Eurozone unemployment has hit its highest level since the euro was introduced (1999). Among the 17 countries that make up the eurozone, December statistics show that 16.5 million people are seeking work, resulting in an unemployment rate of 10.4% (source: European Union’s Statistics Office).

 Sure, there are bright spots. German unemployment fell to 6.7%, while Austria holds the lowest jobless rate in the eurozone of 4.1%, with the Netherlands a close second at 4.9%.

But the good news stops there. The highest unemployment rate in the eurozone can be found in Spain at a staggering 23%, a level not visited since 1993. Spain itself, partly due to austerity measures, sees GDP contracting by 1.5% in 2012—as if the country didn’t have enough problems!

 Italy’s unemployment rate reached 8.9%, an eight-year high, as it institutes austerity measures. Greece’s unemployment rate stands at 19.2%, while Ireland’s latest January figures reveal a 14.2% unemployment rate. France’s unemployment rate reached a 12-year high of 9.3%, as the country continues to implement austerity measures.

 Despite these staggering numbers, the news get worse when December youth (ages 15-24) unemployment rates are extracted from the eurozone data:

 Spain: 51% youth unemployment rate

Greece: 47% youth unemployment rate

Italy: 31% youth unemployment rate

Portugal: 31% youth unemployment rate

Eurozone: 21% youth unemployment rate

 At the basic level, the question is: how is the next generation supposed to create families and do their part as consumers when they can’t find work? Dear reader, look at those numbers again and think of the implications for the countries listed. Out of necessity, children have to remain with parents well past their working age. Families are forced to live together under one roof because they can’t make ends meet. Growth and prosperity cannot be fostered in the eurozone in this type of environment.

 I understand Germany’s insistence for austerity measures in eurozone countries: in order to bring down government deficits and get government debt under control. However, don’t use the word “austerity” in the same breath as “growth.”

 Austerity measures have meant lost jobs and a reduction in wages for countries, which in turn reduce government revenue, which means governments cannot meet their budget targets imposed by the austerity measures, which in turn means deeper job cuts—a snake eating its own tail.

 The eurozone had better be careful, because these numbers reveal a breaking point. This level of unemployment could lead to social unrest; where the unemployed in Greece, Ireland, Portugal and Spain take to the streets and demand an exit from the eurozone and a return of their independence. With a recession in 2012, the situation will only worsen in the eurozone.

 In my opinion, saying the U.S. will escape the economic devastation in Europe is like saying the U.S. economy will not be affected by a fall in housing prices (as one Central Bank Chief said after housing prices started deflating in 2006). (See: Economic Slowdown for 2012 Will Be Worldwide.)

 Michael’s Personal Notes:

The U.S. Congressional Budget Office (CBO) just released its latest report on its projected budget deficits for the next 10 years.

 Under current laws and tax policies, it foresees a budget deficit in 2012 for the U.S. government of $1.1 trillion. This is based on GDP growth of two percent. In 2013, the CBO expects the budget deficit to shrink significantly to $585 billion; based on the assumption of GDP growth of just 1.1% (I’ll believe it when I see it).

 What is shocking is that we are going to have another trillion-dollar budget deficit this year, as government debt in this country continues to climb at an alarming rate. That means that the debt ceiling, right after the election, is going to have to be increased again.

 A ceiling of $16.394 trillion currently and counting!

 Furthermore, if we take the GDP forecasts from the CBO, which I believe could be optimistic, then how does the budget deficit supposedly shrink to just $585 billion in 2013 with GDP of just 1.1%? The answer is the expiration of tax provisions.

 If current tax breaks are eliminated, then Federal Tax Revenues are:

 $2,302 trillion—fiscal 2011 (actual)

$2,523 trillion—fiscal 2012 (estimate)

$2,988 trillion—fiscal 2013 (estimate)

 That means that, in just two short years, taxes in this country will increase 30%(?).

 I’m not criticizing the CBO. They are going by the laws currently in place, and projecting budget deficits accordingly. What I want to point out, dear reader, is that, with GDP growth of two percent this year and 1.1% next year, how is the current or newly elected administration going to allow these tax provisions to expire?

 With the average American in dire straits and the economy weak, will the Bush era tax cuts not be renewed? Will all of the other benefits that were enacted because of the financial crisis be allowed to expire—in spite of government debt—when we haven’t come out of this extended recession/depression?

 I’m contending that the U.S. is not Europe and that the current/new administration will continue past policies. I believe these tax breaks will not be allowed to expire. Should that be the case, we are going to face another trillion-dollar budget deficit in 2013.

 Time to raise the debt ceiling yet again…

 As if that were not dire enough, the CBO admitted that, even under its most conservative estimates, the costs of Medicare, Medicaid and other healthcare programs will double over the next decade to at least $1.8 trillion a year, placing an incredible strain on the budget deficit.

 The CBO itself warns that these costs, combined with Social Security, at current estimates, are not sustainable in the longer term. Revenues need to increase substantially to offset this government debt or the budget deficit will balloon out of control.

 Is it any wonder that the Federal Reserve took drastic steps just a few weeks ago, saying it will keep interest rates near zero until late 2014? The economy needs to grow again so that the tax breaks can be rescinded and tax revenues can grow again, thus resulting in shrinking budget deficits and government debt. Right now, this scenario is facing a steep, uphill climb, because growth is nowhere to be found.

Be wary of the recent stock market rise. We are witnessing a bear in sheep’s clothing. I continue to believe that the only viable insurance against the above numbers consists of gold bullion and the undervalued gold mining shares. (See: Gold Stocks: There’s Value in Them There Hills.)

 Where the Market Stands; Where it’s Headed:

 For the benefit of my new readers, here is where I believe we are with the stock market, the big picture:

 A 25-plus-year bull market in stocks ended in October of 2007. At that point, a secular (which means “long”) bear market was born. By March of 2009, Phase I of the bear market was over (bear markets have three phases), as stocks had fallen 55% from their October 2007 high.

 The bear market entered Phase II in March of 2009 and that’s where we are now. A Phase II bear market is a rally in the confines a secular bear market. It’s when stock prices rally from oversold levels. It’s when the bear market tries to lure investors back into stocks by giving investors the impression that all is well with the economy and stocks are safe again. Phase II bear markets tend to last three to four years.

 The next phase of the secular bear market is Phase III. That’s when investors are caught off guard because everything looks rosy, but stock prices start to decline. Phase III bear markets bring stocks back down to the level where the Phase I bear market started, in this particular case, 6,440 for the Dow Jones Industrial Average.

 That’s why I keep telling my readers: Enjoy this bear market rally while it lasts, because it’s not permanent.

 What He Said:

 “Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi in PROFIT CONFIDENTIAL, May 27, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

Under current laws and tax policies, it foresees a budget deficit in 2012 for the U.S. government of $1.1 trillion. This is based on GDP growth of two percent. In 2013, the CBO expects the budget deficit to shrink significantly to $585 billion; based on the assumption of GDP growth of just 1.1% (I’ll believe it when I see it).

What is shocking is that we are going to have another trillion-dollar budget deficit this year, as government debt in this country continues to climb at an alarming rate. That means that the debt ceiling, right after the election, is going to have to be increased again.

A ceiling of $16.394 trillion currently and counting!

 Furthermore, if we take the GDP forecasts from the CBO, which I believe could be optimistic, then how does the budget deficit supposedly shrink to just $585 billion in 2013 with GDP of just 1.1%? The answer is the expiration of tax provisions.

 If current tax breaks are eliminated, then Federal Tax Revenues are:

 $2,302 trillion—fiscal 2011 (actual)

$2,523 trillion—fiscal 2012 (estimate)

$2,988 trillion—fiscal 2013 (estimate)

 That means that, in just two short years, taxes in this country will increase 30%(?).

 I’m not criticizing the CBO. They are going by the laws currently in place, and projecting budget deficits accordingly. What I want to point out, dear reader, is that, with GDP growth of two percent this year and 1.1% next year, how is the current or newly elected administration going to allow these tax provisions to expire?

With the average American in dire straits and the economy weak, will the Bush era tax cuts not be renewed? Will all of the other benefits that were enacted because of the financial crisis be allowed to expire—in spite of government debt—when we haven’t come out of this extended recession/depression?

 I’m contending that the U.S. is not Europe and that the current/new administration will continue past policies. I believe these tax breaks will not be allowed to expire. Should that be the case, we are going to face another trillion-dollar budget deficit in 2013.

Time to raise the debt ceiling yet again…

As if that were not dire enough, the CBO admitted that, even under its most conservative estimates, the costs of Medicare, Medicaid and other healthcare programs will double over the next decade to at least $1.8 trillion a year, placing an incredible strain on the budget deficit.

 The CBO itself warns that these costs, combined with Social Security, at current estimates, are not sustainable in the longer term. Revenues need to increase substantially to offset this government debt or the budget deficit will balloon out of control.

 Is it any wonder that the Federal Reserve took drastic steps just a few weeks ago, saying it will keep interest rates near zero until late 2014? The economy needs to grow again so that the tax breaks can be rescinded and tax revenues can grow again, thus resulting in shrinking budget deficits and government debt. Right now, this scenario is facing a steep, uphill climb, because growth is nowhere to be found.

 Be wary of the recent stock market rise. We are witnessing a bear in sheep’s clothing. I continue to believe that the only viable insurance against the above numbers consists of gold bullion and the undervalued gold mining shares. (See: Gold Stocks: There’s Value in Them There Hills.)

 Where the Market Stands; Where it’s Headed:

 For the benefit of my new readers, here is where I believe we are with the stock market, the big picture:

 A 25-plus-year bull market in stocks ended in October of 2007. At that point, a secular (which means “long”) bear market was born. By March of 2009, Phase I of the bear market was over (bear markets have three phases), as stocks had fallen 55% from their October 2007 high.

 The bear market entered Phase II in March of 2009 and that’s where we are now. A Phase II bear market is a rally in the confines a secular bear market. It’s when stock prices rally from oversold levels. It’s when the bear market tries to lure investors back into stocks by giving investors the impression that all is well with the economy and stocks are safe again. Phase II bear markets tend to last three to four years.

 The next phase of the secular bear market is Phase III. That’s when investors are caught off guard because everything looks rosy, but stock prices start to decline. Phase III bear markets bring stocks back down to the level where the Phase I bear market started, in this particular case, 6,440 for the Dow Jones Industrial Average.

 That’s why I keep telling my readers: Enjoy this bear market rally while it lasts, because it’s not permanent.

 What He Said:

 “Investors have been put into an unfair corner. Those that invested in stocks because they got caught in the tech boom (1999) have seen their investments gone. Now, those that have leveraged heavily to play the real estate game, because it is the place to be (2005), could see the same fate as the stock market investors. Thanks again, Mr. Greenspan.” Michael Lombardi in PROFIT CONFIDENTIAL, May 27, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

Retail sales in the U.S.are estimated to rise 5.1% year-over-year in January, but then post three successive down months, bottoming at 1.5% year-over-year growth in April before steadily rising from May to August, according to The Financial Forecast Center. But while this growth sounds promising for the retail sector, there are other pundits that aren’t as positive. Retail Metrics predicts retail sales to grow two percent in January versus 4.3% in January 2011.

In December, retail sales excluding auto contracted 0.2%, down from 0.3% growth in November. The January reading will be reported in a few weeks.

In the retail sector space, sales have been largely mixed, with discounters and big-box stores faring the best, as shoppers flock to Wal-Mart (NYSE/WMT), Target (NYSE/TGT), and Costco (NASDAQ/COST) stores, along with the popular dollar stores and the massive hyper-supermarkets.

The reality is that consumer spending drives GDP growth. The way consumers spend will likely dictate how the economy will fare in 2012. With consumer spending accounting for about 70% of the GDP growth in this country, it will be critical to get consumers to spend.

Job creation is the most vital variable for the retail sector. The weekly initial claims have fallen below the threshold 400,000 level for weeks. In December, 212,000 jobs were created. The January reading is estimated to show the creation of 168,000 new jobs, but this is not good. The unemployment rate stands at 8.5%, which is too high for a healthy economy and could strangle growth in the retail sector. The Fed estimates that the unemployment rate will hold above eight percent this year. Moreover, economists feel that the economy needs to create at least 500,000 new jobs monthly to drive growth. Of course, I do not expect this will happen until at least 2013.

A strong U.S. housing market is also critical for the retail sector, as homeowners tend to buy new furnishings, including many big-ticket items. This is not happening, as home prices continue to decline dragged down by continued high foreclosures and short sales where homes are dumped below the mortgage value. Just take a look at the stalling electronic and furniture sales.

The key Case-Shiller 20-city Index remains weak and shows price declines continuing across America. If home values decline, consumers will tend to hold back on spending; thereby impacting the retail sector.

The reality is that foreclosures are driving the buying and this does not reflect well for housing price appreciation. It may not be until 2013 until prices start to steadily rise.

Jobs, confidence, and higher home prices are needed to drive spending in the retail sector. Only under this scenario will there be sustained spending and economic growth.

General Motors Company (NYSE/GM), may be struggling with sales at home, but in China, consumers want GM cars! You can read my discussion in General Motors: China’s Top Foreign Automaker.

There are so many reasons to own some gold and very few not to. Being commodities, they are inherently volatile and so are gold stocks. But that’s the risk you take to own a store of value that is unique in the world.

The spot price of silver has also been particularly positive lately. A silver trade is perhaps even more attractive than gold due to its stronger correction. A lot of Street analysts have been saying to buy silver over gold, because it has more potential upside. As a commodity, silver is used in a lot of manufacturing (especially automobiles) and we know that the industrial economy is outperforming a lot of other industries.

There are always attractive trades in mining companies, but you don’t have to take on company-specific investment risk to have some exposure to gold or silver. There are all kinds of exchange-traded funds (ETFs) that have physical ownership of gold or silver bars and/or futures. For a speculator, I’d consider some mining companies along with a physical position in gold and silver. Today, there are even ETFs that allow you to have a leveraged position in the spot price action. A number of funds, for example, use derivatives to give you twice the percentage change in the spot price of silver or gold. You can even use these funds to bet against the commodities.

In this kind of market, there’s no need for investors to rush into anything. However, I do think that the fundamentals are strong enough for investors to have some kind of hedge in their portfolios, even with the spot price of gold near its all-time high. The prospects in the world for sovereign debt defaults, inflation, war, and currency instability are too great not to warrant some exposure to gold and silver. And it isn’t just these factors that make these commodities attractive. It’s the demand/supply factor as well. Despite the fact that many mining companies are awash in cash (see Precious Metals Winners—Three Excellent Wealth-creating Stocks), global supplies of gold and silver are relatively stagnant.

Probably, the better actionable trade at this time would be to buy silver. Large-cap gold stocks haven’t done much of anything over the over the last 12 months and I don’t believe they need to be an area of focus for equity investors. I’d rather own higher dividend paying stocks in other industries. At the micro-cap level, the trading opportunities are plentiful, but event-driven.

This year is going to be a wacky one for global financial markets. There’s so much political interference that is helping capital markets over the near term. Longer-term, however, the structural problems facing most of the world’s mature economies remain and that’s why you want some exposure to gold and silver. Whether economies get better or they don’t, spot prices should still move higher.

Silver was up approximately 20% and gold up just over 11% for the month of January. In fact, if we looked at the entire precious metals sector, like platinum and palladium, they’ve all had great a great month. Is this more to go for these precious metals? I would say yes, although I wouldn’t rush out and buy precious metals tomorrow, as there are always some consolidation gains before moving up.

With the Federal Reserve stating that they are going to leave rates at these low levels until well into 2014, we’re looking at more monetary stimulus worldwide being implemented over the next couple of years. This will inevitably create inflation and a lack of trust in the faith of paper currencies. This added liquidity will also be pushed into commodities, as it has historically. Just look over the last 10 years and you will see gold and silver prices rising along with additional liquidity (money printing).

This creates value in gold and silver mining companies. Both big-cap and small precious metals miners can offer some value for the investor. Barrick Gold Corporation (NYSE/ABX) and Goldcorp Inc. (NYSE/GG) are huge, diversified precious metals mining firms that have a variety of gold and silver mines. This diversification protects the investor from any problems at one specific mine and the scale of production allows a better ability to predict the flow of revenue from gold and silver sales.

Small- and mid-cap precious metals miners can offer the additional upside of being potentially bought out by the bigger gold and silver miners. Firms like Nevsun Resources Ltd. (AMEX/NSU), which has properties bearing gold, along with copper and zinc, start to look attractive to bigger gold firms that need more precious metals reserves. Plus they pay out a small dividend, which is an additional bonus. Getting paid to wait while the price of gold continues to go up is a nice bonus.

In the silver space, an interesting company is Silvercorp Metals Inc. (NYSE/SVM). This is a company with $1.00 of cash per share, forward price-earnings ratio of 12, and revenue that continues to grow. Profit margins are a healthy 38% and the company has no debt. With prices of gold and silver, as well as other precious metals, continuing to move up, you should look at the miners that have a solid resource base, relatively low level of debt, and a consistent history of hitting their targets.

One area that management can’t control is the actual price of gold and silver. But, thanks to the statements by central bankers and politicians around the world, they’ve essentially laid out the roadmap for the next several years. With more monetary stimulus—meaning more money printing—we will get more inflation. This is a hugely bullish sign for precious metals.

Gold and silver will continue to go up as long as central bankers keep the money tap open.

The buying in small-cap stocks suggests continued economy recovery in 2012. So far this year, the housing and manufacturing data are encouraging and point to renewal.

The European debt crisis continues to be a major risk factor. The talks between Greece and its creditors to reach a debt swap deal have yet to be done and there is some speculation the country will be allowed to have a form of controlled default. The problem is that this would likely send jitters through the eurozone and global markets and wreak havoc.

A positive January indicates an up year for stocks in 2012 about 78.3% of the time, according to the Stock Trader’s Almanac, albeit this failed to materialize in 2011.

And, while the upward advance is encouraging, you might recall that there was a similar start in 2011 that ended up in a mixed trading year, with tech and small-cap stocks negative.

While investor sentiment continues to be bullish and market breadth positive, the lack of mass market participation is worrisome and makes stocks vulnerable to downside risk in the event of bad news surfacing in the U.S. and globally.

