Formally established in 1993, the European Union, often referred to simply as the EU, is a political and economic union established after the ratification of the Maastricht Treaty by members of the European Community. It has since expanded to include some Central and Eastern European nations. The establishment of the European Union provided for the creation of a central European bank and the adoption of a common currency: the euro. The idea behind the European Union is to create a single geographical market where goods, services, and money can be exchanged freely.

U.S. consumer credit jumped in March 2012 by the most in over a decade (source: Bloomberg, May 7, 2012).

Sure, we heard the usual bullish economists and election-hungry politicians say, “Here’s proof that consumer spending and consumer confidence is improving.”

But a look closer look at the number reveals more of the same for consumer confidence and what’s ahead for the remainder of 2012…

The big jump in U.S. consumer credit in March didn’t come because of consumer spending; the big jump came as a result of more student loans and more car loans.

With the U.S. unemployment rate high and youth unemployment at 13.2% here in the U.S. (source: Bureau of Labor Statistics), it is no wonder people who cannot find work are returning to school. This doesn’t feel like consumer confidence to me. (Also see: U.S. Durable Goods an Ominous Sign.)

Congress is thinking of raising interest rates dramatically on new student loans taken after July of this year; hence people are jumping on the “go back to school” bandwagon now.

As for those car loans, financial company Nomura Group just released a research note stating that the average age of cars on the road in the U.S. is more than 10 years old—the oldest on record!

The research goes on to say that strong buying of new cars is probably a necessity and not a reflection of true consumer demand, because the old clunkers will simply give out at some point.

Doesn’t sound like a vote for consumer confidence or for consumer spending going forward.

I have written in these pages about multiple studies here in the U.S. that have detailed the plight of the average American; namely, dipping into their savings or borrowing to make ends meet.

There is another study that has just been released that puts a damper on the supposed consumer confidence and consumer spending recovery.

Connecticut-based LIMRA Research conducted a survey the results of which found that 49% of Americans were not saving for retirement. More than half of those who weren’t contributing said they couldn’t afford to. An incredible 56% of those surveyed, from the ages of 18 to 34, said they were currently not contributing to a pension plan.

This is a retirement crisis, as these people will have to work during their retirement to make ends meet. How can we get consumer confidence going under this scenario?

Forget what the mainstream media and politicians are telling you; this is not a sign of consumer confidence, but consumer distress. This is not a sign of future consumer spending, but of spending contraction. (See: “Economic Recovery” Theory Debunked.)

How will the balance of 2012 go? Terrible. If the economic statistics are any indication, consumer confidence seems to be an illusion. As I have been predicting, the economy will deteriorate as we move along in 2012.

A recession is sailing into America. I just can’t figure out if it coming across the Atlantic from recession-ridden Europe or across the Pacific from economically slowing China.

Michael’s Personal Notes:

Do the politicians really have any idea what is going on?

It was only a few weeks ago that the prime minister of Spain said the country’s banks were so sound that they required no government bailouts.

Fast forward…

Last week, the government of Spain was forced to provide a government bailout for Spain’s third-largest bank; the bank with the greatest exposure to the collapsing Spanish housing market.

The problem is that Spain’s economic expansion prior to 2008 was based on a housing market boom. Spain’s banks were overleveraged in their lending practices. That is, for example, they lent out $6.00 for very $1.00 of money they actually had on their books.

In good times (like in the U.S. prior to 2007), the banks can handle this leverage, because the housing market is moving up. But when the market collapses, there is no money to pay for that debt; hence the government bailouts.

Unfortunately, unlike the U.S. that can print money to bail out its banks, Spain cannot provide the government bailout money required, because it simply doesn’t have the money to do so. The (central) Bank of Spain is saying that the amount that Spain would need to put aside to help its troubled banks is €175 billion. But what the government bailout provision leaves out is that there is €1.4 trillion in loans that are vulnerable (source: Bloomberg, May 10, 2012).

A staggering amount of corporate and housing market debt is in jeopardy, because the Spanish banks are in trouble. The main reason why Spain’s banks are not making money is that Spain is in a recession. In the first two quarters of 2012, Spain’s GDP contracted 0.3%.

While the Spanish economy contracts, one-in-four people in Spain are unemployed and one-in-two young people are unemployed!

With the government admitting that economic growth is continuing to fall, this puts pressure on corporations in Spain and on their debt, which the Spanish banks are exposed to, potentially requiring further government bailouts.

