China is the country with the largest population in the world at over 1.3 billion people. The land covers approximately 3.7 million square miles. The country is governed as a communist country, although they have developed a quasi-capitalist sector for business. China has the second largest gross domestic product (GDP) at approximately $7.0 trillion; behind the U.S. at $15.0 trillion and ahead of Japan at $5.8 trillion. The leaders opened up the centrally planned economy in the late 1970s and early 1980s to allow economic growth through trade, which has allowed China to grow at an unprecedented rate for a country its size. From 2001 to 2011, China grew at an annualized rate of 10.5%.

After so many years mired in a weak global economy, many investors were hoping that 2012 was the year of the rebound. Not so fast, according to BHP Billiton Ltd. (NYSE/BHP). BHP recently announced that it was reducing the total amount of money spent on expanding production and developing mines, which it previously estimated would be $80.0 billion over the next five years.

BHP is plugged into the global economy. It has access to many countries all over the world, getting the feel of how the global economy is performing. The company then takes this analysis of the global economy and generates estimates for future growth. BHP reported that it sees a weaker global economy and lower prices for the commodities that it mines and sells. Part of the reason for this, according to BHP, is the European crisis, which is obvious to almost everyone at this point, and weakness in China. Many investors looking at the global economy feel that China will “come to the rescue;” but here is one of the better informed corporations stating that in its view that won’t happen.

Chart courtesy of www.StockCharts.com

Looking at BHP from a technical analysis point of view, we have first the weekly chart. When studying technical analysis, I like to look at the trendlines in technical analysis from a long-term point of view. The first significant warning sign obtained from technical analysis occurred last summer, as the stock broke below the uptrend line going back to 2009. The stock naturally fell to the 200-period moving average. The stock then used the 200-period moving average as support, as it tried to regain the momentum to start a new bull run.

You will note that the downward sloping trendline since April 2011 has shown that each major high was lower than the previous one, a very bearish indication when studying technical analysis. This weakness finally culminated in the capitulation by the bulls, what was left of them, as the stock broke another long-term support level and the 200-period moving average. In technical analysis, adding together all of these signs paints a picture of a stock with very weak internal strength.

Chart courtesy of www.StockCharts.com

Looking at the technical analysis of BHP on a daily basis, you will notice the strong resistance met by the 200-period moving average. In technical analysis, the more often an indicator shows its importance, the more respect one must pay to it. Now, for all of the bad news we’ve discussed in technical analysis, the stock could make a short-term bounce, as it is entering oversold territory. But, this would not be the only reason to buy, as a stock could continue going down even if it’s “oversold.” That term is a relative one, not absolute. Notice that the low of last year pivoted at approximately $62.50. That is a significant point of interest in technical analysis. Now you have a point of reference along with a slightly oversold stock. What technical analysis does tell us is that, even if the stock were to move up, many investors would take that opportunity to sell, as we’ve seen all year long. Technical analysis of this stock would indicate that, unless the price can exceed its long-term downtrend resistance level, it won’t be in a new bull market.

Gold has shown some good support and buying after recently declining below $1,550. The June gold remains extremely bearish on the charts and is searching for oversold buying support at around $1,500 to $1,525. So far we are seeing support emerge on weakness.

I continue to like gold going forward given the possible exit of Greece from the eurozone after the failure to form a coalition government. New elections are set for June 17, but the uncertainty will be an overhang on equities. A number of Spanish banks were also downgraded, as the 10-year bond yield surged towards seven percent, which inevitably is not sustainable for the country given the current weak financial position.

As I discussed in recent commentary, I do not feel it is time to dump gold stocks and I believe that major price weakness should be viewed as an opportunity to accumulate stocks.

I favor the metal plays and continue to smell opportunities, especially in the mining companies and junior gold miners.

China and India continue to be the world’s top buyers of gold and this is expected to continue. The Chinese have also been buying mining companies around the world in an effort to increase its reserves. This is a reason why I like some of the smaller mining companies, especially those with a massive reserve of proven metals in the ground waiting to be developed and needing a cash-rich partner to get the ore out of the ground.

You can consider buying the major gold players such as Freeport-McMoRan Copper & Gold Inc. (NYSE/FCX), Barrick Gold Corporation (NYSE/ABX), and Newmont Mining Corporation (NYSE/NEM), as I discussed in The Gold Stock at the Top of My List, but, for an opportunity for some real big gains, you need to own some of the smaller miners.

If you want to play the small mining companies, there are hundreds of plays.

I have listed several small mining companies below that look interesting for the speculative trader. Note that these are not necessarily recommendations to buy right now; but just suggestions of the types of stocks you should be looking at.