The charts of the key stock indices are strong; the blue-chip Dow Jones Industrial Average is showing a bullish golden cross with the 50-day moving average (MA) holding above the 200-day MA. On Wednesday, the chart of the S&P 500 turned more bullish, with the 50-day MA breaking back above its 200-day MA, which could signal more gains ahead.

The top two performers, the NASDAQ and Russell 2000, are holding on to a death cross, but even this may turn higher if the buying bias continues.

Small-cap stocks look the strongest on the chart at this juncture and will trend higher should the economy continue to improve.

Small-cap stocks tend to fare well following a recession when the economy begins to grow. After the recession ended in 2009, the small-cap Russell 200 advanced 25.28% in 2010, easily outpacing the 11.02% and 12.74% return of the DOW and S&P 500, respectively.

Yet, despite the overall performance of small-cap stocks, Wall Street focuses on large-cap stocks and those where there are investment-banking fees available. The rest generally “fly” under the radar, being largely under-followed and, thus, by extension, largely undervalued.

My advice is to ride the upward moves, but to make sure you have put hedges in place to protect your gains. It’s also never a bad idea to take some profits.

Reverse mergers are currently out of favor and I expect more of the same this year, which I discussed in How 2012 Is Looking for Reverse Mergers.

The S&P 500 Index is forming a new base with 1,300 as the floor so far this year. It will likely test this level, but it’s a good sign if it can stay above it. The stock market’s trading volume has been weak, but this isn’t a big surprise considering the amount of investment risk in the global marketplace and an uninspiring outlook.

Short-term, the stock market can tick higher; perhaps for the first half of the year. There is the solid expectation for about 10% earnings growth this year. So, as long as investor sentiment doesn’t change, stock market action should continue to be positive.

There’s recently been a change in investor sentiment regarding precious metals. The spot prices of gold and silver have been improving and their recent price consolidation could be over. Gold stocks have been under quite a bit of pressure since the beginning of December last year. Their current resurgence mimics the action in the spot price.

I’m still not that bullish about the stock market for the next several years. While I prefer higher dividend paying stocks for the income, as a strategy, I’d rather overweight gold. Corporations are very healthy right now and valuations are reasonable. Still, in this new age of austerity, I don’t see where the Main Street growth is going to come from. Investor sentiment should be strong enough for the current bear market rally to complete the right should formation of the main stock market indices. But the fundamental problems in the U.S. and European economies remain—the big problem being sovereign debt. This issue isn’t being addressed, especially in the U.S. due to this year’s Presidential race. This is a big worry for me, because of all its potential influence: zero growth; inflation; government shutdowns; downgrades; defaults, etc. The age of austerity is upon us and I think the sovereign debt crisis will tighten its grip next year. (See The Policies We Have Today Will Hurt Us Tomorrow.)

For now, investor sentiment is experiencing a well-deserved upswing. There’s lots of good news in the U.S. economy, but it’s not trickling down to Main Street. Progress, or growth, is mostly being experienced by the industrial economy, which is now a smaller portion of GDP.

As I’ve been writing, short-term, the stock market is looking okay, with investor sentiment, corporate earnings, and a fair valuation all helping out. This year should pan out, but I’m worried about the next couple of years after the election.

When Whirlpool Corporation (NYSE/WHR), the world’s largest appliance maker, cited higher material costs as one of the major factors that impacted its latest earnings report, you can see rising prices again. The company is focused on reducing costs and raising prices, in order to counteract this.

The Hershey Company (NYSE/HSY), a global leader in chocolate and sugar confectionery, released a strong earnings report. However, it wasn’t an increase in demand that spurred their earnings report; instead, the company was able to raise prices enough to offset the increase in the cost of its inputs.

The Proctor & Gamble Company (NYSE/PG), one of the world’s largest consumer products makers, lowered its 2012 estimates due to—along with foreign exchange rates—higher commodity costs. The company is attempting to offset these with multiple measures, including raising prices.

These blue-chip leaders are all citing rising commodity prices as putting pressure on their margins and earnings reports. And most of these blue-chips have been able to offset higher commodity prices, as detailed in their earnings report, by raising prices to the end consumer.

There are two trends happening here, my dear reader…

Since the Federal Reserve made its historic announcement last week that it would be keeping interest rates near zero until late 2014, commodity prices have resumed their rise. Mattel, as an example, believes that commodity prices will continue to rise in 2012, as indicated in its latest earnings report.

The other trend that is critical to highlight is that these blue-chip companies have been, by and large, able to maintain their margins by raising prices.

I’ve been talking about how strained the American consumer is. And since the blue-chips I’m talking about above are multinational companies, it is safe to say that European consumers are feeling the pinch as well, while even economies in Asia are slowing, pressuring their consumers.

As 2012 rolls along and the global economy continues to slow, will these blue-chip companies be able to pass along higher prices to consumers? I doubt it. But if they don’t, they’ll hurt their margins, earnings reports, and share prices. If they do raise prices, inflation will become a problem for the end consumer—who is squeezed already with no wage growth and no jobs. It’s a no-win situation.

Where the Market Stands; Where it’s Headed:

Yesterday was a nice start to the month of February. Since the beginning of 2012, the Dow Jones Industrial Average has risen 4.1%. Could we be getting close to that final blow-off for the bear market rally I’ve been waiting for? Maybe. After all, the Dow Jones is getting closer and closer to that magic 13,000 level.

We are in a bear market rally in stocks that started in March of 2009.

What He Said:

“We will wish Greenspan never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in PROFIT CONFIDENTIAL, April 27, 2004. Michael first started warning about the negative repercussions of Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.

The U.S. economy cannot recover unless the U.S. housing market recovers. As a past “real estate man,” (in my life), I’ve never seen an economic recovery unaccompanied by a real estate market recovery.

There was a lot of speculation going into 2011 that it would be a year for the U.S. housing market to find a bottom. Well, the U.S. housing market hit a “bottom” last year, but not one to build upon.

U.S. new home sales fell 2.2% in December, which closed out 2011 with 302,000 new homes during the year, down from 323,000 new home sales in 2010 (Source: U.S. Commerce Department). In terms of number of units sold, this makes 2011 the worst year on record for new home sales—since 1963. So much for a U.S. housing market recovery.

Even though mortgages are at historically low interest rates, the low rates are not translating into new home sales. Sure, fear of further price declines in the U.S. housing market is discouraging people from buying new homes and directing consumers to rent instead, which I’ve been talking about.

And although fear of further home price declines may play a role, I’m more inclined to believe that the stagnant jobs market and weak economy are resulting in the greatest fear: uncertainty. This is what is really driving more people to rent homes instead of buying homes.

There are those still forecasting a rebound in 2012 for the U.S. housing market, but as I’ve been talking about in PROFIT CONFIDENTIAL, government estimates for foreclosures are still high at 1.8 million homes to be foreclosed upon for each of 2012 and 2013 (source: Federal Reserve Bank of New York). That will place serious pressure on home prices and new home sales; builders are going to be very hesitant towards breaking new ground.

Another factor that will pressure the U.S. housing market is the typical consumer having to pay down those debts and save, after the consumer credit-induced spending spree that occurred late in 2011.

Over the last month, I’ve been talking about how consumer spending cannot be maintained at this pace, since it is based on credit—debt—and not an increase in wealth or an increase in wages (both of which have stowed away on a ship years ago and are lost somewhere in the middle of the ocean).

The Commerce Department just reported that personal income advanced at the fastest pace in nine months in December, probably due to year-end bonuses. Still, with the nice bump in wages, did the consumer take the extra money and spend? No. The savings rate increased to a five-month high, as consumers remained frugal.

If we look at the average family household with still-high debt levels, no wage growth, an uncertain economy, and high gas prices, how can the average American be expected to spend or go out with great confidence and say, I want to buy a home because the U.S. housing market is cheap?

Watch out for those homebuilder stocks that have been rising lately. And be suspicious of this past January’s stock market rally—it will not be a barometer of what’s ahead for 2012.

For the record: my prediction at the beginning of 2011 was for home prices in the U.S. to decline between five percent and 10% in 2011. Final actual figures have not yet been released yet. Once I get them, I will of course pass them on to my readers. For 2012, I’m predicting U.S. housing prices will fall again—about five percent this year.

Michael’s Personal Notes:

When the world’s largest toy company—Mattel, Inc. (NASDAQ/MAT)—raises prices in order to offset rising material costs (as detailed in their latest earnings report), one takes notice.

When Whirlpool Corporation (NYSE/WHR), the world’s largest appliance maker, cited higher material costs as one of the major factors that impacted its latest earnings report, you can see rising prices again. The company is focused on reducing costs and raising prices, in order to counteract this.

The Hershey Company (NYSE/HSY), a global leader in chocolate and sugar confectionery, released a strong earnings report. However, it wasn’t an increase in demand that spurred their earnings report; instead, the company was able to raise prices enough to offset the increase in the cost of its inputs.

The Proctor & Gamble Company (NYSE/PG), one of the world’s largest consumer products makers, lowered its 2012 estimates due to—along with foreign exchange rates—higher commodity costs. The company is attempting to offset these with multiple measures, including raising prices.

These blue-chip leaders are all citing rising commodity prices as putting pressure on their margins and earnings reports. And most of these blue-chips have been able to offset higher commodity prices, as detailed in their earnings report, by raising prices to the end consumer.

There are two trends happening here, my dear reader…

Since the Federal Reserve made its historic announcement last week that it would be keeping interest rates near zero until late 2014, commodity prices have resumed their rise. Mattel, as an example, believes that commodity prices will continue to rise in 2012, as indicated in its latest earnings report.

The other trend that is critical to highlight is that these blue-chip companies have been, by and large, able to maintain their margins by raising prices.

I’ve been talking about how strained the American consumer is. And since the blue-chips I’m talking about above are multinational companies, it is safe to say that European consumers are feeling the pinch as well, while even economies in Asia are slowing, pressuring their consumers.

As 2012 rolls along and the global economy continues to slow, will these blue-chip companies be able to pass along higher prices to consumers? I doubt it. But if they don’t, they’ll hurt their margins, earnings reports, and share prices. If they do raise prices, inflation will become a problem for the end consumer—who is squeezed already with no wage growth and no jobs. It’s a no-win situation.

Where the Market Stands; Where it’s Headed:

Yesterday was a nice start to the month of February. Since the beginning of 2012, the Dow Jones Industrial Average has risen 4.1%. Could we be getting close to that final blow-off for the bear market rally I’ve been waiting for? Maybe. After all, the Dow Jones is getting closer and closer to that magic 13,000 level.

We are in a bear market rally in stocks that started in March of 2009.

What He Said:

“We will wish Greenspan never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in PROFIT CONFIDENTIAL, April 27, 2004. Michael first started warning about the negative repercussions of Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.

There were 92 U.S. bank failures in 2011. Total assets of those banks were just over $36.0 billion. (Wonder why we didn’t read much about this in the news.)

Since the credit crisis began in late 2007 to the end of 2011, there were a total of 417 U.S. bank failures whose assets totaled about $680 billion (source: FDIC). The number of people that lost their jobs at these 417 institutions has obviously not helped job creation in this country.

What is more distressing, dear reader, is that the Federal Deposit Insurance Corporation (FDIC) reported that the number of current troubled banks rose to 111 in its latest quarterly report. That many distressed banks for a single quarter is at a 15-year high. The stresses on the financial systems are mounting and we may be talking about job losses, not job creation, in the coming quarters.

Total assets represented by those 111 banks are a stunning $180 billion…and that’s only one quarter’s worth!

There have been many articles written on the big banks that are “too big to fail” since the crisis erupted in 2008, but little has been written about the smaller banks, which, by and large, have not had the luxury of bailout money from the Fed. Small banks were once a big part of job creation. Not anymore.

What many fail to realize:

It is the smaller regional bank that lends to small businesses in its community and supports job creation, not the big banks. It is the smaller regional bank that helps support the local real estate market resulting in job creation, not the big banks.

There is no question that small businesses are an important source of job creation in this country.

The very high number of distressed U.S. banks point to a real estate market that is not recovering, and small businesses that are not borrowing, which implies little job creation.

Further evidence comes from some of the CEOs of the smaller banks themselves, which have recently indicated how little lending is occurring at the small business level, and how they see no recovery in the real estate market in their local communities (again no job creation).

Small-town America is in trouble.

The first thing you should do as an investor and consumer is to verify that your bank is on the distressed list. However, you should also be very careful as to your investment portfolio to ensure you do not own stocks in companies that have exposure to smaller U.S.  banks. Sure, the FDIC provides depositor insurance, but only to a set amount.

The above has been a grassroots look at what is happening in local communities and the smaller banks that are such a big part of these banks. The news isn’t good. If real estate and small businesses are under duress (and we know they are), then there can be no job creation, which means the GDP numbers will continue to come under pressure and job creation will be elusive…possibly resulting in a higher unemployment rate.

Small-town America is what made this country and it’s suffering big-time right now. Small businesses employee about half of all private employees in the U.S. (source: SBA). The government focus since the credit crisis began has been about Wall Street, the Big Banks, and “Too Big to Fail” companies.

There has been very little done to help the backbone of America, small businesses. And this is one of the main reasons the economy cannot get going in 2012 and why I’m predicting it will be a very difficult year for U.S. economic growth. Job creation will continue to elude us. (See: Recent GDP Numbers Confirm My Prediction.)

Michael’s Personal Notes:

The victim toll of the European Union’s recession is beginning to mount…

Spanair, Spain’s fourth largest airline, filed for voluntary bankruptcy on Monday. Unfortunately, I predict this will be the first of many victims to come, as the recession in the European Union takes hold.

The Barcelona-based firm stopped operating as of last Friday, canceling 200 flights and stranding thousands of passengers across the European Union.

Spanair, a key Spanish carrier that began operations in 1986, pinned its hopes on a merger with Qatar Airlines, but unfortunately talks fell through. Since 2009, as it continued to struggle with the weak economy, the regional government of Catalonia provided €150 million to the airline to help it get through difficult times.

The problem is, those difficult times never subsided, bur rather intensified. After talks with Qatar failed, the airline returned to the government of Catalonia for another undisclosed sum of money. The government refused, due to the severe budget cuts it needed to implement for the austerity measures imposed on it by the European Union.

With losses mounting and with debt of over €300 million, the airline felt it had run out of options and time, with bankruptcy being the only solution.

Spanair is a regional carrier that specialized in short-haul flights within Spain, and on medium-haul routes to parts of the European Union and North Africa. There is no question that the airline faced competition from low-cost carriers Ryanair and Easyjet. However, the recession in Spain reduced air travel significantly, which hurt the carrier’s bottom line.

Not only are Spanair’s 2,400 employees out of a job, but it is estimated that, through contractors, an additional 1,600 people could be affected. This is compounded by the fact that the unemployment rate in Spain stands at a staggering 23.3%, with that economy showing no signs of turning the corner, as austerity measures continue to hamper growth.

The regional government of Catalonia not only spent €150 million in taxpayer money to keep the airline afloat, but it also owns 24% of the airline, which means that it further stands to lose an estimated €349 million.

This, dear reader, could be a harbinger of things to come in the European Union and throughout the world. Companies in distress seek government aid to help them through tough economic times. There are no funds left to bail out these companies, especially when austerity measures enacted by the European Union need to be adhered to.

With the recession firmly in place in the European Union, and growth outside the European Union difficult to find, this leaves many firms with no choice but to declare bankruptcy.

As the strain in the European Union intensifies, this will affect growth here in the U.S. Welcome to 2012. Fasten your seatbelt tight, dear reader; the forecast calls for turbulent times ahead. (Also see: Half of the Eurozone Downgraded: Time to Start Worrying.)

Where the Market Stands; Where it’s Headed:

The numbers are in: the Dow Jones Industrial Average was up 3.4% for January—its best January in about 10 years. This is good and bad. It’s good if you believe in the January effect theory, which states that, if January is up, the remainder of the year is up (I don’t give much credit to the theory). The January rally is “bad” because, despite the Fed saying it will keep interest rates down until late 2014 and despite the government asking to increase the national debt by $1.0 trillion more (which means more spending), we really didn’t get much response from the stock market.

A bear market rally in stocks was born on March 9, 2009. That rally has lasted 34 months. It is common for such rallies to last three to four years. However, this rally is getting very old, very tired.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in PROFIT CONFIDENTIAL, April 8, 2004. Michael first started warning about the negative repercussions of then Fed Governor Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.

Spanair, Spain’s fourth largest airline, filed for voluntary bankruptcy on Monday. Unfortunately, I predict this will be the first of many victims to come, as the recession in the European Union takes hold.

The Barcelona-based firm stopped operating as of last Friday, canceling 200 flights and stranding thousands of passengers across the European Union.

Spanair, a key Spanish carrier that began operations in 1986, pinned its hopes on a merger with Qatar Airlines, but unfortunately talks fell through. Since 2009, as it continued to struggle with the weak economy, the regional government of Catalonia provided €150 million to the airline to help it get through difficult times.

The problem is, those difficult times never subsided, bur rather intensified. After talks with Qatar failed, the airline returned to the government of Catalonia for another undisclosed sum of money. The government refused, due to the severe budget cuts it needed to implement for the austerity measures imposed on it by the European Union.

With losses mounting and with debt of over €300 million, the airline felt it had run out of options and time, with bankruptcy being the only solution.

Spanair is a regional carrier that specialized in short-haul flights within Spain, and on medium-haul routes to parts of the European Union and North Africa. There is no question that the airline faced competition from low-cost carriers Ryanair and Easyjet. However, the recession in Spain reduced air travel significantly, which hurt the carrier’s bottom line.

Not only are Spanair’s 2,400 employees out of a job, but it is estimated that, through contractors, an additional 1,600 people could be affected. This is compounded by the fact that the unemployment rate in Spain stands at a staggering 23.3%, with that economy showing no signs of turning the corner, as austerity measures continue to hamper growth.

The regional government of Catalonia not only spent €150 million in taxpayer money to keep the airline afloat, but it also owns 24% of the airline, which means that it further stands to lose an estimated €349 million.

