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

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

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

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

Chart courtesy of www.StockCharts.com

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

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

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

As an investor, you should be aware that the six-month period from May to October has been historically the worst-performing months for stocks, according to the Stock Trader’s Almanac. And so far, this stock market risk and historical pattern appears to be staying true to form.

The charts continue to be bearish. I said this in March and in April. I had sensed some near-term topping action several weeks back, as the stock market risk intensified after several attempts to move higher failed to be sustainable. For instance, the S&P 500 at 1,400. Moreover, the lack of volume on up days has been a major red herring and stock market risk for the buy side—indicating a lack of mass market interest.

The key stock indices have been devoid of any momentum or signs of sustained buying interest—down in the red over the past five days and month.

And, while stocks continue to hold in positive territory for 2012, the key stock indices are in the red since the end of March below their respective 50-day moving averages. Technology stocks, which fared the best this year, had been up over 18% in March, but have seen gains dwindle down to just over 11% on higher stock market risk. The NASDAQ is down 6.11% since the end of the first quarter, only trailing the 6.27% market correction in the Russell 2000.

The overall Relative Strength is weak, indicating that more weakness may be in the works or the upside gains may be limited, but watch for some oversold buying support. The breach of the 50-day moving average was bearish and points to higher stock market risk. Continued weakness could trigger additional selling and drive the key stock indices to test their respective 200-day moving averages.

The underlying strength as indicated by the advance-decline line for both the NYSE and NASDAQ has been trending lower since the start of May—indicating a loss of momentum. The following chart of the NASDAQ Advance-Decline reflects the weakening position and stock market risk.

Chart courtesy of www.StockCharts.com

The fragility and stock market risk on the charts are deserved in my view.

China and the eurozone remain major areas of stock market risk, which I had previously discussed in Global Market Risk: Is it Improving?

It appears that Greece may fall out of the eurozone and euro, as I have said in my past commentaries. The reality is that Greece is a weak player and it will take decades likely for the country to pull out of its mess. In fact, it could even worsen if the tough austerity programs fail to deliver debt cuts and cost control. Germany, which is fighting its own GDP growth issues, is not interested in funding anymore funds to Greece and clearly wants to focus on its own economy.

And then there’s Spain with its rising bond yields. The 10-year auction showed yields of 6.22%, which are not sustainable for Spain and its troubled debt and muted growth. The high yields are an indication of potential problems down the road.

Italy 10-year bonds are yielding 5.75%.

Note the pattern here?

What about the eroding situation in China? While the new rich Chinese from the mainland flock into Hong Kong and buy expensive goods, China may be a time bomb.

Filings from Wind Information indicate that around 45% of China companies listed on the Shanghai and Shenzhen stock exchanges provided weak forecasts for the first half. In my view, this is a real and valid concern that needs to be monitored.

The warning signs are there as far as the stock market risk, but I hope it’s not the perfect storm!

I do think there is more downside potential in gold, silver and oil prices and it’s not just related to slower growth in the global economy. A lot of the price weakness in these commodities is related to strength in the U.S. dollar, which experiences renewed enthusiasm every time there’s an uncertain development in the eurozone.

There remains, in my view, an underlying strength to the stock market at this time. Institutional investors want to be buyers in this market; they only need a reason to do so. I fully expect that large-cap companies that pay dividends will continue to be the market leaders going into 2013, because, in a slow growth environment, dividends income is crucial. I think it’s fair to conclude that expectations for capital gains are fairly low among all stock market investors, so dividends become the only way to beat the inflation rate.

Because we’re now in the lull between earnings seasons, increased dividends announcements are reduced. I think we’ll get another round, however, during second-quarter earnings season, largely because companies can and want to keep shareholders happy. The cash hoard among most large-cap companies remains substantial.

When share prices go down, yields for dividends go up of course. Most of the stock market’s leaders haven’t actually pulled back in price to a very large degree and this contributes to my view that there is solid underlying strength in this stock market. (See Stock Market Correction’s Here—Put Dividend Paying Stocks on Your Radar Screen.) And the fact that stocks are fairly valued suggests to me that further downside will be modest.

Practically, the only thing that equity investors can really count on in this market is dividends income. Things could blow up in Europe, China’s economy could slow even further, or there could be another war in the Middle East. In any scenario I consider, I just don’t see GDP growth accelerating very much. This is why I’m so pro-dividends. Dividends income is the best bet for new investible money in the age of austerity. Everything else, like gold or oil stocks, you have to get timing right in order to make money. With large-cap dividend paying stocks, all you need is the patience.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Michael’s Personal Notes:

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

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

Fast forward…

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

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

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

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

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

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

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

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

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

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

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

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

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

Where the Market Stands; Where it’s Headed:

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

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

What He Said:

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

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

Fast forward…

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

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

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

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

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

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

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

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

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

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

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

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

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

Where the Market Stands; Where it’s Headed:

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

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

What He Said:

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

Chart courtesy of www.StockCharts.com

JPMorgan estimates that, while it tries to unwind the position, it will cost an additional $1.0 billion. I’ve actively traded around several large blowups due to bad trades, such as Amaranth Advisors, and things get far worse before they get better. Amaranth Advisors was a huge player in the natural gas markets. As its investment strategy started going south, everyone on the street smelled blood in the water. This exacerbated the company’s losses, as its positions got squeezed. Amaranth ended up losing over $5.0 billion in one week, with the entire firm shutting down shortly after with losses well in excess of $6.5 billion, out of total asset size of $9.0 billion.

