Lombardi Publishing was originally established in 1986 as an investment newsletter publisher offering stock market analysis to its readers. Today, we publish 26 paid-for investment letters most of which provide stock market direction and individual stock picking analysis. Profit Confidential is our daily free e-letter that goes to all our Lombardi Financial customers and to any investor who wishes to opt-in in to receive it. Written by Lombardi Financial editors who have been offering stock market guidance for year to Lombardi customers, Profit Confidential provides a macro-picture on where the stock market is headed, what sectors are hot, what sectors to avoid. Our two most recent and popular calls were telling investors to bail from stocks in 2007 and telling investors to jump back into the stock market in March of 2009.

The stock market continues to be in correction mode and so are gold and oil prices. But, the trading action in the equity market isn’t that bad at all; the down days aren’t that pronounced and we’re seeing solid rebound days, which signals that buyers are definitely out there. Daily investor sentiment is no doubt affected by developments in the eurozone and I think it’s fair to expect things to get worse regarding the sovereign debt crisis. European policymakers are likely to apply another round of “patches” to the problem; but, next year, I think the eurozone will be in for some real turmoil.

This combined with the usual geopolitical concerns and slow growth in the U.S. economy means that there is no rush for stock market investors to take action. It’s like the domestic stock market is in some sort of holding pattern, waiting for a shock to occur. Regardless, investment risk remains very high.

The S&P 500 Index is now in danger of giving up all its gain since the beginning of the year. I suspect we’ll get some consolidation around 1,300 on the index, but if this breaks, we’re back to where we started. The stock market was due for a correction after this year’s solid price move. The problems in the eurozone are now compounding the pullback.

It’s my expectation that second-quarter earnings season will be just as solid as the first quarter. The stock market, however, just might look right past the numbers if problems in the eurozone get worse. It’s the uncertainty of it all that is keeping domestic investors from betting on domestic fundamentals, which are better than those in the eurozone. I repeat my view that stock market investors should be watching their favorite large-cap, dividend paying stocks closely for new entry points. I think the correction has further legs, but price-to-earnings ratios continue to be fair.

I’ve learned over the years that anything can happen in capital markets and that, very often, price extremes are the norm. With the stock market being emotionally driven (just like the rest of the world), you have to expect the market to overdo the underlying fundamentals. I suspect that it won’t be too long before we get a small rally in the share prices. I don’t expect any major shock like a debt default in the eurozone to all of a sudden just happen. My best guess is that we’ll get a slow but continuous deterioration of investor confidence in eurozone bonds, which will precipitate a political crisis before a debt default or currency breakup. Institutional investors are just about done buying the bonds of weaker eurozone countries.

We’re in for a lot of change over the next 18 months and it isn’t going to be pretty. The stock market is rightly stalled over all the eurozone uncertainty, while domestic fundamentals slowly improve. If there was one industry where I’d like to see further price correction, it’s that of railroad stocks. (See U.S. Economy: What Freight Haulers Are Saying About It.) This is one sector where companies keep saying that the operating environment is getting better and, to be frank, I’m becoming less enthused about investing in businesses that operate outside of North America.

In the midst of the current market correction in the price of gold bullion, a Japanese pension fund, Okayama Metal & Machinery, is going to place 1.5% of its total assets ($500 million) in gold bullion-backed exchange-traded funds (ETFs) (source: Financial Times, May 16, 2012).

This is the first time the fund has bought gold bullion in its history.

The chief investment officer of the fund said explicitly that investing in gold bullion was meant to protect against sovereign risk.

Historically, the $3.4-trillion Japanese pension market has invested in bonds, with the balance finding its way to other assets, but not gold bullion…until now.

The perception in Japan has begun to change, as retail investors are beginning to view investing in gold bullion as a protection against a crisis—whether it is a tsunami or a debt crisis like in the eurozone.

The oldest and largest Japanese wealth manager, Normura, has added investing in gold bullion in its survey to retail investors. It has found—much to its surprise—that the average Japanese person views gold bullion as the third-most desirable investment.

The second-largest financial firm in Japan, Mizuho Financial Group, has begun to allow smaller Japanese pension funds to invest in gold bullion.