This, dear reader, could be a harbinger of things to come in the European Union and throughout the world. Companies in distress seek government aid to help them through tough economic times. There are no funds left to bail out these companies, especially when austerity measures enacted by the European Union need to be adhered to.

With the recession firmly in place in the European Union, and growth outside the European Union difficult to find, this leaves many firms with no choice but to declare bankruptcy.

As the strain in the European Union intensifies, this will affect growth here in the U.S. Welcome to 2012. Fasten your seatbelt tight, dear reader; the forecast calls for turbulent times ahead. (Also see: Half of the Eurozone Downgraded: Time to Start Worrying.)

Where the Market Stands; Where it’s Headed:

The numbers are in: the Dow Jones Industrial Average was up 3.4% for January—its best January in about 10 years. This is good and bad. It’s good if you believe in the January effect theory, which states that, if January is up, the remainder of the year is up (I don’t give much credit to the theory). The January rally is “bad” because, despite the Fed saying it will keep interest rates down until late 2014 and despite the government asking to increase the national debt by $1.0 trillion more (which means more spending), we really didn’t get much response from the stock market.

A bear market rally in stocks was born on March 9, 2009. That rally has lasted 34 months. It is common for such rallies to last three to four years. However, this rally is getting very old, very tired.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in PROFIT CONFIDENTIAL, April 8, 2004. Michael first started warning about the negative repercussions of then Fed Governor Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.

Considering record low interest rates, there doesn’t seem to be any rush by home buyers to step in aggressively to buy homes. This is a troubling sign. Interest rates can’t get any lower, but evidently home prices can continue to drop. Why aren’t home buyers scooping up the deals? While it’s great that home prices and interest rates are both low, you need several things to drive home buyers. Home buyers need security in their jobs, which means more job growth and visibility in their current jobs, plus the excess inventory of foreclosed homes needs to be cleared.

This could take several years, as some analysts don’t expect home prices to rise significantly until 2015. The problem at that point is that interest rates will most likely start rising. The current level and length of time that interest rates have been this low is unprecedented. U.S. interest rates can’t remain at these levels forever. The Federal Reserve indicated that it expects low interest rates until 2014, at which time hikes will be coming. That certainly won’t help home buyers when they need to get a mortgage.

Now that we’ve briefly touched on the fundamentals of the housing market, let’s take a look at homebuilder stocks. After making lows in the fall, all of the homebuilder stocks have had a massive run up in just a few months. Toll Brothers, Inc. (NYSE/TOL) has risen from $13.16 to $22.41 currently, a 70% move. D.R. Horton, Inc. (NYSE/DHI) has risen from $8.03 to the current price of $14.18, a move of approximately 77%. Lennar Corporation (NYSE/LEN) has moved up from $12.14 to $22.40 currently, a return of 85%.

Many investors are trying to call the bottom in housing by buying homebuilder stocks before home prices have actually started moving up. Home prices need to start moving up for homebuilder stocks to dramatically increase sales and profit margin levels. While it may seem smart to get ahead of the crowd, you must be careful not to buy a value trap, which is a stock that seems cheap, but then can stay cheap for a long period of time.

I would want to see home prices start moving up for several months before jumping in all the way with homebuilder stocks. But we’re not seeing massive job growth and, with interest rates this low, there still isn’t a ton of home buyers stepping in to scoop up the existing real estate that’s cheap. It could be a long time before homebuilder stocks start generating massive returns to justify the big moves. I think that’s highly unlikely that these homebuilder stocks will move up 70% or more from current levels over the next few months. At this point, investors need to see the earnings justify the moves we’ve just had and, with home prices continuing to fall, that’s going to be difficult.

One of the most important markets for Facebook will be China and India given the fact that the two countries account for a third of the world’s population.

In China, just take a look at the numbers. Imagine that China, which strived for socialism under Mao Zedong during the Cultural Revolution from 1966 to 1976, has now become the epicenter of the Internet world with demand growing at a staggering pace.

The number of Internet users in China is tops in the world, with a whopping 505 million on the Internet at the end of November 2011, according to the China Internet Network Information Center (CNNIC). The number of broadband users stands at around 15.51 million users, up 18.6% year-over-year. There are also over 340 million smartphone users.

In addition, about 58% of Internet users in China roam the Web via their cell phones, according to the State Council Information Office.

These are massive numbers and point to the staggering growth.

But what is impressive is that the Internet penetration rate is still low at 37.7% versus over 70% in the U.S., so there is still ample room to grow.

Facebook knows the massive potential in China and wants to dominate the social networking space there, but there will continue to be restrictions in the communist country. A few years ago, Facebook met government resistance when trying to expand in this country where the government tries to control the media, which sometimes unfortunately includes freedom of speech. The key to achieve success is developing alliances with Chinese companies and then working hand in hand to develop the market. Facebook enlisted Chinese Internet giant Baidu, Inc. (NASDAQ/BIDU) to expand its reach.

In the mid-cap space, a Chinese social networking play is Beijing-China-based Renren Inc. (NYSE/RENN). Renren operates a real-name social networking Internet platform in China with about 137 million activated users as of September 30, 2011. The platform allows users to connect with each other. Services include social networking, online gaming, social commerce, and business social networking.

It will be exciting to see how Facebook does in China; but one thing’s for sure: I expect social networking could be the next big thing if allowed to flourish.

Another area that I feel has tremendous growth opportunities in China is travel, which I discussed in The Super-hot Chinese Sector.

If the stock market doesn’t appreciate much this year, it will clearly be undervalued considering the similar corporate visibility we’re hearing from most large-cap companies. The stock market is already trading at a valuation that’s well under its mean and corporate earnings are robust considering GDP growth.

I think it’s likely that the S&P 500 Index will finish its head-and-shoulders formation, probably later next year. When there is another recession (some say 2013/2014), then this would be the time to consider investing in the stock market as a whole. As I’ve written previously, I wouldn’t buy the market at this point in time, even though corporate earnings are solid. (See Dividend Paying Stocks for Income and the Real Estate Market for Capital Gains.)

The financial health of corporate America continues to improve, but this doesn’t mean that share prices will appreciate. It’s going to take a lot of positive economic news to make the stock market appreciate in a meaningful way, not just good corporate earnings. As we know, the employment and housing sectors just aren’t strong enough yet for this to be a reality.

So far this year, the stock market hasn’t been trading on corporate earnings, but on hope for the future. This is always tenuous. The hope that investors are speculating on is related not to corporate earnings or the economic outlook, but to progress regarding the debt crisis in Greece. With so many political elections around the world this year, you can bet that policy makers will be doing everything they can to minimize any more shocks or crises. The goal, it would seem, is to leave the fallout for next year.

According to Bloomberg, the U.S. stock market will have experienced its strongest January since 1997. Corporate earnings in my view are definitely strong enough to call the current stock market fairly valued. It certainly isn’t expensive. Commodities, particularly precious metals, are getting stronger now and investor sentiment is good enough for more upside in share prices.

Are we in a sucker’s rally? My best guess is probably yes. Share prices should be higher based on the corporate earnings we’re getting, but there is a real reluctance out there. A lot of investors, both institutional and individual, are positioned very conservatively or sitting on the sidelines. The stock market is poised for more gains this year, but nothing is “real” or sustainable unless U.S. employment and housing prices improve. Corporate earnings will continue to be strong.

Manufacturing jobs have fallen steadily since the 1950s. Low-wage countries, especially China, have been the center of the movement of factory work and job creation out and away from the United States.

In the 1960s, manufacturer United States Steel Corporation (NYSE/X) employed over 225,000 factory workers, Westinghouse Electric, had 114,000, and General Motors Company (NYSE/GM) employed over 595,000 factory workers. The center of job creation in America was manufacturing.

Today, service companies in the U.S. dominate the economic landscape when it comes to job creation: United Parcel Service, Inc. (NYSE/UPS) employs over 400,000 people; Target Corporation (NYSE/TGT), 355,000; and Wal-Mart Stores, Inc. (NYSE/WMT) has 2,100,000 service employees on its payroll. From what I can see, job creation over the past three years has been in the service sector (with heavy emphasis on retail) and at the government level.

In his State of the Union address last week, the President was adamant about wanting manufacturing jobs to come back to America. It will probably be a major part of his re-election campaign, in a bid to spur job creation, which is sorely needed in this country. But how can it possibly happen? Isn’t it a pipedream that manufacturing jobs will return to America so the job creation engine will start running again?

China’s development and rapid job creation have led to wages rising at least 15% per annum in recent years, which means that, within five years, the cost savings to manufacturers of producing in China as compared to the U.S. will be minimal (source: Boston Consulting Group).

But manufacturers have a choice if labor gets too expense in China. They can simply move their factories to other less-developed economies where wages are rock-bottom and job creation is sorely needed. Why move back to America? The only way to stimulate job creation by creating manufacturing jobs here in the U.S. would be to revamp healthcare costs and our tax structure in order to make the U.S. an attractive place to invest.

The other major factor in determining a plant location for manufacturers is a weak currency. One cannot understate the importance of exchange rate currency costs in setting up a manufacturing plant. The reason China, India and other such developing countries were able to lure manufacturing jobs away in the first place, and so create the foundation for a surge in job creation was a favorable exchange rate to the once mighty U.S. dollar.

Have the tables turned?

Is it just a coincidence that, in the same week as the State of the Union address, the Fed came out with its policy directive of maintaining its almost-zero rate policy until 2014?

If the President is making manufacturing jobs part of his election campaign for job creation and the Fed has sent a clear message to the markets that it wants to stimulate the economy, then, in my opinion both, add up to a weaker U.S. dollar.

When the Fed announced its policy initiative last week, precious metals, commodities and stocks in general rose, while the U.S. dollar fell. Should more money printing be in the cards, you can bet that the U.S. dollar will continue to fall, as it did during QE1 and QE2.

So, dear reader, if the agenda is to lower the value of the U.S. dollar in order to revive job creation, then what will be the benefit in this market for investors to take advantage of?

Precious metals will benefit most, with gold bullion and gold mining stocks leading the way. It is my belief that gold mining stocks are cheap relative to gold bullion; but, at the very least, ensure that you have some of the shiny stuff in your possession. It will protect you from the loss of purchasing power that will come with a declining U.S. dollar. (Also see: Gold Stocks: There’s Value in Them There Hills.)

The following chart explains my words quite well.

(Source: Lombardi Financial)

Michael’s Personal Notes:

U.S. GDP numbers released Friday, a key indicator of economic growth, confirm what I have been saying for weeks…the U.S. economic growth is slowing, not growing.

Here are the full-year GDP numbers for the U.S. over the past three years:

GDP 2009: -2.4%

GDP 2010: 3.0%

GDP 2011: 1.7%

GDP (which stands for gross domestic product: the total market value of all the goods and services produced by a country in a given period) grew at a “lukewarm” 1.7% in 2011 over 2010. When compared to 3.0% growth in GDP in 2010 over 2009, the obvious question is: where is the economic recovery?

The picture becomes even more distressing when we look at fourth-quarter GDP numbers, because they point to a deceleration in growth.

On the surface, the 2.8% rise in fourth-quarter U.S. GDP was weaker than what Wall Street expected. When digging deeper into the numbers, we find that restocking of business inventories accounted for a whopping 1.94 % of GDP in the quarter. This is temporary boost to GDP.

If we remove inventory restocking from the numbers, we find that the U.S. economy grew at just a measly 0.8% in the fourth quarter of 2011, when compared to the third quarter’s 1.8% rise in GDP.

My feeling, looking at my regular economic gauges, is that there is a clear deceleration of growth as we head further into 2012.

Consumer spending, which accounts for 70% of GDP, came in 2.0% higher in the fourth quarter of 2011, missing estimates of 2.4%, but slightly better than the 1.7% pace of the third quarter. Keep in mind, dear reader, as I’ve been saying in PROFIT CONFIDENTIAL, the meager growth the U.S. economy is experiencing is on the back of sharply higher debt spending by consumers (especially over the holidays), which cannot be sustained going forward.

Let’s also keep in mind that gas prices have remained elevated thus far in 2012. With the continued escalation of tensions with Iran and the U.S. dollar falling in value against other major world currencies (except the euro), this will further dampen GDP growth going forward.

Corporate spending on capital goods rose in the fourth quarter of 2011 at the slowest pace since 2009. The corporate sector continues to be timid against the backdrop of slow worldwide economic growth, preferring to stockpile cash instead of inventory.

I’ve been talking about the terrible shape that local and state U.S. governments are in. Their budgets are stretched to the limit, with states like Illinois and California virtually bankrupt. It comes as no surprise that, in the fourth quarter of 2011, the government spending component of GDP shrank for a fifth straight quarter. Many state governments continue to struggle to get their finances under control.

Couple this with the fact that there are no major stimulus programs currently coming out of the White House and we can assume that government spending will continue to remain a drag on GDP growth in 2012.

This latest GDP report merely confirms the weak economic data that have been coming in of late. Not only does this key indicator put downward pressure on the U.S. dollar, but it also makes one wonder how the markets can continue to move higher under these economic circumstances. Eventually, slow or deteriorating economic growth will push down corporate earnings and, when corporate earnings decline, so does the stock market. (Also see: Last Bastion of Higher Stock Prices Turning Negative.)

Where the Market Stands; Where it’s Headed:

The score: What looked like a strong January for the stock market has dissipated. The Dow Jones Industrial Average starts this morning up a diminishing 3.6% for 2012.

Yes, the bear market rally that started in March of 2009 is alive and well. But it is also weak and tired, getting near the end of its cycle.

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.” Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.

Here are the full-year GDP numbers for the U.S. over the past three years:

GDP 2009: -2.4%

GDP 2010: 3.0%

GDP 2011: 1.7%

GDP (which stands for gross domestic product: the total market value of all the goods and services produced by a country in a given period) grew at a “lukewarm” 1.7% in 2011 over 2010. When compared to 3.0% growth in GDP in 2010 over 2009, the obvious question is: where is the economic recovery?

The picture becomes even more distressing when we look at fourth-quarter GDP numbers, because they point to a deceleration in growth.

On the surface, the 2.8% rise in fourth-quarter U.S. GDP was weaker than what Wall Street expected. When digging deeper into the numbers, we find that restocking of business inventories accounted for a whopping 1.94 % of GDP in the quarter. This is temporary boost to GDP.

If we remove inventory restocking from the numbers, we find that the U.S. economy grew at just a measly 0.8% in the fourth quarter of 2011, when compared to the third quarter’s 1.8% rise in GDP.

My feeling, looking at my regular economic gauges, is that there is a clear deceleration of growth as we head further into 2012.

Consumer spending, which accounts for 70% of GDP, came in 2.0% higher in the fourth quarter of 2011, missing estimates of 2.4%, but slightly better than the 1.7% pace of the third quarter. Keep in mind, dear reader, as I’ve been saying in PROFIT CONFIDENTIAL, the meager growth the U.S. economy is experiencing is on the back of sharply higher debt spending by consumers (especially over the holidays), which cannot be sustained going forward.

Let’s also keep in mind that gas prices have remained elevated thus far in 2012. With the continued escalation of tensions with Iran and the U.S. dollar falling in value against other major world currencies (except the euro), this will further dampen GDP growth going forward.

Corporate spending on capital goods rose in the fourth quarter of 2011 at the slowest pace since 2009. The corporate sector continues to be timid against the backdrop of slow worldwide economic growth, preferring to stockpile cash instead of inventory.

I’ve been talking about the terrible shape that local and state U.S. governments are in. Their budgets are stretched to the limit, with states like Illinois and California virtually bankrupt. It comes as no surprise that, in the fourth quarter of 2011, the government spending component of GDP shrank for a fifth straight quarter. Many state governments continue to struggle to get their finances under control.

Couple this with the fact that there are no major stimulus programs currently coming out of the White House and we can assume that government spending will continue to remain a drag on GDP growth in 2012.

This latest GDP report merely confirms the weak economic data that have been coming in of late. Not only does this key indicator put downward pressure on the U.S. dollar, but it also makes one wonder how the markets can continue to move higher under these economic circumstances. Eventually, slow or deteriorating economic growth will push down corporate earnings and, when corporate earnings decline, so does the stock market. (Also see: Last Bastion of Higher Stock Prices Turning Negative.)

Where the Market Stands; Where it’s Headed:

The score: What looked like a strong January for the stock market has dissipated. The Dow Jones Industrial Average starts this morning up a diminishing 3.6% for 2012.

Yes, the bear market rally that started in March of 2009 is alive and well. But it is also weak and tired, getting near the end of its cycle.

What He Said:

“I’ve been pushing gold bullion and gold shares for over a year now. Bank in January 2002, I personally started buying gold shares.” Michael Lombardi in PROFIT CONFIDENTIAL, December 13, 2002. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.

What can you do? Several things are important to note. Yes, the first thing I’m sure you’ve thought of is gold, which I completely agree with. But I would also look to diversify your commodity exposure in other areas like copper. We’ve seen a strong move in copper from the bottom in October, up almost 30%, from approximately $3.00 to the current price of $3.88 per pound. But, with more money flooding the system, we could see last year’s copper highs of just over $4.50 reached and exceeded.

But is copper the right investment for you? Not necessarily, as there are a lot of mining companies that dig for copper and are very reasonably priced. One problem with just buying mining companies in the U.S. is that you are exposed to the dollar when it declines. If commodities go up, so should currencies like the Canadian dollar. A better trade would be to look for copper mining companies listed in Canada. This would give you a two-pronged attack: make money off higher copper prices through higher prices of mining companies and benefit from a higher Canadian dollar against a weaker U.S. dollar.

There are even penny stocks that fit all of these criteria. Amerigo Resources Ltd. (TSX/ARG) is a company that produces copper and molybdenum in Chile. If you thought that penny stocks are only firms that don’t have any real cash, you’re wrong! This copper producer has $0.20 cash per share, for a company whose share price is only $0.88. Since this stock trades in Canadian dollars, the further the U.S. dollar goes down, the more money you make.

Of course, penny stocks are one way to play copper mining companies. The advantage of many penny stocks is that you are getting direct exposure to copper at a low price, while bigger mining companies usually produce a mixture of commodities. Firms like Barrick Gold Corporation (TSX/ABX) produce copper, but a large portion of their production is gold.