This is similar to legendary hedge fund manager John Paulson. His firm, Paulson & Co., was squeezed out of his investment strategy in being long gold during the fall of 2011. The street got wind of his investment strategy and proceeded to squeeze him, forcing even larger losses that snowballed into more selling.

The street is extremely smart in figuring out large players and their respective investment strategy. No one firm can control a market for long. Eventually, the Street will squeeze them out. JPMorgan’s unit has in excess of $200 billion, so a $2.0-billion loss is not a huge amount relatively speaking. But, for bank stocks, this is a worse-case scenario, as more regulatory pressure will be forced onto them as outrage rises.

Frankly, I think there might be an opportunity to look at JPMorgan, but only once it is out of its position. The firm is still one of the largest and most profitable bank stocks, but it will take most of this year to unwind its investment strategy, and I also believe more losses will come. I would look to the late fall or winter, as bank stocks might perform poorly during the September-October period. If we get more news of losses, but JPMorgan also announces it is out of this investment strategy, then that might perhaps signal a long-term bottom. There is, however, a long time to go between then and now. For the time period, I would not invest in bank stocks until the dust settles, which might not happen until early next year.

Bullish investor sentiment in the stock market continues to drive buying interest, albeit the readings in April were mainly neutral, as investors became increasingly hesitant.

You need to understand that being prudent is important for success in the stock market. Too greedy and you will likely see your capital sink.

The reason why I want to briefly talk about risk management in the stock market is my sense that there are some of you who probably fail to incorporate any sort of risk management strategy. If you do, that’s fantastic; if you don’t, read on.

Let’s look at the case when a stock rises. When this happens, you should always think of a potential exit strategy. This does not mean, liquidating profitable trades, but rather protecting your unrealized gains.

Take the mini stock market rally as an opportunity to take some profits.

If you have a price target for your stock, you can sell the stock when it reaches that target. Alternatively, if the gains are significant, you can take profits on a portion of the position and let the remaining portion ride. For instance, if a stock rises by 100%, you can liquidate 50% of the position and keep the remaining 50%. Under this simple strategy, you take some profits, but, at the same time, create a zero-cost trade, as you have recouped your initial investment. You can view the remaining 50% stake as risk capital.

Another stock market strategy that needs to be considered is the use of mental or physical stop-loss limits. But you need to be careful when the volatility increases and wild swings in the stock market materialize that could take you out of your position prematurely.

Stops should also be used when a stock is trending higher. These stops are referred to as trailing stops and are constantly adjusted as the price of the stock rises. Adopting trailing stops helps to protect your gains as the stock rises.

One of my favorite fast food restaurant stocks is McDonald’s Corporation (NYSE/MCD), which you can read about in McDonald’s & this Other Stock Feasting on Fast Food Profits.

It’s a bit too early to jump right in with the spot price of gold likely to experience more downside. From a stock market perspective, most gold stocks began pulling back hard in mid-March, affecting even the best stocks within the sector. We’ve got to see the spot price of gold bottom out from its current downtrend and then I think we’ll have another really good entry point for considering new positions.

Investing in gold has always been a risky business, but it’s a worthwhile endeavor if you’re a stock market and commodities speculator. The key, like always, is to get the cycle right—timing in the investment business is everything. Even though the long-term trend might still be intact, the spot price of gold could easily go down to $1,200 or $1,100 an ounce. Why not? Gold has been in a bull market since 2002. The current price action in spot gold is very similar to the correction that occurred 2008/2009 and I wouldn’t be surprised at all if it repeated this trend: correction, recovery, consolidation, and then re-acceleration. It does take time.

Right now, there are large, medium and small producers of gold trading for reasonable prices on the stock market. A lot of these companies have little to no debt and are sitting on large cash hoards, waiting to put that money into new exploration and development. (See Everything Gold Is Turning Into Some Serious Green.) Even though gold stocks aren’t going up right now, it is an exciting time to be in this industry.

Speculating in gold mining stocks is a difficult business. You can find the best growth story out there, but if the spot price isn’t going up, then you aren’t likely to make any money. That’s why, as a stock market speculator, the majority of the time you need the spot price tailwind behind you. Or you go the other way and short these stocks when spot prices are falling. Just like in the oil market, spot price action is everything.

What I find attractive in a gold mining stock is finding a company that offer a “package” of good business fundamentals. This means that a gold mining company should already be producing and selling ounces of gold with detailed expectations for increased production over the coming quarters and years. The company should have other properties that it’s exploring, even in conjunction with other, perhaps larger mining companies. There needs to be a track record of financial growth, along with lots of cash in the bank for further exploration activities. Finally, a decent track record on the stock market is always helpful; it shows that institutional investors know about the business and are willing to invest and/or trade the stock.

I think we have more downside ahead in the stock market and in precious metals and other commodities. We’ve been due for a correction and here it is. I do see an underlying strength in the U.S. economy that, while not robust, is a good foundation for the future. For stock market investors, be prepared for further correction.

