In the European Union (EU), the European Central Bank (ECB) is the institution that administers the monetary policy of the eurozone member states, giving it great power as a world central bank. Headquartered in Frankfurt, Germany, the ECB was established in 1998 by the Treaty of Amsterdam. As one of its primary tasks, the ECB controls and issues the currency of the EU; the euro. Mario Draghi is the current President of the ECB.

Recently, bank stocks have taken big hits following news of the trading debacle involving JPMorgan Chase & Co. (NYSE/JPM), causing the firm over $2.0 billion in losses. This has caused a market sector selloff across the entire investment banking space. But some interesting developments have occurred with some bank stocks.

The Goldman Sachs Group, Inc. (NYSE/GS) has recently disclosed that it actually increased its holdings of Italian sovereign debt. This was offset by selling Italian bank stocks. This is a very interesting trade. As of March 31, 2012, exposure to Italian government debt was over $8.0 billion, as opposed to just over $3.0 billion at the end of December 31, 2011. Conversely, Goldman reduced its holdings of Italian bank stocks to only $623 million, as opposed to almost $7.0 billion as of December 31, 2011.

Goldman Sachs is building a large inventory of Italian debt in its thinking that clients will want further exposure to sovereign debt versus holding Italian bank stocks. Many bank stocks in Europe continue to need more recapitalization and this will weigh down their share price for some time. Short-term sovereign debt of less than three years is actually backed by the European Central Bank (ECB), so is seen as a safer trade than the bank stocks. In that regard, Goldman has made a shrewd decision to avoid bank stocks in Italy, as I definitely see more problems arising in the future.

Goldman Sachs has been hit recently as well as many other bank stocks in a selloff across the entire market sector. However, over the long run, Goldman Sachs has found a way to produce profits over the long term. Within the market sector of bank stocks, Goldman has usually been a leader in generating trading profits. An example is can be seen by looking at the last quarter in which Goldman reported only one losing day; conversely, it also reported 24 days of gains of at least $100 million.

The possible downgrades by Moody’s Investor Service are worrisome for Goldman shareholders, triggering additional payments and collateral. The company is also pulling money from hedge funds ahead of the new banking regulations called the “Volcker Rule.”

Chart courtesy of www.StockCharts.com

The stock is currently under pressure, as is the entire market sector. I would avoid bank stocks that have large amounts of unknown exposure. In general, this market sector is looking very weak and I don’t believe in catching falling knives. Right now, with the turmoil in Europe, who knows exactly what these bank stocks hold in their portfolios.

Looking at the chart of Goldman Sachs, I don’t see a drastic move up; in fact, I see a continued selloff until a base is formed. All of the support levels have been breached and the downward move is accelerating. Some might indicate that an oversold condition, as noted by the circled Relative Strength Index (RSI), is currently underway. While I do agree that the stock might temporarily bounce, I see all signs that any move upwards will be met with considerable selling pressure.

At this point, I would probably avoid this market sector for most of 2012. Once new regulations are enacted, then we can try to tackle what the true value for these bank stocks is. Don’t forget; with Europe falling apart, there are billions of dollars in credit-default swaps (CDS) that could blow up and take this market sector down even further.

The unemployment rate in the eurozone reached a 15-year high in March at 10.9%, up from the previous record set just a month earlier at 10.8% (source: The Guardian, May 2, 2012). This is the highest unemployment rate since the inception of the eurozone.

March 2012 marks the 11th month in a row that the unemployment rate has increased among the 17 nations that make up the eurozone.

The European Central Bank (ECB) kept interest rates at one percent at its last meeting saying that its policies need to change so that growth is given as much emphasis as austerity. (It would have been nice if the ECB would have thought of that a year ago, before hundreds of thousands of more people joined the unemployment lines.)

I spoke about the quickly deteriorating conditions in Spain recently in these pages. It is worse than most could have imagined. Spain holds the highest unemployment rate in the eurozone. As of March 2012, almost one in four people is unemployed: 24.1%. Spain also has the second-highest youth unemployment at 51.2%.

One in two young people under the age of 25 is unemployed in Spain…an absolutely mind-numbing statistic.

In Greece, the latest unemployment figures available are for January. Its unemployment rate stands at 21.7%.

I’m going to list the youth unemployment rates for March 2012 for the eurozone (except for Greece, whose latest statistics are for January), so my readers understand that some of these countries are placing their youth in a severely dangerous position of being a lost generation. Or will this be the center of the social unrest and the reason why the eurozone will unravel?

  (Source: Reuters)

Going back to the regular unemployment rates…the unemployment rate in Portugal is 15.3%, while the unemployment rate in Ireland is 14.5%.