The key is, when the central banks are stoking inflation, try to protect your assets by being out of U.S. dollars by investing in commodities and mining companies. These could be solid penny stocks or big, diversified mining companies like Barrick.

Until we see signs that the U.S. administration is changing its course on depressing the dollar and the Federal Reserve reduces monetary policy by raising rates, I would continue looking at the copper mining companies for strength as well as penny stocks in Canada.

The charts of the key stock market indices remain strong, but only the blue-chip Dow Jones Industrial Average is showing a bullish golden cross, with the 50-day moving average (MA) above the 200-day MA. And, despite bullish near-term signals, the NASDAQ, S&P 500, and Russell 2000 are holding on to a death cross, in which the 50-day MA is below the 200-day MA.

A bullish event on the charts occurs after the key stock indices have peaked on three successive upward moves with lower peaks; stocks have broken higher and suggest more gains.

And, as I said, the light volume on up days is a red flag and indicates stock market risk. The end result is a bearish divergence forming between price and volume, adding to the stock market risk.

The European debt crisis continues to be a major risk factor. The talks between Greece and its creditors to reach a debt swap deal have yet to be done and there is speculation that the country will be allowed to have a form of controlled default. The problem is that this would likely send jitters through the eurozone and global markets, wreaking havoc.

My advice is to ride the upward moves in the stock market, but make sure you have put hedges in place to protect your gains. It’s also never a bad idea to take some profits.

The mining area continues to be positive in my view this year.

Metals are strong, with gold back above $1,700, while silver powered above $33.00. Copper also edged higher, hinting at an economic recovery, as the metal is used in many industrial applications and is often seen as a barometer on the global economies.

February Gold is at $1,725 and above its 50-day MA of $1,667 and 200-day MA of $1,642 on stronger Relative Strength. Gold is overbought, so look for selling pressure.

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

I like silver as a trade, but strategist John Stephenson is extremely bullish and feels that silver is heading towards $50.00 an ounce based on a historical ratio to gold.

The March Silver is bullish and holding above $33.00. The contract is above its 50-day MA of $30.86, but below its 200-day MA of $35.79. The Relative Strength is strong, but there’s an overbought condition. Silver plays to take a look at include Endeavor Silver Corp. (NYSE/EXK), MAG Silver Corp. (AMEX/MVG), and Silvercorp Metals Inc. (NYSE/SVM).

On the energy front, increased optimism towards the global economies will drive up oil prices. The March WTI Oil is holding above the $100.00 level and at its 50-day MA of $99.45 and 200-day MA of $96.54. A bullish golden cross is holding, with the 50-day MA above the 200-day MA.

Whatever you are trading, the key is prudence and not over-committing to any one area in the stock market.

In the large-cap gold space, Newmont Mining Corporation (NYSE/NEM) is a steady performer; read about it in Newmont Mining: A Class Act in Gold.

As I’ve written previously, I would be happy if the S&P 500 Index would hold around the 1,300 level for now. All of last year’s investment risks remain, but it’s pretty obvious that investors have grown tired of thinking about the eurozone debt crisis. A Greek default is almost assured and, while this will pressure the euro currency, the news is already priced into the stock market.

What are holding the equity market at its current level are decent fourth-quarter earnings and reasonable valuations. This is a difficult market in which to make predictions, but there is a growing probability—in my view—that the stock market will perform similarly to last year. A strong start, followed by consolidation and then correction is likely to reflect the change in earnings expectations this year. The economic news is mostly expected to be what it is now—lackluster. So, with the expectation for modest gross domestic product (GDP) growth, it’s difficult to imagine improving corporate visibility. Industry specific economic news should continue to be varied this year, with some sectors significantly outperforming others. The certainty about interest rates is useful, but it’s also a sign that the Federal Reserve expects the economy to continue to be difficult. There’s no bright light at the end of the tunnel yet; it’s continued mediocrity for next while.

With the expectation of choppy economic news and the likelihood of declining earnings expectations over the coming quarters, individual stock selection is absolutely key in a market without a tailwind. (See Austerity, Inflation, Sovereign Debt & Earnings Growth—An Investor’s Survival Guide.) Price strength in gold, silver and oil is a necessary confirmation if the stock market is going to advance further in a meaningful way. My view is that the stock market will be holding up well if the S&P 500 index can build a base around 1,300. As I said, the economic news isn’t yet strong enough for share prices to make a big advancement. Good corporate earnings were the catalyst for a strong January, but the stock market’s next catalyst is elusive.

Very shortly, the market will be in the “lull” between earnings seasons and this makes share prices that much more vulnerable. With only economic news and geopolitical events to go on, investors will be skittish. Accordingly, the trades in the stock market will be event-driven or corporate-specific only. A general investment strategy in this kind of market isn’t likely to work too well. Outperformance is all about owning the right stories at the right time. Fortunately, the economic news right now isn’t bad enough to cause a major decline in sentiment. If we can hold around the current level, the stock market will be doing well.

The Price/Earnings (P/E) ratio takes the current market price of a stock or index and divides it by the earnings of that stock or index.

Historically, P/E ratios between five and 10 are considered undervalued and indicate a good time to invest in stocks, with the thesis being that corporate earnings have bottomed. When the range is 10 to17, the companies/indices are considered at fair value by most stock market analysts; 18-25 is overvalued; with anything above 25 being considered a bubble (the S&P 500 was well above 25 during the tech bubble of 1997 to 1999).

Personally, given the low-interest-rate environment of today, I see stocks as a bargain if the P/E ratio is between 10 and 12 and corporate earnings are not nose-diving.

It is said that the stock market is the most efficient valuation tool in the world for valuing companies. In 2010, the stock market knew 2011 would be a great year for corporate earnings, hence stock prices moved higher in anticipation of higher corporate earnings.

Even with the latest rise in the stock market, the S&P 500’s current P/E ratio stands at 15.13, while the Dow Jones Industrials’ P/E comes in at 13.77. This would be considered fairly valued.

Some would make the case that any upside surprise in the U.S. economy would result in strong corporate earnings, which would move such a fairly valued market much higher.

The problem with this rationale is the “E” in the P/E—corporate earnings per share. I noted just yesterday how blue-chip companies in the S&P 500 and abroad are struggling in this environment. Over the past month, I’ve been talking about how the recession in the eurozone is causing growth to slow sharply in both Asia and the U.S. (See: Half of the Eurozone Downgraded: Time to Start Worrying.)

In the U.S., this slow growth environment (which I believe could become a recession) means corporate earnings are going to come under extreme pressure. Already, companies are blaming the difficult global economic environment for their lowered 2012 corporate earnings forecasts.

I have a feeling that P/E ratios for both the S&P 500 and the Dow may challenge the undervalued levels closer to 12 or even 11 in 2012, as disappointing quarterly corporate earnings begin to pour in. The market may be undervalued at that point, but I don’t believe the market will perform well in such an environment.

Dear reader, at these fairly valued P/E levels, the S&P 500 and the Dow Jones Industrial Average do not look attractive. If you want to jump into stocks with the hope that corporate earnings will turn higher in 2012, it’s your choice.

Just keep in mind that that roar you hear in the background is the bear lurking in the shadows. I know I’m not buying into this market (except for gold-related investments); I’m just sitting back waiting for one final blow-off to the top for the bear market rally that started in the spring of 2009. (Also see: Official Numbers in: 2012 Not Looking Good.)

Michael’s Personal Notes:

The king of the hill no longer…and a good lesson:

It was not surprising to hear that the co-CEOs of Research In Motion Limited (NASDAQ/RIMM) had stepped down earlier this week amid a falling stock price, poor investor sentiment, falling corporate earnings growth, and increased shareholder pressure to find a way to compete with Apple Inc. (NASDAQ/AAPL) and Google Inc. (NASDAQ/GOOG), which have both been steadily eating away at smartphone market share.

It was not surprising either to hear that, amid the economic turmoil, International Business Machines Corporation (NYSE/IBM), or IBM, the world’s largest computer-services provider, not only beat fourth-quarter 2011 estimates with its corporate earnings, but also painted a strong picture for 2012, boosting investor sentiment.

The “BlackBerry” set the standard for the smartphone industry and provided Research In Motion with an enviable brand name that stood for quality and ease-of-use (sometimes referred to as “CrackBerry” by those so addicted to it), which propelled their corporate earnings and their stock price, amid positive investor sentiment. However, Apple and Google redefined the smartphone industry, turning the almost untouchable BlackBerry into an inferior smartphone; the king of the hill no longer.

In 2004, when IBM decided to sell its personal computer business to Lenovo Group Ltd. (Pink Sheets/LNVGY), some people were very surprised. IBM’s management team understood that the personal computer business had become a commodity business. Future corporate earnings growth would have to come from focusing on the services side of the business, leveraging the solid brand name that IBM had garnered.

Contrast IBM’s decision to Research In Motion’s. IBM’s management team was proactive and responded to the changing dynamics of its industry, as was eventually evidenced by the company’s spectacular corporate earnings. Research In Motion was late in responding to what competitors were doing, instead of taking the lead that it had, introducing new products or entering new market segments, leveraging its brand name.

For Research In Motion to succeed at this point, it needs to redefine the smartphone or improve its product line.

This is easier said than done, because now, Research In Motion’s once stellar brand has been tarnished. Had IBM remained simply a personal computer manufacturer, its brand name would have easily been reduced to “little blue,” reflecting stagnant corporate earnings, instead of the respect and positive investor sentiment it garners today with the brand name of “Big Blue.”

Other hardware makers followed IBM after realizing that business services were where the growth and margins would now come from. IBM was able to not only maintain its market share, but also grow it. Today, IBM is once again redefining itself. The company is focused on generating half of its corporate earnings from business software programs that will help businesses analyze and project trends.

There is a big lesson to be learned here from an investor’s point of view.

IBM’s management team is proactive, responsive to their market’s needs, and is constantly searching for the next opportunity to redefine their industry and increase corporate earnings. Research In Motion’s management’s team failed to take advantage of their lead and brand name in order to expand their market share and/or define other market segments they could have aggressively pursued for future growth.

Research In Motion is now in a reactive mode to what the market is already doing. The stock is a very risky proposition here, in my opinion, because the next stage is going to be a critical one. Investor sentiment is understandably at a “prove it” stage. If the company doesn’t execute, its once-elite brand will be reduced to the dustbin and, along with its stock price, corporate earnings growth will disappear.

When it comes to investing, yes, corporate earnings, dividends, and valuations are very, very important. But you cannot underestimate leadership. Steve Jobs put Apple in a position whereby it led the industry with new and exciting products. Thomas Watson, the “father” of IBM who was with the company for 42 years, was famous for simply focusing executives on THINKING.

I cannot stress how important leadership and ingenuity are for a company’s success. It’s something most investors fail to look at when buying the stocks of public companies.

Where the Market Stands; Where it’s Headed:

If today was the last trading day of January, the Dow Jones Industrial Average would be up 4.3% for the month. Let’s not celebrate just yet. We have two trading days left. I bring this year’s performance up to remind my readers that last January we also had a great start to the year for stocks—but the year in total ended up being almost flat for the stock market.

We are in a bear market rally in stocks that started in March of 2009. This rally is getting old and tired, but still has life left.

What He Said:

“A Stock Market’s Obituary: It is with great sadness that we announce the passing of the Dow Jones Industrial Average. After a strong and courageous battle, the Dow Jones fell victim to a credit crisis and finally succumbed on Friday, October 3, 2008, when it fell decisively below the mid-point between its 2002 low and its 2007 high.” Michael Lombardi in PROFIT CONFIDENTIAL, October 6, 2008. From October 6, 2008, to November 27, 2008, the Dow Jones Industrial Average experienced one of its biggest two-month losses in history.

It was not surprising to hear that the co-CEOs of Research In Motion Limited (NASDAQ/RIMM) had stepped down earlier this week amid a falling stock price, poor investor sentiment, falling corporate earnings growth, and increased shareholder pressure to find a way to compete with Apple Inc. (NASDAQ/AAPL) and Google Inc. (NASDAQ/GOOG), which have both been steadily eating away at smartphone market share.

It was not surprising either to hear that, amid the economic turmoil, International Business Machines Corporation (NYSE/IBM), or IBM, the world’s largest computer-services provider, not only beat fourth-quarter 2011 estimates with its corporate earnings, but also painted a strong picture for 2012, boosting investor sentiment.

The “BlackBerry” set the standard for the smartphone industry and provided Research In Motion with an enviable brand name that stood for quality and ease-of-use (sometimes referred to as “CrackBerry” by those so addicted to it), which propelled their corporate earnings and their stock price, amid positive investor sentiment. However, Apple and Google redefined the smartphone industry, turning the almost untouchable BlackBerry into an inferior smartphone; the king of the hill no longer.

In 2004, when IBM decided to sell its personal computer business to Lenovo Group Ltd. (Pink Sheets/LNVGY), some people were very surprised. IBM’s management team understood that the personal computer business had become a commodity business. Future corporate earnings growth would have to come from focusing on the services side of the business, leveraging the solid brand name that IBM had garnered.

Contrast IBM’s decision to Research In Motion’s. IBM’s management team was proactive and responded to the changing dynamics of its industry, as was eventually evidenced by the company’s spectacular corporate earnings. Research In Motion was late in responding to what competitors were doing, instead of taking the lead that it had, introducing new products or entering new market segments, leveraging its brand name.

For Research In Motion to succeed at this point, it needs to redefine the smartphone or improve its product line.

This is easier said than done, because now, Research In Motion’s once stellar brand has been tarnished. Had IBM remained simply a personal computer manufacturer, its brand name would have easily been reduced to “little blue,” reflecting stagnant corporate earnings, instead of the respect and positive investor sentiment it garners today with the brand name of “Big Blue.”

Other hardware makers followed IBM after realizing that business services were where the growth and margins would now come from. IBM was able to not only maintain its market share, but also grow it. Today, IBM is once again redefining itself. The company is focused on generating half of its corporate earnings from business software programs that will help businesses analyze and project trends.

There is a big lesson to be learned here from an investor’s point of view.

IBM’s management team is proactive, responsive to their market’s needs, and is constantly searching for the next opportunity to redefine their industry and increase corporate earnings. Research In Motion’s management’s team failed to take advantage of their lead and brand name in order to expand their market share and/or define other market segments they could have aggressively pursued for future growth.

Research In Motion is now in a reactive mode to what the market is already doing. The stock is a very risky proposition here, in my opinion, because the next stage is going to be a critical one. Investor sentiment is understandably at a “prove it” stage. If the company doesn’t execute, its once-elite brand will be reduced to the dustbin and, along with its stock price, corporate earnings growth will disappear.

When it comes to investing, yes, corporate earnings, dividends, and valuations are very, very important. But you cannot underestimate leadership. Steve Jobs put Apple in a position whereby it led the industry with new and exciting products. Thomas Watson, the “father” of IBM who was with the company for 42 years, was famous for simply focusing executives on THINKING.

I cannot stress how important leadership and ingenuity are for a company’s success. It’s something most investors fail to look at when buying the stocks of public companies.

As money floods the system and we see inflation start to move higher around the world, not only will precious metals move up, but so will a lot of other commodities like food. We’ve seen many commodities come down in late 2011, but it appears they are now set to take off for an extended period of time. Higher food prices mean more people will be farming and existing farmers will want a higher yield, meaning more crops for the same amount of space. To achieve, this they use fertilizers

Fertilizer is made of three main components: nitrogen; phosphorus; and potash. Potash, a product made from natural potassium salts, is essential for plant growth and is in huge demand, but is costly. When the prices of commodities fall, farmers use less fertilizer to reduce costs, since they are getting less money on the market for their crops. But when prices of commodities rise, as they will with higher inflation, then farmers want more crops and can get higher prices, so they are willing to spend more on fertilizers containing the key ingredient potash.

Potash Corp. of Saskatchewan, Inc. (NYSE/POT) just came out with corporate earnings that missed expectations, as investor sentiment was hoping for a better return. This might be a good opportunity to get in ahead of 2012 being better than what current investor sentiment is expecting, if inflation in food prices starts to move higher. This potential move up in food prices will result in more revenue to farmers and better corporate earnings for late 2012 and 2013. If the Fed is going to keep the money supply flowing into late 2014, then we could have a very long period of inflation starting to rise, moving investor sentiment later this year into the camp of higher expectations, which would mean that the prices of potash stocks would also be quite higher.

Other companies to watch in this sector are CF Industries Holdings, Inc. Co (NYSE/CF) and Agrium Inc. (NYSE/AGU). If investor sentiment becomes more positive for potash in general, then all of these firms will have stronger corporate earnings. While they have moved off their lows from last fall, they are still far off from their highs.

While I wouldn’t recommend stepping in immediately, I would pay attention to how their next corporate earnings outlook appears and the guidance issued by the companies. This will drive investor sentiment. A good example is from the last corporate earnings release from The Mosaic Company (NYSE/MOS), in which the company outlined its guidance for 2012. It stated that, in early 2012, they were cautious, but could see a strong second half, with volume starting to build after February.

I am going to be paying close attention to investor sentiment in agricultural prices, as well as these stocks themselves, ahead of the next corporate earnings releases. If we see inflation start to pick up and food prices headed higher, we should see this result in better corporate earnings for this sector later this year.

What if I told you that your share of the country’s mounting spending spree is around $48,812 per citizen or $135,262 per taxpayer? This national debt could take decades to pay off!

The U.S. national debt broke above $15.0 trillion and is worsening. President Obama said very little about the mounting national debt levels at his State of the Union address on Tuesday, but you cannot simply ignore the problem and pray it goes away. There’s no magic here.

The reality is that something drastic needs to be done soon regarding the national debt or the country’s financial strength will go down the toilet! Never mind talking about the European debt crisis; just look in our own backyard and there’s plenty of work to be done.

Whether it will be President Obama or the Republicans, I don’t care; but the next president will need to focus on significantly cutting costs and reducing the national debt.

Of course, increasing the revenues the government takes in can also help. Taxes on the top one percent of the higher income earners and corporations are fair play. Revenues are also higher when the economy expands and jobs are created to drive consumer spending.

Get the 14 million or so unemployed Americans off to work each morning.

