The Chinese economy, the second-biggest in the world, witnessed a contraction in manufacturing in May. The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) registered 49.6 for May, declining from 50.4 in April. (Source: Markit, May 23, 2013.) Any number below 50 represents contraction in the manufacturing sector.

 The Chinese economy exports a significant amount of what it produces to the global economy. Contraction in Chinese manufacturing shows exports are falling—the global demand for goods is falling.

Similarly, Germany’s Flash Manufacturing PMI showed continuous contraction in the manufacturing sector. The index stood at 49.0 in May. (Source: Markit, May 23, 2013.) The German economy is important to observe, because it’s the largest economy in the eurozone and an economic slowdown in the nation can send the common currency region into another downward spiral, again affecting the global economy.

Looking at other key indicators, they are pointing to an economic slowdown ahead in the global economy. Consider the copper market. Demand for copper is suggesting activity in the global economy is sluggish, even deteriorating.

Copper prices are down more than 10% since the beginning of 2013, and stockpiles of the brown metal, tracked by the London Metals Exchange (LME), are up a staggering 95% this year! (Source: Bloomberg, May 23, 2013.)

Other industrial metal prices, such as aluminum, lead, nickel, and zinc, are in decline as well.

How can the U.S. economy possibly improve when the global economy is in trouble?

The U.S. is highly affected by any shift in demand in the global economy.

After the financial crisis of 2008, U.S.-based companies were able to show growth because of robust demand in the global economy. Some say the growth in the global economy pulled the U.S. out of recession in 2008.

Now, the economic indicators clearly point to diminishing global demand. Will U.S.-based multinational companies be able to show profit growth under the scenario of global manufacturing contraction? Of course not! (Someone tell stock market investors!)

During the first-quarter earnings reporting season, some of the biggest big-cap companies in the key American stock indices displayed concerns regarding the crisis in the eurozone. I expect more companies to start blaming the economic slowdown in the global economy as they report lower second-quarter corporate earnings.

Michael’s Personal Notes:

As I have been writing in these pages, economic growth in the U.S. economy won’t happen by printing more paper money—it’s a short-term fix that creates more long-term problems.

According to data compiled by Bloomberg, 2,267 non-financial constituents of the Russell 3000 index saw their cash holdings increase by 13% to $1.73 trillion in the first quarter of 2013 compared to the same period a year earlier. (Source: Bloomberg, May 23, 2013.)

As the cash hoard continues, business spending declined 21% in the first quarter compared to the last quarter of 2012. This was the biggest decline since the financial crisis of 2008.

To top this off, business executives in the U.S. economy are worried about troubles in the global economy, and they don’t have a very optimistic view on conditions here at home. A CEO Confidence Survey conducted by the Conference Board suggests only 29% of executives believe conditions in their industries have improved in the first quarter; going forward, only 32% expect the U.S. economy to improve in the next six months. (Source: Conference Board, April 25, 2013.)

Looking at all of this, how can you not question the effectiveness of quantitative easing in the U.S. economy? The problem at hand is businesses shying away from spending in the U.S. economy and hoarding cash. To my standards, quantitative easing is failing at making businesses more confident about spending as it was promised.

Dear reader, for economic growth to take place in the U.S. economy, businesses must be willing to spend and make investments; we are seeing the opposite of that. This isn’t rocket science; once businesses start to spend and make investments, we will see recovery in the jobs market and economic growth will eventually follow.

The U.S. economy is at a vulnerable stage. I am paying extra attention to business spending because troubles from outside the U.S. economy are brewing quickly, and as a result, multinational businesses may make further cutbacks on their spending.

Where the Market Stands; Where It’s Headed:

We are putting the finishing touches on “A Dire Warning for Stock Market Investors,” a forecast we will present in video format. Please see your e-mail inbox tomorrow for this presentation. It’s important you watch it to see where the stock market is really headed next.

What He Said:

“As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in Profit Confidential, November 21, 2007. This was a dire prediction that came true.

According to data compiled by Bloomberg, 2,267 non-financial constituents of the Russell 3000 index saw their cash holdings increase by 13% to $1.73 trillion in the first quarter of 2013 compared to the same period a year earlier. (Source: Bloomberg, May 23, 2013.)

As the cash hoard continues, business spending declined 21% in the first quarter compared to the last quarter of 2012. This was the biggest decline since the financial crisis of 2008.

To top this off, business executives in the U.S. economy are worried about troubles in the global economy, and they don’t have a very optimistic view on conditions here at home. A CEO Confidence Survey conducted by the Conference Board suggests only 29% of executives believe conditions in their industries have improved in the first quarter; going forward, only 32% expect the U.S. economy to improve in the next six months. (Source: Conference Board, April 25, 2013.)

Looking at all of this, how can you not question the effectiveness of quantitative easing in the U.S. economy? The problem at hand is businesses shying away from spending in the U.S. economy and hoarding cash. To my standards, quantitative easing is failing at making businesses more confident about spending as it was promised.

Dear reader, for economic growth to take place in the U.S. economy, businesses must be willing to spend and make investments; we are seeing the opposite of that. This isn’t rocket science; once businesses start to spend and make investments, we will see recovery in the jobs market and economic growth will eventually follow.

The U.S. economy is at a vulnerable stage. I am paying extra attention to business spending because troubles from outside the U.S. economy are brewing quickly, and as a result, multinational businesses may make further cutbacks on their spending.

Where the Market Stands; Where It’s Headed:

We are putting the finishing touches on “A Dire Warning for Stock Market Investors,” a forecast we will present in video format. Please see your e-mail inbox tomorrow for this presentation. It’s important you watch it to see where the stock market is really headed next.

What He Said:

“As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in Profit Confidential, November 21, 2007. This was a dire prediction that came true.

Under that vast umbrella of energy innovation, alternative energy has the potential to become a genuine economic engine that can revolutionize personal transportation and the economic landscape.

There is excitement surrounding automaker Tesla Motors, Inc. (NASDAQ/TSLA). This company just doubled on the stock market in a little over a month.

I haven’t driven any of Tesla’s vehicles, but the company’s new four-door sedan looks fantastic, and the quality of the paint job really stands out.

I definitely see more “Chevrolet Volts” around. According to General Motors Company (NYSE/GM), it delivered 5,550 Volts in the first quarter of 2013, up 3.2% comparatively. The company is likely employing new sales incentives.

Virtually every automaker is getting in on the electric vehicle action. Even Porsche has a new electric “supercar.” The company is bringing to market the “918 Spyder,” which has a 4.6 liter V8 engine and two electric motors. The two electric motors provide an additional 218 horsepower on top of the more than 500-horsepower V8. The car can operate on its batteries alone, but I suspect the range would be extremely short.

Trucks and SUVs are bread-and-butter for domestic automakers. But the migration to electric vehicle production (a loss leader right now) is all about range and economies of scale. A $40,000 compact Chevy sedan is a misnomer.

While insider ownership with a company like Tesla is high and its valuation is extreme, the company would be an attractive takeover candidate for a successful automaker. The illusion can become real. BMW AG (XETRA/BMW) perhaps?

Range, costs, and availability of charging stations are obvious barriers for electric automakers.

But there’s been a sea of change with Tesla after so many electric vehicle and alternative energy failures. (See “Why These Old Economy Stocks Aare Absolutely Crucial.”) The company just raised another $1.0 billion from new shares and debt, and it has cashed in on the stock market’s renewed interest.

A close friend of mine who has in-depth knowledge of domestic automakers thinks the whole electric vehicle trend is a bust. Without question, the business case for it is not profitable at this time. (Tesla is even selling its California zero-emission tax credits to other automakers to boost its bottom line.)

But that doesn’t mean that innovation within the industry is not worthy of pursuit—not at all.

There is the issue regarding utility consumption. If electric vehicles become more prevalent, the demand for electricity will go up. The consumer is always on the short end of the stick.

But this build out, if it proves to be a successful business model for automakers, does have real potential to energize the industry.

Energy innovation, in all its forms, is a great opportunity.

In fact, my stock analysis suggests that McDonalds’ rivals are trying to emulate what is working at the company rather than compete against the seller of the iconic “Big Mac.”

Burger King Worldwide, Inc. (NYSE/BKW) may be pursuing a similar strategy to McDonalds’ by diversifying its menu offering with new items and value-conscious options, based on my stock analysis.

Yet while Wall Street focuses on McDonalds and its burger-oriented rivals, my stock analysis reveals that a stock that I feel offers better valuation and potential upside is Denny’s Corporation (NASDAQ/DENN). With a market-cap of $552 million, Denny’s is dwarfed by the $102-billion market cap of McDonalds, but that doesn’t mean there isn’t a buying opportunity with Denny’s, based on my stock analysis.

In fact, Denny’s is up 50% over the past 52 weeks and has easily outperformed the S&P 500’s advance of 26.8% and McDonalds’ 11.8% gain, according to my technical analysis.

Chart courtesy of www.StockCharts.com

Denny’s is best known for its “Grand Slam” breakfast offerings. The company has gone through a major structural reorganization in which it sold many of its stores to franchisors, thereby reducing its own operating costs and collecting fees instead. As of March 27, 2013, 1,525 of the company’s 1,689 restaurants were franchised. The end results have been stronger operating numbers and a steady rise in the company’s share price, according to my stock analysis.

About 98 restaurants are situated in Canada, Costa Rica, Mexico, Honduras, Guam, Curacao, Puerto Rico, Dominican Republic, and New Zealand.

And in an aggressive and bold move, Denny’s has been looking at expanding into the highly competitive Chinese market, where the top players are McDonalds and YUM! Brands, Inc. (NYSE/YUM)—owner of the Kentucky Fried Chicken (KFC) and Taco Bell brands. The company’s deal with Great China International Group was recently cancelled, likely due to some poor results from the top players in China, based on my stock analysis.

On the operations end, Denny’s reported adjusted earnings of $0.08 per diluted share in its first-quarter earnings season, up 48.4% year-over-year and a penny above the Thomson Financial consensus earnings-per-share (EPS) estimates. It was the third straight quarter of outperformance.

On a comparative valuation basis, Denny’s trades at 1.16X trailing sales and has a price-to-earnings-growth (PEG) ratio of 0.92, versus 3.71X sales and a PEG ratio of 2.04 for McDonalds.

Now, don’t get me wrong; I still believe McDonalds will continue to be the top player in the restaurant and fast foods sector going forward. (Read “The Secret to Success in the Fast Food Sector.”) But for some added potential, a small-cap such as Denny’s makes sense for the aggressive investor, based on my stock analysis.

According to the Advisor Sentiment tracked by Investors Intelligence, an indicator I follow to gauge optimism in the stock market, the number of stock advisors who are bullish towards key stock indices is at its highest since April of 2011. (Source: Investors Intelligence, May 22, 2013.) To bring this into perspective, in April of 2011, the key stock indices like the S&P 500 started to decline, dropping nearly 20% through October of that year.

The stock market is becoming very overbought and very overpriced. It’s not a matter of “if” the market faces a major set-back, but “when.”

The U.S. economy continues to struggle and early indicators of economic slowdown are flashing warning signs. Consider the Business Outlook Survey by the Federal Reserve Bank of Philadelphia, which provides an outlook for manufacturing activity in the Philadelphia area. The survey indicates demand has been weak, with new orders and shipments declining and inventories building up. (Source: Federal Reserve Bank of Philadelphia, May 16, 2013.)

The index of current manufacturing activity in the Philadelphia region registered at negative 5.3 in May compared to positive 1.3 in April. Any number below zero indicates conditions in the manufacturing sector are becoming poor.

This isn’t the only troubling statistic that shows the U.S. economy is headed towards an economic slowdown. Our economic growth is questionable; unemployment is still staggering; the majority of jobs created since the financial crisis have been in low-paying jobs, and a significant portion of the U.S. population is on food stamps.

Going back to the stock market…

Companies in the key stock indices aren’t really earning more; rather, it appears they are making more because of two financial maneuvers: cost-cutting and stock buybacks. As of May 17, 463 companies on the S&P 500 have already reported their corporate earnings. While a significant number were able to beat earnings estimates, only 47% were able to show revenues that met Wall Street’s expectations. (Source: FactSet, May 17, 2013.)

If the percentage of S&P 500 companies showing revenues below expectations remains at 47%, by the time they are done reporting their corporate earnings, the first quarter of 2013 will be the third in the last four quarters that the S&P 500 companies didn’t meet their revenue expectations.

What’s happening in the global economy isn’t supporting the key stock indices. Major economic hubs are facing pressures and experiencing an economic slowdown. China, Japan, England, and the eurozone—all these countries have slowing economies.

The rise in the key stock indices has become a joke—there is nothing behind the rise in stock prices except artificially low interest rates and plenty of paper money printing forcing investors into overpriced stocks.

Sure, it’s certainly difficult to be a bear these days as the key stock indices paint a pretty picture. But a great amount of caution should be taken as the risks continue to pile higher each time the stock market moves higher. Just some minor profit-taking can turn into a broad market sell-off.

Michael’s Personal Notes:

While testifying in front of the Joint Economic Committee in Washington regarding monetary policy and the economic outlook of the U.S. economy, the Chairman of the Federal Reserve, Ben Bernanke, said yesterday, “…the committee has said that it will continue its securities purchase until the outlook for the labor market has improved substantially in a context of price stability.” (Source: “The Economic Outlook,” Board of Governors of the Federal Reserve System, May 22, 2013.) In other words, the Federal Reserve has made it clear, once again: it will not stop quantitative easing until the unemployment rate comes down.

The Federal Reserve continues printing $85.0 billion a month in new money, using this newly created money to purchase long-term U.S. bonds and mortgage-backed securities (MBS). The Fed has already inflated its balance sheet to over $3.0 trillion, and by keeping the pace of quantitative easing the same, its balance sheet will reach $4.0 trillion very quickly.

I believe the longer the Federal Reserve continues with the quantitative easing, the bigger the eventual troubles will be.

First of all, quantitative easing and artificially low interest rates by the Federal Reserve have essentially forced investors to take higher risk elsewhere, as guaranteed yields have collapsed. The yield on 10-year U.S. bonds is less than two percent; meanwhile, tax-favored dividends from the rising Dow Jones Industrial Average stocks pay 2.35%.

It is very well documented in these pages how investors are rushing to get higher yields as the Federal Reserve stays the course. Investors are adding junk bonds to their portfolio; conservative investors, like the central banks, are buying stocks; and bond funds are buying stocks, too. In the housing market, we have institutions buying distressed properties for cash, so they can fix them up and rent them out in hopes of a higher rate of return.

Secondly, the more paper money the Federal Reserve prints and injects into the U.S. economy, the bigger the impact it will have on the buying power of the average American. Inflation, which the Consumer Price Index (CPI) says is not there, is rising.

Last but not least, quantitative easing promised economic growth, but we really haven’t gotten it yet. We still have a significant number of Americans unemployed or working part-time because they are unable to find full-time jobs. But, oh yes, the stock market has risen.

Prolonged quantitative easing has not helped the U.S. economy; rather, it is creating bigger issues that we will eventually need to deal with, like the current stock market bubble. We only need to look at the Japanese economy to see the ineffectiveness of continued quantitative easing—it doesn’t work in the long term. Throwing money at our problems doesn’t solve the problems.

What He Said:

“Anyway you look at it; the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in Profit Confidential, August 27, 2007. This was a dire prediction that came true.

The Federal Reserve continues printing $85.0 billion a month in new money, using this newly created money to purchase long-term U.S. bonds and mortgage-backed securities (MBS). The Fed has already inflated its balance sheet to over $3.0 trillion, and by keeping the pace of quantitative easing the same, its balance sheet will reach $4.0 trillion very quickly.

I believe the longer the Federal Reserve continues with the quantitative easing, the bigger the eventual troubles will be.

First of all, quantitative easing and artificially low interest rates by the Federal Reserve have essentially forced investors to take higher risk elsewhere, as guaranteed yields have collapsed. The yield on 10-year U.S. bonds is less than two percent; meanwhile, tax-favored dividends from the rising Dow Jones Industrial Average stocks pay 2.35%.

It is very well documented in these pages how investors are rushing to get higher yields as the Federal Reserve stays the course. Investors are adding junk bonds to their portfolio; conservative investors, like the central banks, are buying stocks; and bond funds are buying stocks, too. In the housing market, we have institutions buying distressed properties for cash, so they can fix them up and rent them out in hopes of a higher rate of return.