Some analysts have been saying Germany would be able to decouple from the rest of the eurozone and experience strong economic growth. I don’t but this. In fact, I believe Germany’s economy is contracting while its manufacturing numbers continue to deteriorate.

Germany cannot decouple from the rest of the eurozone as much as the U.S. can decouple from the global economic slowdown. The big question on my readers’ minds: How bad will unemployment eventually be here in the U.S. as world economic growth falters?

The pressures in the eurozone are mounting. Something will have to give soon, as the situation is clearly unsustainable. This weekend, France took a big step to the left and ushered in a socialist government led by new French President Francois Hollande. The new President campaigned on a variety of promises, including an easing of austerity measures.

A reduction in austerity measures…so where will the money come from? Better crank up those money printing presses again.

Michael’s Personal Notes :

Moving to our own problems…

American April 2012 unemployment numbers released Friday disappointed. Economists were looking for 160,000 in new jobs growth, but only 115,000 in new jobs growth was created (source: Bureau of Labor Statistics). However, mysteriously, the unemployment rate fell from 8.2% to 8.1% (more on that in moment).

Looking closer at the unemployment numbers; temporary help, general merchandise stores and food and drink places contributed the most to jobs growth by adding 62,000 jobs. This means that these low-paying jobs represented 54% of the new jobs growth created.

With this persistent theme of low-paying jobs growth being created in the U.S. economy, it is no surprise the jobs growth report showed average hourly earnings were flat in April 2012, when compared to March. Year-over-year, average hourly earnings have increased by a measly 1.8%, but when one adjusts for inflation, the average American’s real disposable income is declining!

Since 70% of gross domestic product (GDP) is consumer spending, I don’t see how consumer spending can increase in 2012 with pathetic jobs growth and no meaningful increases in average hourly earnings.

U6, as reported by the Bureau of Labor Statistics, is a broader measure of the unemployment rate, because it takes into account discouraged people who are still looking for work, as well as those working part-time, who want full-time work. The U6 unemployment rate was flat in April 2012 when compared to March at 14.5%.

The good news (yes, there is some) is that the previous two months saw higher revisions to jobs growth, with 54,000 more jobs created than originally reported. Not to take away from that positive news…typically in an economic recovery we should consistently be hitting 200,000 news jobs a month. We are far from this number.

One more quick note on U.S. April job numbers…

The labor participation rate measures all people in the working population (from ages 16-64) who are actually employed. In January, the rate hit a 30-year low of 63.7% (that is, only 63.7% of the people who can work and want to work are actually working). In February, it improved somewhat to 63.9%, but in March it dipped to 63.8%; while, in April, it fell further to its lowest level since December 1981 at 63.6%.

So how does the “official” unemployment rate drop to 8.1%? Simply, the figure is misleading. Discouraged workers who stop looking for work and those unemployed after one year are no longer counted in the unemployment rate.

Accordingly, the number of persons not in the labor force continues to climb higher: 88,879 million people, with the seasonally adjusted number being 88,419 million. This is absolutely mind-boggling.

Where the Market Stands; Where it’s Headed:

After a difficult Friday for stocks, stock market futures point to a weak opening this morning, with the Dow Jones Industrial Average slated to open below the pivotal 13,000 range again.

I continue with the belief that the market is putting in a “huge” top here. The stock market rally that started in March of 2009 is near the end of its cycle.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public haven taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks, because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.

Last week in PROFIT CONFIDENTIAL, I presented the facts as to why China would continue to be the largest gold bullion buyer in the world.

The basis of this argument stemmed from China’s desire to see its currency, the yuan (sometimes referred to as the renminbi), be an international currency on par with the U.S. dollar and the euro. Since China only had a fraction of the gold bullion reserves that both the U.S. and Europe had, it was only natural that China would be a huge buyer of gold bullion in the marketplace if expanding the use of the yuan was its goal.

More proof has presented itself that China is taking the necessary steps, in a slow and methodical way, to get the yuan to become an international currency.

At the end of this month, China will sign an agreement with India,South Africa,Brazil, and Russia to offer yuan-based loans in dealings with these countries, instead of U.S.-dollar-based loans.

These countries will agree that, for their international trade and cross-border lending, they will use the yuan instead of the U.S. dollar.China’s stated goal is to have the yuan go from 13% of all transactions between these countries to 50% of all transactions by 2015.

China is not stopping there when it comes to the yuan. It recently signed a loan agreement with Venezuela for $30.0 billion—the loan was denominated in yuan instead of U.S. dollars.

There are two immediate conclusions to this yuan news.

