. Finally, corporate inventories recorded their smallest gains last month, as companies prepared for months
and months of weak and weaker demand.

Opinion polls indicate that most Americans not only don’t believe that the economy is recovering, but they also believe that the economy has either reverted back into a recession or it has never left it. Perhaps the economy has started growing in 2010, but, as far as most Americans are concerned, not much has changed in their financial lives and future prospects. The growth/recovery is obviously still frail and it can easily be run off track, which is making consumers, investors and businesses equally nervous.

Aside from dismal domestic data, the European debt crisis has delivered punches of its own. In June, the eurozone’s problems have pushed the S&P 500 Index down over five percent. Coupled with the estimates that unemployment is going to stay high for a long period
of time, the Fed had little choice but to cut the 2010 GDP predictions from a range between 3.2% and 3.7% to a new range between 3.0% and 3.5%. Additionally, inflation forecasts were also cut to a new lower range between 1.0% and 1.1%, clearly signaling a period of prolonged deflationary price environment.

For the time being, the Fed is only monitoring the situation and weighing macroeconomic factors and their correlations. That also means that institutional investors are also going to step to the sidelines and adopt a “wait-and-see” strategy. With large buyers out of the playing field, I don’t see who will remain in the equity markets to keep the balance of buyers higher over the sellers. This will mean low trading volumes and sideways trading at best, likely resulting in disappointing equity market performance for the remainder of 2010.

Mark this number down: 10,428.05. That is the closing value of the Dow Jones Industrial Average on December 31, 2009. I expect the market to soon turn positive for 2010, moving the Dow Jones above its 2009 close of 10,428.05.

Why will the bear market bring stocks back into positive territory for 2010?

The “head and shoulders” pattern that the stock market completed forming in late June of this year was likely the most well publicized stock pattern in years. Many analysts and advisors turned bearish on the stock market following the formation of the right shoulder of the head and shoulders pattern.

Yes, technically speaking there has been a lot of damage to the stock market. If the Dow Jones Industrial Average ever gets above its 2010 high of 11,258, it will be quite a feat.

If there is one thing I have learned after a lifetime of studying the market, stocks rarely do what is expected of them. If the majority of stocks analysts and advisors are expecting the market to fall (as was the case earlier this month), the stock market will not bow down and oblige.

When pessimism reigns, the market moves higher.

The bear market in stocks, which started in late 2007, has only one objective: Bring as many investors as possible back into the stock market before taking stock prices down again.

We’ve witnessed the first leg of the bear market, as the Dow Jones Industrial Average fell from 14,164 in October 2007 to 6,440 on March 9, 2009. From there, when investors were exhausted and most pessimistic, the bear moved stocks back to 11,258 in April of this year.

There is no doubt that the second leg of the bear market will soon start. But it will be on the bear market’s own timetable and own terms. The retail investor took the pain of the drop in stock prices from October 2007 to March 2009, but retail investors in general were missing from the picture as the bear rally took stocks up almost 5,000 points on the Dow Jones from March 2009 to April 2010.

Before the second leg of this bear market takes its first step, I believe that the bear will do its best to lure investors back into the stock market. That’s why I called for Dow Jones 10,000 late in 2009, and later for Dow Jones 11,000 in 2010. And that’s why I believe the market will soon turn positive again for 2010.

Michael’s Personal Notes:

The technical definition of a recession is two down quarters of GDP. In the U.S., in late 2008 and into 2009, we had three consecutive down quarters of GDP. Loyal readers will remember that I called the recession in 2007.

The U.S. has now experienced three quarters of positive GDP, the most recent GDP report being a positive 2.7% for the quarter ended March 31, 2010. Most economists have forecast positive GDP for the quarter ended June 30, 2010 (not yet released by the Commerce Department).

Hence, and technically speaking, the U.S. has endured the most damaging recession since post World War II. But the effects of the recession and the fear of a double-dip recession are far from over.

Unemployment in the U.S. is still around 10%, banks are not lending to small businesses like they used to, and our annual deficit and national debt are at record levels. The housing market is still a bust, with millions of American homeowners living in homes that are worth less than the mortgage on them. May 2010 was the worst month on record for the sale of new homes in the U.S. Thirty million Americans are receiving food stamps, and one in five American children live below the poverty line.

Recession technically over? Yes. But we are far from out of the woods on this one.

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 Canada remain 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.

07/14/10 — Things are looking up in the technology industry, and one of the best companies to follow in the semiconductor industry isn’t Intel; it’s Novellus Systems, Inc. (NASDAQ/NVLS).

Novellus isn’t the biggest company in the world, but it does belong to the S&P 500 Index. Based in San Jose, CA, this company sells specialized equipment that is used in the fabrication of integrated circuits or semiconductors. These products are the brains of electronic devices. Novellus sells its products all over the world. What it says about its business reveals a telling sign about the health of the technology sector in general. One of the company’s principal competitors is Applied Materials, Inc. (NASDAQ/AMAT).

The company just reported revenues and earnings for the second quarter of 2010 that beat consensus estimates. It also made a solid forecast for the bottom half of the year.
According to Novellus, its second-quarter revenues grew 16% to 321.4 million dollars, up 45.1 million dollars from the first quarter of 2010 and up a whopping 170% from the comparable second quarter of 2009. Net income for the second quarter of 2010 was 63.3 million dollars, or $0.66 per diluted share, up substantially from the first quarter of 2010 and up from a net loss of 50.0 million dollars, or ($0.52) per diluted share, in the comparable quarter last year.