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

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

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

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

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

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

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

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

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

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

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

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

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

Michael’s Personal Notes:

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

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

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

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

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

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

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

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

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

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

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

Where the Market Stands; Where it’s Headed:

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

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

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

Note on Gold:

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

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

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

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

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

What He Said:

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

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

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

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

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

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

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

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

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

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

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

Where the Market Stands; Where it’s Headed:

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

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

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

Note on Gold:

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

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

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

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

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

What He Said:

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

However, some recent developments in the energy markets show that perhaps there is some slight flicker of light for the energy market when it comes to natural gas. As electric utilities transfer from coal to natural gas generation, this has started to use up some of the supply in the ground. While all of this might work into the natural gas story over the next several years, as new plants are built that use exclusively natural gas, not much will be done to deplete the supply until next year’s winter.

Chart courtesy of www.StockCharts.com

As can be seen by the price chart, we are just coming off a new low at the end of April below $2.00 British thermal units (BTU). This comes after the move down from last summer. As can be seen by the horizontal line at approximately $2.20, it appears that natural gas might be in the process of bottoming out when looking at the technical analysis. Not only has the current price range that natural gas has just bounced up from been used as support in January and March this year, but also the natural gas market is now above the 50-day moving average, both important in technical analysis.

Looking at the divergence between the price of natural gas and the Relative Strength Index (RSI) as well as the moving average convergence/divergence (MACD), important for technical analysis, you’ll notice that the low price at the end of April was not followed with a low in the RSI or the MACD. This is what we call a “divergence pattern” in technical analysis. Technical analysis tells us that the underlying pressure is losing momentum, so the price might move further, but without the same level of underlying enthusiasm. Technical analysis also tells us that one cannot trade solely based off a divergence. There is no one “foolproof” method to trade from, just signs and indications seen through technical analysis. But when combined with other indicators, then the technical analysis will alert us that there is an increased probability of accuracy. All the signs point to a rebound in natural gas prices, most likely to the circled level, which is very close to the 200-day moving average at approximately $3.25. You’ll also notice this level has been used as support and resistance back in 2011. The more times in technical analysis a level is used as support and resistance, the more important that level becomes. A break below $2.20 would be a bearish sign and a retest of the lows is most likely at that point.

While all of this points to a short-term possible move back up, it does not change the fact that there is a ton of natural gas being produced and space is running out for this excess supply. Perhaps this is a short-term move back up or perhaps it might be sustained; at this point we don’t know. I would not be long-term bullish until we see more depletion in the natural gas storage facilities, which won’t happen until next winter. Until then, follow the technical analysis roadmap.

“China is the most attractive place in the world right now for hotels. That’s why investment capital is racing there and why the major international brands are racing there too,” said Patrick Ford, president of U.S.-based Lodging Econometrics, in an article on time.com.

China is the fourth top destination for tourism, but is expected to become the number one destination by 2020, according to the World Tourism Association.

The country is predicted to see major growth in its domestic travel from 2011 to 2013, according to a research report, China Tourism Industry Forecast to 2012, by traveldailynews.com.

China’s growth and travel industry are driven by a population of over 1.3 billion people and a steadily increasing middle class with money to spend on travel. As wages increase, so will the spending on non-essential items such as travel and recreation.

There is also a rising wave of foreign travelers that have made Asia and China premier travel destinations.

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

In the Chinese travel and hotel area, there are numerous operators that have excellent potential for the aggressive investor looking for growth areas.

Some of my favorite Chinese travel stocks include China Lodging Group, Limited (NASDAQ/HTHT), Home Inns & Hotels Management Inc. (NASDAQ/HMIN), and 7 Days Group Holdings Limited (NYSE/SVN). All three companies have above-average long-term share appreciation potential, but I will take a closer look at 7 Days Group today.

7 Days is the third largest national economy hotel chain. It offers limited services under the “7 Days Inn” brand, akin to budget hotels and motels in the U.S. and Canada.

As of December 31, 2011, 7 Days Group operated 944 hotels, up from 568 hotels a year earlier. The company has another 234 hotels under development. Currently there are 94,684 hotel rooms in 141 cities.

In 2011, the occupancy rates were between 81.5% and 87.9%, depending on the hotel.

The nine analysts who follow 7 Days Group estimate that the company will make $0.59 per American Depositary Share (ADS) in 2010, followed by profits of $0.82 per ADS in 2011, which are both higher than previous estimates. Revenues are predicted to grow 31.2% in 2012 and 24.4% in 2013.

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.

Want to know some of the top U.S. restaurant stocks that are in China? Read about my ideas in The Top Three Restaurant Stocks in China.

No matter what the story, the fact of the matter is that precious metal stocks trade commensurately with underlying spot prices. They tend to trade on their own, not lockstep with the rest of the stock market. A mining company could be generating outstanding production and earnings growth, but stock market investors (I should say speculators, because mining stocks are 100% risk-capital investments) are always looking to the future and that means if the spot price is going down, so must precious metal stocks.

As a stock market sector, precious metal stocks have been in decline for some time now and valuations are getting to be very attractive. If you were interested in speculating in this sector, I’d put together a list of five top companies right now within the group and start following them. The spot prices for gold and silver may continue to correct for another couple of quarters, but I really feel that the upward commodity price cycle isn’t finished quite yet, especially with the underreported inflation in the U.S. economy.