First, there can be no doubt that China will continue to be the largest buyer of gold bullion. Both the U.S.and Europe have enough gold bullion with which to back their currencies. China has just 14% of the gold bullion that the U.S.owns and just 11% of what the European Union owns in gold bullion.

The People’s Bank of China has stated consistently that it views gold bullion as the only true currency in the world—even against the yuan—which means that China is scouring the world for gold bullion.

Secondly, it means that the Chinese economy and the Chinese companies will continue to be the future generators of growth going forward. One need only look to U.S. international companies and see what an international currency has meant for them in terms of expanding trade with countries worldwide and so providing great returns for their shareholders back home in the U.S.

The stars are aligned for Chinese companies to experience this same type of growth going forward, as the yuan becomes used by more and more countries around the world.

You have to give the Chinese credit. They don’t just talk about how they will make the yuan an international currency; they back it up with action. This means that, in spite of China not reporting how much gold bullion it has,China’s population and the People’s Bank of China will continue to be the largest source of demand in the gold bullion market.

For investors like you and me, softness in the price of gold bullion and quality gold stocks should be seen as an opportunity.

Michael’s Personal Notes:

The unemployment rate in Europe is at its highest level since the inception of the euro.

This is not the type of statistic the 17 members of the European Union had in mind when they decided to share a currency. Here is what the unemployment rate trend is looking like throughout the European Union…and it is not encouraging:

December 2011: 10.4%

January 2012: 10.6%

February 2012: 10.7%

(Source: European Central Bank)

That 0.1% difference between January and February represents roughly 185,000 people, so it is by no means an insignificant number. Once again, records are being broken, but for all the wrong reasons.

Spain, which I’ve been writing about in these pages, is fighting back against the European Central Bank (ECB). The country refuses to go along with the budget deficit targets set by the ECB—it is no wonder with their unemployment rate now sitting at 23.3% as of February.

Italy’s unemployment rate soared to an 11-year high of 9.2%.Greece’s unemployment rate continues to rise, hitting a high of 19.9% and counting. Both Ireland and Portugal saw their unemployment rates climbing higher, with both reaching 14.4%.

As Ireland’s unemployment rate continues to rise and voters go to the polls in the next few months to decide if they are going to implement austerity measures from the ECB, what, dear reader, do you believe the voters will decide?

The good news is that Austria’s unemployment rate continued to be a true bright spot in an otherwise dreary landscape; its unemployment rate remained at just four percent.Germany’s unemployment rate worsen somewhat, but still came in at a very respectable 5.8%.

The numbers I list below are horrifying. Here are some of the worst youth unemployment rates (ages 16-24) across the European Union as of January 2012, except where noted:

Greece: 51.1% (as of December 2011)

Spain: 49.9%

Portugal: 35.1%

Italy: 31.1%

Ireland: 29.6%

Mostly Germany, but to some extent Franceas well, has been pushing austerity measure laws throughout the ECB for all of its 17-member nations. They have held countless summits in order to develop and discuss the laws.

But where is the summit to discuss youth unemployment and the deteriorating unemployment rates among the youth of Europe? Where is the summit to discuss the rising unemployment rates across southern Europe?

I was the first economist I know who said in early January that the European Union was in a recession. The economic numbers are accelerating to the downside, which means that the “mild” recession that is being talked about is going to be just that: talk. The truth is that the recession is worsening in the European Union.

Watch out for the complacency in the markets—and be suspicious of their recent rise. There are serious structural problems in the world that are not being dealt with, dear reader.

Where the Market Stands; Where it’s Headed:

They were dancing on Wall Street last night! After the trillions of dollars by which the U.S. government has increased its debt, after the trillions of dollars by which the Fed has increased the size of its balance sheet, the stock market hit a high yesterday not seen since 2007.

Wall Street finally got what it wanted, a strong breakout for stocks on the upside—a surefire way to lure even more investors back into the stock market. This is exactly what the bear market rally is supposed to do—bring more suckers in before their money is taken away again.

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.

The unemployment rate inEurope is at its highest level since the inception of the euro.

This is not the type of statistic the 17 members of the European Union had in mind when they decided to share a currency. Here is what the unemployment rate trend is looking like throughout the European Union…and it is not encouraging:

December 2011: 10.4%

January 2012: 10.6%

February 2012: 10.7%

(Source: European Central Bank)

That 0.1% difference between January and February represents roughly 185,000 people, so it is by no means an insignificant number. Once again, records are being broken, but for all the wrong reasons.

Spain, which I’ve been writing about in these pages, is fighting back against the European Central Bank (ECB). The country refuses to go along with the budget deficit targets set by the ECB—it is no wonder with their unemployment rate now sitting at 23.3% as of February.