The Spanish housing market has lost 30% since 2008 and shows no signs of slowing as more homes are left empty and the high unemployment rate is pushing prices lower. This means the housing market debt on the books of Spain’s banks is worth less and less.

Although the Spanish government is putting on a brave front, the only way it can support the €1.4 trillion in debt is if its revenues increase or it prints money. With one in four people unemployed in Spain, government revenues are falling, not rising. As for money printing, Spain is part of the eurozone. Germany is steadfastly against printing euros because of the inflation risk money printing presents.

If this seems like a perfect death spiral, wait; there’s more!

Germany understands what is occurring and realizes that the Spanish government is going to need a government bailout from Europe, because the Spanish government doesn’t have enough money.

Germany wants Spain to stick to the austerity measures and so reduce its budget deficit. With a contracting economy and high unemployment and with government bailouts of the banks, this will not be possible.

Yes, it is a perfect death spiral. The European Union is falling apart at the seams. This will put further pressure on the earnings of American corporations and on the U.S. stock market.

Where the Market Stands; Where it’s Headed:

We are in a bear market rally in stocks that started in March of 2009. The rally is now more than three years old, so I would classify it as a typical post-crash rally. However, the bear market rally is getting old and tired.

While the purpose of a bear market rally is to lure investors back into stocks (this rally has done an excellent job of it), there are now clear signs that economies worldwide are slowing. We are getting close to a top for stocks unless the Fed drops QE3 on us faster than we thought it would.

What He Said:

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

Do the politicians really have any idea what is going on?

It was only a few weeks ago that the prime minister of Spain said the country’s banks were so sound that they required no government bailouts.

Fast forward…

Last week, the government of Spain was forced to provide a government bailout for Spain’s third-largest bank; the bank with the greatest exposure to the collapsing Spanish housing market.

The problem is that Spain’s economic expansion prior to 2008 was based on a housing market boom. Spain’s banks were overleveraged in their lending practices. That is, for example, they lent out $6.00 for very $1.00 of money they actually had on their books.

In good times (like in the U.S. prior to 2007), the banks can handle this leverage, because the housing market is moving up. But when the market collapses, there is no money to pay for that debt; hence the government bailouts.

Unfortunately, unlike the U.S. that can print money to bail out its banks, Spain cannot provide the government bailout money required, because it simply doesn’t have the money to do so. The (central) Bank of Spain is saying that the amount that Spain would need to put aside to help its troubled banks is €175 billion. But what the government bailout provision leaves out is that there is €1.4 trillion in loans that are vulnerable (source: Bloomberg, May 10, 2012).

A staggering amount of corporate and housing market debt is in jeopardy, because the Spanish banks are in trouble. The main reason why Spain’s banks are not making money is that Spain is in a recession. In the first two quarters of 2012, Spain’s GDP contracted 0.3%.

While the Spanish economy contracts, one-in-four people in Spain are unemployed and one-in-two young people are unemployed!

With the government admitting that economic growth is continuing to fall, this puts pressure on corporations in Spain and on their debt, which the Spanish banks are exposed to, potentially requiring further government bailouts.

The Spanish housing market has lost 30% since 2008 and shows no signs of slowing as more homes are left empty and the high unemployment rate is pushing prices lower. This means the housing market debt on the books of Spain’s banks is worth less and less.

Although the Spanish government is putting on a brave front, the only way it can support the €1.4 trillion in debt is if its revenues increase or it prints money. With one in four people unemployed in Spain, government revenues are falling, not rising. As for money printing, Spain is part of the eurozone. Germany is steadfastly against printing euros because of the inflation risk money printing presents.

If this seems like a perfect death spiral, wait; there’s more!

Germany understands what is occurring and realizes that the Spanish government is going to need a government bailout from Europe, because the Spanish government doesn’t have enough money.

Germany wants Spain to stick to the austerity measures and so reduce its budget deficit. With a contracting economy and high unemployment and with government bailouts of the banks, this will not be possible.

Yes, it is a perfect death spiral. The European Union is falling apart at the seams. This will put further pressure on the earnings of American corporations and on the U.S. stock market.

Where the Market Stands; Where it’s Headed:

We are in a bear market rally in stocks that started in March of 2009. The rally is now more than three years old, so I would classify it as a typical post-crash rally. However, the bear market rally is getting old and tired.

While the purpose of a bear market rally is to lure investors back into stocks (this rally has done an excellent job of it), there are now clear signs that economies worldwide are slowing. We are getting close to a top for stocks unless the Fed drops QE3 on us faster than we thought it would.