While there has been no indication of where the major cuts will be from, they will likely be from the top six budgetary areas: Medicare/Medicaid; Social Security; defense/wars; income security; interest on the debt ($223 billion!); and Federal pensions.

We know that President Obama will save money after the recent withdrawal of American troops from Iraq. This will help, but I hope there is not another war or conflict around the corner, or we will be in real trouble. North Korea? Iran? It’s a scary thought.

Where I think there will be additional cuts will be Social Security and possibly Federal pensions. The reality is that cuts and austerity measures are required. Greece, Portugal, Italy, and Ireland are cutting back on spending or they risk defaulting. The U.S. is no different. You just cannot go on and just print money and hope the debt problem goes away.

For months now, the stock markets have focused largely on the debt crisis developments in the eurozone and, in the process, ignored this country’s own debt and deficit issues.

The headline each morning would talk about the European debt crisis. The fiasco in Greece has been front-page news. I can’t recall the last time the U.S. national debt was on page one.

But the country also needs to be careful, as the economic renewal remains fragile; albeit, if the debt and deficit are not dealt with now, we would likely see further problems around the corner and a potential cut in the U.S. credit rating from the current AA+.

Moody’s and Standard & Poor’s have warned that another rate cut would be possible if the national debt and deficit situation is not resolved.

The stock market has some decent price momentum now, and news from the Federal Reserve that it plans to keep interest rates at their current level going in 2014 is the kind of certainty that investors like. The stock market has accommodative monetary policy, good corporate earnings, and a reasonable valuation to go on. What it needs to take itself to the next level are better economic data. Recent news on durable goods showed a three-percent gain in the month of December, on top of an upwardly revised 4.3% gain in November. Clearly, there is momentum out there. Let’s hope it keeps going.

I am worried that corporate earnings will slow in the bottom half this year. Without growth in employment, U.S. incomes cannot grow and the consumer, Main Street economy will be stuck. A lot of the great earnings we’re getting form large-cap companies are due to their international operations generating the growth. While demand is improving domestically, it’s nowhere near where it was.

Near-term, the stock market is looking good. The S&P 500 Index solidly broke 1,300, and it has performed very well since the beginning of the year, as if a switch on investor sentiment were flipped. Commodities are also confirming the price strength of the stock market, and this is important. Although it’s hard to tell, it’s possible that the correction in gold and silver prices is now over. (See Precious Metals Winners—Three Excellent Wealth-creating Stocks.)

Cautious optimism is my outlook for the stock market right now. With the expectation for 10% growth in corporate earnings, there’s no reason why the stock market can’t accomplish a similar gain for the year or better. If expectations for corporate earnings begin the decline later this year, then all bets are off. The marketplace desperately wants more growth—in the economy and in corporate earnings. Without it, the stock market will sell off just like last year.

In its most recent Federal Open Market Committee meeting, which concluded yesterday, the Federal Reserve announced that it would extend its near-zero interest rates policy until at least the end of 2014—further down the road from its previous timeline of mid-2013.

What this means for investors like me and you…

This historic move by the Fed (I have a feeling I’ll be using the “historic move” line again in 2012) is a bid to help the U.S. economy, which is obviously in the doldrums regardless of what the statistics say.

Businesses and the average person have now been told that higher interest rates won’t be an issue for at least the next 35 months. The idea is interest rates that are low will spur consumers to borrow and businesses to initiate capital projects (to create jobs).

But, hold on a minute. With consumers hobbled with debt they can’t pay off and jobs being scarce, won’t consumer demand remain weak?

The Fed’s decision not to raise interest rates for 35 more months will not spur economic growth, as it is up to the White House, and not the Fed, to repair the structural issues with the U.S. economy.

The Fed has cut its economic growth forecast for 2012 to 2.2% from 2.7% (I predict a further downward revision), while predicting 2.8% to 3.2% growth for 2013 (highly unlikely). Remember that these low growth rates are predicted in a period where short-term higher interest rates are nonexistent.

Yesterday, the Fed described the unemployment rate as “elevated” and acknowledged that business investment has slowed (issues I’ve been talking about) and, in light of this, it predicts that the U.S.unemployment rate will only come down slightly.

Dear reader; short-term interest rates have already been kept near zero for almost four years. This is unprecedented. Over the last 40 years, interest rates have normally been in the four percent to five percent range, with the Federal Funds Discount Rate moving at least one half of one percent, up or down, at least every six months.

Over the last four years, with interest rates at historical lows and the Fed expanding its balance sheet with QE1 and QE2, economic growth has been in the two percent range, which is far below growth rates from normal recovery periods after a recession.

And, during a normal economic recovery period, interest rates rise—they don’t decline!

The immediate conclusion is that we have not experienced a normal recession; it was closer to a depression. Nor have we experienced any type of meaningful recovery, which is what I’ve been saying all along (and the reason why I believe we will fall back into hard economic times once more before this is all over).

Precious metals and gold mining stocks reacted to the news that the Fed has decided to keep interest rates at zero until late 2014 by moving significantly higher in price. Gold bullion jumped almost three percent to over $1,700 an ounce yesterday. Why? Because real interest rates continue to remain negative and the real rate of return on short-term bonds is negative (i.e. loss of purchasing power).

Ultimately, what the Fed announced Wednesday—that it will keep short-term interest rates at zero until late 2014—will lead to greater inflation. Furthermore, with the Fed acknowledging that economic growth is slowing significantly, if economic growth continues to fall (which I believe will occur), then more money printing will happen. (See also: Lower Rates and More Money Printing: Just What We Don’t Need.)

I’m telling you; gold mining stocks and precious metals stocks are the place to be in 2012.

Michael’s Personal Notes:

Now it’s the blue-chip leaders in the stock market warning of slow growth.

The stock market has experienced a 20%-plus rise since October, spearheaded by blue-chip names. But the party may not last for long…the bear market rally is showing cracks.

Many companies have been reporting their fourth-quarter numbers with their earnings outlook for 2012:

Kimberly-Clark Corporation (NYSE/KMB), a worldwide consumer products blue-chip leader, reported fourth-quarter earnings that disappointed Wall Street and issued an earnings outlook for 2012 that was anything but rosy. The company cited a slowdown in developed economies—the U.S. and Europe being the principal ones—as what is reducing demand.

LM Ericsson Telephone Company (NASDAQ/ERIC), the world’s largest maker of equipment for mobile phone networks, surprised the market with a 50% drop in quarterly profit. The results were even worse than the blue-chip firm had anticipated, with its 2012 earnings outlook very weak.

Siemens AG (NYSE/SI),Europe’s blue-chip engineering group, also reported weak earnings and a tepid earnings outlook, as delays in orders impacted revenue and profits. Siemens warned that Europe is facing a mild recession.

What was surprising was not so much the trouble from Europe, but the fact that orders from China slowed 17% in the quarter, a source of growth Siemens was banking on.

Siemens’ earnings outlook calls for a pickup in growth in the second half of 2012. With consumer demand flat on its back in both the U.S. and Europe, which in turn is affecting the export markets in Asia, it is difficult to see where the rise in consumer demand is going to come from.

Expect earnings outlook reports from the major eurozone blue-chip companies to be very negative in the weeks and months ahead. The stock market is a leading indicator; it trades based on the earnings outlook for companies that trade in the market.

The bear market rally that started in March 2009 is unraveling on several fronts. Economic growth will slow worldwide in 2012 (see: 2012 Economic Growth Slashed Across Most Countries). Blue-chip companies from Asia, to Europe, to America are delivering earnings outlooks for 2012 that are negative. The most accommodative monetary policy we have seen in our lifetime, a combination of money printing and multi-year zero interest rate policies, will eventually lead to rapid inflation, which will bring interest rates higher.

Earnings outlooks from blue-chip companies that are negative, rapid inflation, and higher interest rates…a lethal three-way combination for stocks! Rapid inflation will not happen tomorrow. Neither will higher interest rates. They will creep in. But, remember, the stock market is a leading indicator. The market will head down before these events start to happen.

Where the Market Stands; Where it’s Headed:

We are in a bear market rally in stocks that started in March of 2009. Yesterday, by attempting to spur economic growth by saying it would keep interest rates near zero until the end of 2014, the Fed gave its first shot in months at extending the rally.

The next silo, I believe, to be fired by the Fed is QE3. After that, there’s not much that can be done to stop the bear market rally from expiring. Enjoy it while it lasts.

What He Said:

“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi, in PROFIT CONFIDENTIAL, February 25, 2008. By the end of 2008, the rest of the world was realizing that the recession would be much longer and deeper than most had realized.

The stock market has experienced a 20%-plus rise since October, spearheaded by blue-chip names. But the party may not last for long…the bear market rally is showing cracks.

Many companies have been reporting their fourth-quarter numbers with their earnings outlook for 2012:

Kimberly-Clark Corporation (NYSE/KMB), a worldwide consumer products blue-chip leader, reported fourth-quarter earnings that disappointed Wall Street and issued an earnings outlook for 2012 that was anything but rosy. The company cited a slowdown in developed economies—the U.S. and Europe being the principal ones—as what is reducing demand.

LM Ericsson Telephone Company (NASDAQ/ERIC), the world’s largest maker of equipment for mobile phone networks, surprised the market with a 50% drop in quarterly profit. The results were even worse than the blue-chip firm had anticipated, with its 2012 earnings outlook very weak.

Siemens AG (NYSE/SI),Europe’s blue-chip engineering group, also reported weak earnings and a tepid earnings outlook, as delays in orders impacted revenue and profits. Siemens warned that Europe is facing a mild recession.

What was surprising was not so much the trouble from Europe, but the fact that orders from China slowed 17% in the quarter, a source of growth Siemens was banking on.

Siemens’ earnings outlook calls for a pickup in growth in the second half of 2012. With consumer demand flat on its back in both the U.S. and Europe, which in turn is affecting the export markets in Asia, it is difficult to see where the rise in consumer demand is going to come from.

Expect earnings outlook reports from the major eurozone blue-chip companies to be very negative in the weeks and months ahead. The stock market is a leading indicator; it trades based on the earnings outlook for companies that trade in the market.

The bear market rally that started in March 2009 is unraveling on several fronts. Economic growth will slow worldwide in 2012 (see: 2012 Economic Growth Slashed Across Most Countries). Blue-chip companies from Asia, to Europe, to America are delivering earnings outlooks for 2012 that are negative. The most accommodative monetary policy we have seen in our lifetime, a combination of money printing and multi-year zero interest rate policies, will eventually lead to rapid inflation, which will bring interest rates higher.

Earnings outlooks from blue-chip companies that are negative, rapid inflation, and higher interest rates…a lethal three-way combination for stocks! Rapid inflation will not happen tomorrow. Neither will higher interest rates. They will creep in. But, remember, the stock market is a leading indicator. The market will head down before these events start to happen.

Where the Market Stands; Where it’s Headed:

We are in a bear market rally in stocks that started in March of 2009. Yesterday, by attempting to spur economic growth by saying it would keep interest rates near zero until the end of 2014, the Fed gave its first shot in months at extending the rally.

The next silo, I believe, to be fired by the Fed is QE3. After that, there’s not much that can be done to stop the bear market rally from expiring. Enjoy it while it lasts.

What He Said:

“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi, in PROFIT CONFIDENTIAL, February 25, 2008. By the end of 2008, the rest of the world was realizing that the recession would be much longer and deeper than most had realized.

We’ve seen record prices attained for high-end artwork over the last few months. The reason is that even the wealthy are worried about the stock market and their market sentiment is to buy tangible things, like art and gold. This investment strategy also benefits with inflation, as art will appreciate at a rate equal to or higher than inflation. A sign of wealthy individuals with such an investment strategy should alert everyone else that they too should fear the possibilities of inflation blowing in the wind.

When compared to the S&P 500 index, the art market beat the index, returning 11% in 2011, from data compiled by the Mei Moses All Art Index. Over the last decade, this art index has beaten the S&P 500 60% of the time, exceeding the average by 7.8%.

While the art market was hit by the initial fall in all of the markets in 2008, it has bounced back very strong. The wealthy realized they wanted to diversify their investment strategy. They looked for hard assets that would go up with inflation and they looked to places like art and gold. I would agree with this market sentiment; one needs to be prepared for the coming rise in inflation. While precious metals and gold are great hedges, there are other ways to take advantage of this market sentiment.

I wouldn’t recommend the investment strategy of directly buying high-end artwork. For the average investor, it is far too difficult and costly to enter the market and diversify their portfolio. However, an interesting avenue might be to make money off each transaction through auction house Sotheby’s (NYSE/BID).

Sotheby’s was established in 1766 and has expanded all over the world, being one of two leaders in the market for high-end art. The firm has a profit margin of approximately 23%, but more importantly it gives the investor the ability to take part of a diversified investment strategy when the price of assets goes up.

I’m not the only one who has noticed that art prices have been strong performers even in this bad economy, as several hedge funds have been set up with this very same investment strategy. A report by Deloitte Luxembourg and ArtTactic showed that, in 2011, the assets in investment funds in art went up 26% from 2010 to a total of $960 million. Sales at both of the major art auction houses, Sotheby’s and Christie’s, were also strong last year, totaling $1.7 billion in 2011, up 35% from 2010.

Some of the most expensive works of art are now by Chinese artists. As Chinese wealth continues to soar, the rich there are putting their money into unique investments. The growth of the Chinese market is here to stay; as the number of millionaires and billionaires grows, so will their appetite for art as an investment strategy.

The place where these wealthy individuals and hedge funds buy their artwork for this investment strategy is at one of the major auction houses, including Sotheby’s. Of course, it’s impossible to know if this market sentiment will continue. What we do know is that there will be more Chinese wealthy patrons 10 years from now and we know that the central banks are about to start printing money at a very fast pace.

With this combination of a whole new group of clients and inflation about to soar, it would seem that being the middle-man as an auction house might be a really good option.

President Obama talked about the need to generate job creation and add some stimulus to the domestic manufacturing landscape. He proposes minimizing the advantage of foreign tax incentives that make American companies initiate job creation outside of the U.S. via placing a minimum tax on a company’s profits made overseas.

While the idea to deliver job creation makes sense, I cannot see how you can overcome the superlative tax breaks and much cheaper labor available overseas in emerging markets such as Asia, Eastern Europe, and Latin America. In these regions, the labor is significantly cheaper than their American counterparts, as the countries also want to drive local job creation.

The costs of plants and equipment, specifically the cost of operating overseas, are generally cheaper compared to the U.S. And also keep in mind that many of the major U.S. multinationals that have operations overseas also derive a good portion of their revenue stream from foreign markets, so it would not be as easy to do.

Take the case of General Motors Company (NYSE/GM), which I recently discussed in General Motors: China’s Top Foreign Automaker. The automaker used to be the king of cars in the U.S. until the Japanese and Korean automakers emerge decades ago. Given the change in the domestic environment, General Motors, like many U.S. companies, looked east towards China. The company reported an 8.3% year-over-year rise in sales in China to a record 2.55 million vehicles in 2011, down from 29% in 2010, but well above the average. China accounts for about 36% of total GM sales in 2011, so the region is critical for growth and for job creation in China.

Now, why would GM slow down production in China? Do you really think the Chinese government would sit idly by and allow GM to take some production back home, cut into Chinese job creation, and then sell the U.S.-made vehicles to the Chinese consumer? I doubt this would happen. GM will likely not be swayed by President Obama’s extra tax, as would be the case of many U.S. companies with key operations and sales in foreign countries, especially China.

The reality is that U.S. companies flourish in foreign countries due to the business incentives there and the ability to be close to the market, which often is different from that in the U.S.

President Obama also wants to offer a new tax credit for companies that close their operations overseas and generate domestic job creation along with more domestic tax incentives.

I like the reasoning and the move to bring in manufacturing and drive job creation, but, realistically, I cannot see why and how a multinational, which often has joint ventures in the particular overseas market, would suddenly close shop and move home.

The stock market offers up good opportunities no matter whether you’re in a bull market or a bear market, but different kinds of businesses behave differently on the stock market, depending on whether it’s a bull or a bear. The degree to which a stock performs is directly related to the degree institutional investors are willing to be interested in the story. A company growing its earnings by eight percent per year and paying dividends is going to be much less attractive than one growing 20% per year in a bull market. But, in a bear market, investors’ needs change and consistency becomes king.

I want to highlight for you two businesses that I really admire. I admire them because of the wealth they have created for shareholders and the consistency with which they’ve performed on the stock market. Both of them pay a modest amount of dividends and these businesses are what you might call boring and unexciting. In a bullish stock market, I’d bet most investors would ignore these companies. It would be a mistake, however, considering the consistency with which they make money over time. (See The Dow, S&P 500 & the NASDAQ: Why It’s Time to Ignore Them.)

If you have a chance, pull up a long-term chart (20 years) on Ecolab Inc. (NYSE/ECL). This company, based in St. Paul, MN, started out selling carpet cleaning products to hotels. Now the business sells cleaning supplies, and pest control and maintenance services to the foodservice, hospitality and healthcare industries. It isn’t fancy, but it makes money and the stock has been an outstanding, consistent wealth creator for years. It’s up about 20-fold over the last 20 years (not including dividends) and it’s weathered every shock to the system with demonstrable strength. The stock just hit another new record high and I’m surprised that Warren Buffett hasn’t bought it out yet.

The other consistent wealth creator that I admire is W.W. Grainger, Inc.(NYSE/GWW). This company pays a similar amount of dividends to Ecolab (current yield about 1.3%) and has been an outstanding, consistent wealth producer for many years. Based in Lake Forest, IL, W.W. Grainger is a wholesale distributor of industrial equipment such as electric motors and fasteners. It’s not the kind of business that you get excited about, but that doesn’t mean it hasn’t made a ton of money for shareholders. On the stock market, it just hit a new all-time record high, doubling since the beginning of 2010 and quadrupling since 2004 (not including dividends).

Ecolab and W.W. Grainger are but two examples of outstanding businesses that pay dividends and have created an enormous amount of wealth on the stock market. And they’ve performed consistently and with very little downside historically.

An equity portfolio, in my view, needs to have some boring, but consistent wealth creators in order to smooth out the effects of the business cycle on your holdings. You can trade the stock market for capital gains sure, but, at the same time, it can also pay big-time to hold great businesses that pay dividends. In my mind, a consistent business is just as useful as the next high-tech breakthrough.

