Perfect Scene for Phase Three of Bear Market Rally in Stocks

How a perfect scene is being set for phase three of the bear market.They moved quickly…

While I’ve been talking (maybe screaming) about getting out of U.S. government bonds because I think interest rates are headed higher, the folks at Pimco, who run the world’s biggest bond fund, took real action.

Pacific Investment Management Co. (“Pimco” for short) eliminated all government-related debt from its flagship $237-billion Total Return Fund in February.

In a posting on the company’s web site, Pimco says that the yield on U.S. Treasuries is too low to maintain demand for U.S. debt. The people at Pimco simply believe that interest rates are headed higher, thus it’s not a good time to own government bonds. Bill Gross, head of Pimco, recently wrote in a research report posted on Pimco’s web site that inflation is a more serious threat than most realize.

And that’s really what I’ve been writing about since last summer: Inflation will rise with the unprecedented amount of liquidity in the financial system. Interest rates will rise in advance of inflation. The proof is in the pudding: The bellwether 10-year U.S. Treasury has risen from a yield of 2.4% in October 2010 to a yield of 3.4% today. Even the Japanese crisis failed to rally U.S. government bonds (see more on that below).

Hence, when I say I’m short- to long-term bearish on stocks, with a 30-year down cycle in interest rates now complete and interest rates starting to rise, with gold confirming that inflation will be a problem in the months and years ahead, with a government that continuously fails to exercise fiscal responsibility, a perfect scene is being set for phase three of the bear market.

Michael’s Personal Notes:

It’s being called the “Japan Trigger.”

The worst-kept secret in the financial world is the devaluation of the U.S. dollar. What I find most interesting is that, in spite of devastating world economic events, we are failing to see any significant rally in the greenback sustain itself. In the aftermath of a huge natural disaster such as Japan is currently experiencing, the U.S. dollar is failing to rally. Just how sick is the greenback?

My colleague and expert stock market technical analyst Anthony Jasansky, P. Eng., said it best in an e-mail to me over the weekend:

“Michael, in the short term, with the U.S dollar being so oversold, it should be rallying. Most analysts thought Japan’s disaster would be the trigger. The same goes for the U.S. Treasuries. However, if the U.S dollar and U.S. Treasuries cannot rally following the latest world catastrophe, which would normally be favorable to the greenback, I would view it as another bearish sign. The Euro and Middle East crises have failed to give the U.S. dollar a lift. Now the Japanese disaster, so far, is failing to lift the greenback and U.S. Treasuries. The U.S. dollar could be in dire straights.

Our Hearts Pour Out:

With great sadness, we’ve all witnessed the devastation to families in Japan. Thousands lost their lives to the earthquake and its after-effects. This morning, millions in Japan have no water or electricity.

Here at Lombardi, we’ve appointed a committee to find the most effective way to contribute to those in most need in Japan. We’ve decided that 20% of all our profits from Lombardi Publishing operations this month will be donated to Japan earthquake victim relief causes.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens today up four percent for 2011. There are markets that trade down sharply on bad news and markets that trade up sharply on good news. By monitoring the reaction of stocks to events in the economy and world marketplace, astute investors gauge the strength of a market’s trend.

Frankly, I’m surprised to see the resiliency of this stock market. No matter how bad the news (Japan’s earthquake disaster, Libya’s threat to the oil market, signs of world inflation returning), this market just shrugs off the bad news and holds its own.

The bear market rally in stocks, born two years ago this month, remains intact.

What He Said:

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