What He Said:

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

Since 1945, Greek elections have swung back and forth between two parties, similar to the Republicans and the Democrats here in the U.S.—very predictable.

With the Greek unemployment rate at a record 21.7% in February and youth unemployment at an alarming 54%, the elections in Greece held earlier in May saw this 60-year political cycle come to an abrupt end.

The parties that support the European Union and the austerity measures—and the parties that traditionally held power for over 60 years—only garnered 34% of the vote. The other minority extreme right-wing and left-wing parties, which gained seats as a consequence, stand against the European Union and the austerity measures.

Greek law states that the minority party with the most votes must attempt to form a coalition government in order to run the country. The party in support of the European Union and the austerity measures was, of course, unsuccessful in forming a coalition government.

According to Greek law, the party with the second-most votes is next to try to form a coalition government. Although these extreme parties are against the European Union and the austerity measures, their ideals are so different that they were unable to form a coalition.

Now that this has failed, Greek law states that another election must be held in the hopes of finding a majority government. This new election should take place sometime in mid-June. Of course, there is no way that the pro-European Union groups will get elected. The question is: will the people of Greece provide either the more extreme left- or right-wing parties with enough seats to run the country?

The European Union has already responded to this shift in Greek politics by saying that, if they don’t implement the austerity measures required of them, the country will not get any further bailout money. And if Greece does not receive the bailout money, it will be in default and will risk having to leave the European Union.

This situation is further complicated by the fact that certain interest payments on Greek bonds are due this week. Will Greece be able to pay for them? If the country doesn’t pay, it will be in default and could cause a cascade of events that may lead to Greece having to leave the European Union.

I can see the European Union holding together even if Greece leaves, as everyone has been painfully aware over the last few years that Greece will be unable to pay its massive debt.

However, besides Germany, there are not many other countries that are happy with the austerity measures. Therefore, will Greece leaving make Spain, Italy, Portugal, Ireland and now France take their leave of the European Union?

The other issue is that, if Greece defaults on its debt, well, someone is going to lose a lot of money. That someone could be a German or French bank. Also, the derivatives tied to Greece defaulting mean that someone will lose a lot of money. The European Union may need to step in and print who knows how much money to contain the crisis.

This mess is cloudier than trying to look through a body of water after an oil spill.

Compounding things…Ireland is holding a referendum at the end of May to vote on the austerity measures imposed on it by the European Union. Will Ireland indirectly vote to leave the European Union?

The situation in the European Union continues to erode. For the first time, one euro trades below $1.30 U.S. With so many U.S. S&P 500 companies having revenue exposure to Europe, is it any wonder the stock market has been in a free-fall as of late?

Michael’s Personal Notes:

When the competitors of Cisco Systems, Inc. (NASDAQ/CSCO) reported weaker first-quarter 2012 earnings, market participants bid up Cisco’s stock believing that Cisco was taking market share away from its competitors.

Polycom, Inc. (NASDAQ/PLCM), a videoconferencing company, reported weaker first-quarter earnings. This competitor to Cisco noted that lower government spending caused revenues to decline more sharply than anticipated.

The company also provided its earnings outlook for 2012. It noted that the economic landscape looked weak. It cited business in North America and in Asia as being weak. This earnings outlook flies in the face of those who say that the U.S. economy will remain strong, despite what the rest of the world is doing.

Juniper Networks, Inc. (NYSE/JNPR) is a major communications equipment maker, the main competitor of which is Cisco Systems. Juniper’s earnings outlook for 2012 was provided with a very cautious tone. The company believes that the slowing U.S. economy and the European debt crisis are preventing telecommunications companies from spending, which in turn will affect its bottom line.

Many traders thought it is easy to blame a weak U.S. economy and the European debt crisis on a weak earnings outlook when Cisco is taking market share.

Cisco System reported earnings last week, which were fine, but its earnings outlook for 2012 painted the picture of a very nervous business sector that was unwilling to spend on Internet gear and a weaker global economic environment.

Despite the cash large corporations have on their balance sheets, they are not spending. Cisco noted that the European debt crisis not only meant weaker consumer and business spending in Europe, but it is also preventing large corporations from spending here in the U.S. and in Asia because of the perception of a coming global economic slowdown.

Yes, business in Asia was strong in the quarter for Cisco, but the company is uncertain about its earnings outlook in Asia going forward. Cisco is considered a leader in the technology space and its earnings outlook is a barometer of how the economy is doing.

Cisco also noted that weak government spending in the U.S. and in Europe—with the European debt crisis—was also an issue that was going to persist in 2012.