Secondly, the more paper money the Federal Reserve prints and injects into the U.S. economy, the bigger the impact it will have on the buying power of the average American. Inflation, which the Consumer Price Index (CPI) says is not there, is rising.

Last but not least, quantitative easing promised economic growth, but we really haven’t gotten it yet. We still have a significant number of Americans unemployed or working part-time because they are unable to find full-time jobs. But, oh yes, the stock market has risen.

Prolonged quantitative easing has not helped the U.S. economy; rather, it is creating bigger issues that we will eventually need to deal with, like the current stock market bubble. We only need to look at the Japanese economy to see the ineffectiveness of continued quantitative easing—it doesn’t work in the long term. Throwing money at our problems doesn’t solve the problems.

What He Said:

“Anyway you look at it; the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in Profit Confidential, August 27, 2007. This was a dire prediction that came true.

Just as you can with statistics, if you dig hard enough, you can find the numbers to support any case.

But in the stock market, it’s very important to remember that the mindset of institutional investors is different from that of Main Street.

By “institutional investors,” I’m referring to any entity that is buy-side, with investing money being the main concern. The Wall Street investment banker mindset, the sell-side, is its own unique beast.

Institutional investors are paid to play. That’s their business. If a mutual fund or exchange-traded fund (ETF) takes in money, it has to invest it. Contributors don’t pay fees to have money sit in cash.

The stock market is very much a marketplace that is fueled by the supply and demand of common shares and cash.

With greater demand (new inflows to institutional investors) and less supply (the amount of initial public offerings [IPOs], secondary offerings, and corporate share buybacks), prices go up.

That’s why everything in the stock market is only relative—share prices, earnings, earnings estimates, valuations, and views.

Is priceline.com Incorporated (NASDAQ/PCLN) worth $847.33 a share? Or should it be $694.06 a share, like it was on May 1? That’s a huge stock market gain, and the month isn’t even over yet. (See “BlackRock Takes in Billions For Equities: A Signal the Stock Market Is Near a Top?”)

The only thing institutional investors lament is a lack of new cash inflows.

Being in the business of getting paid to play the stock market, the effort is always about participating, not deciding whether to get in or out of the market.

And for institutional investors and funds that buy stocks, new cash inflows create a situation in which the stock market then feeds itself as that money is slowly put to work.

In a secondary market, the supply and demand for common shares is very important.

If you have the desire, consider reading the Form 10-Qs of publicly traded institutional investors and the statistics on new cash inflows to the stock market. It’s a great way to get a sense of the demand part of the equation.

Also consider reading the quarterly and annual outlooks from institutional investors. Most of them offer their general market views for free.

Because institutional investors are the drivers of share prices, it’s useful to know what they’re thinking.

With so much free information available on the stock market today, getting to know the institutional mindset is as valuable as any piece of information available.

A stock like priceline.com appreciated 22% since the beginning of this month for no other reason than the increased buying by big investors.

Getting to know the mindset of institutional investors is helpful in shaping your own outlook and maximizing your returns.

It’s an easy, uncomplicated research method that can pay.

With the move, Bill Gates has recaptured his title as the world’s richest man, having a net worth of over $75.0 billion. Microsoft is now valued at $292 billion and is catching on fire.

Only a few months ago, I was questioning the potential of Microsoft; I felt that the former Wall Street darling was set for a crash landing unless it could convince the market that better times were ahead. (Read “Another Lost Decade for Microsoft?”)

Fast-forward three months, and my stock analysis now suggests that Microsoft seems to be firing on all cylinders and is once again catching the attention of Wall Street and investors.

The chart of Microsoft below shows the stock (as shown in red candlesticks) moving higher in relation to the S&P 500 (as shown by the green line), based on my technical analysis.

Chart courtesy of www.StockCharts.com

My stock analysis indicates that the rising of the stock has not been triggered by its new “Windows 8” touchscreen or the Windows smartphone in association with Nokia Corporation (NYSE/NOK); but the company is showing great potential in its ever-growing gaming division.

On Tuesday, Microsoft launched its highly anticipated “Xbox One,” which will represent a dramatic change from the “Xbox 360.”

Based on the somewhat glitzy presentation in New York City, the Xbox One looks like it has seen a radical change, evolving from its previous models as the company tries to continue the popularity of its gaming console; the Xbox has developed into more of an integrated entertainment system that will allow users to access games, online movies, music, and the Internet.

In fact, since I purchased my Xbox 360 a few years ago, I have watched the steady evolution of the console from being solely for gaming and movies to a much more integrated platform that allows for online gaming and movies, along with Internet features.

The next-generation Xbox One looks like it will offer even more. The console will allow for real-time switching between live TV, video games, Internet, Skype, and other services. You will be able to play a game while you toggle over to live TV or the Internet.

The aftermath will be a more powerful entertainment platform that could allow Microsoft to widen its distance from the rival “PlayStation 3” (soon to be “PlayStation 4”) and “Nintendo Wii.”

While Microsoft is still not providing growth at the same scale as the likes of Google Inc. (NASDAQ/GOOG) or Netflix, Inc. (NASDAQ/NFLX), according to my stock analysis, the growing acceptance of its gaming unit will offer excitement to a company that many felt was ready to be buried.

Perhaps as the gaming unit grows, Microsoft may even decide to split its gaming unit to increase the lock-in value that I believe will grow.

To start with, home prices in the U.S. housing market are nowhere close to their pre-crash levels. There are millions of homeowners in the U.S. economy whose homes are worth less than what they originally paid for them. From their peak in 2006, home prices in the U.S. housing market are still down roughly 30%. For millions of homeowners to break even on their home investment, home prices will have to go up by at least 40%.

We just learned housing starts plunged 16.5% in April from March. (Source: U.S. Census Bureau, May 16, 2013.) This decline in new housing starts was one of the sharpest declines since mid-2011.

The chart below depicts housing starts from 2001 to today. Notice the recent sharp decline in housing starts.

Chart courtesy of www.StockCharts.com

Housing starts may not be a very exciting number to some, but I follow housing starts to gauge consumer spending. Think of it this way: when a family buys a new home they need to buy things that are needed in the household—new furniture, appliances, lawn mowers, and so on. It is this spending that ultimately results in economic growth for the U.S. economy.

Construction spending in the U.S. economy is also on the decline. It registered an annual rate of $893.6 billion in December of 2012, and by March 2012, construction spending fell to an annual rate of $856.7 billion—a decline of four percent. (Source: Federal Reserve Bank of St. Louis web site, last accessed May 21, 2013.) Construction spending is not only a measurement of activity in the housing market; it directly affects gross domestic product (GDP).

Finally, those closest to the housing market are showing concerns again—they’re turning outright pessimistic on the housing market. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) registered at 44 in April. (Source: National Association of Home Builders, May 15, 2013.)

Any number below 50 indicates that homebuilders view market conditions to be more poor than good. Remember: homebuilders see the changes in the housing market much quicker than other market participants. If they are worried, it’s certainly not good news for the U.S. housing market.

As I continue to preach in these pages, rising home prices don’t mean that the housing market—a critical component of economic growth in the U.S. economy—has recovered.

And as I have written before, first-time home buyers are missing from the U.S. housing market recovery, because they continue to be worried about their jobs, falling real income, and rising expenses.

The bottom line is: the recent rise in home prices that we’ve witnessed over the past year is a reflection of financial institutions rushing to buy homes for rental income—and this is exactly why I remain skeptical of the housing recovery.

Michael’s Personal Notes:

As companies in the key stock indices, like the S&P 500, reported their first-quarter corporate earnings, some of the most notable names showed concerns about the eurozone.

Conglomerate General Electric Company (NYSE/GE) said, “We planned for Europe to be similar to 2012, down again, but it was even weaker than we had expected.” (Source: “Earnings Insight,” FactSet, May 17, 2013.) General Electric (GE) reported corporate earnings of $0.34 per share in the first quarter, with sales in its industrial businesses declining 5.7% and profit falling 11%. (Source: MarketWatch, April 19, 2013.)

McDonalds Corporation (NYSE/MCD), in announcing its first-quarter results, stated, “For the quarter, Europe’s results were dampened by ongoing economic uncertainty.” (Source: Ibid.)

When talking about the eurozone, the chief executive of Whirlpool Corporation (NYSE/WHR), Jeff Fettig, said, “…demand is not recovering so far.” He added that Whirlpool’s sales were unchanged this year in Europe, and he warned that if the demand continues to slide, Whirlpool will have to make more changes to cut costs. (Source: “Companies Feel Pinch on Sales in Europe,” Wall Street Journal, April 28, 2013.)

GE, McDonalds, and Whirlpool are not the only companies in the key stock indices suffering from troubles in the eurozone. Big-cap companies like International Business Machines Corporation (NYSE/IBM), United Technologies Corporation (NYSE/UTX), and Xerox Corporation (NYSE/XRX) have also shown concerns in their first-quarter corporate earnings due to bleak demand in the eurozone.

What’s ahead for the eurozone? The strongest nations in the region, such as Germany and France, are struggling to keep up. France is in a recession, while the German economy showed very little change in the first quarter. Similarly, the situation in the debt-infested nations of Greece, Spain, Portugal, and Italy hasn’t changed.

Dear reader, pieces of the puzzle are coming together now. American companies are becoming concerned about their corporate earnings due to an economic slowdown in the eurozone. Readers of Profit Confidential shouldn’t be surprised by this; I have been warning about it in these pages for some time now.

Looking forward, it wouldn’t be a surprise to me to see more companies in the key stock indices that have exposure to the eurozone show poor corporate earnings. The stock market is running on hope, and that hope can only go for so long.

Where the Market Stands; Where It’s Headed:

I’m telling you; the higher this stock market goes, the harder it’s going to fall flat on its face! Within the next week, I will be releasing a video I’m just finishing called a Dire Warning for Stock Market Investors. Watch for it.

What He Said:

“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures, and the construction market. These events will dampen the U.S. economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in Profit Confidential, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

Conglomerate General Electric Company (NYSE/GE) said, “We planned for Europe to be similar to 2012, down again, but it was even weaker than we had expected.” (Source: “Earnings Insight,” FactSet, May 17, 2013.) General Electric (GE) reported corporate earnings of $0.34 per share in the first quarter, with sales in its industrial businesses declining 5.7% and profit falling 11%. (Source: MarketWatch, April 19, 2013.)

McDonalds Corporation (NYSE/MCD), in announcing its first-quarter results, stated, “For the quarter, Europe’s results were dampened by ongoing economic uncertainty.” (Source: Ibid.)

When talking about the eurozone, the chief executive of Whirlpool Corporation (NYSE/WHR), Jeff Fettig, said, “…demand is not recovering so far.” He added that Whirlpool’s sales were unchanged this year in Europe, and he warned that if the demand continues to slide, Whirlpool will have to make more changes to cut costs. (Source: “Companies Feel Pinch on Sales in Europe,” Wall Street Journal, April 28, 2013.)

GE, McDonalds, and Whirlpool are not the only companies in the key stock indices suffering from troubles in the eurozone. Big-cap companies like International Business Machines Corporation (NYSE/IBM), United Technologies Corporation (NYSE/UTX), and Xerox Corporation (NYSE/XRX) have also shown concerns in their first-quarter corporate earnings due to bleak demand in the eurozone.

What’s ahead for the eurozone? The strongest nations in the region, such as Germany and France, are struggling to keep up. France is in a recession, while the German economy showed very little change in the first quarter. Similarly, the situation in the debt-infested nations of Greece, Spain, Portugal, and Italy hasn’t changed.

Dear reader, pieces of the puzzle are coming together now. American companies are becoming concerned about their corporate earnings due to an economic slowdown in the eurozone. Readers of Profit Confidential shouldn’t be surprised by this; I have been warning about it in these pages for some time now.

Looking forward, it wouldn’t be a surprise to me to see more companies in the key stock indices that have exposure to the eurozone show poor corporate earnings. The stock market is running on hope, and that hope can only go for so long.

Where the Market Stands; Where It’s Headed:

I’m telling you; the higher this stock market goes, the harder it’s going to fall flat on its face! Within the next week, I will be releasing a video I’m just finishing called a Dire Warning for Stock Market Investors. Watch for it.

What He Said:

“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures, and the construction market. These events will dampen the U.S. economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in Profit Confidential, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

Many components have been underperforming the stock market significantly; if there is to be any real economic recovery, these companies should feel it.

As an index, the Dow Jones Industrial Average seems a little out of date and not particularly reflective of today’s world or the rest of the stock market.

But regardless, it’s still the global benchmark, and ownership of both the index and component companies is vast.

Even though Merck & Co., Inc. (NYSE/MRK) is a great pharmaceutical company (and dividend payer), on the stock market, the position is back to where it was in 1997.

Another Dow Jones component looking for improvement is Hewlett-Packard Company (NYSE/HPQ), which has its own specific set of problems.

Then there’s Alcoa Inc. (NYSE/AA), which reports early. This stock market laggard is still trading at the same level it was in 1989, taking share splits into consideration.

And there are several other Dow Jones components that are laggards.

It’s pretty clear that institutional investors have made a profound bet on the safest blue chips, most evident in January and February.

While business conditions for a lot of companies are flat, both interest rates and monetary environments remain very accommodative. In addition, there are efforts being made regarding fiscal policies in many important economies.

China effected a policy to slow its frothy economy and real estate market, and it succeeded.

So, with many countries trying to get their fiscal affairs in order, the potential for genuine economic growth (in a year or two) is being cultivated.

If this came to fruition, then laggards within the Dow Jones Industrial Average should improve, and this could help the index with even more capital gains.

To me, the Dow Jones Transportation Average is an important leading indicator for the U.S. economy. (See “The Great Big Gamble: Can a Little Earnings Growth Turn into a Lot?”)

But for the long haul, investors are more likely to build positions in component companies of the Dow Jones Industrial Average.

Without question, this is a very difficult stock market in which to be a buyer. The reaping should almost be finished.

But if global economic data shows improvement over the coming quarters and the Dow Jones laggards start moving, then this would be a signal that the broader stock market could still go higher.

As a manufacturer of aluminum, Alcoa is an important leading indicator. Not specifically for the stock market, but for the global economy. Alcoa is one Dow Jones laggard to watch.

While the maker of the “iPhone” and “iPad” tries to rejuvenate its business in light of increased and fierce competition from rivals, Apple is also currently caught in a fight against the tax authorities on allegations of tax evasion.

This is not what Apple and CEO Tim Cook want at this time, given the company is under immense pressure to deliver fresh products to the marketplace that have that “wow” factor.

The iPhone has been around since June 2007, and to tell you honestly, with the exception of a faster processor, larger screen, and some refinements to its “iOS” operating system, the iPhone has really not kept up with the advancements in some of the competing “Android” phones, specifically those made by Samsung Electronics Co. Ltd. through its increasingly popular “Galaxy” line.

Apple continues to lead the pack in the U.S., but as far as the global market, Nokia Corporation (NYSE/NOK) is holding onto the top market position. Nokia’s “Lumia” line, operating on the “Windows 8” mobile platform by Microsoft Corporation (NASDAQ/MSFT), is gaining some ground.

Yet for Apple, the landscape for smartphones and tablets is changing rapidly; it’s now about which company can bring the best phone, armed with the best functionality, to the market the quickest.

I’m in the process of looking at changing my smartphone from my current “iPhone 4” to either the “iPhone 5,” “Samsung Galaxy 4,” or the “BlackBerry Z10” or “BlackBerry Q10” (with the physical QWERTY keyboard) by Blackberry (NASDAQ/BBRY), formerly Research In Motion Limited. (Read “RIM Replacing Apple as the Stock Market’s Tech Darling?”)

Having looked at the comparative features of the phones, the iPhone 5 really doesn’t jump out at me, compared to the Galaxy or Z10.

I wonder if other potential buyers are also coming to the same conclusion. If so, then Apple needs to deliver a next-generation iPhone “5S”—or whatever it will be called—that has the “wow” factor. There’s some speculation the next iPhone will have a fingerprint sensor and be available with more color options (Source: “Will the next iPhone handset be available in GOLD? Apple fans in a frenzy after new 5S parts leak online,” Daily Mail May 16, 2013.)