Bookings in the second quarter of 2010 were 384.9 million dollars, up 63.5 million dollars, or 20%, from the first quarter. Company management reported that the current upturn in semiconductor demand is being fueled by growth in worldwide communications. No doubt, all those smartphones are making a difference in the semiconductor industry.

Novellus expects that its third-quarter revenues will increase sequentially to between 335 million dollars and 365 million dollars with an improvement in gross margin and earnings per share.

We’re in the very early days, but a financial report like this is a definite positive sign, particularly as the company expects business to improve through the third and fourth quarters.

The technology industry is certainly one that’s going to be leading the economy. As soon as individuals have more income, they spend more on consumer electronics. As soon as corporations have more cash flow, they upgrade their information technology infrastructure.

What we need from the technology sector is confirmation of improved business conditions in other sub-sectors like software and services. So far, I’d say we’re off to a decent start. I hope it stays this way.

— “Ahead of the Street” Column, by Mitchell Clark, B. Comm.

While the broader market has been ticking higher, I still get an uneasy feeling about the market’s general trading action. I think the best word to describe the state of the equity market is fragile. No doubt, the recent rally was due to the Fed’s unwavering support for the status quo and that’s what the market wanted to hear. There remains, however, a lot of investment risk out there and that’s why a lot of individual investors aren’t participating.

It’s a tough environment in which to be a buyer right now. There’s not a lot of compelling evidence for taking on new risks. The broader market might keep ticking higher, but I wouldn’t be surprised if we get a pullback shortly. That’s the way the trading action’s been for quite a while.

The price of a barrel of oil still is the best near-term indicator for the stock market. Gold’s been holding its own, but it seems to be suffering from a lack of new investor interest. The spot price of gold looks to be waiting for a breakout, but won’t likely form a new trend unless there’s some major geopolitical event and/or major new weakness in the dollar.

It’s really a wait-and-see kind of market, but the outlook for corporate profits is still strong. This is why we will likely continue to experience what I call a “stealth rally” in stocks this year: choppy trading action with an overall upward trend on light trading volume. That’s my outlook right now.

As a speculator in stocks, the two most attractive sectors of the market include U.S.-listed Chinese companies and precious metal producers. As a new buyer, I’d lean more towards the mining industry as a theme. While there continue to be more and more U.S.-listed Chinese stocks in the marketplace, only a select few are really doing well. In fact, from my analysis, you can count the select few great companies on one hand only. The opportunities in Chinese enterprise are plentiful, but investors in those businesses are a fickle bunch and will jump ship on a moment’s notice. These kinds of stocks are much more suited to real-time traders, while you can be more of a longer-term investor in mining shares.

I can’t think of a better play on economic recovery than global precious metals and, to a lesser extent, the agricultural sector. These are two investment themes that encompass all the best stories there are to tell in China, India and at home.

— “Profit Confidential” Column, by Michael Lombardi, CFP, MBA

Tiffany & Co., the luxury retailer, announced this morning that it made 140 million dollars in profit in its fourth quarter, up from 30 million dollars a year ago.

Looks like the rich are back at buying luxury items again after a big scare in 2008. Or is retail in general that is picking up?

Also this morning, Williams-Sonoma, what I would call a mid-market retailer, announced it made 88 million dollars in its fourth quarter, up from only 12 million dollars in the same period of 2008.

So what gives with retail? Are consumers starting to buy again?

With retail companies, it is tricky to see what is really happening, because a retailer can often improve earnings by working its inventory, closing stores, firing staff, etc. What is important to economists is if retail sales in general are rising. And, in the case of both Tiffany and Williams-Sonoma, their sales rose 17% and 8.1%, respectively, in the fourth quarter.

Consumers are definitely spending again, led by luxury items.

It is extremely important to note that the Dow Jones U.S. Retail Stock Index is only 12% away from breaking its high of 2007. There are few other sectors that can make this call except hot sectors like gold mining.

Did investors dump retail stocks too quickly going into the recession? The answer is more than likely, yes. The chart of the Dow Jones U.S. Retail Stock Index looks well positioned to break above its 2007 high. And I wouldn’t be surprised to see that happen before the bear market rally in stocks is over.

Michael’s Personal Notes:

You haven’t heard much from me lately, as I just got back this weekend from a one-week trip in Europe. I’ll be writing plenty about my trip in upcoming editions of PROFIT CONFIDENTIAL. But, if there was one take-home message for me it was twofold:

The economic crisis of 2008 hit Europe much harder than it hit the United States. Secondly, I am convinced, more than ever, that the euro will not become an alternative currency to the U.S. dollar.

Yes, I believe the U.S. dollar will lose its status as the world’s reserve currency, but it will not be replaced by the euro.

Where the Market Stands:

The Dow Jones Industrial Average opens this week up three percent for the year. Having spent the weekend reading stock and economic research reports, it is surprising to see how many analysts are presenting arguments for why the stock market shouldn’t go up. In my experience, when that happens, stocks just ride the wall of worry higher.

Making stock market predictions can get analysts like me in trouble if we are wrong simply because we lose credibility. I was one of the few to predict that the Dow Jones would surpass the 10,000 level (I said this when the Dow Jones was under 9,000) and I am probably the only one out there predicting that the Dow Jones will pass through the 11,000 level.

The bear market rally that started in March of 2009 is alive and well.

What He Said:

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