Due to Cisco and other technology firms’ weak earnings outlook, Internet technology spending growth worldwide has been slashed by many forecasters and analysts for the remainder of 2012.

There are clear signs the U.S. economy is weakening considerably (see: The Missing Economic Recovery), especially when considering the earnings outlook for the remainder of 2012 from key companies within the S&P 500. (Also see: Many Public Companies Predicting Soft Earnings for Balance of 2012.)

Where the Market Stands; Where it’s Headed:

After a great start to the year, May is proving to be a terrible month for stocks. The Dow Jones Industrial Average has dropped 518 points since the beginning of May.

Corporate insider selling of stock is at a record high. I’ve written repeatedly about the recessions amongst European countries and about the slowdown in China. Now corporate America is pulling back on its corporate earnings forecasts for the remainder of 2012.

Is this the end of the bear market rally that started back in March of 2009? We’ll soon see, dear reader, we’ll soon see.

Note on Gold:

Reports in the media have it that investors are unloading their gold and running for the “safety of the U.S. dollar.” I don’t buy this at all. Firstly, central banks have been big buyers of gold bullion in 2012. Central banks just don’t turn around and dump gold they just bought.

Secondly, the only “security” in the U.S. dollar is the fact that it’s a currency backed by a central bank that will simply print more of it in the event more dollars are needed. Money printing is something Germany has held the European Central Bank back from.

So you tell me, dear reader. Would you rather own a currency that is limited in circulation or one that is issued by a country that just prints more of it as needed?

Finally, after years of rising gold bullion prices, we are seeing a meaningful correction in the gold market. Gold is up five percent from where it traded one year ago. It’s all in the way you look at it and where you see inflation and the U.S. dollar in the next two to three years out.

I’m in the camp that sees the glass as half-full. When I could, over the past decade, during the bull market in gold bullion, I have been buying gold-related investments as the price of the metal corrected. I believe this strategy has worked well for me.

What He Said:

“Bonds could now be a buy: Bonds rise in price when interest rates fall, as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in PROFIT CONFIDENTIAL, July 24, 2006. The yield on 10-year U.S. Treasuries fell from five percent in the summer of 2006 to 2.4% in October 2011—doubling the price of the bonds Michael recommended.

Gold prices have been all over the chart and moving in a sideways consolidation channel since late September, caught between $1,800 at the top end and $1,550 at the bottom end.

After a recent move towards $1,800 in late February, the metal topped, and it is again struggling to hold ground at around $1,650 with key support at $1,600 to $1,625.

Gold had been on a four-day winning streak, but the June Gold remains below its 200-day moving average (MA) of $1,702 and 50-day MA of $1,680. There is a bearish death cross on the chart, so there could be more weakness.

Failure to rally to the 50-day MA could see a subsequent move down towards $1,600, which I would view as a decent buying opportunity to buy or add to a position. Moreover, a further decline to $1,550 would represent an excellent buying opportunity for the metal.

The reality is that the price of gold is currently driven by two key variables—global risk and world demand. I feel both factors are supportive of higher prices.

I feel there will be tough years ahead for the European Union and eurozone, along with the debt mess here. Spain is in its second recession and in trouble. Read my thoughts in Don’t Jump on the European Bandwagon Yet.

China continues to stall, with the first-quarter gross domestic product (GDP) at 8.1%, below the 8.3% to 8.5% estimates, and the lowest reading in 11 quarters.

In the Middle East, there are mounting issues in Syria and speculation that Iran is close to having the knowledge to develop nuclear weapons.

The second major variable that could drive gold higher is the higher demand from China and India. China is expected to jump ahead of India as the top consumer of the yellow metal in 2012. China’s demand for gold is estimated to surge 20% this year, according to the World Gold Council. This demand has helped to drive up prices and will continue. Moreover, there are thoughts that China wants to reduce its buying of U.S. debt and instead accumulate physical gold. Should this happen, it would give a major push for prices.

Staying in the Asiatic region, I also expect gold to continue to be in high demand in India, a major consumer of the precious metal. Demand in India could be massive and expand at 10% to 15% this year, up from an estimated five to seven percent in 2011. India imported a record 969 tonnes of the yellow metal in 2011, according to the World Gold Council.

Given the current downward pressure, my advice is to buy gold stocks on price weakness, with a break below $1,600 representing a great opportunity to buy.

I’ve been highlighting over the last few months how a key indicator, stock selling by corporate insiders, has continued to rise as the stock market rally continued.