I’m not sure if I would refer to the reaction to the potentially new iPhone as “a frenzy,” as I just don’t think it will be enough to convince me to wait for the anticipated launch of the next iPhone in September. My thinking is that the Galaxy and Z10 are well ahead of the Apple iPhone. Even the speculation of a cheaper “Q5” phone with a physical keyboard is highly anticipated, especially as a competing product in the emerging (and key) phone markets, including China and India.

Don’t take my word for it: go take a look and compare the phones for yourself. I wonder if you will come to the same conclusion. If so, Mr. Cook will have a lot more pressing problems down the line than trying to convince Congress that Apple’s not trying to evade its taxes.

But while the prices of gold stocks have pulled back significantly this year, demand for physical gold bullion has gone through the proverbial roof.

The U.S. Mint had to halt the sales of its most-sold 1/10-ounce gold bullion coin. In Australia, the Perth Mint is working in overdrive to fill rising orders. The British Mint reports British consumers’ buying of gold has accelerated as well.

In the first quarter of 2013, total demand for gold bullion from China amounted to 294 tonnes, as jewelry demand in the country increased by 19% from the same period last year. Bar and coin investment demand rose by 22% from the first quarter of 2012. (Source: World Gold Council, May 16, 2013.)

In India, demand for gold bullion came in at 257 tonnes in the first quarter, up 27% from the first quarter of 2012. Retail investments in gold bullion edged up by 52%, and demand for jewelry was up 15% in the first quarter.

Likewise, demand for gold bars and coins in the U.S. were up by 43% in the first quarter of 2013 compared to the first quarter of 2012.

And that’s not all! The biggest driver of gold bullion prices in my opinion, central banks, bought more gold.

The first quarter of 2013 marked the seventh straight quarter when central banks accumulatively added more than 100 tonnes of gold bullion to their reserves. But we still have central banks, such as the Bank of China and the Russian central bank, whose gold bullion reserves are nowhere close to the ones of the U.S. or Germany.

In total, in the first quarter of 2013, overall demand for gold bullion was 963 tonnes.

While the gold bears argue economic conditions in the U.S. are getting better and, thus, the luster of gold bullion has dissipated, the reality is that the global economy is slowing as growth rates become stagnant. At the same time, central banks around the world still think paper money printing will drive their economies toward economic growth.

What holds true, regardless of the bearish pressures for gold bullion prices now, is that fundamental demand is still strong, while the long-term technical uptrend has yet to be broken.

I am still bullish on gold bullion. In the long term, the paper currency will lose its fight against inflation. Just look at the U.S. dollar as an example. In a matter of 100 years, what you could have bought for $1.00 in 1913 now costs you close to $23.50. (Source: Bureau of Labor Statistics web site, last accessed May 17, 2013.)

If I calculate the amount of interest payments relative to the national debt outstanding, which is around $17.0 trillion, the U.S. government is paying interest on the national debt at the rate of about 2.5%.

Now, look at these two scenarios…

If we assume that the U.S. national debt will be $23.0 trillion by 2023, then the interest payments on the debt will rise to about $575 billion, not taking interest rate changes into account.

If in 10 years from now, interest rates go back to historical levels and double to five percent, interest payments on the national debt will exceed $1.0 trillion per annum. 2023 is 10 years from now. You can be assured the economic environment will be very different one decade out from today.

But as I wrote the other day, according to the action in the 30-year Treasury market, interest rates may already be on their way up.

Since their peak in July of 2012, the 30-year U.S. bonds have declined in value—they are down almost six percent. Trading above $153.00 in mid-2012, 30-year U.S. bonds now hover around $144.00.

Take a look at the chart of 30-year U.S. Treasury bond prices below:

Chart courtesy of www.StockCharts.com

As we can clearly see from the chart, prices on U.S. bonds are falling, which means interest rates are rising. (I am watching the bond market very closely as the recent decline in bond prices is significant.)

Bonds are signaling higher interest rates ahead, something very few economists are talking about. Hence, even if the government cuts back on spending and/or brings more receipts in, the eventual increase in interest rates will offset any short-term reduction in the budget deficit.

In other words, any way you look at it, the national debt will keep rising. Once it reaches the point at which interest costs on the national debt hit $1.0 trillion, there will only be 15 countries in the world whose annual gross domestic product (GDP) is greater than our annual debt interest payments.

What He Said:

“Starting two years ago I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending and a lower stock market.” Michael Lombardi in Profit Confidential, August 15, 2007. You would have been hard-pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.

When stocks go up on bad news (like last week’s higher initial claims for jobless benefits and lower-than-expected housing starts), you know you don’t want to be short.

Cisco Systems, Inc. (NASDAQ/CSCO) is a component of the Dow Jones Industrial Average, and for such a mature technology stock, it recently reported a very solid quarter.

In its fiscal third quarter (ended April 27, 2012), Cisco announced sales of $12.2 billion, for a net gain of five percent over the comparable quarter. It was the company’s ninth consecutive quarter of record sales.

Earnings grew 14.5% to $2.5 billion, while earnings per share grew 15% to $0.46 per share, beating consensus estimates.

John Chambers, Cisco’s CEO, noted improving signs in the U.S. economy and other markets. Business conditions for the company are also improving.

Like many cash-rich, large corporations, Cisco recently repurchased 41 million shares of its own common stock, spending $860 million.

This, of course, is a pittance. The company finished its latest quarter with cash and cash equivalents of $47.4 billion.

Wall Street boosted the company’s earnings estimates and share price target.

Cisco is ripe for more gains on the stock market because of its valuation.

The company also offers a dividend yield of 3.2%, which is attractive in this market. The company’s huge cash hoard also makes it highly likely that at some point this year, the company will issue another dividend increase.

All institutional investors want to see in this stock market is stability and certainty.

Cisco provided that certainty in its latest earnings report, and this is the reason why the company has leapt upward by over 10% on the stock market.

Still, the positive trading action is truly astonishing.

If there was ever a case to be made that the stock market is a leading indicator, recent action proves it. This market is way ahead of fundamentals.

Cisco hasn’t done anything for years on the stock market, although it has been slowly growing its revenues.

The company’s latest earnings report really was decent in terms of the competition and maturity in the networking and communication devices subsector.

The broadening of the blue chip breakout into the NASDAQ Composite is confirmation of the uptrend. But it is becoming even more difficult to be a buyer in this stock market when you see the key stock indices going up on bad news.

The appetite that institutional investors have to be buyers is stunning.

A majority of companies beat consensus earnings in the latest quarter. But only half of all companies in the S&P 500 beat consensus on revenues.

This is why big investors are now chasing stocks like Cisco. Top-line growth remains elusive.

The fact is that Japan is finally beginning to see some results from Prime Minister Shinzo Abe’s aggressive strategy to inject $2.4 trillion into the Japanese economy over the next decade.

Maybe this time it’s for real. Previous attempts to drive Japan’s economy out of its economic tailspin have failed. Of course, it will take some time, and success will depend on the continued weakness of the yen and a pickup in the global economy, especially with the country’s key trading partners in China.

If the first quarter was any indication, the despair in Japan may be finally coming to an end after decades of disappointment; but again, it’s only one quarter.

Japan saw its gross domestic product (GDP) surge 0.9% in the first quarter or an annualized rate of 3.5%, according to data from Japan’s Cabinet Office. (Source: “Japan GDP Rises 0.9% On Quarter In Q1,” RTTNews, May 15, 2103.)

What’s also interesting is the rise in private consumption in Japan, which contributed to 2.3% of the 3.5% GDP growth. The upward move in consumer spending is critical, as a large part of the economic renewal in Japan will be dependent on consumer spending as is the case in the United States. According to Trading Economics, consumer spending accounted for about 60% of GDP in Japan, so it’s essential.

While it’s still way too early to see if Japan is on the path to growth, the country’s first-quarter GDP was encouraging. Yet there are also many obstacles in Japan’s way to a full-blown recovery.

First of all, its key trading partner, China, needs to grow and avoid an economic bubble. If China falters, so will the trade between the two Asian powerhouses.

I also continue to be concerned with the massive debt Japan is adding to its already fragile and debt-ridden balance sheet. I have long been critical of the Federal Reserve and its free-flow printing of money here, but Japan is also in a similar situation, and it could worsen.

Japan’s national debt as a percentage of its GDP was a monstrous 208.2% in 2011, whereas the U.S. national debt as a percentage of GDP was at 102.9%. (Source: International Monetary Fund, May 17, 2013.)

This will be a precarious situation for Japan, especially if the country fails to rise from its downtrodden state. It’s a $2.4-trillion gamble that I’m not even sure Vegas would take.

Consumer spending in the U.S. economy is bleak; it doesn’t seem to be improving, and it’s nowhere near what the stock market is depicting. Consumer spending makes up about two-thirds of U.S. gross domestic product (GDP), so if consumer spending continues to decline, our economic growth becomes questionable.

Personal consumption expenditure, a measure of consumer spending, has been experiencing a decline. From between 2010 and 2011, consumer spending increased by little more than five percent. Meanwhile, the rate of change between 2011 and 2012 was only 3.64%. (Source: Federal Reserve Bank of St. Louis web site, last accessed May 16, 2013.)

What Wal-Mart’s contracting same-store sales and slowing consumer expenditure rates show is that consumer spending in the U.S. is not growing. From the statistics, we can see the average American consumer is suffering.

As of February (the latest available figures), there were more than 47.5 million Americans, which is 15% of the population or 23 million households, on food stamps. (Source: U.S. Department of Agriculture, May 10, 2013.) Food stamp usage has increased immensely. So, how can consumer spending increase when we are sitting at record poverty levels in the U.S.?

This “job growth” the government talks about—the official rate—doesn’t include people who have given up looking for work and people who have part-time jobs but want full-time jobs. And even if we put that aside, the majority of jobs that have been created over the past couple of years have been in the low-wage-paying service sector.

Dear reader, the rising stock market—it’s a mirage. And the higher it goes, the bigger the crash will be.

Michael’s Personal Notes:

Looking at the monthly budget statement from the Department of the Treasury, in fiscal 2013, year-to-date (that’s October 2013 to this April), the U.S. government has already paid interest of $227 billion on its national debt. For the entire fiscal year 2013, the government expects to pay a little more than $420 billion in interest payments. (Source: U.S. Department of the Treasury, Financial Management Service, May 10, 2013.)

If I calculate the amount of interest payments relative to the national debt outstanding, which is around $17.0 trillion, the U.S. government is paying interest on the national debt at the rate of about 2.5%.

Now, look at these two scenarios…

If we assume that the U.S. national debt will be $23.0 trillion by 2023, then the interest payments on the debt will rise to about $575 billion, not taking interest rate changes into account.

If in 10 years from now, interest rates go back to historical levels and double to five percent, interest payments on the national debt will exceed $1.0 trillion per annum. 2023 is 10 years from now. You can be assured the economic environment will be very different one decade out from today.

But as I wrote the other day, according to the action in the 30-year Treasury market, interest rates may already be on their way up.

Since their peak in July of 2012, the 30-year U.S. bonds have declined in value—they are down almost six percent. Trading above $153.00 in mid-2012, 30-year U.S. bonds now hover around $144.00.

Take a look at the chart of 30-year U.S. Treasury bond prices below:

Chart courtesy of www.StockCharts.com

As we can clearly see from the chart, prices on U.S. bonds are falling, which means interest rates are rising. (I am watching the bond market very closely as the recent decline in bond prices is significant.)

Bonds are signaling higher interest rates ahead, something very few economists are talking about. Hence, even if the government cuts back on spending and/or brings more receipts in, the eventual increase in interest rates will offset any short-term reduction in the budget deficit.

In other words, any way you look at it, the national debt will keep rising. Once it reaches the point at which interest costs on the national debt hit $1.0 trillion, there will only be 15 countries in the world whose annual gross domestic product (GDP) is greater than our annual debt interest payments.

What He Said:

“Starting two years ago I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending and a lower stock market.” Michael Lombardi in Profit Confidential, August 15, 2007. You would have been hard-pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.

After several summers as a teenager working in golf course construction, I can tell you that building a golf course requires a lot of planning.

The crew I worked with would go into an existing golf course and rebuild an entire hole. Or a green that wasn’t draining properly.

The problem—and the most delicate part of this endeavor—was to be careful not to wreck all the services that were buried in the ground. These included irrigation, drainage, telecom, and power lines.

While operating a Case backhoe, I cut through a large electrical line that was missed by the locate crew.

Needless to say, you reevaluate your priorities pretty quickly when something like this happens. An enormous flame shot up out of the ground.

Case Corporation doesn’t trade on the stock market. It is now part of a company called CNH Global N.V. (NYSE/CNH) out of the Netherlands, Fiat Industrial S.p.A being its majority owner.

On the stock market, Caterpillar Inc. (NYSE/CAT) is one of the largest players in heavy equipment. The company was doing really well a few years ago when the construction boom in Asia combined with the mining boom to produce significant growth.

The position is down from its previous stock market high, but the company is not expensively priced.

With a current price-to-earnings ratio of around 12, the position boasts a current dividend yield of 2.3%. If it was over three percent, then Caterpillar would be a much more attractive stock market opportunity.

This fiscal year, Wall Street expects the company’s revenues to fall about 10% comparatively. Solid growth for the company is expected to resume in 2014.

As much as Caterpillar is in the business of manufacturing and selling heavy equipment, it is also an enormous financing company.

Normally, in the first quarter, the company and its dealers build up inventory in anticipation of the spring/summer sales season. The company cut its inventory in the recent first quarter due to slower business conditions.

Total revenues for this year were reduced to an expected range of $57.0–$61.0 billion, down from the previous range of $60.0–$68.0 billion. (Read “Why DuPont’s Earnings Results Are So Typical for This Stock Market.”)

Caterpillar has also had problems in China regarding an acquisition that was later found to have accounting irregularities.

On the stock market, the company has been flat for the last year, but like I said, it’s not expensively priced.

Caterpillar is a well-managed business that makes great products. (Learning how to operate a backhoe was a lot of fun.)

The company’s growing cash balance could produce another dividend increase this year, making it a better stock market opportunity.

Investing success with a company like Caterpillar is about getting the business cycle right. A lot does ride on business conditions in Asia now. The stock market won’t bid the shares with slow growth from that region.

With a little more certainty in the global economy, Caterpillar would be worth considering in this stock market, based on its valuation and dividend yield.

One of these days, I’d like to try operating a big bulldozer. Without question, I’ll make sure there are no power lines around—that was an illuminating experience.

My concern is how far the stock market can rise before we see a correction of any significant magnitude. Yet even with selling, it would be a buying opportunity, not a sign to exit.

The one key thing you need to make sure of is that your portfolio is diversified to withstand any major selling in a particular sector and market cap. Case in point: if you were heavily weighted in the precious metals, such as gold and silver, your portfolio would have been devastated by now.

This doesn’t mean you shouldn’t have any metals in your portfolio, but you need to have ample diversification, which is the key to success in the stock market.

If your assets are well diversified, it would be fine to play a possible upside bounce in gold. (Read “Is Gold’s Near-Beath Crisis Over-Exaggerated? Concerns of a Market Meltdown May Not Be.”)

The reality is that it doesn’t matter if you are investing in real estate, gold, stocks, art, or classic cars; the prudent way to protect your assets is to make sure you are diversified in the stock market.

The concept of spreading the investment risk is portfolio management—a process that encompasses the creation, monitoring, and adjustment of your investments. This process never stops, because you are continually buying and selling new stocks. Taking a portfolio approach to your stock market investments will help you improve your success.

When I refer to taking a “portfolio approach” to your stock market holdings, it means diversifying your investments through different industries. Not only do you need to spread your investment capital around a number of different stocks, but you also need to diversify your holdings across different industries. Owning a basket of stocks in one market sector increases your investment risk substantially, so you have to spread your money around different sectors if you want to protect your wealth over the long term.

Make sure you have investments spread across the board. The Dow Jones Industrial Average is a good index to look at as far as diversification ideas.

You can create a “do-it-yourself” fund by allocating your assets to various indices that will give you a broad measure of the stock market and allow for ample diversification. In this case, you can add a mixture of the Dow, S&P 500, NASDAQ, and Russell 2000 as the core holdings along with foreign exposure via exchange-traded funds (ETFs) in Asia, Latin America, and Europe.