Italy’s unemployment rate soared to an 11-year high of 9.2%.Greece’s unemployment rate continues to rise, hitting a high of 19.9% and counting. Both Ireland and Portugal saw their unemployment rates climbing higher, with both reaching 14.4%.

As Ireland’s unemployment rate continues to rise and voters go to the polls in the next few months to decide if they are going to implement austerity measures from the ECB, what, dear reader, do you believe the voters will decide?

The good news is that Austria’s unemployment rate continued to be a true bright spot in an otherwise dreary landscape; its unemployment rate remained at just four percent.Germany’s unemployment rate worsen somewhat, but still came in at a very respectable 5.8%.

The numbers I list below are horrifying. Here are some of the worst youth unemployment rates (ages 16-24) across the European Union as of January 2012, except where noted:

Greece: 51.1% (as of December 2011)

Spain: 49.9%

Portugal: 35.1%

Italy: 31.1%

Ireland: 29.6%

Mostly Germany, but to some extentFranceas well, has been pushing austerity measure laws throughout the ECB for all of its 17-member nations. They have held countless summits in order to develop and discuss the laws.

But where is the summit to discuss youth unemployment and the deteriorating unemployment rates among the youth of Europe? Where is the summit to discuss the rising unemployment rates across southern Europe ?

I was the first economist I know who said in early January that the European Union was in a recession. The economic numbers are accelerating to the downside, which means that the “mild” recession that is being talked about is going to be just that: talk. The truth is that the recession is worsening in the European Union.

Watch out for the complacency in the markets—and be suspicious of their recent rise. There are serious structural problems in the world that are not being dealt with, dear reader.

Where the Market Stands; Where it’s Headed:

They were dancing on Wall Street last night! After the trillions of dollars by which the U.S. government has increased its debt, after the trillions of dollars by which the Fed has increased the size of its balance sheet, the stock market hit a high yesterday not seen since 2007.

Wall Street finally got what it wanted, a strong breakout for stocks on the upside—a surefire way to lure even more investors back into the stock market. This is exactly what the bear market rally is supposed to do—bring more suckers in before their money is taken away again.

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.

In spite of the continued hiccups due to the systemic risks posed by the European debt crisis, equities have just completed a three-year bull market and are entering the fourth year. The movement of the price and volumes illustrate that once again the markets are in a hope phase for a self-sustaining recovery in the U.S., a soft landing in China, stability in Greece, and improvement in the eurozone situation, because of the European Central Bank (ECB) liquidity measures. With regards to the eurozone, the recent policy measures to support the banking system and provide Greece with further fiscal assistance have alleviated part of the near-term systematic risks, but I believe the risks in the region remain high.

However, while the overall stock market is edging higher with 70% of U.S. stocks above their respective 200-day moving average (MA), reverse-merger stocks continue to face a tough climate based on mistrust.

The Bloomberg Chinese Reverse Mergers Index (CHINARTO) has witnessed a significant decline due to the numerous allegations related to accounting frauds.

Cornerstone Research recently published the Securities Class Action Fillings report for 2011. According to the report, the Class Action Fillings (CAF) Index reported 188 fillings in 2011, compared to 176 fillings during 2010, up 6.8% year-over-year. The average number of filings from 1997 to 2010 was 194, so the numbers are not unreasonable compared to the average.

The litigation against Chinese stocks listed on U.S. exchanges through reverse mergers accounted for a major component of filings activity during 2011. Out of the reported 188 filings, 33 were related to the Chinese stocks via reverse mergers, compared to nine in 2010, an increase of 267%. And since 2010, there have been 42 class-action filings with Chinese stocks that listed through the reverse-merger route.

Most of the filings for the Chinese stocks via reverse mergers (24 out of 33) materialized during the first half of 2011, so the situation has improved, with much fewer Chinese stocks listing via reverse mergers. There are reports that four Chinese stocks are set to be listed in the U.S., but none are via the reverse-merger route and instead are via the normal and tougher listing route. What this is doing is making Chinese stocks that list here meet the strict listing requirements, so we could see only the better Chinese stocks list here.

It has been evident from the data that Chinese fraudsters have been taking advantage of easy loopholes in the reverse-merger process, which has cost investors billions of dollars. In light of this, the Securities and Exchange Commission and exchanges have adopted strict rules for reverse-merger listing that will it difficult to cheat. The end result will be a better flow of reverse-merger and Chinese stocks to the market, which should help to add some lost confidence to the reverse-merger process.

A good strategy to use in searching for investment ideas is to follow the institutional money flow, which I discussed in Making the Best Investments: Should You Follow the Pro Money?