Precious metal stocks take their lead from gold prices and, at $1,600 an ounce, the correction in gold hasn’t been that bad at all. Because precious metal stocks are considered to be risk-capital investments, speculators within the group tend to follow a herd mentality. This is especially the case with institutional investors. This is why it’s a stock market sector that can really pay if you get in ahead of the group. As is almost always the case, once the news is in the headlines, most of the money has already been made. If there ever was a stock market sector that is perfectly suited for the buy-low, sell-high investment philosophy, I can’t think of a better one.

Precious metal stocks are tricky to get right as an equity market speculator, because there are so many factors at play in order to run a successful mining business. There’s always the potential for equipment failure (which stops/slows production), a change in government policy, or exploration drilling that doesn’t meet expectations. But when everything comes together correctly and the spot price of the underlying commodity turns upward, precious metal stocks can generate excellent stock market returns in a short period of time. (See One of the Best Sectors for Risk-capital Speculators.) It’s similar to the biotechnology sector where a new drug discovery or approval can send shares soaring.

Right now, the stock market isn’t much interested in precious metal stocks and that’s why equity speculators should begin paying closer attention. I don’t think the correction in precious metal prices is over, so, generally speaking, I’d be waiting and watching.

In San Jose, California, the public unions are taking the city to court to contest the city’s attempt to force the public employees to either contribute more of their paycheck toward their pension or accept a reduced retirement pension plan (source: Reuters, May 8, 2012).

There are eight similar lawsuits nationwide!

I have discussed most of these troubled cities in these pages before the court dates were set. You know what I’m going to say now; this is just the beginning.

The San Jose Police Officers’ Association is ready to fight for years if it has to, to protect what it feels it’s entitled to for its service.

The City of San Jose attempted to explain to the police officers and the other city unions that, since the recession hit in 2008, the pension fund has lost money on its investments, which has widened the budget deficit. On top of this, with home prices falling and fewer people working, tax revenues to the city have declined, further exacerbating budget deficits.

And with interest rates near zero, it is proving very difficult for pension fund to generate any interest income to help fill the budget deficit hole.

The City of San Jose has to make cuts somewhere to make up the budget deficit. It has chosen to increase pension contribution rates instead of cutting basic services. Of course, if the battle in court continues, the city may have no choice but to cut essential services for the citizens of San Jose, because the cost of the case was not planned in the budget deficit.

I’ve talked about the plight of Detroit. Its budget deficit is enormous as the city’s home prices continue to languish. Just recently, the city outlined a severe plan to address the budget deficit. The City of Detroit is planning to cut 25% of its 10,000 workers—or 2,500 employees (source: Detroit Free Press, April 24, 2012).

The cuts are across the board, from public safety like police officers to healthcare workers. A citywide hiring freeze has also been put in place. The city doesn’t want to cut the fire department so it is asking the federal government for a grant to help retain 100 firefighters, because the city cannot afford to with its budget deficit.

San Jose and Detroit join the long list of municipalities that are cutting essential services to their citizens and are pushing the public unions to the point where disputes are now being handled in court.

The pushback will continue until the budget deficits get pushed from municipalities to the bankrupt states and eventually to the federal government. Where will the next round of bailout money come from?

And can you believe that economists thought earlier this year that the Fed would not delivery QE3? The audacity of thinking more money printing was not coming!

Michael’s Personal Notes:

A sign of things to come…

Outplacement firm Challenger, Gray & Christmas released a report last week illustrating that, for the month of April 2012, planned firings at corporations in America rose 11% from a year ago. From the month of March, planned firings were up 7.1%.

The report also expressed the opinion of its authors that, at the current level of demand for goods and services, companies in the U.S. don’t require additional workers to meet output; very bad news for May’s upcoming job numbers report.

Sure, this means the U.S. economy is weak. Without sufficient demand from the consumer, which is 70% of GDP, companies will not hire new workers, which is going to stall jobs growth. This is a bad sign that May’s job numbers could be worse than April’s.

This is further confirmed by the fact that the biggest sector of the economy that cut the most jobs thus far in 2012 has been the consumer products companies. If consumers are not spending, then the companies that make and sell consumer products will not lead jobs growth, but instead lead in layoffs.

The report also highlighted that layoffs at the government level—led by education—continued to increase, which is something I’ve been talking about in these pages.

As municipalities continue to cut the expenses to meet their budget deficits, jobs growth will be nonexistent at the state and municipal levels. And the monthly job numbers will continue to display the effect of this reality.

Challenger always prefaces its report by saying that a corporation’s intention to lay off will change if the economy improves, which will lead to improved job numbers. Given all of the economic headwinds I’ve detailed in these pages recently, like weak U.S. durable goods orders, weak job numbers and weak retail sales, the economy will most likely not improve.

Many are saying that April’s job numbers report was not the start of a downtrend in job numbers. I beg to differ.

Where the Market Stands; Where it’s Headed:

I believe the stock market has been putting in a huge top for months…what technical analysts call the right shoulder of a “head and shoulder” pattern.

The bear market knows that worldwide economic growth is declining rapidly…that Recession Part II is not far behind. It just doesn’t want investors to know, so they keep putting money into the stock market so the bear can take it away again!