The fundamental reasons behind the rise in today’s key stock indices are missing. For a real rally to happen, there has to be rising demand in the U.S. economy, consumers must be confident to spend, and businesses should see their sales rising. None of this is taking place.

Industrial production in the U.S. economy decreased 0.5% in April—marking the second decline since the beginning of the year. (Source: Federal Reserve, May 15, 2013.)

Similarly, manufacturing in the U.S. economy is also portraying a bleak picture of demand. Manufacturing output in the U.S. economy declined 0.4% in April after continuing its slump from March, when it decreased by 0.3%.

In the first quarter, a large number of companies on the key stock indices, like the S&P 500, were able to show better-than-expected corporate earnings. But in hindsight, they showed one troubling phenomenon: as the majority of the companies on the S&P 500 have already reported their corporate earnings, only 48% of them were able to beat revenue expectations. (Source: FactSet, May 10, 2013.)

Looking ahead, the picture for the key stock indices in the U.S. economy doesn’t look bright. For example, as of May 10, out of all the companies on the S&P 500 that have issued their corporate earnings guidance, more than 79% of them have issued a negative outlook. The estimated earnings growth rate for companies on the S&P 500 stands at 1.6%, compared to 4.5% near the end of March.

On top of all these troubles in the U.S. economy, the global economy is weakening, as major economic hubs are begging for growth. Look at China, for example. The country is expected to move at a very slow rate this year. Japan is in a recession. The eurozone just announced it has now completed six quarters of negative gross domestic product (GDP).

As a result of all these negative factors, companies on the key stock indices will eventually suffer—and suffer big. During an economic slowdown, consumers buy less and hoard what they have, because they are uncertain about their future. So companies don’t really sell more and their profitably decreases and, obviously, this is priced into the key stock indices.

In the first quarter of this year and the last quarter of 2012, we saw an unprecedented increase in share buyback activity from companies in the U.S. economy. Some of the most notable corporate names in history bought back their shares—all this does is increase the earnings ratio without really increasing the profit.

I continue to be skeptical as the key stock indices move higher. Right now, it seems as if investors are looking for reasons to buy no matter what. Unfortunately, optimism is the stock market’s worst friend.

Michael’s Personal Notes:

In the first quarter of 2013, the eurozone continued to witness an economic contraction. The gross domestic product (GDP) of the 17-nation region declined 0.2%. This decrease in the GDP marked the sixth straight quarter of economic contraction in the eurozone and the longest since 1995. (Source: Reuters, May 15, 2013.)

The debt-infested countries in the eurozone, such as Greece, Spain, Italy, and Portugal, are already experiencing severe economic contraction; and to say the very least, they have a lot of issues to resolve before they even come close to seeing any economic growth.

What concerns me the most is that the stronger nations in the eurozone are starting to show weakness—the economic slowdown is picking up speed. It could make the economic contraction in the entire region much more severe and could send the eurozone into another downward spiral.

Consider the French economy—the second-biggest economic hub in the eurozone. In the first quarter of 2013, France witnessed an economic contraction—GDP declined 0.2% and France entered a recession. (Source: Bloomberg, May 15, 2013.) For the past few quarters, France’s economy has been witnessing severe pressures, and unemployment in the country continues to be a major problem.

Similarly, Germany—the biggest nation in eurozone by GDP—grew at a dismal pace in the first quarter of 2013, below economists’ estimates. The German Federal Statistical office reported that the German economy grew 0.1% in the first quarter, and the revised calculation showed the country experienced an economic contraction in the last quarter of 2012, when its GDP declined by 0.7%. (Source: Destatis, May 15, 2013.) But there are even more troubling statistics; looking at it from a year-on-year basis, Germany’s GDP declined by 1.4% in the first quarter of 2013.

All of this shouldn’t come as a surprise to the readers of Profit Confidential; I have been harping on about more economic contraction in the eurozone for some time now. All the pieces of the puzzle are just falling into place.

Dear reader, the troubles in the eurozone are important to observe, because the region as a whole can create a significant amount of demand in the global economy. If the area struggles further, it will weigh heavily on global trade. More specifically, major U.S.-based companies that operate in the eurozone will see their profitability decline.

What He Said:

“I’ve been writing to my readers for the past two years claiming the decline in the U.S. property market would not be the soft landing most analysts were expecting, but rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most can realize today.” Michael Lombardi in Profit Confidential, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worse times ahead.

The debt-infested countries in the eurozone, such as Greece, Spain, Italy, and Portugal, are already experiencing severe economic contraction; and to say the very least, they have a lot of issues to resolve before they even come close to seeing any economic growth.

What concerns me the most is that the stronger nations in the eurozone are starting to show weakness—the economic slowdown is picking up speed. It could make the economic contraction in the entire region much more severe and could send the eurozone into another downward spiral.

Consider the French economy—the second-biggest economic hub in the eurozone. In the first quarter of 2013, France witnessed an economic contraction—GDP declined 0.2% and France entered a recession. (Source: Bloomberg, May 15, 2013.) For the past few quarters, France’s economy has been witnessing severe pressures, and unemployment in the country continues to be a major problem.

Similarly, Germany—the biggest nation in eurozone by GDP—grew at a dismal pace in the first quarter of 2013, below economists’ estimates. The German Federal Statistical office reported that the German economy grew 0.1% in the first quarter, and the revised calculation showed the country experienced an economic contraction in the last quarter of 2012, when its GDP declined by 0.7%. (Source: Destatis, May 15, 2013.) But there are even more troubling statistics; looking at it from a year-on-year basis, Germany’s GDP declined by 1.4% in the first quarter of 2013.

All of this shouldn’t come as a surprise to the readers of Profit Confidential; I have been harping on about more economic contraction in the eurozone for some time now. All the pieces of the puzzle are just falling into place.

Dear reader, the troubles in the eurozone are important to observe, because the region as a whole can create a significant amount of demand in the global economy. If the area struggles further, it will weigh heavily on global trade. More specifically, major U.S.-based companies that operate in the eurozone will see their profitability decline.

What He Said:

“I’ve been writing to my readers for the past two years claiming the decline in the U.S. property market would not be the soft landing most analysts were expecting, but rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most can realize today.” Michael Lombardi in Profit Confidential, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worse times ahead.

It is a phrase that’s pertinent to the stock market.

Without question, I remain completely taken aback by what has transpired with the stock market since the beginning of the year.

Looking at the numbers, not being invested in many corporations has been costly.

Excluding the reasons why, the simple fact is that the Dow Jones Industrial Average is up 16% since the beginning of the year (not including dividends).

The S&P 500 is up 15.7%. The NASDAQ Composite is up 14.8% and the Russell 2000, an index of small-caps, is up 16.6% (not including dividends).

I think this stock market can smell the end of quantitative easing.

More meaningful, however, is the Federal Reserve’s policy regarding interest rates, which are going to continue to be low for the near future, as it has been made very clear.

This is a huge, perhaps neglected, certainty for the stock market and corporations.

Making the case for being a buyer in this market is extremely difficult. Institutional investors have already placed their bets and a lot of corporations—good companies with real staying power and solid prospects for earnings growth going forward—are fully priced.

Johnson & Johnson (NYSE/JNJ) is a benchmark stock. Like many large corporations, Johnson & Johnson does everything it can to squeeze every penny out of its bottom line. The company lays off employees, closes plants, and does everything to minimize taxes. Johnson & Johnson’s 10-year stock chart is featured below:

Chart courtesy of www.StockCharts.com

Like many global corporations, Johnson & Johnson grows organically and by acquisition.

In the second quarter last year, the company bought Synthes Incorporated, a global manufacturer of orthopedic devices, for $20.2 billion (in cash and stock).

In its first quarter of 2013, the company’s worldwide sales were $17.5 billion, representing a gain of 8.5%. The acquisition of Synthes, net of a separate divestiture, helped revenues by 5.7%.

Revenue strength in the first quarter was strongest in the U.S. and Canada. According to the company, sales gained 11.2%, coming in at $8.0 billion.

Unlike many other global corporations, Johnson & Johnson experienced sales growth in all international regions. But the standout growth at home is meaningful.

The opportunity cost of not owning Johnson & Johnson’s shares since the beginning of the year has been significant. On the stock market, the position is now up approximately 24%, excluding its dividend payment (recently boosted 8.2%), since the beginning of the year.

From 2005 to 2011, the position was flat, while the corporation paid increasing dividends.

This is the way so many corporations trade, and it should be part of an investor’s expectation that there will be considerable periods of non-performance. (Read “Stock Market Fake-Out: Where Is the Retrenchment?”)

With a price-to-earnings ratio of approximately 24, Johnson & Johnson is fully priced on the stock market.

But I don’t expect this position—or the stock market for that matter—to just come apart without some sort of astonishing shock, like a big change in Fed policy, war, sovereign debt shock from Europe, or a big derivatives trade gone bad.

All eventualities are possible with the stock market at a record high. But the opportunity cost of not being in it has proven to be significant.

A meaningful, full-blown correction in the stock market would be a very healthy development for the medium-term trend.

Given current information, I think Johnson & Johnson will be a buying opportunity.

Airlines around the world have reaped the benefits from the improved travel sector.

The airline sector is estimated to earn $10.4 billion in profits this year, up from the previous estimate of $8.4 billion, according to the International Air Transport Association (IATA). (Source: “Small Boost to Airline Profitability – Industry Profit Margin Improves to 1.6%,” International Air Transit Association web site, March 20, 2013.)

According to the IATA report, the top market in the airline sector is predicted to be the Asian-Pacific airlines, with estimates calling for $4.2 billion in net profits this year, up from $3.9 billion in 2012 and accounting for a 40.4% share of the total global airline sector.

The North American airline sector is also looking good, with profits estimated at $3.6 billion this year, well ahead of the $2.3 billion recorded in 2012.

Coming in third is expected to be the Middle Eastern airline sector, with $1.4 billion in profits, more than 50% higher than the $900 million in 2012.

The airline sector has been improving since the end of the recession. Lower fuel costs and increased bookings and travelling have helped to drive up the sector.

Take a look at the Dow Jones US Airlines Index in the chart below. Notice the beautiful uptrend since November 2012 in correlation with the S&P 500, as highlighted by the green line.

Chart courtesy of www.StockCharts.com

In the low-cost discount side, a carrier that I frequently fly with and like is JetBlue Airways Corporation (NASDAQ/JBLU). I have followed the stock for over a decade and continue to feel the company has what it takes to be a major player in the discount airline sector.

Chart courtesy of www.StockCharts.com

First formed in 1998, JetBlue Airways is a discount air carrier serving markets in the United States, Puerto Rico, and Mexico; along with 10 countries in the Caribbean and Latin America region. JetBlue offers services to 77 cities via 800 daily flights.

In April, the airline’s key revenue passenger miles reading came in at $11.5 million for an 83.8% load factor, up 6.8% year-over-year. (Source: JetBlue Airways Corporation, last accessed May 16, 2013.)

Following a decline in revenues from 2008 to 2009, JetBlue came back with growth in 2010 to 2012 and Thomson Financial estimates call for the growth to continue in 2013 and 2014.

For more of a global airline sector play, United Continental Holdings, Inc. (NYSE/UAL) is worth a look. The company formed from the merger of Continental Airlines and United Airlines in 2010.

Chart courtesy of www.StockCharts.com

United Continental offers around 5,446 flights daily to 370 airports on six continents.

Revenues are predicted to rise three percent to $38.3 billion this year, followed by $39.7 billion in 2014, up 3.9% year-over-year.

To play the growth in the airline sector, you can also play the suppliers of parts and services, which I discussed in “Aerospace: The Only Way Left to Play Global Growth.”

Core retail sales declined 0.1% in April—and that’s after they already fell 0.4% in the previous month! (Source: U.S. Census Bureau, May 13, 2013.)

When compared to the first four months of 2012, consumer spending in the U.S. economy declined in the first four months of 2013 at electronics and appliance stores, health and personal care stores, gasoline stations, and general merchandise stores.

And looking forward, consumer spending in the U.S. economy doesn’t appear to look very promising either.

If companies don’t spend or create better-quality/better-paying jobs, can consumer spending really pick up? It’s well documented in these pages: the job creation we have seen since the financial crisis started has been in low-wage-paying sectors.

Keeping all this in mind, with consumer spending still bleak and core retail sales constantly declining, the retailer must be suffering.

But that’s not so!

When you look at the stock market and, more specifically, at the retailers, it appears that consumer spending in the U.S. economy is booming! Consider the chart below of the S&P Retail Index. This index tracks the performance of some of the most well-known retailers in the U.S. economy.

Chart courtesy of www.StockCharts.com

Dear reader, the stock market isn’t portraying the real picture of the U.S. economy. The retail sales number actually shows how consumer spending—the biggest contributor to our gross domestic product (GDP)—is fairing, and those numbers look terrible.

Even with the printing of trillions of dollars of new money via quantitative easing, the Federal Reserve hasn’t been able to do what it originally intended to do—spur economic growth in the U.S. economy. The Fed has made the banks financially stronger and has sent the stock market higher, but the “little guy” really hasn’t been helped.

It’s a vicious cycle that’s not working right now. For consumer spending to pick up, businesses must be willing to spend and invest rather than spending their money buying back their own shares to boost their earnings. Mark my words: this can only go on for so long.

Michael’s Personal Notes:

Something is starting to smell in the bond market…

Since their peak in July of 2012, 30-year U.S. bonds have declined in value—they are down almost six percent. Trading above $153.00 in mid-2012, 30-year U.S. bonds now hover around $144.00, as depicted in the chart below.

Chart courtesy of www.StockCharts.com

Keep in mind that bond investors use U.S. bonds as a benchmark to what kinds of rates other types of bonds, such as corporate bonds, municipal bonds, and junk bonds, should sell at.

For example, if U.S. bonds decline in value, chances are the other types of bonds in the bond market will follow in the same direction. So the yield on 30-year U.S. bonds really matters when it comes to looking at the direction of the overall bond market.

The bond market experienced a significant run-up as the 2008 financial crisis unfolded and investors sought safety. Now, investors have a different type of worry on their hands.

The Federal Reserve, which has become a major buyer of long-term U.S. bonds, buying up to $45.0 billion worth of them a month, is contemplating when it should stop reducing the amount of bonds it purchases each month.

According to data from Investment Company Institute, an association of U.S. investment companies, in the first three months of 2013, long-term bond mutual funds had inflows of $68.9 billion. This was 25% lower than the same period a year ago, when these funds had inflows of $92.08 billion. (Source: Investment Company Institute, May 8, 2013.)

As I have been harping on about in these pages for some time now, caution and capital preservation are hands-down the best strategy for bond investors, as conditions in the overall bond market are changing. A decline in the bond market will hit the most conservative type of investments, like pension funds and insurance companies, which invest heavily in bonds.

I am watching the bond market very closely as the recent decline in bond prices is significant. Bonds are signaling higher interest rates ahead, something very few economists are talking about.

Where the Market Stands; Where It’s Headed:

As I wrote last week, it feels like 2007 all over again. The stock market rises on good news and bad news. Bullishness among investors and stock advisors is near a multiyear high. Corporate profit growth has stalled. The higher this market goes, and it has gone higher than even I thought it would, the bigger the drop will be. The bear market has done a masterful job at convincing investors the stock market is a safe bet again.

What He Said:

“If the U.S. housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure – these are the bank stocks I wouldn’t own.” Michael Lombardi in Profit Confidential, May 2, 2007. From May 2007 to November 2008, the Dow Jones U.S. Bank Index of the world’s largest bank stocks was down 65%.

Since their peak in July of 2012, 30-year U.S. bonds have declined in value—they are down almost six percent. Trading above $153.00 in mid-2012, 30-year U.S. bonds now hover around $144.00, as depicted in the chart below.

Chart courtesy of www.StockCharts.com

Keep in mind that bond investors use U.S. bonds as a benchmark to what kinds of rates other types of bonds, such as corporate bonds, municipal bonds, and junk bonds, should sell at.

For example, if U.S. bonds decline in value, chances are the other types of bonds in the bond market will follow in the same direction. So the yield on 30-year U.S. bonds really matters when it comes to looking at the direction of the overall bond market.

