Michael’s Back

by Michael Lombardi, CFP, MBA

Thank you to those readers of this daily e-letter who called into our customer service department asking. “Where’s Michael?” I’m flattered to be missed! I’ve been away…away in Europe surveying the economy there for my readers.

To read it is one thing. To see it is another. Hence, I wanted to see firsthand for myself how the important economies of Europe are faring. After all, were we not told that Germany and France had ended their recessions?

In a blanket statement, I would like to tell my readers how lucky we are to be in America during this economic crisis. In my opinion, the Europeans, in this global recession, have been much harder hit than us here in America. Hard to believe, since we started this economic mess, but that is what I see.

In Italy, there has been widespread closure of factories. Millions are unemployed. People are selling homes that have been handed down generation to generation to put food on the table. While I expected to see great deals on Italian vacation properties, I did not anticipate seeing tourism so down. Americans are simply not traveling this year.

As for Switzerland, the bankers complained to me that business is not coming back. UBS is such a prominent fixture in Switzerland and the added negative publicity the large financial institution has encountered has not helped business in general. Tourism is down in Switzerland, too.

In Germany, things are certainly not bustling in Munich or Frankfurt. I have to wonder if the recent positive GDP report that came out of Germany was a blip. I just don’t see the turnaround here either.

The rally that world stock markets have displayed since March of this year has definitely put a “feel-good” spin on the economic situation. However, I’m very suspicious. The more I look around, especially in Europe, the more convinced I become that economic growth is far from returning. And the more convinced I am that the rally that world stock markets have put on since March is simply a classical bear market trap.

Michael’s Personal Notes:

So Ben Bernanke has been appointed for another term at the Fed. He could have bowed out gracefully as the central banker who pulled all the stops out to turn the economy around. Instead, he’s back for another four years. One newspaper headline read, “Bernanke given a chance to finish what he started.” My opinion is very different. The next four years will be more difficult than the past four years for the central bank, as zero interest rates and ballooning debt cannot last forever.

Where the Market Stands:

In spite of three poor market days, the Dow Jones Industrial Average is ahead six percent for 2009 and is up an impressive 45% from its death knell of March 9, 2009. (Investors who didn’t get into the market this year and chose to play it safe with T-bills or money market funds must be kicking themselves in the head today.)

So, where do we go from here? In the past week, I’ve been reading and hearing about more and more analysts coming out and saying that the bear market rally is over. But I’m not sure about that. I’ve counted eight articles that I have read, written by market analysts warning investors about the dreaded September/October period.

I’m a big believer in the stock market giving us the opposite of what is expected of it. Hence, while many analysts are now saying that the bear market is over, I believe there is more life left in the rally. Similarly, while it is a rare to find a stock market analyst who feels that the March 9, 2009, low of the Dow Jones Industrial Average  (6,440.08) will be tested again, I believe it will happen.

What He Said:

“What group of stocks is next to fall in light of the softening U.S. housing market? The stocks of companies that sell retail products to the American consumer, I believe, are next on the hit list. Many retail stocks are already reporting soft sales. In my opinion, they haven’t seen anything yet in respect to weaker sales.” Michael Lombardi in PROFIT CONFIDENTIAL, August 30, 2006. According to the Dow Jones Retail Index, retail stocks fell 42% from the fall of 2006 through March 2009.