Singing a Tune for Stocks

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

Remember the famous lyric in Janis Joplin’s song, “Oh lord, won’t you buy me a Mercedes Benz. My friends all drive Porsches. I must make amends?”

There are probably quite a few investors this morning saying, “Oh lord, won’t you give me 93 points on the Dow Jones. I need to make back all the money I lost in the stock market, I must make amends.”

Well, I’m not a song writer, nor a philosopher. But I would be surprised if the Dow Jones went all the way to 10,907 (yesterday’s close) and didn’t continue for 93 more measly points to hit the 11,000 mark.

This week, I read the recent stock market newsletters/comments of Bob Appel, Anthony Jasansky and Richard Russell. All three of these well-known market analysts are either very bearish or expecting a market correction. When I see this kind of bearish consensus, especially with seasoned market analysts, I just see stocks climb the wall of worry even higher.

Yes, stocks will eventually fall, as U.S. Treasuries become harder to sell, as inflation sets in and as interest rates rise, but that could be months away. And when the inevitable does happen to stocks, gold will offer investors a once-in-a-lifetime profit opportunity. Hence, there is money to be made now (as I have been saying since March of last year), as the bear market rally continues, and there will be money to be made when the bear market rally expires.

I turned bullish on stocks in March 2009, because stocks became oversold too quickly. Fear set in and that’s when you buy stocks. By the time all the bears become bulls in the current stock market rally, I’ll likely have turned bearish again. The economic threats I mentioned above (hard to sell U.S. Treasuries, rapid inflation and higher interest rates) are all real threats to the stock market.

In fact, the rising rates on 10-year U.S. Treasuries are already flashing a yellow light warning of higher interest rates ahead.

Michael’s Personal Notes:

I tried to understand the new healthcare bill the U.S. government has put forth, but I can’t. The document is over 2,000 pages long. Call me a dummy, call me a slow reader or a slow learner, but I don’t fully understand it. I will try to read it again this weekend.

From what I can put together, the government is becoming more directly involved in the healthcare system in the U.S., which may not be a bad thing (I’m a big fan of the Canadian healthcare system), but my experience is that the more government involvement there is, the more inefficient the process becomes. I’m also very concerned about the cost of the new healthcare plan. Did we just add more billions to our annual deficit?

The pharmaceutical stocks did not rally or contract on the passing of the healthcare bill, hence, if you believe like me that the stock market is a leading indicator, the pharmaceutical companies do not see the healthcare reform making much of a difference to their business.

Where the Market Stands:

It’s been a great year so far. As I write my column this morning, recognizing that it is the last day of the first quarter of 2010, there is not much that investors can complain about.

The Dow Jones Industrial Average is up 4.6% for the year, the S&P 500 is up 5.2% so far in 2010, and the NASDAQ was the big winner in the first quarter, up 6.2%. Only gold bullion has been disappointing, trading today at about the same price today that the yellow metal traded at the beginning of 2010.

As an ever-grateful person (I wake up every morning grateful for the day ahead, for my health, for my family and for the freedom to write as I want), thank you to the 25,061 people who signed up to receive PROFIT CONFIDENTIAL in the first three months of 2010. And
thank you to my loyal readers, who had faith in my view that the bear market rally, which most analysts had said was dead in the beginning of February, was still alive and well.

What He Said:

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