The bond market experienced a significant run-up as the 2008 financial crisis unfolded and investors sought safety. Now, investors have a different type of worry on their hands.

The Federal Reserve, which has become a major buyer of long-term U.S. bonds, buying up to $45.0 billion worth of them a month, is contemplating when it should stop reducing the amount of bonds it purchases each month.

According to data from Investment Company Institute, an association of U.S. investment companies, in the first three months of 2013, long-term bond mutual funds had inflows of $68.9 billion. This was 25% lower than the same period a year ago, when these funds had inflows of $92.08 billion. (Source: Investment Company Institute, May 8, 2013.)

As I have been harping on about in these pages for some time now, caution and capital preservation are hands-down the best strategy for bond investors, as conditions in the overall bond market are changing. A decline in the bond market will hit the most conservative type of investments, like pension funds and insurance companies, which invest heavily in bonds.

I am watching the bond market very closely as the recent decline in bond prices is significant. Bonds are signaling higher interest rates ahead, something very few economists are talking about.

Where the Market Stands; Where It’s Headed:

As I wrote last week, it feels like 2007 all over again. The stock market rises on good news and bad news. Bullishness among investors and stock advisors is near a multiyear high. Corporate profit growth has stalled. The higher this market goes, and it has gone higher than even I thought it would, the bigger the drop will be. The bear market has done a masterful job at convincing investors the stock market is a safe bet again.

What He Said:

“If the U.S. housing market continues to fall apart, like I predict it will, the stock prices of major American banks that lend money to consumers to buy homes will come under pressure – these are the bank stocks I wouldn’t own.” Michael Lombardi in Profit Confidential, May 2, 2007. From May 2007 to November 2008, the Dow Jones U.S. Bank Index of the world’s largest bank stocks was down 65%.

These are just some of the provocative words in the Medium Term Oil Market Report-2013 that was just released by the International Energy Agency (IEA).

I don’t think I’ve ever read a more enthusiastic and fervent document from a government body in my life.

The IEA is an organization funded by 28 countries that was created after oil prices skyrocketed in 1973 and 1974. As policy, the agency doesn’t forecast oil prices.

The IEA’s executive director, Maria van der Hoven, said, “North America has set off a supply shock that is sending ripples throughout the world.” (Source: “Supply shock from North American oil rippling through global markets,” International Energy Agency web site, last accessed May 15, 2013.)

The IEA forecasts the North American oil supply will grow by 3.9 million barrels of oil per day (mbopd) from 2012 to 2018. That’s significant.

Chart Industries, Inc. (NASDAQ/GTLS) out of Garfield, Ohio is an oil and gas storage manufacturer that was recently featured in these pages. (Read “This Is an Investment Theme Worth Paying Attention To.”)

But the biggest gain of all, according to the IEA, will be in global oil refining capacity, which is expected to surge by 9.5 mbopd over the next five years, led by China and the Middle East.

The report said that higher oil prices over the past few years provided the backdrop for the “revolution.” Lofty oil prices helped make fracturing technology (used to extract oil from under rock) and Canadian oilsands production economically viable.

What’s most interesting (and worrisome) is that the report said the supply “revolution” is transforming the global supply chain, but that future economic growth related to the global oil industry will be strongest in commercial storage capacity and global hubs to support long-haul crude oil. (Source: Ibid.)

The ripples that van der Hoven is referring to have serious consequences—and not just for oil prices.

The report implies that the North American production boom, may only be that. With oil prices where they are (or better) much of the new hydrocarbons are going to get sent directly overseas.

The benefits of the oil and gas resurgence (refining, new infrastructure, jobs, spin-offs, the chance for lower oil prices, and lower prices at the pump) could essentially be shipped overseas.

There are infrastructure benefits (and costs) occurring now because of the oil and gas build-out. Oil prices recently strengthened.

The IEA said that every aspect of the global energy industry will experience some degree of “transformation” over the next five years.

I believe it. But if the “bonanza” simply gets shipped overseas, a huge opportunity will be lost.

The IEA and Exxon Mobil Corporation (NYSE/XOM) predict North America will become a net energy exporter by 2030.

When I read this report from the IEA and considered what it hinted at, it made me think how important it is not to give away the store.

Energy in all its forms (and alternative energy) has so much potential to help revitalize the U.S. economy.

Yet while the collapse of the factory building was a total shock, the underlying issues of major apparel makers using cheap labor in these poor countries have been going on for decades as a way of improving earnings.

In the pursuit of earnings growth, The Gap, Inc. (NYSE/GPS) and Wal-Mart Stores, Inc. (NYSE/WMT) have long been accused of turning a blind eye to the extremely poor working conditions of the third-party factory workers who produce cheap goods for consumers here and abroad. The reason is the need to deliver earnings.

The reason why the conditions are largely ignored is simply a matter of cutting costs and increasing earnings. Consumers in the richer countries want cheaper clothing and goods. Companies want lower costs and higher earnings. The demand for low costs places immense pressure on the third-party manufacturers to run a very tight operation, which is why the incident in Bangladesh was allowed to happen and why similar incidents will continue to occur as long as earnings are key. (Read “Market Near Record High, but Where’s the Revenue?”)

For those who want to support the local manufacturing sector, especially in the highly competitive apparel sector, there are still some U.S. companies that manufacture here.

A small-cap speculative retail play with high risk and above-average upside potential is Los Angeles, California-based American Apparel, Inc. (AMEX/APP), with a share price of $1.81. A big surprise is that the manufacturing for American Apparel is not done in China or another low-cost country; rather, the company makes its clothes out of an 800,000-square-foot facility in downtown Los Angeles. Other facilities are found in California.

Chart courtesy of www.StockCharts.com

The company is a vertically integrated manufacturer, distributor, and retailer of branded fashion apparel for women, men, children, and babies. Its products include T-shirts, denim, sweaters, jackets, and casual wear, along with related accessories and personal care products.

American Apparel is a global company with over 260 retail stores in 19 countries, including the United States, Canada, Mexico, Brazil, the United Kingdom, Ireland, Austria, Belgium, France, Germany, Italy, the Netherlands, Spain, Sweden, Switzerland, Australia, Japan, South Korea, and China. About 146 stores are situated in the U.S., with Canada at around 38 stores.

American Apparel reported 23 straight months of positive comparable store sales, according to the company web site. In April, comparable store sales jumped five percent, but the growth from the company’s online sales to over 60 countries surged 17%.

American Apparel is a high-risk buying opportunity that can return big profits if the company can deliver steady revenue and earnings growth.

The earnings side will come, but it’s more difficult, given the higher domestic labor costs.

The company reported sequential annual revenue growth from $201.5 million in 2006 to $558.8 million in 2010 to $547.3 million in 2011 and $617.3 million in 2012. The revenue growth is estimated to continue at 6.2% in 2013 and seven percent in 2014, according to data by Thomson Financial.

If you want to buy “Made in the USA” stocks while taking a stand against the terrible working conditions in global sweatshops, look to American Apparel.

According to EPFR Global, a firm that tracks money flows, for the week ending May 8, money managers fled from gold bullion and precious metal funds, withdrawing $1.27 billion. So far this year, they have withdrawn $20.8 billion—the largest amount since the firm started to track the data in 2000.

As bears continue to look for reasons to sell and investors pour out of gold, I see a brighter future for gold bullion ahead.

For the price of any investment to decline, there has to be some fundamental changes. Consider the decline in the key stock indices in 2008–2009. The reasons for the broad market sell-off were dismal earnings, a financial system on the verge of collapse, and anemic consumer demand.

But the fundamental reason for the rise in gold bullion prices hasn’t changed. There is still strong demand, and it’s increasing not just in U.S., but in the global economy.

In April, the trade deficit of India, the biggest consumer of precious metals, increased by more than 70% from March due to high imports of gold bullion and silver. The country imported $7.5 billion worth of precious metals in April, compared to $3.1 billion in the same year-ago period. (Source: MarketWatch, May 13, 2013.)

As a result of this pressure on the account deficit, the central bank of India put restrictions on gold bullion imports by banks in that country. In a statement, the Reserve Bank of India (RBI) said, “…to moderate the demand for gold for domestic use, it has been decided to restrict the import on consignment basis by banks, only to meet the genuine needs of exporters of gold jewellry.” (Source: “Reserve Bank of India puts restrictions on gold imports by banks,” The Indian Express, May 13, 2013.)

Dear reader, take a look at the chart below of gold bullion prices stretching back to when the bull run began, and tell me if it looks like the uptrend has been broken.

Chart courtesy of www.StockCharts.com

The long-term trend is still in place, as it is evident that whenever prices touch the upward-moving trendline (the red circles in the chart above), gold bullion prices ended up going much higher.

Readers of Profit Confidential know I am bullish on gold bullion; my opinion remains the same. I consider the recent decline in gold bullion prices an opportunity.

Michael’s Personal Notes:

This has caught some by surprise…

The U.S. government reported a budget surplus (money coming in was more than money going out) of $112.9 billion for the month of April. (Source: U.S. Department of the Treasury; Financial Management Services, May 10, 2013.)

It’s a surprise, because April’s surplus is the biggest monthly government budget surplus in five years.

But unfortunately, this trend will be very short-lived. The main reason the U.S. government was able to post a budget surplus in April was, obviously, the large amount of individual tax deposits during that month.

One month of budget surplus certainly doesn’t mean the U.S. government is back on its feet. On the contrary, the U.S. government has been posting a budget deficit for a long time now, and as a result, our national debt has skyrocketed to $17.0 trillion. It’s a major problem. So far in fiscal year 2013 (which began in October of 2012), the U.S. government has already run up a budget deficit of about $500 billion.

We are the most indebted nation in the global economy. Remember: when a government runs a budget deficit, it needs to borrow money to pay for its expenses.

And as the government continues to spend and post budget deficits, adding more to its national debt, there’s another set of troubles developing.

Consider the situation in Detroit, Michigan. The city is on the verge of defaulting on its obligations to its creditors because of its massive budget deficit. Detroit is expected to run out of cash, even though the state took control over the city’s finances. (Source: Bloomberg, May 13, 2013.)

Detroit is not the only city in the U.S. economy facing defaults; there are many others. There are states that have a significant amount of pension liabilities.

When cities run out of money, the states they are located in may be able to bail them out. But what happens when the states’ funds run dry? No doubt; they will go to the federal government for help. This phenomenon will force more spending and increase the budget deficit of the U.S. government, pushing the national debt even higher.

I am keeping a close eye on cities and states that are in trouble, because what happens next with them may send ripple effects through the economy.

Right now, the Federal Reserve is purchasing $45.0 billion worth of government bonds, but at the same time, it’s debating if its quantitative easing program should soon end. If the Fed does stop funding the U.S. government, a major buyer of U.S. bonds will be exiting the market. I wonder who will buy our bonds then.

What He Said:

“Over-built, over-speculated, over-financed and over-done. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in Profit Confidential, April 3, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

The U.S. government reported a budget surplus (money coming in was more than money going out) of $112.9 billion for the month of April. (Source: U.S. Department of the Treasury; Financial Management Services, May 10, 2013.)

It’s a surprise, because April’s surplus is the biggest monthly government budget surplus in five years.

But unfortunately, this trend will be very short-lived. The main reason the U.S. government was able to post a budget surplus in April was, obviously, the large amount of individual tax deposits during that month.

One month of budget surplus certainly doesn’t mean the U.S. government is back on its feet. On the contrary, the U.S. government has been posting a budget deficit for a long time now, and as a result, our national debt has skyrocketed to $17.0 trillion. It’s a major problem. So far in fiscal year 2013 (which began in October of 2012), the U.S. government has already run up a budget deficit of about $500 billion.

We are the most indebted nation in the global economy. Remember: when a government runs a budget deficit, it needs to borrow money to pay for its expenses.

And as the government continues to spend and post budget deficits, adding more to its national debt, there’s another set of troubles developing.

Consider the situation in Detroit, Michigan. The city is on the verge of defaulting on its obligations to its creditors because of its massive budget deficit. Detroit is expected to run out of cash, even though the state took control over the city’s finances. (Source: Bloomberg, May 13, 2013.)

Detroit is not the only city in the U.S. economy facing defaults; there are many others. There are states that have a significant amount of pension liabilities.

When cities run out of money, the states they are located in may be able to bail them out. But what happens when the states’ funds run dry? No doubt; they will go to the federal government for help. This phenomenon will force more spending and increase the budget deficit of the U.S. government, pushing the national debt even higher.

I am keeping a close eye on cities and states that are in trouble, because what happens next with them may send ripple effects through the economy.

Right now, the Federal Reserve is purchasing $45.0 billion worth of government bonds, but at the same time, it’s debating if its quantitative easing program should soon end. If the Fed does stop funding the U.S. government, a major buyer of U.S. bonds will be exiting the market. I wonder who will buy our bonds then.

What He Said:

“Over-built, over-speculated, over-financed and over-done. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in Profit Confidential, April 3, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

Everyone said that in their respective professions (a manufacturing sales manager, an insurance adjuster, a foodservice executive, and a bank manager) business conditions were flat.

I’ve heard this from many people. Countless businesses are holding steady, but despite profound efforts, they can’t generate meaningful top-line growth.

Yet, the stock market just hit an all-time record high on modest first-quarter earnings results.

Quite obviously, this stock market is overbought.

Wall Street and institutional investors are in the business of betting on the future using someone else’s money.

Corporate earnings over the last several quarters have held up. But the earnings have mostly been squeezed out of worker productivity and cost controls.

Blue-chip balance sheets continue to grow stronger, and the lack of certainty in the global marketplace has dampened the willingness of corporations to make new investments.

The result is continued growth in quarterly dividends and share buybacks; and this is one of the many reasons why institutional investors have been buying this stock market—there is nowhere else to go.

I think it is still worth keeping a sharp eye on the crucial movements in the Dow Jones Transportation Average. It is old-school, but I believe that many component companies do provide a decent reflection of economic activity in the U.S.—at least from a corporate perspective. (Read “BlackRock Takes In Billions for Equities: A Signal the Stock Market Is Near a Top?”)

What I learned from many large-cap earnings reports was that sales and prices have somewhat improved domestically.

However, the international contribution combined with a stronger U.S. dollar provided weakness. The result: little to no business growth.

While balance sheets are solid for blue chips, there’s no way the stock market can maintain its recent pace without genuine business growth.

Institutional investors have now placed their bets on the stock market. The gamble is on second-quarter earnings growth, and the stock market must deliver.

From what I read, first-quarter earnings outlooks from many corporations expect business conditions to improve in the bottom half of the year. This is typical and is no surprise.

The manufacturing sales manager said that at his company (which makes highly specialized tools used by other manufacturers) business conditions were better in the first quarter of 2012 than the most recent quarter.

Loads of caution continues to be appropriate. Stock market investors in the first quarter opened their wallets (just slightly) and placed a bet.

The stock market is overbought until second-quarter earnings season.

He made tons of money in the stock market in a short period of time, but his actions were driven solely by excess greed, refusing any advice to lighten his positions. He had a sense of invincibility and felt the stock market was heading much higher.

In 2000, when the NASDAQ traded above 5,000, my overconfident friend was so extremely bullish on the stock market that he decided to take out a reverse mortgage on his parent’s home to play stocks. He promised great returns, early retirement, and a new lifestyle.

The problem was he was investing in speculative issues that had minimal history and financial success. He thought the NASDAQ could rise another 30%.

At that level, he was thinking he would make over a million dollars, pay back the mortgage, and quit his day job to become a day trader.

Luckily, he did not quit his day job, as it’s the only thing he had left after the stock market imploded in early 2000.

New bubbles come and go. Each one is different and driven by different factors—the only commonality is greed.

We are hearing some whispers that this current stock market is bubble-like. While I’m not fully in agreement, I do feel the rally in the stock market to record highs has largely been driven by the Federal Reserve’s easy monetary policy, as is the case with stock markets around the world as global central banks from Europe to Asia cut interest rates.

The reality is there is no viable alternative in which to invest your money other than the stock market. Investment-grade bonds are yielding very little, and unless you are willing to take the risk and invest in bonds in Greece, Spain, Italy, or Portugal, you are out of luck.