What He Said:

“A low savings rate was eventually blamed for the length of the Great Depression. Consumers just didn’t have enough money to spend their way of the Depression. With today’s savings rate being so low, a recession could have a profoundly negative effect on overextended consumers.” Michael Lombardi in PROFIT CONFIDENTIAL, March 26, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

Outplacement firm Challenger, Gray & Christmas released a report last week illustrating that, for the month of April 2012, planned firings at corporations in America rose 11% from a year ago. From the month of March, planned firings were up 7.1%.

The report also expressed the opinion of its authors that, at the current level of demand for goods and services, companies in the U.S. don’t require additional workers to meet output; very bad news for May’s upcoming job numbers report.

Sure, this means the U.S. economy is weak. Without sufficient demand from the consumer, which is 70% of GDP, companies will not hire new workers, which is going to stall jobs growth. This is a bad sign that May’s job numbers could be worse than April’s.

This is further confirmed by the fact that the biggest sector of the economy that cut the most jobs thus far in 2012 has been the consumer products companies. If consumers are not spending, then the companies that make and sell consumer products will not lead jobs growth, but instead lead in layoffs.

The report also highlighted that layoffs at the government level—led by education—continued to increase, which is something I’ve been talking about in these pages.

As municipalities continue to cut the expenses to meet their budget deficits, jobs growth will be nonexistent at the state and municipal levels. And the monthly job numbers will continue to display the effect of this reality.

Challenger always prefaces its report by saying that a corporation’s intention to lay off will change if the economy improves, which will lead to improved job numbers. Given all of the economic headwinds I’ve detailed in these pages recently, like weak U.S. durable goods orders, weak job numbers and weak retail sales, the economy will most likely not improve.

Many are saying that April’s job numbers report was not the start of a downtrend in job numbers. I beg to differ.

Where the Market Stands; Where it’s Headed:

I believe the stock market has been putting in a huge top for months…what technical analysts call the right shoulder of a “head and shoulder” pattern.

The bear market knows that worldwide economic growth is declining rapidly…that Recession Part II is not far behind. It just doesn’t want investors to know, so they keep putting money into the stock market so the bear can take it away again!

What He Said:

“A low savings rate was eventually blamed for the length of the Great Depression. Consumers just didn’t have enough money to spend their way of the Depression. With today’s savings rate being so low, a recession could have a profoundly negative effect on overextended consumers.” Michael Lombardi in PROFIT CONFIDENTIAL, March 26, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

Corporate profits for NIKE have continued to grow for several reasons. NIKE’s strategy to grow its presence in the retail sector across many different nations, including the emerging markets, has generated strong growth in corporate profits. Emerging market sales increased 23% from the previous year.

China continues to be a strong market for NIKE in the retail sector, as the company continues to expand. With over 7,000 stores currently in China, NIKE plans to double its revenue over the next several years.

Because the retail sector is so finicky, innovation is the key to driving corporate profits. NIKE is a leader in innovation, which is one reason why corporate profits continue to grow.

Several interesting developments will be drivers for corporate profits later this year. The Olympics, starting in July, will be a nice push in corporate profits for NIKE going into late summer. In the fall, NIKE now has the contract for the NFL. As the exclusive provider for the NFL, NIKE should see a nice bump up in corporate profits near the end of 2012 and first quarter of 2013.

The newest in lightweight shoes, the “Flyknit,” will debut in July at a cost approximately of $150.00. The amazing thing about this shoe is the way it’s produced. This shoe is made by a computer-controlled weaving machine that makes the top portion of the shoe, which is then sewn to the bottom portion. Traditionally, a running shoe would have 37 pieces sewn together, a very labor-intensive procedure that hurts corporate profits. This new process only has two sewn pieces, a definite benefit to corporate profits. The lightweight running category is a huge and growing business for NIKE.

These new lightweight running shoes will weigh approximately half as much traditional running shoes, at 5.6 ounces versus 10.2 ounces. They will be more expensive when sold and less labor-intensive to make, which combines for better corporate profits.

Chart courtesy of www.StockCharts.com

But here’s the question: have investors priced all of these good things into the stock already? The forward price-to-earnings ratio is almost 19, and the price-to-book is over five times. These are very expensive multiples for NIKE. If we look at the stock over the last three years, it has made a tremendous run. While the retail sector has being good to NIKE and corporate profits have grown, this percentage move cannot be sustainable forever.

Technically, the stock is near a key trend level that, if broken, would be a significant warning sign. If that level were to be broken, we could see a pullback initially to the $90.00 range, which should offer some support. If things got even worse, the next level of support could be as low as $75.00, which would also coincide with the 200-day moving average.

While I personally love NIKE’s products and think its innovations have allowed it to be a market leader in the retail sector, the stock price is very high and I certainly wouldn’t be putting money to work right now. A smarter strategy would be to wait until the fall when we’ll get more information regarding the company’s sales of the Flyknit shoe, Olympics clothing and NFL gear. At that point, the stock might have sold off and allowed an even better entry point. Over the next decade, I do see NIKE continuing to be a market leader in the retail sector.

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 Stores, Inc. (NYSE/WMT), Target Corporation (NYSE/TGT), and Costco Wholesale Corporation (NASDAQ/COST), along with the increasingly 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.

Spending on big-ticket items continues to be fragile. Durable Goods Orders fell 4.2% in March, well below the drop of 1.7% expected and the 1.9% gain in February. Excluding transportation, the reading fell 1.1% compared to the 1.9% gain in February.

In March, retail sales excluding auto increased 0.8%, down from 0.9% growth in February, but above the 0.6% estimate.