Gold mining stocks and precious metals stocks did not perform very well last year (compared to recent years), but that doesn’t mean there is no value in them. Usually, when a sector like this is beaten down or forgotten by the market in general, value players come in and buy it up (myself, when gold bullion prices dip, I try my best to buy gold-related investment to average down my overall investment cost).

Analysts who follow the mining sector and who have earnings forecasts for these gold mining stocks typically value them as if the price of gold bullion was trading well below its current level. This means that, not only are the gold mining stocks cheap, they are also trading on the assumption that the price of gold bullion will fall to within the range of $1,200-$1,500 an ounce in a few years. Why buy gold bullion when you can buy a quality gold mining stocks at a discount to the price of gold bullion?

It’s been a frustrating time for investors of the gold mining stocks, but if the value players are hesitant to jump in feet first, there are other players who will.

Pan American Silver Corp. (NASDAQ/PAAS), the world’s second-largest primary silver miner, has just offered $1.5 billion in combined cash and stock deal to acquire Minefinders Corp. Ltd. (ASE/MFN), a medium-sized silver producer whose primary assets reside in Mexico. The price tag is a 36% premium to where Minefinders traded last Friday.

This, in my opinion, is just one of the many mining deals that will take place in 2012. The larger mining companies like Barrick Gold Corporation (NYSE/ABX), sitting on $3.0 billion in cash, Newmont Mining Corporation (NYSE/NEM), with over $1.0 billion in cash, and Goldcorp Inc. (NYSE/GG), with almost $1.5 billion in cash, are always searching for ways to grow their businesses.

It is a very attractive proposition for the large miners to buy quality junior and medium-sized gold mining companies, who are trading very cheap in terms of the price of gold bullion today. If the large gold mining companies believe the price of gold bullion will trade much higher, then the acquisitions become even more inexpensive and the value of gold mining stocks that much more attractive.

Be careful, dear reader; the wheat truly needs to be separated from the chaff. There are many promising junior gold mining stocks that will, in the end, offer up just that; promises. The companies that have proven assets, in my opinion, will earn a rich premium for their gold mining stocks in a buyout as the large firms look to improve their growth rates.

In 2012, if the value players in the gold mining industry don’t buy the gold mining stocks aggressively, the large gold mining companies flush with cash will. This will spur other hedge funds and asset managers to take a look at the mining sector more carefully and, in my opinion, will cause a stampede into the gold mining stocks, driving their prices much higher.

Sometimes patience is required in a market. But if there is one thing I’ve learned, it’s that value has always produced winners in the end.

Michael’s Personal Notes:

Another startling statistic that gave me pause: government benefits are now required for nearly half of Americans.

In the latest census data, covering the period of the second half of 2010, 48.6% of Americans received social security, unemployment insurance or another type of government benefit payout (Source: Wall Street Journal).

This past recession has hit harder than most. Only seven percent of Americans who lost their jobs during this recession have attained their previous financial position (Source: Rutgers University).

Without government assistance, imagine where we would be. The fact that the government has to help so many people illustrates the damage that this great recession has caused America and shows how far we still need to climb to get ourselves back to where we once were.

Researching these statistics gave me an idea. What if we removed government benefits (government transfer payments) from personal income to see how the average working American is doing?

This is a more pure form of the data, because it calculates income from work—the jobs market—with government assistance excluded.

To give us some perspective, let’s go back to the 1960s and look at personal income excluding government transfer payments. During this period of economic growth, this measure gained anywhere from 10% to 25%—people enjoyed strong personal income growth in a strong jobs market.

How did people do during recent recessions? In the late 1970s recession, the personal income growth rate slowed to just six percent. In the recession of the late 1980s and early 1990s, the personal growth rate dropped to merely three percent, while the recession that visited us in the early 2000s saw a personal income growth rate of five percent in a very difficult jobs market.

How about today and since 2008? Here comes the shock-and-awe part. Not in 50 years has this statistic once showed negative personal income growth, despite having experienced four recessions in that span. Is it different this time? You bet.

In the middle of 2011, real personal income excluding government transfer payments fell 5.1%. Currently it stands at negative 3.6%. Translated, salaries for the average worker are 3.6% lower than they were in 2008. What jobs market?

So, dear reader, not only are close to half of Americas receiving some form of government benefit, but also real personal incomes for those working is actually falling, which means that the average working American is being squeezed by inflation (through higher food and gas prices), while purchasing power is being further eroded by salaries that are below 2008 levels in a stagnant jobs market.

In case we dare to look outside, this is 2012. So I ask, where is the growth in consumer spending going to come from if the average American is witnessing the first post-recession decline in personal income in 50 years?

Where the Market Stands; Where it’s Headed:

Joe Granville came out yesterday and said that the stock market is going to dive 4,000 points this year. (Can you believe he is past 80 years of age?) I’ve been reading other reports that say the bottom is about to fall out of stocks, because the market is oversold and volume is thin.

But when I look at the number of stock market advisors who are bullish vs. bearish (a reliable stock market indicator I follow), it’s not a frightening spread just yet.

We are in a bear market rally in stocks that started in March of 2009. This bear market rally has further upside potential.

What He Said:

“For the economy the message from retail stocks is quite clear: Consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like “drunkards” during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in PROFIT CONFIDENTIAL, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008.

In the latest census data, covering the period of the second half of 2010, 48.6% of Americans received social security, unemployment insurance or another type of government benefit payout (Source: Wall Street Journal).

This past recession has hit harder than most. Only seven percent of Americans who lost their jobs during this recession have attained their previous financial position (Source: Rutgers University).

Without government assistance, imagine where we would be. The fact that the government has to help so many people illustrates the damage that this great recession has caused America and shows how far we still need to climb to get ourselves back to where we once were.

Researching these statistics gave me an idea. What if we removed government benefits (government transfer payments) from personal income to see how the average working American is doing?

This is a more pure form of the data, because it calculates income from work—the jobs market—with government assistance excluded.

To give us some perspective, let’s go back to the 1960s and look at personal income excluding government transfer payments. During this period of economic growth, this measure gained anywhere from 10% to 25%—people enjoyed strong personal income growth in a strong jobs market.

How did people do during recent recessions? In the late 1970s recession, the personal income growth rate slowed to just six percent. In the recession of the late 1980s and early 1990s, the personal growth rate dropped to merely three percent, while the recession that visited us in the early 2000s saw a personal income growth rate of five percent in a very difficult jobs market.

How about today and since 2008? Here comes the shock-and-awe part. Not in 50 years has this statistic once showed negative personal income growth, despite having experienced four recessions in that span. Is it different this time? You bet.

In the middle of 2011, real personal income excluding government transfer payments fell 5.1%. Currently it stands at negative 3.6%. Translated, salaries for the average worker are 3.6% lower than they were in 2008. What jobs market?

So, dear reader, not only are close to half of Americas receiving some form of government benefit, but also real personal incomes for those working is actually falling, which means that the average working American is being squeezed by inflation (through higher food and gas prices), while purchasing power is being further eroded by salaries that are below 2008 levels in a stagnant jobs market.

In case we dare to look outside, this is 2012. So I ask, where is the growth in consumer spending going to come from if the average American is witnessing the first post-recession decline in personal income in 50 years?

Where the Market Stands; Where it’s Headed:

Joe Granville came out yesterday and said that the stock market is going to dive 4,000 points this year. (Can you believe he is past 80 years of age?) I’ve been reading other reports that say the bottom is about to fall out of stocks, because the market is oversold and volume is thin.

But when I look at the number of stock market advisors who are bullish vs. bearish (a reliable stock market indicator I follow), it’s not a frightening spread just yet.

We are in a bear market rally in stocks that started in March of 2009. This bear market rally has further upside potential.

What He Said:

“For the economy the message from retail stocks is quite clear: Consumer spending, which accounts for roughly 70% of U.S. GDP, is in jeopardy. After having spent like “drunkards” during the real estate boom years, consumer spending is taking the same trend as housing prices, slowing down faster than most analysts and economists had predicted. As news of the recession continues to make headlines in the popular media, the psychological spending mood of consumers will continue to deteriorate, lowering earnings at most high-end retailers and bringing their stock prices down even further.” Michael Lombardi in PROFIT CONFIDENTIAL, January 28, 2008. According to the Dow Jones Retail Index, retail stocks fell 39% from January 2008 through November 2008.

And, while the investment community was pleased to see a change at the top and was hoping for a visionary to turn around the ailing “BlackBerry” in its life and death battle against the Apple Inc. (NASDAQ/AAPL) and “Android” devices, there was no extended search for a new leader. Instead, the new CEO, Thorsten Heins, who is also the former COO, has been given the daunting task of reversing the company’s fortunes, but his appointment is not drawing rave reviews on Wall Street. The future clearly is cloudy, as the company really needs a visionary and “go to” guy and I’m not convinced that an operations specialist will be able to right the ship.

The reality is that Heins may be better than the Research In Motion (RIM) co-founders who appeared to be caught off guard by the rise of Apple, but he is likely not like the late Steve Jobs or Richard Branson of Virgin Media, Inc. (NASDAQ/VMED). However, only time will tell if Heins can offer something different. The reaction by investors indicates pessimism with selling in the stock.

So, while Apple is moving along with innovation and creative products, the BlackBerry is vulnerable to being crushed in the wake of not only Apple, but also a host of Android and “Windows”-powered smartphones and devices.

As an investor, I would stick with Apple—the best of breed. The company is the largest company in the world, with an astounding market cap in excess of $394 billion, which would rank it 27th on the International Monetary Fund GDP rankings for 2010, between Iran and Austria. By comparison, RIM’s market cap of $7.64 billion is tiny. In fact, Apple has $25.95 billion in cash and no debt, so it could easily take out RIM if it wanted to. But Apple doesn’t have to do this, as its “iPhone” and “iPad” have garnered worldwide acclaim and are seen as sexy products, while RIM’s BlackBerry may be dying a slow death and its “PlayBook” tablet is essentially dead in the water, with no chance of competing against the iPad.

Apple has made many investors rich. I added a position in Apple for my Daily Profits online trading service at $87.00 in November 2008, with the stock up 387% since. That’s not that bad, but I was somewhat late the game in catching Apple before it began to move higher.

Investors recognizing this great opportunity in 1997 when Apple was trading at around $3.56 would have made nearly 120 times their money. An investment of about $13,000 in Apple in 1997 would make you a millionaire. A $100,000 investment is worth nearly $12.0 million!

Given this, I kind of wonder if I should have used the $100,000 I put down on a house in 1997 and instead bought shares of Apple. That’s what makes trading exciting.

We have seen an impressive start for stocks to begin the year, specifically the technology sector, with the NASDAQ up nearly seven percent. Read what I have to say in Technology Stocks: Invest in Them or Run for the Hills?

It’s been a very good start for the stock market since the beginning of the year, but the same thing happened last year. Share prices advanced solidly, then consolidated, followed by a correction. The similarities to last year are quite striking, with the S&P 500 starting this year and last at almost exactly the same level. Figuring out where the market will go this year is very difficult, but corporate earnings are expected to grow about 10%. For the most part, business seems to be holding up, but it certainly isn’t booming.

Commodity prices also have had a good start to the year, with the spot price of gold up about $100.00 an ounce since the end of 2011. In my view, the price of gold seems poised for a new breakout soon, and I base this on technical analysis and the long-term trend. Gold looks poised to trade in a tight range over the very near term. Like oil, there’s been some safe haven buying in gold in recent weeks due to the geopolitical risks with Iran.

So, for the stock market to continue with its advance, we need continued good corporate earnings and better news on the economy. I’m encouraged lately by the financial results being generated in many sectors within the industrial economy, and other industries like retail and pharmaceuticals. The technology sector is holding its own, but corporate earnings growth for many of the brand-name large-caps isn’t strong enough for a bullish stance within the group.

In this kind of stock market, investors wanting to take on new positions should stick with existing winners. I’m usually a buy-low/sell-high kind of investor, but we’re not in a market that recognizes value. I’d buy dividend-paying large-caps that are making new highs in this stock market. You won’t go wrong following those companies that are generating good corporate earnings and paying a dividend. (See How to Get Outperformance in this Kind of Market.)

We’re not in a bull market, so expectations are low and we can’t forget that investment risk for equities remains high. The bank can’t offer you investment returns that beat the rate of inflation and, with the structural problems facing most of the world’s mature economies, preservation of capital, in my view, is more important than trying to generate above-average returns.

Corporate earnings are good right now, but they have to get better for the stock market to advance. Balance sheets are strong and companies are running lean operations. Any uptick in top-line growth (revenues) will translate right into better corporate earnings. With all the current information, the stock market is appropriately valued. Investment risk remains high.

Following the release, three out of the four firms’ stocks were up. Would you be surprised to learn that it was Google that disappointed investors with their quarterly earnings release? Investors have sold the stock hard; now down over $50.00, or 7.8%? Obviously, Google is an outstanding company with innovative products and a huge market lead in many sectors. What I find interesting is that, since the rise of Google, all we’ve heard is how you should replace “old” technology firms in your portfolio with the “new” high-tech firms as the prime investment strategy. This recent quarterly earnings release is a sign that even the best and brightest of new technology companies have a few lessons to learn from the old, blue-chip high-techs.

To start, Google actually had pretty good numbers in its quarterly earnings, with revenue rising 25% to $10.5 billion. The real problems are: Google’s ability to communicate with investors what the future plans will be regarding its investment strategy; how will the firm monetize some of its assets; and the European economy.

Part of the job for the executives of any organization is to let investors know what their investment strategy and guiding future expectations are with a solid business plan. While Google’s CEO Larry Page has tried to alleviate investor concerns, a drop of over seven percent immediately after the quarterly earnings release obviously shows there was a disconnect between what investors believed they knew about the firm and reality.

A large portion of Google’s revenue comes from Europe. This is an obvious concern for investors looking at the quarterly earnings. Unlike IBM, Intel and Microsoft, Google doesn’t make much money from corporations for products and services, but focuses mainly on advertising to the retail market. This entrenched customer base of corporate accounts provides a cushion in times of uncertainty, buffering quarterly earnings, especially when current corporate profits and cash levels are quite high. Companies are looking to lower costs by adding to their technological arsenal, rather than hiring more people, an investment strategy that is obviously working.

The push by Google into mobile technology is a mixed picture. Yes, “Android” enjoys a huge market share, but the ad revenue generated is less than standard PC searches, as we see lower-than-expected results in its quarterly earnings. The lack of being able to monetize on the actual installation of Android software on so many millions of mobile devices also seems to be frustrating investors, when compared to Apple Inc. (NASDAQ/AAPL), which does make money on both the software and hardware sales of its “iPhone.”

Something that always scares investors is a company that has done well, but that starts to do too much and get into areas that isn’t their specialty, usually a dangerous investment strategy. CEO Larry Page is trying to rein in such excesses and get back to the firm’s core competency, eliminating “pet” projects and attempting to focus Google on areas where the highest returns are possible. This is certainly a step in the right direction. Compare how many products and sectors Apple is in versus Google and you can see how much more focused Apple is.

Personally, I love all of these high-tech names. The interesting point: a firm like Microsoft or Intel is considered a slow growth firm compared to Google, obviously. Yet, if you held shares over the last couple years in all three, you would be essentially flat, except that in Microsoft and Intel you would’ve gotten a yield of approximately three percent between the two stocks. Had you held the shares of IBM and Apple, you would have had the stocks move up approximately 50% and 100%, respectively, over the last few years, compared to flat for Google.

The difference is that, while Google has brilliant people working for the firm coming up with great products, they need to do several things to see strong returns in its stock. Focus on what they do best and leverage it to obtain the highest return on investment. Considering their expertise on the Internet, it makes more sense for the firm to develop its “Google+” social network, with over 40 million users already compared with Facebook’s 800 million, than for the firm to develop solar projects for green energy, on which the firm has spent almost $1.0 billion with no foreseeable avenue to make any money off that at all.

Old tech still has a few things to teach the new kids on the block.

Yes, we all know about the fiasco with numerous Chinese reverse merger (CRM) stocks. Some companies are cheating and lying about their operations and are getting caught. The fear of reverse mergers has not only impacted CRMs, but has also sent a ripple throughout the vast majority of Chinese stocks. Yet the selling has been overdone and unjustified.

Many of you know that I have been a big supporter of Chinese stocks despite a down year so far in 2011. But take a look at the facts…

China will continue to be one of the top major growth regions in the world. China had about 1.341 billion people at the end of 2010, according to the National Bureau of Statistics.

And better yet, people are spending their yuans.

While consumers are hesitant and faced with high debt burdens in the United States, the new money in China is being spent on everything from housing to furnishing to vehicles and travel. The country is now the world’s largest buyer of luxury cars. The government’s mandate is to drive domestic consumption to push up growth.

The per capita disposable income in China was about $3,000 a year for urban residents as of January 20, 2011, according to the National Bureau of Statistics. For rural residents, it was a mere $925.00. The income has more than doubled over the past few years and wages are heading higher along with spending. At the present time, only a small fraction of China’s GDP is driven by consumer spending compared to about 70% in the U.S. China wants to drive consumer spending long-term and this will drive organic GDP growth.

In my view, no other country offers such incredible investment opportunities. Moreover, you can add in the fact that China is a neighbor of the world’s second most populous country, India, where there are also excellent growth opportunities, with over 1.1 billion people and great growth prospects. Imagine the combined markets when the disposable incomes in both countries rise upwards. The two countries are working on increasing their bilateral trade.

Overall, China is on the right path towards developing into a rising world economic power as well as a basin for incredible and sustained growth across many sectors, including industrial, mining, energy, services, and technology. The reality is that if it is saleable and in demand, then you know that China will likely have the consumer market for it. China knows that and so do many of the top multinational companies, including many in the United States.

At this point, I believe that there are good aggressive buying opportunities in Chinese stocks, specifically small-cap stocks. However, you should be cautious and take a look at buying value at the current price levels. Chinese stocks listed in the U.S. will continue to represent an excellent area for growth investors; yet, you also need to be careful and to be diversified in your portfolio, as there could be more downside risk.