Unlike North America, the talk isn’t of investing in gold bullion as a commodity, but the perception is that of gold bullion as a currency.

Now that the tables have turned and Japanese pension funds are beginning to dip into gold bullion, while the average person in Japan is warming to the idea of investing in gold bullion, increased demand in Japan is just beginning.

Follow me here. If even five percent of assets are invested in gold bullion, then five percent of a $3.4-trillion dollar pension fund market is a staggering $170 billion.

You know what that would do for gold bullion prices…

I don’t believe I’m making an outrageous claim. If the perception of gold bullion as protection against a crisis takes hold in Japan, then five percent is a reasonable portion of one’s portfolio to set aside for insurance against a crisis. I’m not even counting the average person in Japan. The $170 billion represents just the pension funds.

Besides China, Japan is joining the group of gold bullion investors around the world. Central banks as well have been investing in gold bullion in the first few months of this year, as I’ve been writing about in these pages. (See: Half of World Gold Production Being Bought by Central Banks.)

If you want to sell your gold bullion, looks like there are plenty of Japanese investors who will be happy to take it off your hands.

Michael’s Personal Notes :

Last Friday came news that Hewlett-Packard Company (NYSE/HPQ) is considering cutting 25,000 jobs in an effort to help the company trim costs and increase profits.

With the second half of 2012 looking like a continued slowdown in economic growth, I believe we will see more companies like Hewlett-Packard announcing job cuts as the year progresses.

It’s been a snowball effect…

The recessions in various eurozone countries have resulted in big American companies that sell in Europe seeing softness in product/service demand. And the slowdown in China’s economic growth is causing a pullback in demand from one of the world’s biggest economies.

After a couple of years of solid earnings growth from big American companies, I believe earnings growth will falter this year.

Amid stagnant economic growth, companies are finding it difficult to deliver revenue growth. If revenue is not growing, and companies want to increase profits, their next logical move is to cut expenses.

Twenty-five thousand job cuts at Hewlett-Packard is a big number, but percentage wise, it’s only eight percent of Hewlett-Packard’s total workforce. As more companies cut payrolls in the second half of 2012, more pressure will be placed on the unemployment rate and, consequently, economic growth in this country could easily stall.

In a global economy, it is unreasonable to believe a country as big as America can isolate itself from worldwide slowdown in economic growth.

Because of what I have outlined above, the Fed will be forced to keep interest rates low for a very long period of time. As the stock market continues to struggle and economic growth falters, the Fed will be more aggressive in quantitative easing.

So, as investor, I believe you are looking at a prolonged period of low interest rates and more money printing by the Fed, both of which are inflationary.

Eventually, interest rates will be pushed up as a consequence of inflation. It’s just a matter of when. But in the meantime, just expect more of the same…record-low interest rates to continue, government debt to continue rising, and the monetary policy to be very expansive. Oh, and let’s not forget, economic growth to deteriorate rapidly.

Where the Market Stands; Where it’s Headed:

If I am correct, the stock market is just about finished putting in a huge top that will act as the right shoulder of a classic head and shoulders pattern. This means it is more likely stocks are headed down than up.

Facebook, Inc. (NASDAQ/FB) wasn’t able to change the market’s tide on Friday. If there is one thing I know about traders, when the market is fragile, like it was last week, they don’t like to go home for the weekend with too much stock on their books.

Expect a bad summer for the stock market. The economy is slowing rapidly, so corporate profits will be stretched. Those smart corporate insiders I’ve have written about a few times this year…they jumped off the bandwagon at just the right time. (For the benefit of my new readers, corporate insiders have been very big sellers of stock this year; see: Another Key Stock Market Indicator Flashes Red.)

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.

In a consumer-driven economy, what retailers say about their businesses is very important. For the most part, the retail sector has been saying that business conditions are getting better. A lot of retail stocks performed very well up until the recent stock market correction and valuations are reasonable. I’ve been writing about an underlying strength in the stock market and the U.S. economy and you can see it right now in the retail sector.