Small-cap gold miner Jaguar Mining Inc. (NYSE/JAG) is an interesting miner. The stock surged in late 2011 on news of a potential $1.0-billion takeover bid from China-based Shandong Gold Group, but the bid never came to fruition for whatever reasons.

Keegan Resources Inc. (AMEX/KGN, TSX/KGN) continues to report positive feasibility results, specifically at its Esaase Project in southwest Ghana. I like this stock as an aggressive small-cap play with above-average price appreciation potential.

Another I like is Canada-based Taseko Mines Limited (AMEX/TGB), which mines for copper and gold in Canada. The small-cap has a market cap of $532 million and is profitable with above-average price appreciation potential. Trading at 5.32X its estimated 2013 earnings per share (EPS) of $0.42, I like the value here.

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 5.13X its 2013 EPS, I like the valuation and potential for long-term gains.

For gold traders, check out small-cap Nevsun Resources Ltd. (AMEX/NSU), which beat on EPS and revenues.

Within the non-precious mining companies, 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 mining companies 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.

In the midst of the current market correction in the price of gold bullion, a Japanese pension fund, Okayama Metal & Machinery, is going to place 1.5% of its total assets ($500 million) in gold bullion-backed exchange-traded funds (ETFs) (source: Financial Times, May 16, 2012).

This is the first time the fund has bought gold bullion in its history.

The chief investment officer of the fund said explicitly that investing in gold bullion was meant to protect against sovereign risk.

Historically, the $3.4-trillion Japanese pension market has invested in bonds, with the balance finding its way to other assets, but not gold bullion…until now.

The perception in Japan has begun to change, as retail investors are beginning to view investing in gold bullion as a protection against a crisis—whether it is a tsunami or a debt crisis like in the eurozone.

The oldest and largest Japanese wealth manager, Normura, has added investing in gold bullion in its survey to retail investors. It has found—much to its surprise—that the average Japanese person views gold bullion as the third-most desirable investment.

The second-largest financial firm in Japan, Mizuho Financial Group, has begun to allow smaller Japanese pension funds to invest in gold bullion.

Unlike North America, the talk isn’t of investing in gold bullion as a commodity, but the perception is that of gold bullion as a currency.

Now that the tables have turned and Japanese pension funds are beginning to dip into gold bullion, while the average person in Japan is warming to the idea of investing in gold bullion, increased demand in Japan is just beginning.

Follow me here. If even five percent of assets are invested in gold bullion, then five percent of a $3.4-trillion dollar pension fund market is a staggering $170 billion.

You know what that would do for gold bullion prices…

I don’t believe I’m making an outrageous claim. If the perception of gold bullion as protection against a crisis takes hold in Japan, then five percent is a reasonable portion of one’s portfolio to set aside for insurance against a crisis. I’m not even counting the average person in Japan. The $170 billion represents just the pension funds.

Besides China, Japan is joining the group of gold bullion investors around the world. Central banks as well have been investing in gold bullion in the first few months of this year, as I’ve been writing about in these pages. (See: Half of World Gold Production Being Bought by Central Banks.)

If you want to sell your gold bullion, looks like there are plenty of Japanese investors who will be happy to take it off your hands.

Michael’s Personal Notes :

Last Friday came news that Hewlett-Packard Company (NYSE/HPQ) is considering cutting 25,000 jobs in an effort to help the company trim costs and increase profits.

With the second half of 2012 looking like a continued slowdown in economic growth, I believe we will see more companies like Hewlett-Packard announcing job cuts as the year progresses.

It’s been a snowball effect…

The recessions in various eurozone countries have resulted in big American companies that sell in Europe seeing softness in product/service demand. And the slowdown in China’s economic growth is causing a pullback in demand from one of the world’s biggest economies.

After a couple of years of solid earnings growth from big American companies, I believe earnings growth will falter this year.

Amid stagnant economic growth, companies are finding it difficult to deliver revenue growth. If revenue is not growing, and companies want to increase profits, their next logical move is to cut expenses.

Twenty-five thousand job cuts at Hewlett-Packard is a big number, but percentage wise, it’s only eight percent of Hewlett-Packard’s total workforce. As more companies cut payrolls in the second half of 2012, more pressure will be placed on the unemployment rate and, consequently, economic growth in this country could easily stall.

In a global economy, it is unreasonable to believe a country as big as America can isolate itself from worldwide slowdown in economic growth.

Because of what I have outlined above, the Fed will be forced to keep interest rates low for a very long period of time. As the stock market continues to struggle and economic growth falters, the Fed will be more aggressive in quantitative easing.