There is little choice at this time. I don’t think the stock market is in a bubble yet, as long as the Fed maintains its easy money flow. But you should be careful; interest rates will inevitably rise, and then we’ll see traders making a mad dash toward the exits.

At this juncture, don’t fight the trend. (Read “S&P 500 Could Hit 1,700, but Weaker Stock Cycle Ahead.”) You will never win.

Ride the stock market higher, but at the same time, understand the current rate of the advance this year is not sustainable.

Yes, I feel there will be a pending correction; I’m just not sure when it will happen and by how much. The only thing I know is that a stock market correction will provide a buying opportunity.

Remember the story of my friend; look to lighten up on some of your bigger winners, especially those in the growth and technology areas.

Take some profits off across the board. There’s no shame in this. Greed is not your friend.

The company has doubled on the stock market since 2010, and it has more than tripled since 2006.

This kind of stock market performance really is amazing. In just three years, a $12.5-billion company has become a $25.0-billion company.

From Oregon, Bill Bowerman and Phil Night created Blue Ribbon Sports with $500.00 each and a handshake.

In January of 1964, Bowerman and Night ordered 300 pairs of Tiger brand shoes from Onitsuka Inc. of Kobe, Japan for distribution in the U.S. market. Night began selling the shoes out of his Plymouth “Reliant,” and Bowerman began tearing them apart.

Bowerman took an idea from his wife’s waffle iron and created a new running shoe.

Jeff Johnson (a friend and the company’s first employee) came up with the NIKE name in 1971. Shoes were successfully tested and Carolyn Davidson, a graphic design student at Portland State University, created the “swoosh” logo. The company’s first shoes were sold at the U.S. Track & Field Trials held in Eugene, Oregon. The rest, as they say, is history.

As a stock market investment, NIKE has mostly been excellent. The position was flat between 1997 and 2004. The company signed Eldrick “Tiger” Woods in 1996.

In its latest quarter (ended February 28), the company’s comparable sales grew nine percent to $6.2 billion, up solidly from $5.7 billion. Comparable earnings grew from $560 million to $866 million, for a gain of 55%, while earnings from continuing operations were $662 million, up 16% from $569 million.

Sales growth was strongest in North America (18%), followed by Central and Eastern Europe (16%), then Western Europe (8%). Western Europe’s growth is uncharacteristic compared to other earnings reports from many global brands.

On February 1, 2013, NIKE sold its Cole Haan brand to Apax Partners for $570 million. The deal resulted in a gain on sale of $231 million. But on November 30, 2012, NIKE sold Umbro to Iconix Brand Group for $225 million. This resulted in a loss of $107 million, net of tax.

I consider NIKE to be fully valued on the stock market currently. With a price-to-earnings ratio of approximately 25, the company’s earnings growth combined with its dividend suggests it’s a little pricey.

NIKE is a shining example of how a business can still be very successful during tough times. Arguably, the position held up extremely well on the stock market through the financial crisis and the recession.

Wall Street estimates for the company have been going up for the next quarter, all of 2013, and all of 2014.

Realistically, I wouldn’t say the stock is a buy right now, simply because the stock market is at an all-time record high. It’s very difficult to consider new positions with the stock market sitting so high.

I would say, however, that this company would be worthy of consideration for long-term investors if the stock were to experience a meaningful retrenchment.

While a track record of success certainly cannot predict the future, NIKE’s demonstrated record of innovation and wealth creation still makes it a winner.

Internet stocks are a favorite of mine. This is where I believe some of the top money will be made going forward, with Internet stocks like Google Inc. (NASDAQ/GOOG), priceline.com Incorporated (NASDAQ/PCLN), and LinkedIn Corporation (NASDAQ/LNKD). Alternatively, there are other niche-market Internet stocks deserving of a look. (Read my thoughts in “Why There’s No Stopping the Internet Sector.”)

Take a look at the chart of the Internet Index below and the decisive upward trend since late 2002 as indicated by the solid blue line. Note the three successive higher tops as reflected by the short horizontal blue lines.

Internet stocks are clearly in an upward trend, based on my technical analysis.

Chart courtesy of www.StockCharts.com

While the majority of you are familiar with the brand-name Internet stocks I’ve already mentioned in this article, an up-and-coming small-cap Internet play that I feel has a great niche market and is worth a closer look is OpenTable, Inc. (NASDAQ/OPEN).

Having used the OpenTable service on a regular basis, I like the service, and I feel it offers users a valuable way of booking restaurant reservations.

OpenTable provides a real-time online restaurant reservation system that is free to use for booking a table at your favorite restaurant. You can make, edit, and cancel reservations at participating restaurants, currently including more than 27,000 restaurants located in the United States, Canada, Germany, Japan, Mexico, and the United Kingdom.

Let’s say you have a specific restaurant in mind and it is set up for the OpenTable system. You simply go to the reservation system, select the date and time you’d like a reservation, along with the number of guests and any additional requests. Once this is done, you are sent a confirmation of reservation e-mail and a reminder as the date of the reservation nears. You can cancel at any time.

For the restaurant, it means a 24-hour reservation system that is electronic and efficient.

For OpenTable, revenues are generated from a one-time installation fee for reservation software/hardware for the restaurant, a monthly subscription fee, and a charge for each restaurant guest seated via the service.

The stock debuted on May 22, 2009 at $31.97 and traded as high as $118.66 on April 25, 2011 before steadily declining to the current level, which is where I see a buying opportunity among the Internet stocks.

The price chart for OpenTable below shows a sideways channel, but a possible breakout, as indicated by the top blue horizontal resistance line, may be in the works.

Chart courtesy of www.StockCharts.com

Fundamentally, the company is profitable and has beaten the Thomson Financial earnings-per-share (EPS) estimates in four straight quarters.

The company’s revenues are estimated to rise 16.1% to $187.7 million in 2013, followed by growth of 15.3% to $216.4 million in 2014, according to Thomson Financial.

Annual earnings are estimated to come in at $1.92 per diluted share in 2013 and rise to $2.28 per diluted share in 2014.

Watch the large short position of 4.71 million shares, or 24.3% of the float as of April 15. Should the stock rally, we could see short-covering and an upward move in the stock.

OpenTable is an excellent play among Internet stocks and is worth a look.

I continue to believe the key stock indices have been propped higher by unprecedented money printing by the Federal Reserve. I say this because the fundamental reasons behind the stock market rally are just not there.

Companies on the key stock indices are struggling to get sales going. McDonald’s Corporation (NYSE/MCD), the fast food giant, reported that its global same restaurant sales fell 0.6% in April. In its Asia/Pacific territory, sales plummeted 2.9%; in Europe, they declined 2.4%; and sales only rose 0.7% in the United States. (Source: Reuters, May 8, 2013.)

The demand from consumers is anemic. Businesses are building up inventories. Data from the U.S. Census Bureau showed that inventories at merchant wholesalers increased 0.4% in March compared to February, and they were up 4.7% from a year ago. (Source: U.S. Census Bureau, May 9, 2013.)

As of May 3, the majority of the companies on the S&P 500 had issued their corporate earnings. Only 47% reported sales above earnings estimates—the average for beating sales estimates over the last four quarters was 52%. (Source: FactSet, May 3, 2013.)

And of the companies that have provided corporate earnings guidance for the second quarter of 2013, almost 79% of them issued a negative outlook; they expect their corporate earnings to be lower.

Meanwhile, investors are taking much higher risks. Let’s look at the margin debt at the New York Stock Exchange (NYSE), for example. In March, it reached $379.5 billion, 28% higher than last year at this time. In March of 2012, the margin debt on the NYSE was $295.9 billion. (Source: New York Stock Exchange web site, last accessed May 10, 2013.)

Margin debt on the NYSE is very close to what it was prior to the broad market sell-off in the key stock indices during the financial crisis.

Increased margin debt means that even a minute fluctuation in the key stock indices could turn into panic selling, as a fall in stock prices will cause investors to close their positions to meet brokers’ margin requirements.

With the key stock indices posting new highs on a regular basis, it is certainly tough to be a bear, but I am sticking with my opinion. The fundamentals that drive the key stock indices higher—corporate earnings and sales growth, consumer demand and better economic conditions—are just not present. And there is far too much optimism in the marketplace—a classic trap for investors.

Michael’s Personal Notes:

The U.S. housing market is still under stress, and it will take a very, very long time for it to recover. Take a look at the chart below of the S&P/Case-Shiller Home Price Index—the most prominent indicator followed by economists to assess the health of the U.S. housing market.

Chart courtesy of www.StockCharts.com

Now consider this: if a stock goes down by 50% one day, and then increases 10% the next day, has the price recovered? The U.S. housing market is in a very similar situation. Yes, home prices have increased since they hit their lows in late 2011, but they are far from recovering. The S&P/Case-Shiller Home Price Index clearly shows that home prices are down significantly from their peak in 2006–2007.

What else is wrong with the U.S. housing market? According to the Mortgage Bankers Association’s (MBA) National Delinquency Survey, the delinquency rate for mortgage loans on one-to-four-unit residential properties increased to 7.25% of all outstanding loans at the end of the first quarter of 2013. (Source: Mortgage Bankers Association, May 9, 2013.)

And that’s not all. CoreLogic data showed that 10.3 million homes with a mortgage in the U.S. housing market had negative equity—meaning the price of the house was much less than the amount borrowed at the end of 2012. (Source: CoreLogic, March 19, 2013.)

To give you an idea about how negative the situation in the U.S housing market still is, in Nevada, more than 52% of properties with a mortgage have negative equity. Other states like Florida, Arizona, Georgia, and Michigan have a significant portion of homes with negative equity as well

With all this said, one question rises: where is the U.S. housing market headed next?

In his essay in the New York Times, Robert Shiller, founder of the S&P/Case-Shiller Home Price Index, commented on the direction of the U.S. housing market, saying, “Forecasting is indeed risky, because of factors like construction productivity, inflation, and the growth and bursting of speculative bubbles in both home prices and long-term interest rates. The outlook is so ambiguous that there is no single answer to the question of housing’s potential as a long-term investment.” (Source: Shiller, R.J., “Today’s Dream House May Not Be Tomorrow’s,” New York Times, April 27^th, 2013.)

The reality of the situation is that the road ahead is more uncertain now than it was before. I look at first-time home buyers as a key indicator of sustainable growth in the housing market. Unfortunately, even with mortgage rates at a record low and home prices being reasonable, first-time home buyers are not there.

What He Said:

“Over the past few weeks I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy and the stock market. There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.” Michael Lombardi in Profit Confidential, March 22, 2007. At the same time Michael wrote this, former Federal Reserve Chairman Alan Greenspan was quoted saying, “the worst is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”

Chart courtesy of www.StockCharts.com

Now consider this: if a stock goes down by 50% one day, and then increases 10% the next day, has the price recovered? The U.S. housing market is in a very similar situation. Yes, home prices have increased since they hit their lows in late 2011, but they are far from recovering. The S&P/Case-Shiller Home Price Index clearly shows that home prices are down significantly from their peak in 2006–2007.

What else is wrong with the U.S. housing market? According to the Mortgage Bankers Association’s (MBA) National Delinquency Survey, the delinquency rate for mortgage loans on one-to-four-unit residential properties increased to 7.25% of all outstanding loans at the end of the first quarter of 2013. (Source: Mortgage Bankers Association, May 9, 2013.)

And that’s not all. CoreLogic data showed that 10.3 million homes with a mortgage in the U.S. housing market had negative equity—meaning the price of the house was much less than the amount borrowed at the end of 2012. (Source: CoreLogic, March 19, 2013.)

To give you an idea about how negative the situation in the U.S housing market still is, in Nevada, more than 52% of properties with a mortgage have negative equity. Other states like Florida, Arizona, Georgia, and Michigan have a significant portion of homes with negative equity as well

With all this said, one question rises: where is the U.S. housing market headed next?

In his essay in the New York Times, Robert Shiller, founder of the S&P/Case-Shiller Home Price Index, commented on the direction of the U.S. housing market, saying, “Forecasting is indeed risky, because of factors like construction productivity, inflation, and the growth and bursting of speculative bubbles in both home prices and long-term interest rates. The outlook is so ambiguous that there is no single answer to the question of housing’s potential as a long-term investment.” (Source: Shiller, R.J., “Today’s Dream House May Not Be Tomorrow’s,” New York Times, April 27^th, 2013.)

The reality of the situation is that the road ahead is more uncertain now than it was before. I look at first-time home buyers as a key indicator of sustainable growth in the housing market. Unfortunately, even with mortgage rates at a record low and home prices being reasonable, first-time home buyers are not there.

What He Said:

“Over the past few weeks I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy and the stock market. There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.” Michael Lombardi in Profit Confidential, March 22, 2007. At the same time Michael wrote this, former Federal Reserve Chairman Alan Greenspan was quoted saying, “the worst is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”

The U.S. Securities and Exchange Commission (SEC) requires a publicly traded company to file what’s called a “form 10-Q.” This is a more in-depth document that describes the quarterly performance of a company’s specific operations, along with a more thorough review of its earnings performance. While time-consuming, these reports are very much worth reading, even if you aren’t a shareholder.

The Walt Disney Company (NYSE/DIS) is a company that’s on my list of important benchmark stocks. Disney’s operations are representative of the media and entertainment industry which, for better or worse, is a huge portion of the global economy.

Disney hinted that business was getting better in its fiscal first quarter of 2013 (ended December 29, 2012) due to theme parks. The company’s latest 10-Q for quarterly earnings ended March 30, 2013 proved it.

According to the company, fiscal 2013 second-quarter sales grew to $10.6 billion, up solidly from $9.6 billion in the comparable quarter last year.

Earnings improved significantly to $1.5 billion, up from earnings of $1.1 billion. Fully diluted earnings per share were commensurate to $0.83 per share, compared to diluted earnings per share of $0.63 in the 2012 comparable quarter.

In the company’s recent quarter, what was notable was Disney’s strength in its operating divisions, which include: media networks, parks and resorts, studio entertainment, consumer products and interactive.

The previous quarter showed weakness in the studio entertainment area, but the company recently had a big hit with Oz the Great and Powerful.

Also notable in the company’s 10-Q was its share repurchases.

In the six months ended March 30, 2013, Disney bought back 37 million shares of its common stock, spending $1.9 billion. This is huge, and it is partially the reason why the company’s earnings per share, dividends, and share price performance have been so strong.

On the stock market, Disney has helped the Dow Jones industrials considerably. The company’s price-to-earnings (P/E) ratio is approximately 21 and its dividend yield is 1.2%. (Read “How Did Walt Disney Just Double on the Stock Market?”)

A 10-Q, along with other SEC documents, is much more valuable than a company’s regular quarterly press release, or even a conference call.

Disney’s 10-Q describes segment performance, how seasonality affects the company, and more specifics regarding acquisitions, including Disney’s recent acquisition of Lucasfilm Ltd. LLC for 37.1 million shares and $2.2 billion in cash.

Disney’s parks and resorts division saw revenues jump 14% to $3.3 billion. Earnings for this division leaped 73% to $383 million.

A company’s10-Q is typically long, boring, and quite detailed. But it’s worth reading if you want to better understand a public company’s operations. The 10-Qs of the biggest, brand-name companies are very helpful in enhancing your market view.

In Disney’s case, business is getting better.

Disney’s share price, which is at a record high, isn’t unreasonable at all—this company has earned it.

As the old saying goes, “the trend is your friend,” and so far, this has played out.

Just take a look at the chart below of the S&P 500 and its rally from the March 2009 bottom. Also note the rising flow of money into the system by the Federal Reserve, as indicated by the green upward-trending line. (Read “Thank the Fed for Your New Car, Home, Investments.”) Cheap and ample money combined with extremely low interest rates and yields on bonds has helped to fuel the stock market rally.

Chart courtesy of www.StockCharts.com

The stock market advance could continue, as long as the Fed and other central banks around the world are willing to continue to print money.

Now, let me explain why not everyone is happy.

With the burden of home foreclosures, job losses, declining wages, and continued uncertainties, many Americans do not have the resources to play the stock market. These lower- and middle-income Americans are just trying to pay for the necessities to survive daily, never mind thinking about their 401(k)s and retirement funds.

So you have the people making tons of money from the stock market. These are the consumers buying new cars, homes, traveling, and playing the stock market.