An area that I believe is ripe for strong growth as the material wealth grows in China is the travel sector, which I recently discussed in The Super-hot Chinese Sector.

These are excellent corporate earnings from a very mature industry and it’s a strong signal that the industrial economy in the U.S. is in a solid recovery. The stock market’s been pretty keen on Union Pacific for the last six years. Despite a major pullback in its share price during the subprime mortgage crisis (like most other stocks), Union Pacific’s share price appreciated from around $30.00 a share in 2005 to its current all-time record of over $114.00 per share (adjusting for a stock market split).

Corporate earnings have been so strong in the railroad industry; railroad stocks have handedly beat traditional higher growth companies like Intel Corporation (NASDAQ/INTC) and Oracle Corporation (NASDAQ/ORCL). (See Record Results & Good Visibility for Railroad Companies, But Nobody’s Buying the Success.) A lot of brand-name companies like Intel and Oracle haven’t done anything on the stock market for the last 11 years. There’s no need to even consider pure-play technology when companies like McDonald’s Corporation (NYSE/MCD) and Union Pacific are doing so well. As I keep writing, what’s old is new again and the corporate earnings are robust enough in “old names” to support a rising stock market.

I’d own a railroad stock in a long-term equity portfolio, but I’d wait until there was a price retreat before initiating a new position. The biggest issue affecting railroad corporate earnings is fuel costs and this is why Union Pacific’s earnings were so impressive. Last quarter’s fuel costs increased by close to 40%, yet the company was still able to grow its earnings an impressive 24%. And the best sign (for Union Pacific and the economy) is the company’s ability to increase its prices without affecting demand. This means there’s underlying strength within the industry.

The stock market has been kind to railroad stocks over the last five years because of their strong corporate earnings. It’s no wonder Warren Buffett wanted to purchase all of Burlington Northern Santa Fe Railway. It’s a great business to be in once you’ve got your infrastructure built and paid for.

I wouldn’t be surprised if the railroads return more of their corporate earnings to shareholders this year. As a group, they are due for increased dividends. If this happens, then the stock market’s interest in the sector will continue. In this kind of market, it pays to stick with your winners.

So far this year, the S&P 500 has gained 4.6%—its best January start in 15 years! Market sentiment—how investors feel about the stock market—has shown a marked improvement.

The eurozone, through its Long Term Repo Operation (LTRO), has provided liquidity to the eurozone banks, which has improved market sentiment there for now. This solves the eurozone’s short-term liquidity problem (but does nothing to solve the mountain of debt on their balance sheets and on the balance sheets of the countries themselves—a crisis that will resurface in the not-too-distant future).

With the eurozone currently calm, U.S. Treasuries yielding close to zero, and market sentiment turning positive, money has found its way back into the equities market.

It sounds like an attractive proposition: China’s economy is slowing and their central bank has stated that it will ease monetary policy, providing more monetary liquidity. The eurozone is providing monetary liquidity. How could market sentiment not be improving?

Here in the U.S., the Fed is determined to hold rates low until 2013 and there have been no fewer than five Fed governors talking about the need to provide more support to the economy by buying more bonds, specifically, mortgage-backed securities—QE3. Should this occur, it is more money printing—liquidity. This will do wonders for market sentiment!

The problem with this story, as I have been documenting over many months, is that this liquidity hasn’t resulted in growth. In order for equities market to continue to perform well and market sentiment to remain positive, earnings are going to have to grow and, in order for that to occur, consumer demand is going to have to come back to life.

With almost every part of the world currently experiencing slow growth, and with the eurozone already most likely in a recession, I don’t see how consumer spending will improve. (See: 2012 Economic Growth Slashed Across Most Countries.)

Over the last few years, China and India have been the strongest growing economies in the world. However, as 2011 came to a close, their growth rates began to slow noticeably. These countries themselves have slashed their growth forecasts for 2012. Here in the U.S., anemic job growth and stagnant wages continue to pressure consumers.

With the consumer missing in action, and growth a fleeting mirage, investors should tread very carefully with this latest rise in market sentiment and corresponding rise in the equities market.

You shouldn’t see the sign of investors turning bullish on stocks as a positive. On the contrary, I believe the secular bear market is simply achieving its goal of luring more investors back into stocks during this phase of the bear market, a rally often called the “sucker’s rally”. (See: Exactly Where We Are in This Secular Bear Market.)

 Michael’s Personal Notes:

A stronger sign of inflation headed our way…

Late last week, the U.S. Treasury sold $15.0 billion in 10-year Treasury Inflation Protected Securities (more commonly known as “TIPS”) at a negative yield (interest rate), for the first time in its history. Demand for this issue was strong from bond investors.

TIPS are instruments that are purchased by bond investors from the U.S. Treasury as a hedge against inflation.

TIPS are tied to the Consumer Price Index (CPI). This means that, should inflation rise, TIPS would pay the bond investor the interest plus the change in inflation that occurred over the previous year. Should there be deflation, however, the bond investor would lose money on his/her investment.

For the first time, bond investors paid a negative yield, which means bond investors paid extra to purchase these TIPS from the U.S. Treasury.

This, dear reader, tells me two things. On the surface, if we look at this (bond investors buying Treasuries with negative returns), we think investors are finding fewer and fewer places to park their money safely—they are sacrificing profit for the actual return of their money. But there is more to it.

With the eurozone crisis unresolved and global growth slowing significantly around the world, which I’ve been writing a lot about lately, investors are looking for safety. Right now, the safest of currencies to be in is the U.S. dollar…and maybe only because it is the reserve currency of the world.

When bond investors buy TIPS with a negative return, it really tells me that bond investors are worried about inflation. Why pay more for something unless you are fairly confident it will appreciate in value in the future?

As I’ve been writing since the credit crisis started, the Fed is trying desperately to generate inflation. Bond investors are telling the market that they think the Fed will be successful. Combine this with the Fed governors indirectly continually talking about QE3 and the argument for buying TIPS from the U.S. Treasury becomes that more attractive to bond investors.

In my opinion, if you are going to buy an inflation hedge, gold-related investments are really the best plays. TIPS are fine, but not at a negative yield and not when they pay out in dollars. Should the Fed continue to expand the money supply aggressively (i.e. printing money), then the value of those U.S. dollars will continue to fall, which means a bond investor would be paid back in the future with dollars that are worth less than today—evaporating any return earned by the bond investor from higher inflation.

Gold offers protection from currency depreciation, since historically, it rises when currencies depreciate. History has repeated itself over the last 10 years. As the dollar depreciated in value, gold embarked on its bull run.

This is why gold has been a store of value for thousands of years. It can’t be printed, its supply is limited, and it is very difficult to mine.

Inflation is coming. The recent action in the TIPS market is just another sign of that. But if you want to protect yourself against inflation, the best vehicle, in my opinion, is still gold-related investments.

Where the Market Stands; Where it’s Headed:

You have to hand it to this market. Quietly, without much fanfare, January is turning out to be a banner month for the Dow Jones Industrial Average. With seven more trading days in the month still to go, the market is up four percent for 2012 already.

I’ve been writing for months that the bear market rally that started in March of 2009 is alive and well. We’ve been seeing the proof since the beginning of October. But each time the market moves higher, more investors and stock advisors enter the bullish camp. Nothing alarming yet, but once enough people are in the bullish camp, that’s when we will see the bear market rally finally run for the exit gate.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S.peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we began experiencing in 2008 long before anyone else.

Late last week, the U.S. Treasury sold $15.0 billion in 10-year Treasury Inflation Protected Securities (more commonly known as “TIPS”) at a negative yield (interest rate), for the first time in its history. Demand for this issue was strong from bond investors.

TIPS are instruments that are purchased by bond investors from the U.S. Treasury as a hedge against inflation.

TIPS are tied to the Consumer Price Index (CPI). This means that, should inflation rise, TIPS would pay the bond investor the interest plus the change in inflation that occurred over the previous year. Should there be deflation, however, the bond investor would lose money on his/her investment.

For the first time, bond investors paid a negative yield, which means bond investors paid extra to purchase these TIPS from the U.S. Treasury.

This, dear reader, tells me two things. On the surface, if we look at this (bond investors buying Treasuries with negative returns), we think investors are finding fewer and fewer places to park their money safely—they are sacrificing profit for the actual return of their money. But there is more to it.

With the eurozone crisis unresolved and global growth slowing significantly around the world, which I’ve been writing a lot about lately, investors are looking for safety. Right now, the safest of currencies to be in is the U.S. dollar…and maybe only because it is the reserve currency of the world.

When bond investors buy TIPS with a negative return, it really tells me that bond investors are worried about inflation. Why pay more for something unless you are fairly confident it will appreciate in value in the future?

As I’ve been writing since the credit crisis started, the Fed is trying desperately to generate inflation. Bond investors are telling the market that they think the Fed will be successful. Combine this with the Fed governors indirectly continually talking about QE3 and the argument for buying TIPS from the U.S. Treasury becomes that more attractive to bond investors.

In my opinion, if you are going to buy an inflation hedge, gold-related investments are really the best plays. TIPS are fine, but not at a negative yield and not when they pay out in dollars. Should the Fed continue to expand the money supply aggressively (i.e. printing money), then the value of those U.S. dollars will continue to fall, which means a bond investor would be paid back in the future with dollars that are worth less than today—evaporating any return earned by the bond investor from higher inflation.

Gold offers protection from currency depreciation, since historically, it rises when currencies depreciate. History has repeated itself over the last 10 years. As the dollar depreciated in value, gold embarked on its bull run.

This is why gold has been a store of value for thousands of years. It can’t be printed, its supply is limited, and it is very difficult to mine.

Inflation is coming. The recent action in the TIPS market is just another sign of that. But if you want to protect yourself against inflation, the best vehicle, in my opinion, is still gold-related investments.

Where the Market Stands; Where it’s Headed:

You have to hand it to this market. Quietly, without much fanfare, January is turning out to be a banner month for the Dow Jones Industrial Average. With seven more trading days in the month still to go, the market is up four percent for 2012 already.

I’ve been writing for months that the bear market rally that started in March of 2009 is alive and well. We’ve been seeing the proof since the beginning of October. But each time the market moves higher, more investors and stock advisors enter the bullish camp. Nothing alarming yet, but once enough people are in the bullish camp, that’s when we will see the bear market rally finally run for the exit gate.

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S.peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we began experiencing in 2008 long before anyone else.

On the surface, consumers are getting themselves into trouble by taking on more debt. However, a closer look reveals something more disturbing.

Loans taken from retirement saving accounts (dipping into your savings) rose 20% in 2011, across all demographics. Among lower income earners, this number jumped by as much as 60%! A large sample of 150,000 people with 401(k)s was taken to gauge how Americans with 401(k)s were faring.

The study revealed that close to 33% of people have loans outstanding against their 401(k)s (source: Aon Hewitt). The economic contraction that started in 2007 has caused havoc for retirement savings accounts.

Almost all of the people in the sample initiated their loans against their savings to pay for essentials like day-to-day bills, car repairs, and student loans. I must admit, dear reader; this gave me pause…33% of people with a retirement plan borrowing money against it…this reveals how deep this economic contraction really is.

Many Americans have given up on trying to plan for retirement; people are just trying to survive day-to-day after the economic contraction we experienced from 2007 to 2008. The rising costs of food and energy were also cited as sapping money away that would otherwise have gone toward paying other bills.

Lower income families spend more than half of their earnings on essentials compared to the middle class. It is no surprise that, combined with little job growth and rising food and energy costs, 60% of lower income individuals have been forced to dip into their retirement accounts to make ends meet. The economic contraction was most devastating to the lower income families.

Not only do these statistics reveal a crisis, but they also highlight the fact that, unless we exit this economic contraction with significant job creation and real wages climbing considerably over real inflation, a comfortable retirement will allude—or actually become an impossibility for—most Americans.

Speaking of retirement, how are those aged 50 and over adapting to the economic contraction? In one recent survey for 2011, the results hit a new low.

Almost 28% of people over 50 are having difficulty paying their monthly bills, with 15% of these respondents quite certain they will have to work until the age of 70. Roughly 20% of respondents cut the number of doctor appointments per year, while just over 20% changed their prescriptions, all in a bid to save money (source: Economic Benefit Research Institute).

These are truly troubling statistics. With this backdrop, and a continued lack of job growth, and keeping in mind that 70% of our GDP comes from consumer spending, I believe the surprise for most economists in 2012 will be just how quickly economic growth converts to economic contraction again.

Michael’s Personal Notes:

The World Bank has finally come out and said what I’ve been saying to my readers for weeks: Europe is most likely already in a recession.

The World Bank has chimed in with their latest semi annual forecast for world economic growth. They are calling for a 0.3% contraction of GDP growth for the 17 members of the eurozone in 2012 (recession).

The institute is convinced that the U.S. will not be able to escape the global economic slowdown (which I’ve been warning my readers about as well) and, as a consequence, cut America’s growth rate down to 2.2% from 2.9% for 2012. I personally believe that even 2.2% is going to be out of reach!

The biggest downside risks to its forecast are the evolving sovereign debt crisis in the eurozone, which will accelerate the economic slowdown, and the tensions in the Middle East, which could result in a spike in oil prices, destroying any hope of escaping a recession.

The reason for the biggest downward revision in the World Bank’s growth forecast in three years is plain and simple: the eurozone. The World Bank sees the eurozone recession causing an economic slowdown in the developing nations that trade with it—China, Brazil, and India—and this is in turn affecting countries like Japan and the U.S. I’ve been warning my readers that this is already happening.

No country was spared from a cut in GDP growth rates in light of the global economic slowdown. Aside from the eurozone, the largest engines of growth,China and India, were also cut significantly. For 2012, the World Bank estimates growth of 8.4% for China (which would be China’s slowest growth rate in a decade) and has India penciled in at 6.5%, down from 8.4%.

Due to the debt crisis in the eurozone, the Institute also cites the possibility of a global freezing-up of the markets causing a global crisis similar to what took place in 2008, which would plunge much of the world into a recession.

I’ve been warning readers that in this precarious environment, one event—like the failure of a large eurozone bank—will result in a chain-reaction that will freeze up the system. I don’t usually quote the forecasts of other think-tanks, but I find that the World Bank has been a quite reliable economic predictor over the past few years.

The world is littered with land mines of too much debt and banks that are teetering on a cliff thanks to a customer confidence crisis, especially in the eurozone. Couple this with an economic slowdown, which depresses bank and government revenue, and we’ll easily see financial pressures building.

Where the Market Stands; Where it’s Headed:

Little by little, the Dow Jones Industrial Average inches towards the 13,000 level. We experienced multiple days of minor advance by the world’s most watched stock market index, with the Dow Jones Industrial Average now up 3.3% for 2012 so far.

This bear market rally is doing an excellent job of luring investors back into the stock market. Positive economic news over the next couple of months will add credence to the belief that the economy has turned around. It will be exactly at that point that the bear will take the chips off the table again.

What He Said:

“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major home builder will go bankrupt in 2008.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. WCI Communities, the largest U.S. luxury home builder at that time, filed for Chapter 11 protection on August 4, 2008.

The World Bank has chimed in with their latest semi annual forecast for world economic growth. They are calling for a 0.3% contraction of GDP growth for the 17 members of the eurozone in 2012 (recession).

The institute is convinced that the U.S. will not be able to escape the global economic slowdown (which I’ve been warning my readers about as well) and, as a consequence, cut America’s growth rate down to 2.2% from 2.9% for 2012. I personally believe that even 2.2% is going to be out of reach!

The biggest downside risks to its forecast are the evolving sovereign debt crisis in the eurozone, which will accelerate the economic slowdown, and the tensions in the Middle East, which could result in a spike in oil prices, destroying any hope of escaping a recession.

The reason for the biggest downward revision in the World Bank’s growth forecast in three years is plain and simple: the eurozone. The World Bank sees the eurozone recession causing an economic slowdown in the developing nations that trade with it—China, Brazil, and India—and this is in turn affecting countries like Japan and the U.S. I’ve been warning my readers that this is already happening.

No country was spared from a cut in GDP growth rates in light of the global economic slowdown. Aside from the eurozone, the largest engines of growth,China and India, were also cut significantly. For 2012, the World Bank estimates growth of 8.4% for China (which would be China’s slowest growth rate in a decade) and has India penciled in at 6.5%, down from 8.4%.

Due to the debt crisis in the eurozone, the Institute also cites the possibility of a global freezing-up of the markets causing a global crisis similar to what took place in 2008, which would plunge much of the world into a recession.

I’ve been warning readers that in this precarious environment, one event—like the failure of a large eurozone bank—will result in a chain-reaction that will freeze up the system. I don’t usually quote the forecasts of other think-tanks, but I find that the World Bank has been a quite reliable economic predictor over the past few years.

The world is littered with land mines of too much debt and banks that are teetering on a cliff thanks to a customer confidence crisis, especially in the eurozone. Couple this with an economic slowdown, which depresses bank and government revenue, and we’ll easily see financial pressures building.

Where the Market Stands; Where it’s Headed:

Little by little, the Dow Jones Industrial Average inches towards the 13,000 level. We experienced multiple days of minor advance by the world’s most watched stock market index, with the Dow Jones Industrial Average now up 3.3% for 2012 so far.

This bear market rally is doing an excellent job of luring investors back into the stock market. Positive economic news over the next couple of months will add credence to the belief that the economy has turned around. It will be exactly at that point that the bear will take the chips off the table again.

What He Said:

“Home-building in the U.S. will enter a quasi depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major home builder will go bankrupt in 2008.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. WCI Communities, the largest U.S. luxury home builder at that time, filed for Chapter 11 protection on August 4, 2008.

At the time, it was discussed extensively that Yang was the hold-out against Microsoft’s offer. In the area of Internet-related stocks, Yang thought Yahoo! could go it alone and succeed. He was wrong. But since he’s now gone, does this represent a buying opportunity in Yahoo! or one of the other Internet-related stocks?

Let’s take a look at some recent developments in Yahoo!, what the company’s pieces are worth, and what the most likely scenario will be. Yahoo! has recently added a new CEO, Scott Thompson, who was formerly the president of PayPal, part of eBay Inc. (NASDAQ/EBAY). He has extensive knowledge of online payment systems and international development. Although he does not have direct experience with search and advertising, he does have knowledge of Internet-related stocks working with a firm that is a global leader in payment processing.