Why do we need to pay attention to what corporate insiders are doing? Corporate insiders are officers, directors and the largest shareholders of corporations. They have a deep understanding of their company, market and earnings outlook.

When corporate insiders are buying stock in the companies they work for, investors often think this is a key indicator to buy, as it may indicate that the company’s earnings outlook is improving. When insiders are selling, it could be a key indicator something is up, and so investors often consider selling.

Argus Research has just released its corporate insider sell-to-buy results for April 2012. In March, the insider sell-to-buy ratio was 5.77-to-1, which means that, for every 100 shares insiders bought, 577 shares were sold by insiders. In April, this key indicator deteriorated further to 6.56-to-1 (source: MarketWatch, March, 6, 2012).

The last time this key indicator had this high a reading was May 2011, which coincided with the last market top!

After two months of consistent and increasing corporate insider selling, a correction at the very least usually ensues, according to this key indicator.

Another company that follows corporate insiders, Trim Tabs Research, has seen its sell-to-buy insider ratio go from 5-to-1 in January to 15-to-1 in February, to 20.8-to-1 in March!

Corporations have been warning about their 2012 earnings outlook, as evidenced by the fact that corporate earnings growth has been slowing due to the global economic slowdown.

While some remain bullish on the prospect for higher stock prices, these key indicators of corporate insider selling are indicating that, if investors want to buy shares of corporations, corporate insiders are ready to sell their shares to them.

This is not a good sign on what has been historically a reliable key indicator. Given the earnings outlook for corporations for the remainder of 2012, I’d rather follow the corporate insiders, as I believe they know more about what is happening within their firms than the rest of us do.

Michael’s Personal Notes:

The action in the gold bullion market was rocky yesterday. Here’s what my esteemed colleague Robert Appel, BA, BBL, LLB, has to say about gold:

“Yesterday, the $1,630-per-ounce pivot in gold bullion was broken to the downside. This coincides with massive problems in Europe and strength in the greenback. As a result, we expect the gold bullion complex to work even lower before finding solid support.

“By no coincidence, the ‘gold bashers’ have brought new talent to their CNBC road show, a spectacle in which they explain what a terrible investment gold bullion is!

“First Warren Buffett, now Bill Gates. This is in spite of the fact that, over the last 10 years, the price of gold bullion has outperformed both Berkshire Hathaway and Microsoft both! What is going on? On one level, clearly the chaos out of Europe is, indeed, chaos. As we have reported, the European Union, that ‘grand design’ from the ‘one-worlders,’ was a disaster.

“Welding together the economies, the habits, the social structures, and the currencies, of two cultures as far apart as Greece and Germany, for example, made no sense then—and makes no sense now.

“And the one thing all, repeat ALL, Western nations agree on is that they don’t need strong gold bullion right now to tempt buyers away from paper currencies, which are already in a death spiral, hence the massive selling at the paper level. (Note that we said ‘paper level’—as Eric Sprott, one of the largest players in the realm of physical gold bullion recently reported, there is an actual shortage of hard bullion at these prices for those who want delivery of the asset instead of the script).

“But, as with anything, you have to be careful what you wish for. A strong U.S. dollar will choke the already-fragile U.S. recovery to death, something that the boys on the Hill don’t want or need in an election year.

“So, amid the chaos, amid the confusion, our view is that the party is not over until it’s over. By the end of the summer, or early fall at the latest, we expect a spectacular recovery in the gold bullion complex. And we also expect the metal to return to the $1,630-per-ounce pivot sooner rather than later.”

Personally, I like to buy when the majority of investors are selling and sell when the majority of investors are buying. It is in that vein that I bought more gold-related investments yesterday. (Also see: Is the Bull Market in Gold Over?)

Where the Market Stands; Where it’s Headed:

It could have been much worse for the stock market yesterday. After all, most major European countries are back in recession. China’s economy is slowing. Japan is back at it…printing money again. And here in America we have a situation where jobs are not being creating and the central bank is buying government debt.

All this happening while the Dow Jones Industrial Average trades at 13,000…that’s 15 times our estimated earnings for stocks that trade in the index. Fifteen times earnings is a good number when earnings are growing…but not when corporate profits are stagnant, as they are today.

Since March 2009, I have been saying that we are in a bear market rally. My opinion remains unchanged. The rally has been extended by artificially low short-term interest rates, out-of-control government debt and money printing…events that cannot go on indefinitely.

The stock market is putting in a huge top here at which point the bear market rally will retire. (Also see: Proof Stock Market Rally’s Just an Old-fashioned Bear Trap.)

What He Said:

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