Then you have the people who are still struggling and haven’t yet recovered fully from the Great Recession. It could take a few more years for these people to rally out of their sinkhole, but in the meantime, they are missing out on the gains in the stock market.

By the time those who have not partaken in the current bull market are ready to once again invest in something other than the necessities, the stock market may be turning down, due to the aftermath of higher interest rates—and yes, they are coming down the road.

The reality is that it has been all about the timing over the past four years. If you invested, you made money. You can still ride the current gains, which still show no signs of stopping.

We will likely see a stock market correction—I’m just not sure when it will happen. But since we have yet to see a significant correction, aside from in mid-April, you know one is on the horizon. I would view a correction as a buying opportunity.

In these pages, I have written rigorously about how the main economic hubs of the global economy are witnessing an economic slowdown, with the eurozone and Japan in an outright recession. The Chinese economy is slowing down, and emerging market economies are now starting to show concerns, as their troubles are quickly brewing.

This week, the central bank of South Korea cut its interest rates to 2.5% from 2.75%. The main reason for this cut in rates was deteriorating exports. In March, industrial output for the country declined 2.6% from February—the biggest decline in a year.

Similarly, central banks from countries like India, Taiwan, and the Philippines may do the same and cut interest rates to boost their exports and economies.

Emerging market economies export to developed nations in the global economy. If these emerging markets experience an economic slowdown, it will mean that demand is weak in the developed countries.

Other key indicators, like industrial metal prices, are reaffirming the economic slowdown.

Consider the price of aluminum, a metal used in many different technologies. On the London Metal Exchange (LME), aluminum traded for about $2,100 per ton at the beginning of 2013. Fast-forward to today, and the price has declined almost 12% to around $1,850 per ton. (Source: London Metal Exchange web site, last accessed May 9, 2013.)

Likewise, other industrial metals, such as copper, are signaling an economic slowdown or even a recession ahead in the global economy. The price of copper has declined roughly 13% since the beginning of the year.

The decline in corporate earnings and gross domestic product (GDP) in the U.S. may be one thing, but I am worried about higher unemployment and more misery for Americans who are already struggling.

The recession we witnessed in 2008 was a result of a U.S. domestic banking system on the cusp of collapse because of our housing bust. But this time around, the problems are coming from the global economy. Be very careful if you are heavily involved in the stock market.

What He Said:

“I see a deal when it’s a deal. And right now there’s a good ‘for sale’ sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690 an ounce level earlier this year, gold could be a bargain at its current price of around $650 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi in Profit Confidential, March 14, 2007. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.

There are still almost 12 million individuals in the U.S. economy who are jobless, and a significant portion of them have been unemployed for more than six months.

So far this year, 783,000 jobs have been added to the U.S. jobs market. While this number sounds good, in the same period last year, there were almost 900,000 jobs added to the jobs market. In 2011, it was 774,000 jobs. (Source: Wall Street Journal, May 8, 2013.)

In addition to all this, there are threats to the jobs market ahead, such as sequestration—$85.0 billion in spending cut from the U.S. federal government. These cuts are expected to hit the jobs market in the summer. The Congressional Budget Office (CBO) estimated that the cuts in government spending will result in a reduction of 750,000 jobs. (Source: CNBC, May 1, 2013.)

I am looking at the recent declining number of jobless claims as a positive sign, but the jobs market is still in a dismal state. Until the jobs market really picks up, my negative opinion on the U.S. economy won’t change.

Michael’s Personal Notes:

Economic conditions in the U.S. economy may be improving slightly, but the global economy is on the verge of witnessing an economic slowdown—and a possible recession. Key indicators are flashing red signals and warning of trouble ahead for the global economy.

In these pages, I have written rigorously about how the main economic hubs of the global economy are witnessing an economic slowdown, with the eurozone and Japan in an outright recession. The Chinese economy is slowing down, and emerging market economies are now starting to show concerns, as their troubles are quickly brewing.

This week, the central bank of South Korea cut its interest rates to 2.5% from 2.75%. The main reason for this cut in rates was deteriorating exports. In March, industrial output for the country declined 2.6% from February—the biggest decline in a year.

Similarly, central banks from countries like India, Taiwan, and the Philippines may do the same and cut interest rates to boost their exports and economies.

Emerging market economies export to developed nations in the global economy. If these emerging markets experience an economic slowdown, it will mean that demand is weak in the developed countries.

Other key indicators, like industrial metal prices, are reaffirming the economic slowdown.

Consider the price of aluminum, a metal used in many different technologies. On the London Metal Exchange (LME), aluminum traded for about $2,100 per ton at the beginning of 2013. Fast-forward to today, and the price has declined almost 12% to around $1,850 per ton. (Source: London Metal Exchange web site, last accessed May 9, 2013.)

Likewise, other industrial metals, such as copper, are signaling an economic slowdown or even a recession ahead in the global economy. The price of copper has declined roughly 13% since the beginning of the year.

The decline in corporate earnings and gross domestic product (GDP) in the U.S. may be one thing, but I am worried about higher unemployment and more misery for Americans who are already struggling.

The recession we witnessed in 2008 was a result of a U.S. domestic banking system on the cusp of collapse because of our housing bust. But this time around, the problems are coming from the global economy. Be very careful if you are heavily involved in the stock market.

What He Said:

“I see a deal when it’s a deal. And right now there’s a good ‘for sale’ sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690 an ounce level earlier this year, gold could be a bargain at its current price of around $650 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi in Profit Confidential, March 14, 2007. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.

Macau is designated a special administrative region of China, which means the area has the backing of the Chinese government for the purpose of casino development.

Attracted by abundant wealth and the appetite for risk and money in China and Asia, there has been a rapid move by the major casinos to establish and expand their presence on the island of Macau, China, which is the world’s largest gambling market, known in the gambling world as the “Monte Carlo of the Orient.”

I have visited this former Portuguese colony, which is located some 38 miles from Hong Kong, and there is an obvious push to build more high-end casinos, especially those integrated with hotel, retail, and casino operations. The market is primarily the China and Asia tourist market.

Much of the newer major development is along the Cotai strip in Macau, which will add to the original gambling establishments in the city.

The Cotai strip area is bustling with people armed with money to spend, and if the expansion plans are on target, it will inevitably make Vegas seem sedate in comparison.

In March, gross revenues in the Macau casino sector came in around $3.9 billion, up 25.4% year-over-year. (Source: Garlitos, K., “SLM Holdings Continue to Hold Top Revenue Spot in Macau,” CalvinAyre.com, April 3, 2013, last accessed May 9, 2013.)

The prospects for Macau, China are enormous; I’m betting on that, and so are some of the world’s largest casino operators.

Two of the major players expanding their presence in Macau are Las Vegas Sands Corp. (NYSE/LVS) and China-based Galaxy Entertainment Group Limited (OTC/GXYEY).

In the first quarter, Las Vegas Sands attributed its strong growth in part to its expansion in Macau, where the company’s four Cotai strip properties attracted a record 14 million visitors. The company is a major player on the Cotai strip, which is attracting even more major players. The company’s subsidiary Sands China Ltd. reported a 39.3% year-over-year jump in net revenues to $2.0 billion in the first quarter, while earnings surged 63.3% year-over-year.

           Chart courtesy of www.StockCharts.com

But the company that I feel has excellent prospects is Galaxy Entertainment because of the fact that it’s an Asian-based company. The company is on an aggressive expansion path. Currently, it has two core properties—Galaxy Macau and StarWorld Hotel and Casino.

Galaxy Entertainment’s expansion plans are aggressive. The current development includes doubling the size of Galaxy Macau by the middle of 2015, and there are plans to launch Phase 3 and 4 at Galaxy Macau, to be completed between 2016 and 2018.

Two smaller casino players in the Macau China casino scene are Wynn Resorts, Limited (NASDAQ/WYNN) and MGM Resorts International (NYSE/MGM).

Going against the stock market that just proved an asset is not attractive is not only risky, but it is counterintuitive to the emotional decision-making that takes place in financial markets.

I always scan the stock market for positions at their 52-week lows.

The reason for doing this is twofold: 1) to identify potentially attractive buy low/sell high assets; and 2) to assess what Wall Street dislikes for the purpose of honing my market view.

What you want to look for isn’t a company that is going broke or whose business plans have failed, but a large-cap, brand-name company—a leader within its industry that is down on the stock market for its own specific set of reasons.

One company that exemplifies the scenario I’m describing is Barrick Gold Corporation (NYSE/ABX).

This blue-chip gold producer has been having a very tough time on the stock market. The position is down another 10 points since April and has been cut in half since last November.

Barrick Gold’s stock chart is below:

    Chart courtesy of www.StockCharts.com

Barrick Gold looks like a good buy low/sell high trade candidate. But obviously, there are two immediate explanations as to why the position just bounced off a major low: weaker gold prices and rising production costs.

The company did particularly well on the stock market between the mid-1980s and mid-1990s. Then it took a break for a good 10 years, doing nothing except paying its dividends.

I would now keep a sharp eye on Barrick Gold for a buy low/sell high trade. But here’s the thing: the company’s fundamentals are not going to suddenly just improve and turn on a dime, even if gold spikes higher. The company does have structural operational issues related to costs and shareholders aren’t happy.

With a four-percent dividend yield, a buy low/sell high trade on a position like Barrick Gold is becoming attractive.

Clearly, the gold bugs are taking a break, but practically speaking, the spot price of gold isn’t down too much from its high.

The buy low/sell high investment strategy does take a lot of determination, forbearance, and luck. It is, after all, a risk capital trade.

It’s worth scanning the stock market, if you’re so inclined, simply to see what the rest of the stock market dislikes. (See “Unbelievable Stock Market Now Destined for Greatness?”)

To buy low/sell high in large-cap, blue-chip companies, it really is more about getting the cycle right. And that cycle includes both fundamental economic factors and sentiment.

Bottom-fishing in the stock market is always a tough business to be in. But then again, you can land a really big trophy there.

A popular measure of U.S. consumer confidence, the IBD/TIPP Economic Optimism Index fell 2.4% in May. It registered at 45.1, compared to 46.2 in April. What’s problematic is that this consumer confidence measure is only 0.7 points above the reading in December 2007, when the U.S. economy entered into a recession. (Source: Tipponline, last accessed May 7, 2013.) A reading below 50 indicates consumers have a pessimistic view of the U.S. economy.

This U.S. consumer confidence measure essentially has three different components. It asks consumers three questions: 1) how will the U.S. economy perform in the next six months; 2) what is the status of their personal financial outlook; and 3) how confident are they in federal economic policies? Of the three components, two witnessed a decline. Consumer confidence toward the U.S. economy had the biggest drop in May, down 8.5%.

As we all know, consumer confidence is essential to consumer spending, as consumers tend to hold back on their purchases if they believe economic conditions will become worse.

Another major obstacle in front of consumer spending, consumer credit in the U.S. economy grew at an annual rate of only 5.7% in the first quarter of 2013. If this rate remains the same, then 2013 will post an increase in consumer credit, which was lower than the credit expansion rate of 2012. (Source: Federal Reserve, May 7, 2013.) When consumers borrow less, they spend less.

Adding to the misery of consumer confidence, jobs growth in the U.S. economy isn’t anywhere close to what it really should be. Last month, only 165,000 jobs were added to the U.S. economy. As good as this may sound, any economist would agree we need to have about 250,000 jobs added each month in order to see sustainable growth in the jobs market. And the majority of new American jobs this year have been in low-wage-paying jobs.

Consumer spending is a major part of the U.S. economy, and it can make or break America’s economic future.

Look at the chart below, which compares the gross domestic product (GDP) of the U.S. economy (represented by the black line) and consumer spending (represented by the red line).

Chart courtesy of www.StockCharts.com

Consumer spending leads economic growth and contraction. For example, in 2008, consumer spending plummeted first, while the GDP followed after, moving lower.

Add to the poor confidence picture in the U.S. economy the fact that personal disposable income is falling in the U.S. and businesses’ inventories are rising—our economic picture is anything but bright. Hence my concern about the overpriced and overbought stock market.

Michael’s Personal Notes:

Exports from the Chinese economy increased 14.7% in April. This was a surprise, because analyst consensus estimates were expecting an increase of only 10.3%. The China General Administration of Customs reported the country had a surplus of $15.1 billion in April—it exported more than it imported. (Source: Reuters, May 8, 2013.)

This is a good sign for the Chinese economy; but the threats of an economic slowdown in the country still persist.

Looking closely at the data, exports from the Chinese economy to the U.S. fell 0.1% in April; and to the European Union, Chinese exports declined 6.4%. The economic slowdown in Europe is still a major issue and exports to the region will likely decline even further.

It is way too early to say the Chinese economy is coming back.

In the first quarter of 2013, the gross domestic product (GDP) in the Chinese economy only grew at an annual rate of 7.7%, compared to 7.9% growth in the last quarter of 2012. While this number looks great when measured against the growth in developed nations in the global economy, it’s nowhere close to the growth rate the Chinese economy has experienced in the past.

According to Fitch Ratings, a credit rating agency, credit in the Chinese economy reached 198% relative to the country’s GDP at the end of 2012. In 2008, this number was only 125% of the GDP. (Source: Time, April 28, 2013.)

Similarly, the debts of local governments in the country are stacking higher, estimated to be $2.0 trillion, or about 25% of GDP. The Chinese economy may very well be faced with a financial crisis due to significant credit expansion in a very short period of time.

Dear reader, one good number doesn’t really mean economic conditions have changed.

I am watching developments in the Chinese economy very closely, because it can impact an already struggling global economy. As news of an economic slowdown in China has surfaced, industrial metals and other commodities have fallen in price, as the Chinese economy used to be a major consumer of these commodities. This will have an impact on U.S.-based companies that are involved in those sectors.

What He Said:

“There is no mixed signal about this: Foreclosures in the U.S. will continue to rise, the real estate market will get weaker, and the U.S. economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi in Profit Confidential, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.

This is a good sign for the Chinese economy; but the threats of an economic slowdown in the country still persist.

Looking closely at the data, exports from the Chinese economy to the U.S. fell 0.1% in April; and to the European Union, Chinese exports declined 6.4%. The economic slowdown in Europe is still a major issue and exports to the region will likely decline even further.

It is way too early to say the Chinese economy is coming back.

In the first quarter of 2013, the gross domestic product (GDP) in the Chinese economy only grew at an annual rate of 7.7%, compared to 7.9% growth in the last quarter of 2012. While this number looks great when measured against the growth in developed nations in the global economy, it’s nowhere close to the growth rate the Chinese economy has experienced in the past.

According to Fitch Ratings, a credit rating agency, credit in the Chinese economy reached 198% relative to the country’s GDP at the end of 2012. In 2008, this number was only 125% of the GDP. (Source: Time, April 28, 2013.)

Similarly, the debts of local governments in the country are stacking higher, estimated to be $2.0 trillion, or about 25% of GDP. The Chinese economy may very well be faced with a financial crisis due to significant credit expansion in a very short period of time.

Dear reader, one good number doesn’t really mean economic conditions have changed.

I am watching developments in the Chinese economy very closely, because it can impact an already struggling global economy. As news of an economic slowdown in China has surfaced, industrial metals and other commodities have fallen in price, as the Chinese economy used to be a major consumer of these commodities. This will have an impact on U.S.-based companies that are involved in those sectors.

What He Said:

“There is no mixed signal about this: Foreclosures in the U.S. will continue to rise, the real estate market will get weaker, and the U.S. economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi in Profit Confidential, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.

But recently, the placid corporate environment of fishing equipment was shaken up, as privately held The Orvis Company Inc. from Manchester, Vermont announced it will acquire two corporations, Scientific Anglers and Ross Reels, from 3M Company (NYSE/MMM).

Both businesses will operate separately from the main Orvis business. They must not have been large enough to be meaningful to 3M’s earnings results.

Apparently, as a corporation, Orvis is the longest-running mail-order business in the United States. Not only does the company sell good fly fishing equipment, but it also sells clothing, home furnishings, gifts, and even products for your dog.

3M reported first-quarter earnings that could only be described as mediocre. But on the stock market, 3M is trading at an all-time record high with a 2.4% dividend yield and a price-to-earnings (P/E) ratio of approximately 17.