So, as investor, I believe you are looking at a prolonged period of low interest rates and more money printing by the Fed, both of which are inflationary.

Eventually, interest rates will be pushed up as a consequence of inflation. It’s just a matter of when. But in the meantime, just expect more of the same…record-low interest rates to continue, government debt to continue rising, and the monetary policy to be very expansive. Oh, and let’s not forget, economic growth to deteriorate rapidly.

Where the Market Stands; Where it’s Headed:

If I am correct, the stock market is just about finished putting in a huge top that will act as the right shoulder of a classic head and shoulders pattern. This means it is more likely stocks are headed down than up.

Facebook, Inc. (NASDAQ/FB) wasn’t able to change the market’s tide on Friday. If there is one thing I know about traders, when the market is fragile, like it was last week, they don’t like to go home for the weekend with too much stock on their books.

Expect a bad summer for the stock market. The economy is slowing rapidly, so corporate profits will be stretched. Those smart corporate insiders I’ve have written about a few times this year…they jumped off the bandwagon at just the right time. (For the benefit of my new readers, corporate insiders have been very big sellers of stock this year; see: Another Key Stock Market Indicator Flashes Red.)

What He Said:

“What group of stocks is 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.

Last Friday came news that Hewlett-Packard Company (NYSE/HPQ) is considering cutting 25,000 jobs in an effort to help the company trim costs and increase profits.

With the second half of 2012 looking like a continued slowdown in economic growth, I believe we will see more companies like Hewlett-Packard announcing job cuts as the year progresses.

It’s been a snowball effect…

The recessions in various eurozone countries have resulted in big American companies that sell in Europe seeing softness in product/service demand. And the slowdown in China’s economic growth is causing a pullback in demand from one of the world’s biggest economies.

After a couple of years of solid earnings growth from big American companies, I believe earnings growth will falter this year.

Amid stagnant economic growth, companies are finding it difficult to deliver revenue growth. If revenue is not growing, and companies want to increase profits, their next logical move is to cut expenses.

Twenty-five thousand job cuts at Hewlett-Packard is a big number, but percentage wise, it’s only eight percent of Hewlett-Packard’s total workforce. As more companies cut payrolls in the second half of 2012, more pressure will be placed on the unemployment rate and, consequently, economic growth in this country could easily stall.

In a global economy, it is unreasonable to believe a country as big as America can isolate itself from worldwide slowdown in economic growth.

Because of what I have outlined above, the Fed will be forced to keep interest rates low for a very long period of time. As the stock market continues to struggle and economic growth falters, the Fed will be more aggressive in quantitative easing.

So, as investor, I believe you are looking at a prolonged period of low interest rates and more money printing by the Fed, both of which are inflationary.

Eventually, interest rates will be pushed up as a consequence of inflation. It’s just a matter of when. But in the meantime, just expect more of the same…record-low interest rates to continue, government debt to continue rising, and the monetary policy to be very expansive. Oh, and let’s not forget, economic growth to deteriorate rapidly.

Where the Market Stands; Where it’s Headed:

If I am correct, the stock market is just about finished putting in a huge top that will act as the right shoulder of a classic head and shoulders pattern. This means it is more likely stocks are headed down than up.

Facebook, Inc. (NASDAQ/FB) wasn’t able to change the market’s tide on Friday. If there is one thing I know about traders, when the market is fragile, like it was last week, they don’t like to go home for the weekend with too much stock on their books.

Expect a bad summer for the stock market. The economy is slowing rapidly, so corporate profits will be stretched. Those smart corporate insiders I’ve have written about a few times this year…they jumped off the bandwagon at just the right time. (For the benefit of my new readers, corporate insiders have been very big sellers of stock this year; see: Another Key Stock Market Indicator Flashes Red.)

What He Said:

“What group of stocks is 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.

More bad economic news…

U.S. retail sales for April rose at the slowest rate of 2012. While the retail sector was expected to continue its torrid pace of consumer spending increases in 2012, this report proves my theory: lack of a real winter (because of much better than usual weather in January and February) on the east coast this year resulted in consumers going out and doing their spring shopping early.

To get the real picture on consumer spending, we need to remove car sales, filling up at the local gas station, and building materials from the retail sales numbers to get core retail sales. Core retail sales came in at 0.1% in April (source: Department of Commerce), well below the consensus economic forecast of 0.3%.

April core retail sales in the U.S. were at their lowest level since December of 2011—a poor sign for the fragile retail sector.