Job creation is the most critical variable for the retail sector. The weekly initial claims have been below the threshold 400,000-level for weeks.

In March, a disappointing 120,000 jobs were created, well below the 200,000 estimate and the 240,000 in February. The jobless rate was 8.2%, which is an improvement, but it’s still 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 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 at below the mortgage value.

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 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.

Technology will continue to be a top growth area, which I discussed in Apple & Technology Stocks Looking Like Great Investment Opportunities.

The stock market began to roll over naturally after the majority of first-quarter earnings were reported. We were due for a market correction just based on the market’s strong performance from the beginning of the year. Then, the most recent catalyst was the political uncertainty in the eurozone and the continuing worries regarding European sovereign debt. The timing could not have been more perfect. Going forward, I wouldn’t be surprised at all if stock market trading action is difficult right until the end of the summer. Then, it’s election fever. The old adage, “Sell in May and go away,” looks like a winner this year.

In terms of investment strategy, now isn’t the time to be a buyer. I think stock market investors should wait for the current market correction to play itself out, while watching for good corporate news and dividend increases. The spot price of gold is also in correction mode and could be soft for the next couple of quarters, perhaps even into next year. For stock market speculators, I continue, however, to like mining stocks. For the majority of an equity portfolio, higher dividend paying stocks are the only way to go in a slow growth environment.

Investor sentiment isn’t all that bad at this time. The stock market needed a market correction and is gyrating on Europe, but the domestic outlook is still decent and stocks are not expensive. Some industries are doing much better than others, but this is the nature of economic recovery. It takes a lot of time for the system to balance itself out after the mortgage debt-induced financial crisis.

So, if you’re a stock market investor, you need a lot of patience. Most U.S. corporations said in their first-quarter financial reports that they expect business to get better in the bottom half of the year. The fundamentals, in terms of valuations and corporate earnings, are actually pretty decent for the stock market. But, the marketplace is now in fear mode and the biggest problem is all the uncertainty. We’ll see how long this market correction lasts. Anything is possible these days.

I would add that the gift of a material price correction is the opportunity to invest in good companies at a more attractive price. Equally important is the falling price for oil, which has an almost immediate impact on disposable income and corporate earnings. The financial world isn’t coming to an end (at least not quite yet); it’s only going through a well-deserved market correction. There is an underlying strength to the stock market and that’s because of valuations. (See The Best Performing Index Over the Last 12 Years.) Share prices could be soft for the next several months, so retail investors will likely keep to the sidelines. I expect institutional investors to keep buying higher dividend paying stocks throughout the year. I also expect increased dividend announcements right into 2013.

There is no question that the U.S. east coast just experienced the warmest winter in decades. And, as a result, shoppers who were normally held back by cold weather were free to visit their favorite local store to shop and the retail sector welcomed them with open arms.

As strong retail sales—when compared to the previous year when we actually had a winter—rolled in during January, February and March of this year, some were claiming that this was proof of consumer confidence…that the economic recovery finally had some traction…that the retail sector looked great.

That theory hit a roadblock this past April. The retail sector missed sales estimates for the first time in five months this April (source: Reuters, May 3, 2012).

Also in April, McDonald’s Corporation (NYSE/MCD), the world’s largest fast food chain, came in with weaker than expected same-stores sales. The company says the weak sales reflect a difficult economic environment with challenged consumer confidence.

In Europe, Germany was supposed to have escaped recession…

But retail sales in Germany fell at the fastest rate in April in over 18 months (source: Markit Economics, April 27, 2012). Operating margins were under pressure in the retail sector and retailers felt they needed to provide deep discounts to get sales going. Not a good sign of consumer confidence in Germany.

In France, retail sales plunged to their lowest level on record in April (they started keeping records only in 2004). Oddly enough, this was the biggest falloff in 18 months and the retail sector in France had to discount, which squeezed margins; certainly not the backdrop for strong consumer confidence.

In Italy, retail sales fell at the second-highest year-over-year annual rate in history in April. The retail sector laid off a record number of employees in the month as well.

With these pressures, the eurozone retail sales figures fell to their second-lowest level on record, continuing a trend of falling retail sales that has been in place since June 2011. The retail sector continues to suffer in the eurozone from disappearing consumer confidence.

The U.S. is off to a weak start in the second quarter, as highlighted by the retail sector. Without real disposable income growth, consumer confidence and retail sales will continue to come under pressure.

Meanwhile, Europe’s retail sector is living through difficult times, as the economic slowdown there is gaining traction on the downside. The winds of recession are slowly crossing the Pond.

Michael’s Personal Notes:

Germany has lost its dance partner…

Francois Hollande is France’s first elected socialist president in 17 years. He has stated that he will reduce the government’s budget deficit while increasing taxes and increasing spending. He believes he can eliminate the budget deficit by 2017.

Just the kind of guy France needs…

Because of the European economy’s recession, France’s budget deficit is already worse than it was a year ago because of lower tax revenue. Hollande wants to spend €20 billion to get the economy going, lower the retirement age back to 60, and raise taxes on businesses and the rich.

The problem is that Hollande doesn’t spell out how France is going to pay for this spending and how he will be able to increase spending and reduce the budget deficit at the same time.