While not expensively priced, earnings for 3M came in at $1.129 billion, or $1.61 diluted earnings per share. This was flat compared to the $1.125 billion, or $1.59 diluted earnings per share, generated in the first quarter of 2012.

3M’s first-quarter 2013 sales grew two percent to $7.6 billion.

In February, the corporation authorized another dividend increase of 7.6%, marking the 55th consecutive year of increased dividends.

It also authorized another share buyback program of up to $7.5 billion to pay for its dividends and to keep shareholders happy.

The company’s cash and marketable securities position grew to $4.4 billion, up from $3.7 billion. The gain was not as big as those of other corporations, but it was still significant.

3M reduced its full-year earnings outlook just slightly. Top-line growth certainly is an issue for the company, but it’s doing all it can to keep shareholders happy—increasing its dividends and buying back shares.

In a more normal environment for stocks, a corporation like 3M would’ve sold off after such a lackluster earnings report.

If there remains a lack of certainty on the part of consumers, I think it’s fair to say that there has been an improvement in certainty among institutional investors. (Read “Make Money in Homebuilders Without Building Homes.”)

The numbers from large corporations reveal an improvement in their overall financial health as balance sheets improve. Cash positions are rising, and the costs of interest rates on debt are extremely low.

The improved health of large corporations offers more certainty, and institutional investors are buying it.

The fact that a stable, but slow-growth corporation like 3M is trading at an all-time record high on the stock market illustrates the continued appetite institutional investors have to be buyers.

I view investment risk as going up because of all the new highs, but regardless of this, the fact still remains that big investors are buying.

The monetary party continues until there’s a shock.

But while China sorts out its growth issues, across the East China Sea, Japan has been on a tear. The massive infusion of liquidity into the Japanese monetary system has driven down the yen and, in the process, is leading to an export-led economic recovery.

The benchmark Nikkei 225 stock market index is up a whopping 36.4% this year, breaking above the 14,000 level for the first time in close to five years.

Take a look at the technical analysis chart below, comparing the movement of the Nikkei 225 index, as indicated by the upward-trending solid green line, and the downward-moving yen.

As the yen weakens, the Japanese stock market rises, Japanese goods become cheaper to buy from foreigners, and this drives up sales of the many Japanese multinationals.

     Chart courtesy of www.StockCharts.com

At the same time, the Shanghai Stock Exchange (SSE) Composite Index is down 1.5% and is struggling to convince the world that not all Chinese companies are deceitful. (Read my take in “China in a Holding Pattern, but There Are Opportunities Inside the Great Wall.”)

The chart below shows the movement of the Nikkei 225 stock market, as shown in the candlestick formation, versus the SSE Composite Index, as indicated by the green line.

You’ll notice the outperformance of the Shanghai stock market from 1990 to around 2008, and then the current rally by the Nikkei.

        Chart courtesy of www.StockCharts.com

I must admit I was caught off guard by the strength of the Japanese stock market rally this year.

Japan’s Prime Minister Shinzo Abe is going gangbusters, injecting tons of money into the Japanese economy. His goal is $2.4 trillion over the next 10 years.

While I’m not convinced it will work longer-term, it’s clearly working now with the cheaper yen. Again, it’s the case of cheap money fueling the stock market.

The massive spending to try to lever the country out of its multiyear economic coma may work, but a lot will depend on the state of the global economy.

Of course, with the gain comes the pain.

To finance the gross domestic product (GDP) growth, Japan, just like America and many other parts of the world, will add to its national debt. The problem with Japan is that the country’s debt levels are some of the highest in the world, and there’s still the new tranche of stimulus to come. In 2011, Japan’s national debt as a percentage of GDP was a staggering 208.2%, whereas the U.S. was at 102.9% in 2011. (Source: International Monetary Fund, last accessed May 8, 2013.)

The aggressive high-stakes move by Shinzo Abe could be the only way for the country to recover. An extensive period of near-zero interest rates did not work. Since 2005, the country’s interest rate hit its high point of 0.5% in 2007. (Source: “What is the Japanese yen (JPY)?,” GoCurrency.com, last accessed May 7, 2013.)

So while I’m not totally convinced about Japan, you can’t fight the trend in the stock market.

It’s telling the Japanese stock market is as hot as wasabi, and it could rise higher, as long as the Bank of Japan provides cheap money and a weak yen.

So when Buffett speaks on the stock market, you have to listen.

He doesn’t have the same market clout he once had in the 90s, when investors tuned into every word that came out of his mouth, but you still have to listen to what he says.

In an interview on CNBC Squawk Box, Buffett expressed his negativity toward bonds and said he would not buy them. (Source: “Warren Buffett: Stocks Will Go ‘Far Higher’ Over Time,” CNBC, May 6, 2013.) This is no big surprise, given the extremely low yields offered in bonds versus the stock market, where the prevailing dividend yields are much more attractive and also offer better tax treatment. And in addition to dividends, you can make money via the price appreciation of a stock.

Buffett suggested that the stock market would inevitably go a “lot higher” over the longer term and advised investors to ignore the short-term fluctuations. Buffett remains a buyer and scours for long-term investment opportunities in the stock market.

His Berkshire Hathaway, Inc. (NYSE/BRK.A) stock is a diversified holding of over 50 companies that represent a broad range of corporate America. Its businesses include financial services, industrial, medical, apparel, media, homes, jewelry, furniture, steel, and others.

Berkshire Hathaway’s broad businesses make the fund ideal for the investor looking for a highly diversified company in the stock market that would provide an excellent alternative to a mutual fund and, best of all, is run by an investment guru who has a long history of outperforming.

The only caution is the advancing age of Buffett, which could become an issue sometime down the road, as there really is no one like Buffett. The succession plan calls for a group arrangement led by a new CEO, along with three to four investment managers.

For the majority of individual investors, the current price of $165,228 a share, as of Monday, is likely an issue. An alternative would be the lower-priced “B” shares; at $109.00, these shares are designed to emulate the “A” shares, but at a more manageable price level for investors.

Chart courtesy of www.StockCharts.com

And in spite of the current turmoil in Europe (see “Why America Will Struggle if the Eurozone Languishes”), Buffett remains supportive of the region and advises there are buying opportunities in the European stock market.

While I feel Europe and the eurozone are positive over the longer term, I question the short- to mid-term prospects and feel the region is still vulnerable to further weakness. Buffett has a long-term perspective on the stock market, so I’m not surprised with his view to buy and ignore the short-term.

I would rather wait and buy Europe when there are clearer signs of a turnaround. I would also be more cautious of the domestic market and would look to buy on weakness.

Johnson & Johnson (NYSE/JNJ) jumped about 23% since the beginning of the year, not including its dividend payment.

This upside on the stock market from such a mature brand is striking. And here’s the thing: the company actually delivered with its earnings results.

Companies like PepsiCo, Inc. (NYSE/PEP), Kraft Foods Group, Inc. (NASDAQ/KRFT), Colgate-Palmolive Company (NYSE/CL), The Walt Disney Company (NYSE/DIS), and even McDonalds Corporation (NYSE/MCD) performed similarly.

I can’t recall a time of such coordinated stock market strength from blue chips.

Of course, the stock market breakout has been all about the safest names. Institutional investors wanted to buy this market, but they needed the earnings safety to do it.

Over the last two weeks, the NASDAQ Composite saw a turnaround from its little slump, based on good earnings news. This broadening of the stock market breakout is definitely necessary for price strength to continue.

Oddly, there hasn’t been a correction yet.

Quite often on Wall Street, when you get groupthink or a group expectation about an event taking place in the financial markets, it doesn’t happen. There has been no correction so far, and this is truly amazing.

Without question, an abundance of caution is appropriate considering where the stock market just came from.

First-quarter earnings season is winding down, and a lot of smaller companies are reporting now.

Companies like LKQ Corporation (NASDAQ/LKQ), Alaska Air Group, Inc. (NASDAQ/ALK), Qlik Technologies Inc. (NASDAQ/QLIK), Global Medical, Inc. (NASDAQ/GMED) and NeuStar, Inc. (NYSE/NSR) reported improved earnings results. (See “Old Economy Auto Parts Stock a Better Play Than Any Tech Stock?”)

I consider the stock market’s trading action and investor sentiment as strong enough to carry this market a little higher.

But I just don’t see how the stock market can advance meaningfully higher in the face of mediocre economic news. While earnings did show improvement in the first quarter, sales were flat.

Clearly, the appetite that institutional investors have to be buyers in this market has some staying power.

While corporations were once again cautious with their earnings outlooks for the rest of the year, I read many outlooks that were generally positive, expecting economic improvement.

Institutional investors must be taking this to heart, and they are buying. Also helping the cause is the enormous cash hoard that continues. Corporate balance sheets, especially among blue chips, are getting stronger.

I look at the performance of the stock market with continued amazement. With the Dow Jones industrials up around 14% year-to-date, it is a breakout.

Making the case for buying blue chips now is tough, although decent second-quarter earnings can move them higher.

I keep waiting for the correction. I’m not rooting for losses, but it is a requirement for the medium-term health of this market.

If there isn’t a correction, this unbelievable action will bust.

We broke 15,000 on the Dow Jones Industrial Average yesterday. I hear traders in the pits are wearing hats that say Dow 15,000. Recently, we even wrote about how central banks and bond mutual funds are buying stocks now, too.

Looks like everyone is getting back on the stock market bandwagon. Bullishness amongst stock advisors is at a multimonth high. And the percentage of assets mutual funds have invested in the stock market is near a multiyear high (both negative factors for the market)…

All the sudden, the luxury car market is hot again. Prices for prime New York real estate have hit the stratosphere. Wall Street banks and brokerages are making billions of dollars in new profits and their executives been paid out billions of dollars in bonuses.

I remember 2007 quite vividly. From January to August of that year, the stock market just kept rising. The bulls were plentiful; the bears were rare. But just when it looked like the stock market was the only game in town, stocks started to move sideways; by October 2007, stocks started to collapse.

During 2007, in Profit Confidential, I kept writing about how stocks were overbought and overpriced. And I remember getting letters from subscribers telling me I was “on the wrong side of the fence and wrong about the stock market.” I took the abuse on the chin. But by the end of 2007, as stocks started to collapse in price, I was totally vindicated, and circulation to Profit Confidential had its biggest jump ever.

What I see today is very similar to 2007. But the underpinnings of the stock market are actually worse now than they were in 2007.

Today, we have corporate insiders dumping stock at an alarming rate. Public companies are propping up their earnings with an unprecedented amount of stock buyback programs. Corporate earnings growth has come to a halt. The global economy is slowing. Certain countries in the eurozone are in a depression. Cypress has resorted to taking money away from people who have over 100,000 euros on deposit (could be a new trend), and it doesn’t seem to be a big deal.

The U.S. economy could be contracting right now. The underemployment rate (which is the unemployment rate taking into consideration people who have stopped looking for work and people who have part-time jobs but really want full-time jobs) actually went up last month and still sits around 14%.

The average American consumer is in big trouble. Real disposable income is lower today than it was in 2008. The personal savings rate has fallen more than 70% since 1980. Average hourly earnings of production and non-supervisory employees have crashed 50% since 2008.

So what do we really have? We have a Federal Reserve that has artificially kept interest rates low for years—a central bank that is printing new money and giving it to the big banks or the government. This can’t be sustained.

To my readers, I advise caution. It’s impossible to know the exact point at which the stock market rally that started in 2009 will be over. But I can tell you the higher the stock market goes, the bigger the eventual fall, the bigger the damage to consumer confidence, and the greater the impact on the economy.

Inadvertently, the Fed is creating a huge bubble for the stock market. And all bubbles eventually burst.

What He Said:

“If I had to pick one stock exchange that would rank as the best performer of 2007, it would be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canada remain very low and they are not expected to rise any time soon. Americans looking to diversify their portfolios, both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should consider the TSX. Most brokers in the U.S. can buy stock on this exchange.” Michael Lombardi in Profit Confidential, February 8, 2007. The TSX was one of the top-performing stock markets in 2007, up almost 20% for the year.

Yet, while the stock market gains are great for the bulls, I still have an issue with the rate of the stock market rally. Simply stated, it’s just a bit too fast, too quick.

I also wonder why the stock market is ignoring the continued fragile state of the global economy in spite of a deep recession in the eurozone and stalling in China.

The reality is that we need to be concerned about how the global economy is faring. The idea of focusing too much on only America doesn’t make sense due to the increased correlation between the global economies. Slowing in Asia and Europe will impact U.S. companies. (Read “Why America Will Struggle if the Eurozone Languishes.”)

Looking at China, while the Chinese economy continues to expand at rates we can only dream of, the country is stalling, as reflected in its demand for commodities.

Copper is a key commodity used in wiring, pipes, electronics, and other areas. When the economy expands, so does the demand for copper.

China imported less copper in February with imports declining to a 20-month low, according to the country’s General Administration of Customs (Source: “China Copper Imports Slump to 20-Month Low on Holidays,” Bloomberg, March 7, 2013, last accessed May 6, 2013.) China is the world’s top importer of copper, so the decline in the import number is important. (Source: “International Trade Centre,” NationMaster.com, last accessed May 6, 2013.)

The lower demand from China is a telltale sign that there could be more slowing on the horizon. If this is the case, then you have to wonder about the current level of the stock market.

Take a look at the chart below comparing the movement of spot copper on the Chicago Mercantile Exchange (CME), as shown by the red candlesticks, against the S&P 500, reflected by the green line.

    Chart courtesy of www.StockCharts.com

You will notice the direct correlation in the first part of the chart up to around March, when copper prices begin to trend lower on global growth concerns, while the S&P 500 continues to ratchet higher, based on my technical analysis.

Looking at this comparative move, I’m somewhat baffled by the stock market. The reason for the decline in copper prices is the rise in copper stockpiles due to the global slowing.

So why is the S&P 500 continuing to move higher?

It’s true, the U.S. economy is improving across the board, but you have to also consider or discount in what’s happening with the global economy; there are signs of fragility.

My view is that the S&P 500 and the stock market are running ahead of the fundamentals.

Among retail stocks, it was widely expected that Cabela’s Incorporated (NYSE/CAB) would report very good earnings results. But the company didn’t just announce good earnings—it hit a grand slam.

Cabela’s is the world’s largest direct marketer of hunting, fishing, camping, and other outdoors merchandise. It is one of those retail stocks that is implementing its business plan perfectly.

It currently has 41 stores in the U.S. and three in Canada, totaling 5.4-million square feet of retail space, up 5.8% since the end of 2012.

According to the company, its sales for the first quarter of 2013 grew to $802 million, representing a gain of $179 million, or 29%, over the comparable quarter.

Not surprisingly, the company’s hunting equipment category experienced the biggest increase in sales.

The company said that its comparable store sales increased 24%, which is an outstanding performance in retail merchandising.

First-quarter earnings grew 73% to $49.8 million, way up from earnings of $28.8 million. Earnings per diluted share grew 75% to $0.70 from $0.40 in the comparable quarter.

Cabela’s five-year stock chart is featured below:

          Chart courtesy of www.StockCharts.com

While the sale of firearms and ammunition was expected to be strong, what was notable about Cabela’s first-quarter earnings performance is the strength experienced in other categories.

The company said it experienced strong growth in the sale of soft goods, footwear, optics, and archery. Excluding firearms and ammunition, comparable store sales increased nine percent, which is impressive. (See “Tills Ringing for Costco, Cabela’s—Obama Effect or Big New Trend?”)

As is the case with many corporations today, Cabela’s cash balance leaped to $364 million, more than doubling its cash balance of $157 million at the end of the first quarter of 2012.

In the universe of retail stocks, Cabela’s is referred to as a specialty merchandiser.

If you ever consider investing in retail stocks, a specialty merchandiser can offer the potential for greater capital gains, because customers tend to be brand-loyal.

Cabela’s has basically doubled on the stock market over the last few years, and given its recent earnings results, it is not expensively priced.

Wall Street analysts boosted the company’s earnings expectations for this year and 2014. With the stock at an all-time record high, there has been quite a bit of insider selling.

Like the rest of the stock market, many retail stocks have done exceedingly well lately. It is a group that has been mostly ticking higher since the recession.

Similarly, retail stocks are very much due for a break. But the momentum can continue as consumer confidence remains elevated.

Without question, Cabela’s first quarter was a huge success.