What was the big soft spot in April retail sales? It was weak sales at the clothing stores and at the department stores that weakened the retail sector considerably for April.

Sales at building materials stores in the retail sector also experienced a weak April. Obviously these areas were affected by the warm weather and Easter being moved up to March this year.

Let’s face the facts…

If economic growth was strong and the economic recovery was really taking shape, retail sales would have been stronger in April. Instead, there is no follow-through to that short burst in real sales earlier in the year.

The main problem, as I’ve cited countless times in these pages, is that real disposable income is not increasing. How can consumer spending, which is 70% of gross domestic product (GDP), grow when people’s real purchasing power is falling?

The Home Depot, Inc. (NYSE/HD), one of the key components of the retail sector, recently reported weaker than expected earnings because, despite a strong February and March due to warm weather, sales fell off more than expected in the month of April.

Do Home Depot’s financial results suggest that consumer spending will be weaker moving forward? I think they do.

With the unemployment rate remaining relatively high and real discretionary spending not rising, strong retail sales reported in February and March of this year were just an anomaly due to the warm weather.

Now that spring is here and the average consumer is worse off than he/she was before the year started, the retail sector will struggle.

Signs of the weakening U.S. economy are evident everywhere I look (see: U.S. Durable Orders Post Biggest Drop in Three Years). Again, consumer spending makes up 70% of U.S. GDP. And if consumers are not spending, GDP growth will suffer.

Michael’s Personal Notes:

When North America was coming out of its financial crisis, we were fortunate that the emerging markets—especially the growth in the Chinese economy and Indian economy—helped provide some of the growth that the world so desperately needed at the time.

A few short years later, with Europe in a recession and the U.S. economy not growing very much at all, the dependence on Asia has changed. The fact is that the Chinese economy and the economy of India are slowing measurably.

In India, manufacturing production in March 2012 fell 4.4% from a year earlier. This slowdown is blamed squarely on the recession in Europe.

What is more alarming is that the “investment indicator of capital goods output,” which measures how future investment in manufacturing is looking, fell 21% in India from last year!

If this is not an economic slowdown, I don’t know what is.

The central bank of India had forecast 7.6% growth for the coming year, but that will have to be taken down significantly in light of these numbers. The central bank of India is looking for ways to stop the economic slowdown, including lowering interest rates.

While not contracting, the Chinese economy is slowing considerably. In April, China’s industrial output slowed to its lowest level since 2009!

In April, the employment level in the manufacturing sector, which is so important to the Chinese economy, fell at the fastest rate since 2009!

The month-over-month increase in industrial output between March and April this year in the Chinese economy was 0.35%, which was the lowest growth rate ever recorded since the index was created decades ago!

In response to the economic slowdown, the People’s Bank of China reduced its banks’ reserve requirements (equivalent to cutting interest rates here in the U.S.) by one-half-of-a-percent. The People’s Bank of China sees further downside risks to the Chinese economy, which means it could cut rates further a month from now.

There is no doubt that the Chinese economy is feeling the effects of the recession in Europe in terms of its exports (as is evident by the industrial and manufacturing numbers). Retail sales in China grew at a slower pace than expected in April, further adding to the evidence of an economic slowdown in the Chinese economy.

While it helped tremendously to have the Chinese economy and Indian economy as great sources of growth when the U.S. financial crisis hit, they will not be there to support the global economy on the next leg of the downturn. (Also see: World Economic Growth Moving From Slowdown to Contraction.)

Where the Market Stands; Where it’s Headed:

Update and reiteration from yesterday…

Last fall, I circulated a report that stated the stock market would start to crash in the U.S. on or about April 13, 2012. It was entitled “Next Market Crash Starts April 13, 2012.”

I was exactly two week early. From the end of April to yesterday, the Dow Jones Industrial Average has collapsed 896 points, or about seven percent.

But we should not be afraid. Money printing will save the day again.

Wednesday of this week, we got news that several members of the Federal Open Market Committee (the Federal Reserve) said that more monetary easing (money printing) may be required. As I have been predicting for months, as soon as the stock market started to pull back, QE3 would be on to the table again.

What a concept. Stock market and economy start to go down; we just print more money to get them both moving again. How long can this process go on for? How long can the Fed fight the natural forces of a secular bull market?

The bear market rally in stocks that started in March of 2009 is getting close to the end of its cycle. I have been warning my readers that the limited upside for the market may not be worth the risk.

What He Said:

The year “2000 was a turning point of consumer confidence in high tech stocks. 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold onto your seats, this is going to be a nail biter.” Michael Lombardi in PROFIT CONFIDENTIAL, August 24, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.