Let’s get real…

The wealthy and corporations in France are going to have little incentive to invest and create jobs if they know their tax rates are going to rise. Their profit margins are going to be squeezed by higher taxes.

These “disincentives” to business come at the worst possible time for France, which needs to create jobs in order to grow with the European economy’s recession hanging over them.

Hollande wants to meet with the Chancellor of Germany, Angela Merkel, to ratify the European fiscal pact, which focuses on austerity measures and reducing budget deficits through fiscal discipline. (I’m sure Merkel can’t wait to have a serious discussion with France’s new leader.) Hollande has explicitly said he will not go along with the fiscal pact of reducing budget deficits unless there are growth provisions added to it to help the European economy.

Over the past few years, it was France’s previous president, Nicolas Sarkozy, who agreed with Merkel regarding the fiscal pact and budget deficits. He convinced the other European members to go along, while the European economy was falling into a recession.

Even if Merkel and Hollande come to some agreement on the fiscal pact, the big test is just a few months away—this summer.

Hollande will present his budget and how he plans to reduce the budget deficit while increasing spending. If the bond market is not convinced by his policies, I believe interest rates on France’s bonds will rise to the levels currently seen in Italy and Spain.

To make things worse, the rating agencies may threaten further downgrades if Hollande’s policies don’t bring down the budget deficits.

Who will buy France’s bonds if interest rates rise, as its budget deficit policies are not seen as attainable by the bond market? With the European economy in a recession, it will have to be Germany that helps France out in some capacity. But now that France no longer wants to play by Germany’s rules, will Germany help?

Back at the ranch, America is far too complacent about the crisis situation in Europe. China’s economy is slowing. Japan is printing money again. What a mess. But have no fear; the Dow Jones Industrial Average is back at 13,000!

Where the Market Stands; Where it’s Headed:

Last year, I made a crazy prediction that stocks would start to fall in mid-April of 2012. I was two weeks too early. Since the beginning of May, the Dow Jones Industrial Average has lost about 500 points…four percent gone, very quickly.

As the stock market continues to fall, get ready for QE3. I bought more gold-related investments earlier this week.

What He Said:

“As a reader, you’re aware I’m not a Greenspan fan. In the years that lie ahead, I believe we (and our children) may pay dearly for the debt bubble Greenspan created during his tenure as head of the U.S. Federal Reserve.” Michael Lombardi in PROFIT CONFIDENTIAL, March 20, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

Francois Hollande is France’s first elected socialist president in 17 years. He has stated that he will reduce the government’s budget deficit while increasing taxes and increasing spending. He believes he can eliminate the budget deficit by 2017.

Just the kind of guy France needs…

Because of the European economy’s recession, France’s budget deficit is already worse than it was a year ago because of lower tax revenue. Hollande wants to spend €20 billion to get the economy going, lower the retirement age back to 60, and raise taxes on businesses and the rich.

The problem is that Hollande doesn’t spell out how France is going to pay for this spending and how he will be able to increase spending and reduce the budget deficit at the same time.

Let’s get real…

The wealthy and corporations in France are going to have little incentive to invest and create jobs if they know their tax rates are going to rise. Their profit margins are going to be squeezed by higher taxes.

These “disincentives” to business come at the worst possible time for France, which needs to create jobs in order to grow with the European economy’s recession hanging over them.

Hollande wants to meet with the Chancellor of Germany, Angela Merkel, to ratify the European fiscal pact, which focuses on austerity measures and reducing budget deficits through fiscal discipline. (I’m sure Merkel can’t wait to have a serious discussion with France’s new leader.) Hollande has explicitly said he will not go along with the fiscal pact of reducing budget deficits unless there are growth provisions added to it to help the European economy.

Over the past few years, it was France’s previous president, Nicolas Sarkozy, who agreed with Merkel regarding the fiscal pact and budget deficits. He convinced the other European members to go along, while the European economy was falling into a recession.

Even if Merkel and Hollande come to some agreement on the fiscal pact, the big test is just a few months away—this summer.

Hollande will present his budget and how he plans to reduce the budget deficit while increasing spending. If the bond market is not convinced by his policies, I believe interest rates on France’s bonds will rise to the levels currently seen in Italy and Spain.

To make things worse, the rating agencies may threaten further downgrades if Hollande’s policies don’t bring down the budget deficits.

Who will buy France’s bonds if interest rates rise, as its budget deficit policies are not seen as attainable by the bond market? With the European economy in a recession, it will have to be Germany that helps France out in some capacity. But now that France no longer wants to play by Germany’s rules, will Germany help?

Back at the ranch, America is far too complacent about the crisis situation in Europe. China’s economy is slowing. Japan is printing money again. What a mess. But have no fear; the Dow Jones Industrial Average is back at 13,000!

Where the Market Stands; Where it’s Headed:

Last year, I made a crazy prediction that stocks would start to fall in mid-April of 2012. I was two weeks too early. Since the beginning of May, the Dow Jones Industrial Average has lost about 500 points…four percent gone, very quickly.

As the stock market continues to fall, get ready for QE3. I bought more gold-related investments earlier this week.

What He Said:

“As a reader, you’re aware I’m not a Greenspan fan. In the years that lie ahead, I believe we (and our children) may pay dearly for the debt bubble Greenspan created during his tenure as head of the U.S. Federal Reserve.” Michael Lombardi in PROFIT CONFIDENTIAL, March 20, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

This sale was the highest priced auction sale in history, showing that the market sentiment for rare assets is still very high. The reason why the price went so high is that the collector assigned the value of the art as far more than paper money. When market sentiment gets to the point where the actual paper money is worth less than hard assets, this is a warning sign to everyone.