But as good as Thompson is as an executive, he might not be able to generate enough of an increase in revenue to justify Yahoo! as a buying opportunity. Don’t forget; prior to Thompson, the Board brought in Carol Bartz, former CEO of Autodesk, Inc. (NASDAQ/ADSK). She ran a very successful firm, but also was not directly involved in Internet search and online advertising. Her reign was definitely not a buying opportunity.

The pieces of Yahoo! are very interesting. Yahoo! has a 40% stake in Alibaba Group Holding Ltd. and a 35% stake in Yahoo! Japan. These are very valuable entities. Some estimates have these as a buying opportunity, valued together in the $18.0-billion range. The current market value of Yahoo! itself is $20.0 billion, which includes these pieces and $2.0 billion in cash on hand.

At a $20.0-billion value for Yahoo!, the core business is valued at zero. While it’s not a top-notch Internet firm like Google Inc. (NASDAQ/GOOG), there is some value in having 700 hundred million users. A firm like Microsoft might want to buy some of the pieces, especially Yahoo! Japan. Microsoft search engines have a market share in Japan of approximately 1.7%, compared to over 51% for Yahoo! Japan. Microsoft has a ton of cash on hand and needs to find growth somewhere. Adding Yahoo! Japan might be a great fit and a current buying opportunity. Even the U.S. share of searches for Yahoo!, approximately 14.9%, would be a nice addition to Microsoft’s search engine market share of six percent.

The Yahoo! stake in Alibaba is thought to be sought by the parent company itself. Rumors have been swirling that Alibaba might buy Yahoo! outright. One thought to consider: Thompson the CEO of Yahoo, comes from PayPal. Online payment processing is his specialty, not web search. Perhaps he will work to combine his skills with a partnership between Yahoo! and Alibaba. Alibaba is a global Web-based firm that provides a business-to-business marketplace.

No matter how you slice it, Internet-related stocks will be sure to have some sort of shake-up within the next year. It’s very hard to predict the future of any industry, but if you thought that Yahoo! might sell off pieces or itself as a whole, then I would step in and see this as a buying opportunity. Until then, I would be cautious, as Yahoo! continues to lose market share in its core operations.

Something has to be done. This is why new management was brought in and I don’t think Thompson will stand and watch the company slide into oblivion without some drastic action. The year 2012 should be an interesting year for Internet-related stocks!

China is predicted to see major growth in its domestic travel from now until 2013, according to research report, China Tourism Industry Forecast to 2012, by traveldailynews.com.

As income levels rise in this country, we are seeing a corresponding increase in domestic travel. The country’s domestic travel market could be worth approximately RMB 3.9 trillion or about US$590 billion by 2020, according to a report published by The Boston Consulting Group (Taking Off: Travel and Tourism in China and Beyond). The country will see strong growth in its inbound travel industry from 2011 to 2013 that will be driven by overseas investment and the influx of foreign companies, according to traveldailynews.com report China Tourism Industry Forecast to 2012. But, while higher-end hotels like the Hilton are desirable, the cost is often out of reach for the majority of domestic and foreign visitors. I like the budget end of the hotel side similar to the Days Inn, Super 8 Motels, Howard Johnston, and Holiday Inns in the United States.

China has a population of about 1.34 billion people; over four times the size of the United States. The size of the middle class is over 300 million and this is expected to grow exponentially. The World Bank estimates that, within five years, there will be 542 million middle-class consumers in China. I have heard estimates of up to 700 million! And as wages increase so will the spending on non-essential items such as travel and recreation.

The Chinese economy saw its GDP slowed to 9.1% in the third quarter, down from 9.5% in the second quarter and over 10% in 2010. The Chinese economy may be slowing, but the growth is still staggering given the muted growth in the United States and Europe.

The reality is that the Chinese consumer is continuing to spend money. In September, retail sales in China grew a staggering 17% versus a muted 1.1% in the U.S.

To handle the expected increase in travel, there is a push to build more hotels and motels across the vast country.

I like Chinese travel stocks, including China Lodging Group, Limited (NASDAQ/HTHT), Home Inns & Hotels Management Inc. (NASDAQ/HMIN), and 7 Days Group Holdings Limited (NYSE/SVN). Note that these are not recommendations to buy; just an example of stocks to look at.

All three companies have above-average long-term share appreciation potential, but 7 Days Group is more interesting due to its better valuation versus the other two rivals.

7 Days Group is the third largest national economy hotel chain in China. The company offers limited services under the “7 Days Inn” brand, similar to budget hotels and motels in the U.S. In the third quarter of 2011, the company added 116 net hotels. As of September 30, 2011, 7 Days Group operated 838 hotels spread across 127 cities and 83,487 rooms. In addition, growth is expected to be strong, with 251 hotels in the pipeline.

7 Days Group may or may not have the greatest potential of the three stocks. Only time will tell, but what is for sure is that the travel sector in China is a key growth area.

I truly feel China continues to be the place to make money going forward, which you can read more on in China: On the Offensive Again.

For a large-cap stock and Dow Jones component, McDonald’s has appreciated steadily and with remarkable consistency since 1980. Put a ruler underneath the company’s share price and you’ll see how extraordinary its performance has been. This large-cap stock struggled in 2002/2003, but that’s about it. When the stock market collapsed in 2008 and then hit a low in March of 2009, McDonald’s basically traded flat, just below $60.00 a share. This week, it hit an all-time record high of over $101.00 per share, with a current dividend yield of 2.8%. Not bad at all if you ask me. The stock split seven times since the early 80s and is now due for another split.

A stock market performance like McDonald’s makes me think that bothering with the rest of the stock market is mostly just a waste of time. Financial markets are like a casino where the odds are stacked against you and your win is only the result of someone else’s loss.

I’ve always been a fan of investing in large-cap stocks, especially those that pay dividends. Even though I spend most of my time researching smaller companies, I’ve seen stock market portfolios with a handful of large-cap stocks create a lot of wealth for people. And the dividends compensate you for the prevailing rate of inflation and, for the most part, you sleep well at night knowing what you own. (See A Company Doesn’t Have to Be Small to Provide Big Returns.)

I don’t own shares in McDonald’s, but I wish I did. Not only is it impressive for such a large-cap stock to perform so well, but this company is renovating restaurants and expanding while other chains are struggling in this lackluster economy. The company reports its next set of financial results on January 24 and it’s a benchmark stock that I will be paying attention to.

Over the last 12 months, the stock market was flat, while McDonald’s appreciated 35% not including dividends. Over the last two years, McDonald’s appreciated 60% on the stock market and, over the last five years, the stock went up 141% not including dividends. All this proves that you can do just as well owning the right large-cap stocks as you can speculating in the latest high flyers. And you can do so with a lot less risk.

But I’m taking a break today from reporting on the stock market, economy, precious metals, the eurozone, and everything else I usually write about on these pages.

The events surrounding the Costa Concordia (the ship that went aground on the Island of Giglio in Italy) have been heavily reported in the media. Sure, accidents happen. But what bothers me about this incident is the lack of integrity and character surrounding the actions of the ship’s captain, Francesco Schettino.

Schettino could face charges of manslaughter and abandoning ship. I wonder what this man was thinking. Where is his character, his integrity? The captain should be the last person off a sinking ship or airplane, not one of the first. But it’s deeper than that. Integrity, in my opinion, has become a rare trait amongst people today. I see it in business and government every day: People say things they are going to do that they never do.

Costa Concordia is owned by the world’s largest cruise ship operator, Carnival Corporation (NYSE/CCL). Carnival’s CEO and major shareholder is Micky Arison. This weekend, I just happened to be in the Port of Miami when someone pointed out Arison’s yacht to me. It’s definitely longer than my house…maybe a few times longer…one of the biggest yachts I’ve seen.

If I were a shareholder of Carnival, I would have liked to see the CEO of my company go to Italy and get personally involved with the search and rescue mission. This would have shown character on the part of the individual at the top of the organization. I believe it would be something the great CEOs of our time, like the late Steve Jobs, would have done.

(Arison also owns the Miami Heat, a very popular basketball franchise right now. The fellow at the ticket counter told me Tuesday night that the only good seats available for Tuesday night’s game were about $300 each, so I passed.)

I’m not one to bash other people. That’s not my character. I stick to my knitting, which is analyzing the stock market and economy.

I wrote this “character piece” today to get this point across, as I tell my children all the time: There are two ways to deal with any crisis situation; the one that is morally correct, which displays a person’s integrity, and the cowardly, shallow way.

Remember in 2009 when US Airways Flight 1549 went down in the Hudson River in New York? The captain of the plane became an overnight hero. He was the last person off the plane (which really became a ship). He left once all the passengers and crew were off safely. The entire crew of Flight 1549 was later awarded the Master’s Medal of the Guild of Air Pilots and Air Navigators. The captain of Flight 1549, Captain Chesley Sullenberger, showed the utmost integrity and became a hero, a leader, a perfect example for other airline captains.

I believe the credit crisis of 2008, which ultimately resulted in millions of people losing their jobs and their means to support their families, could have been avoided if some key people in business and government showed some integrity by taking leadership and dealing with the U.S. housing and mortgage bubble before it got too big.

The older I get, the more I invest in businesses, and the more I realize it’s all about people. Dedication, integrity and leadership have always been of utmost importance to me in respect to the people I want to be associated with. My children; take note.

Michael’s Personal Notes:

I’ve been critical of quantitative easing (i.e. money printing), because most of the money was funneled to help shore up the balance sheets of the banks, without finding its way to the person who needs it most: the average American, who can spur the economic recovery.

There are exceptions, which include some infrastructure spending that could have long-lasting economic benefits. Another creative measure, called the “bonus depreciation,” is set to disappear early in 2012. This tax break was enacted in 2009, as part of a tax incentive package to spark the economic recovery back to life.

The measure allowed businesses to write off 100% of certain capital expenditures, in the year of purchase, instead of spreading out that write-off over a five-year period. Think of it as a type of cash-for-clunkers for businesses. It saves them a lot of money upfront on their taxes, which gives them the incentive to go out and purchase capital goods and/or services, because this incentive reduces the actual cost of the item significantly.

This tax break has had three positive impacts on economic recovery. It incentivized companies to spend on capital goods, which kept capital goods manufacturers and service providers busy and employees employed, and could have resulted in job creation from the increased demand. Secondly, it boosted the country’s productivity, since the companies that purchased the capital goods and/or services became more efficient. Thirdly, a more efficient firm improves sales, as it offers products/services at more competitive prices, either around the world or in their own backyard (which keeps their employees employed, possibly expands job creation and spurs economic recovery). (See: December U.S. Job Numbers Disappoint.)

It is a real shame to me that, to date, Congress has dropped this incentive from their tax holiday bill. Associations are fighting hard to have the incentive reinserted into the bill, and so extended through 2012, with no luck thus far. The associations argue, and rightly so in my opinion, that it impacts businesses directly and, in turn, job creation, and so the economic recovery.

Here is a measure that actually supports the average businessperson, and so the average American, in sustaining and bettering their businesses and their jobs. This country needs all the help it can get in its attempt to ratchet up its economic recovery and, even if this measure helps just on the margin, we should take it. With unemployment remaining stubbornly high, any measure that results in some job creation is a measure worth keeping.

It’s not like the economic recovery has turned the corner so the incentive can be dropped. There is no doubt that 2012 will continue to be a struggle for the economy. Getting rid of the accelerated depreciation measure at this point in the economic recovery pushes us in the wrong direction; we want to move toward economic recovery, not contraction.

Where the Market Stands; Where it’s Headed:

Only three weeks into January and the Dow Jones Industrial Average is up three percent for 2012. If you’re a firm believer in the January Effect (the old adage that says if the stock market goes up in January, it is up for the remainder of the year), things are looking good for you!

I don’t put much credence in the January Effect theory. I believe that we are in a bear market rally that could be making its last run to the top before it finally fades and we get down to the real business of the bear: bringing stock prices down again. (See: Official Numbers in…2012 Not Looking Good.)

What He Said:

“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.

There are exceptions, which include some infrastructure spending that could have long-lasting economic benefits. Another creative measure, called the “bonus depreciation,” is set to disappear early in 2012. This tax break was enacted in 2009, as part of a tax incentive package to spark the economic recovery back to life.

The measure allowed businesses to write off 100% of certain capital expenditures, in the year of purchase, instead of spreading out that write-off over a five-year period. Think of it as a type of cash-for-clunkers for businesses. It saves them a lot of money upfront on their taxes, which gives them the incentive to go out and purchase capital goods and/or services, because this incentive reduces the actual cost of the item significantly.

This tax break has had three positive impacts on economic recovery. It incentivized companies to spend on capital goods, which kept capital goods manufacturers and service providers busy and employees employed, and could have resulted in job creation from the increased demand. Secondly, it boosted the country’s productivity, since the companies that purchased the capital goods and/or services became more efficient. Thirdly, a more efficient firm improves sales, as it offers products/services at more competitive prices, either around the world or in their own backyard (which keeps their employees employed, possibly expands job creation and spurs economic recovery). (See: December U.S. Job Numbers Disappoint.)

It is a real shame to me that, to date, Congress has dropped this incentive from their tax holiday bill. Associations are fighting hard to have the incentive reinserted into the bill, and so extended through 2012, with no luck thus far. The associations argue, and rightly so in my opinion, that it impacts businesses directly and, in turn, job creation, and so the economic recovery.

Here is a measure that actually supports the average businessperson, and so the average American, in sustaining and bettering their businesses and their jobs. This country needs all the help it can get in its attempt to ratchet up its economic recovery and, even if this measure helps just on the margin, we should take it. With unemployment remaining stubbornly high, any measure that results in some job creation is a measure worth keeping.

It’s not like the economic recovery has turned the corner so the incentive can be dropped. There is no doubt that 2012 will continue to be a struggle for the economy. Getting rid of the accelerated depreciation measure at this point in the economic recovery pushes us in the wrong direction; we want to move toward economic recovery, not contraction.

Where the Market Stands; Where it’s Headed:

Only three weeks into January and the Dow Jones Industrial Average is up three percent for 2012. If you’re a firm believer in the January Effect (the old adage that says if the stock market goes up in January, it is up for the remainder of the year), things are looking good for you!

I don’t put much credence in the January Effect theory. I believe that we are in a bear market rally that could be making its last run to the top before it finally fades and we get down to the real business of the bear: bringing stock prices down again. (See: Official Numbers in…2012 Not Looking Good.)

What He Said:

“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.

The new GM stock debuted at $34.00 in November 2010 before moving to $45.00, but this was followed by a subsequent decline to the current low $20.00 level. Yet there is value with GM. Based on the estimated earnings of $3.74 in 2012, GM is trading at a price-earnings multiple of 6.53X based on the prevailing stock price of $24.49 on January 18. U.S. rival Ford Motor Company (NYSE/F) is trading at 7.84X its 2012 earnings per share (EPS), while Japanese leader Toyota Motor Corporation (NYSE/TM) trades at 9.29X its fiscal 2013 EPS.

However, General Motors is looking beyond the U.S. for its growth, specifically the company’s growing position in China’s massive auto sector, which has softened somewhat over the past year. Nevertheless, it continues to be the world’s largest auto market, with an estimated 14.5 million vehicles to be sold in 2011 versus about 12 million in the U.S. And with only about one in five Chinese owning a vehicle in Beijing and 30 of 1,000 in remote provinces, there is clearly ample room for growth, especially as the income levels continue to rise. In spite of mere 2.5% growth in 2011, industry pundits predict auto sales will rebound in 2012 with estimated growth of five percent to 10%.

Foreign auto companies looking for growth are expanding in China. General Motors may return to number one for automakers in 2011 driven by strong growth in China.

General Motors reported an 8.3% year-over-year rise in sales in China to a record 2.55 million vehicles in 2011, down from 29% in 2010, but well above the average. China accounts for about 36% of total GM sales in 2011, so the region is critical for growth.

So, while the GM story is encouraging in China, I continue to prefer the smaller Chinese auto-parts suppliers that provide parts and services to foreign and domestic automakers.

Two small-cap Chinese companies to take a look at include China Automotive Systems, Inc. (NASDAQ/CAAS, $5.19) and SORL Auto Parts, Inc. (NASDAQ/SORL, $2.47). Note that these are not recommendations to buy; just an example of stocks to look at.

You can buy GM as a longer-term holding, but I prefer to stick my capital in the small-cap Chinese auto plays for added growth and price appreciation potential.

Housing is showing signs of improvement, but it will be a while until the stock market is considered healthy. I discussed in What’s Really Driving the Housing Market.

Stock picking

If I were stock picking in this kind of lackluster market for stocks, I’d be focused on momentum plays. I’d rather bet on a stock that’s already gone up with a strong following than make a value trade or bet on a turnaround. This means that I would be consistently making lists of stocks that are hitting new 52-week highs and watching the news wires.

Last year, one of the best market sectors for speculators was gold and to a lesser extent other precious metals. As an investment theme, I think stock picking among gold and silver miners remains one of the best strategies over the next three years. The fundamentals for gold (and silver) are still very much intact. (See Central Bank and Inflation—the Top New Fundamentals for Gold Stocks.) Spot prices for gold and silver have been experiencing a well-deserved correction and, no matter what the individual story, these kinds of stocks always trade on spot prices. While I’d be trading momentum stocks this earnings season, I’d consider stock picking in gold and silver over the coming months with a 12- to 18-month time horizon for investment. The timing is almost right for a reacceleration in precious metal prices.

I think we’re going to see more economic news that shows a relatively strong close to 2011 and this should provide some further stock market momentum, at least for the first half of this year. Individual stock picking is still the key. For the second half, all bets are off—or rather, it’s too unpredictable for a current view.

The European debt crisis remains the financial world’s most serious investment risk at this time. But there is another major risk brewing out there and it has to do with the country of Iran. Western political leadership is ramping up the tough talk on Iran and they are taking action with strong economic sanctions. It’s my fear that this geopolitical threat could derail what I think is a slow and methodical recovery of the U.S. stock market.

Economically, the European debt crisis and the currency instability that this could create prese