Yes, this art is only for the super-rich, but if they’re willing to trade a paper money for a painting, this tells me that paper money is becoming more worthless every day. The market sentiment of the super-rich is not to be ignored. If their market sentiment indicates that money printing is causing the devaluation of the dollar, then I would suggest following in their steps and protecting your assets.

While we can’t all participate in the high-end art market, regardless of our market sentiment towards paper money, one way is to look for firms the corporate profits of which will benefit from this market sentiment. The sale took place at Sotheby’s auction house, the main publicly traded firm available for investors who believe that the market sentiment of hard asset values will continue to go up. On Thursday, May 10, 2012, the firm will announce quarterly corporate profits. Even with this sale and the profit generated, I think it will miss corporate profits. Therefore, I would not invest in the stock at this point.

The stock is coming off two straight quarters in which there was a decline in revenue and, even though the high-end art is selling, a lot of the mid-to low-end art is not. Partially I think this is a sign that, even though the market sentiment for many is to trade paper money for assets, people don’t have a lot of disposable cash left to acquire such assets.

Chart courtesy of www.StockCharts.com

Sotheby’s stock does trade at a book value of almost three times, quite high for a firm that isn’t growing corporate profits at a fast pace. While profit margins are very healthy at over 20%, quarterly revenue declines recently have worried me. Looking at the weekly stock price after a big run-up from 2009 to 2011, the stock has pulled back and retraced into several Fibonacci levels. This area will be of significant resistance and impede further moves up, as market sentiment is now essentially flat; neither bullish nor bearish.

Chart courtesy of www.StockCharts.com

Looking at the shorter term, you’ll notice two horizontal lines that have locked Sotheby’s stock into a trading range. With so many reversals along the trading range, it’s not possible to predict which way will break out, only that whichever side the stock does break out, it will be significant and will most likely continue in that direction. News this week about the company’s quarterly earnings might be the catalyst for the stock to break the range and for a change in market sentiment.

With a series of quarterly revenue misses, I am doubtful Sotheby’s can beat estimates. Looking at the chart, there aren’t that many bullish signs to me. If somebody knows something about the company’s corporate profits, they’re not buying ahead of the news. Investors are sitting on their hands and I would recommend you do the same.

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

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

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

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

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

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

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

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

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

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

I think the S&P 500 Index is vulnerable now to the 1,300 level and, if it gets there, this would be a meaningful correction and a good buying opportunity for higher dividend paying, large-cap companies. Generally speaking, I think we’re in a time now where the stock market will be more apt to reward income over growth. Large-cap, dividend paying stocks have been leading the stock market since last October and I think this trend will continue right into 2013.

Along with large-cap stocks, both smaller companies and commodities are also experiencing a pullback. Growth concerns in the global economy are real and whether it’s related to price inflation in China or sovereign debt problems in Europe, the new normal is slower economic growth rates, especially among mature economies.

I don’t see any reason why the U.S. stock market can’t reaccelerate this year, especially as we are likely to see sporadic improvement in the economic news. And, while the outlook for corporate earnings isn’t robust, it’s still solid and stock market valuations are reasonable. Investment risk remains high for all equities, but it’s been like this since the financial crisis.

I think that big corporations are keeping earnings expectations purposefully low, in order to outperform come earnings season. (See Earnings Reflect Expectations—the Stock Market Is Fairly Valued.) It’s a way of providing shareholders with “good news” in a slow growth environment. One thing we are getting though is increased dividends and this is great news if you like dividends income with the potential for capital gains. Intel Corporation (NASDAQ/INTC) was the latest brand-name company to up its dividends payment to shareholders and, with so much cash building up on corporate balance sheets, increasing dividends news should continue throughout the year.

As I’ve said, this stock market correction is healthy and well-deserved. The stock market is fairly valued and this gives us a lot of breathing room for a pullback. If I were an equity investor looking for new positions this year, I’d wait until the correction plays itself out and I’d be watching my favorite dividend paying stocks for a good entry point. I still like gold investments for speculators; but, to me, dividends are king in this kind of market.

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

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

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

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

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

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

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

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

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

Michael’s Personal Notes:

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

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

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

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

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

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

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

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

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

Where the Market Stands; Where it’s Headed:

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

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

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

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

What He Said:

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

]]> http://www.profitconfidential.com/stock-market/another-key-stock-market-indicator-flashes-red/feed/ 0 http://www.profitconfidential.com/michaels-personal-notes/why-i-bought-more-gold-related-investments-yesterday/ http://www.profitconfidential.com/michaels-personal-notes/why-i-bought-more-gold-related-investments-yesterday/#comments Wed, 09 May 2012 09:44:49 +0000 Michael Lombardi, MBA http://www.profitconfidential.com/?p=36064 The action in the gold bullion market was rocky yesterday. Here’s what my esteemed colleague Robert Appel, BA, BBL, LLB, has to say about gold:

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

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

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

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

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

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

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

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

Where the Market Stands; Where it’s Headed:

It could have been much worse for the stock market yesterday. After all, most major European countries are back in recession. …