The strong first-quarter financial results of Wal-Mart Stores, Inc. (NYSE/WMT) beat consensus and the company expects strong profit growth in the current quarter. A lot of other brand-name companies in the retail sector reported very good numbers for the first quarter and many retail stocks are trading close to record highs on the stock market. Right now, with all the available news and lower oil prices, I’d say that second-quarter earnings season is shaping up to be surprisingly strong.

So, we have a stock market that’s in correction; however, economic news is showing mixed, but generally improving data. Lower oil prices stimulate consumers to spend and they lower the cost of doing business in the industrial sector. While speculators might bet that lower oil prices are a put option on the global economy, the spot price action directly affects the retail sector and that’s good for the economy.

As I keep saying, if we didn’t have the sovereign debt crisis in Europe, I believe the stock market would be a lot higher than it is currently. Corporate earnings growth may not be robust, but it isn’t flat either. The retail sector has been and should continue to be strong through to the end of this year. (See Wall Street Beats Main Street Again.) As well, a lot of industrial companies are expecting a solid bottom half to 2012. And the outlook for the consumer goods sector is also strong, with companies like Colgate-Palmolive Company (NYSE/CL) and Kimberly-Clark Corporation (NYSE/KMB) trading at all-time record price highs on the stock market.

The structural problems in the U.S. economy and the eurozone are almost entirely related to sovereign debt. This is a fundamental problem that needs to be addressed by policymakers. But consumers are doing their part and, as stock market investors, we can see this in the numbers. I fully expect the retail sector to keep outperforming over the coming quarters and the strength in this industry should trickle down to other sectors for a better-than-expected second-quarter earnings season. That’s my current view right now.

Companies in the U.S., China, Japan, the U.K., and the eurozone will need a staggering $30.0 trillion in new money to refinance corporate debt within the next five years (source: Standard and Poor’s Rating Services).

Because of all the problems in the world that could prevent corporate debt from being refinanced, S&P believes a perfect credit storm could be brewing. I wholeheartedly agree with them.

I believe the eurozone mess coupled with the global economic slowdown that will eventually lead to weaker corporate profits is going to severely hamper the refinancing efforts of trillions of dollars in corporate debt.

The possible breakup of the eurozone and the continued recession in the eurozone could make the refinancing of corporate debt in those countries very difficult. The eurozone banks and the countries themselves already have finances that are very strained.

Just yesterday, we learned the European Central Bank stopped lending to some large Greek banks for the first time.

The U.K. faces similar types of issues, although not as severe as the eurozone. The U.K. is mired in recession, but does possess its own central bank that can print money to help the banking system and so the corporate debt market. Print, print, print!

China is in the enviable position of sitting on plenty of foreign reserves (U.S. dollars). If China sees its corporate debt market needs money, China can dump some of these reserves to help its banks and so its corporations.

On the other hand, Japan has massive debt problems. It will certainly print money should its corporate debt market require it.

The situation in the U.S. is very different.

U.S. non-financial corporations are in good shape, because they are holding so much money on their balance sheets. I would argue that corporations are holding money on their balance sheets because they are scared of another financial crisis like 2008.

U.S. companies don’t want to be cut out of the corporate debt market like they were in 2008, so they are sitting on a record amount of cash.

S&P notes that the biggest risks to the multi-trillion-dollar corporate debt market—an opinion I agree with—are the eurozone crisis, the slowing U.S. economy, the slowdown in China, and the continued unrest in the Middle East, which could send oil prices skyrocketing.

The amount of corporate debt that needs to be refinanced in the next five years is staggering. In our history, we never had so much corporate debt coming up for maturity at one time.

And because there are so many possible problems in the world, I wouldn’t be surprised to see the corporate debt market experience severe strain.

If this is the case, dear reader, it will further exacerbate the economic slowdown, placing us on the path to recession. Corporations create jobs and impact growth. If they can’t finance their corporate debt, the repercussions will be severe.

Michael’s Personal Notes:

How is America faring?

To find the answer, in the past month, I have visited New Jersey, New York, Boston, Palm Beach, and Miami.

Of these five cities (surprise), New York is doing the best. Almost looks like the credit crisis never happened here. Restaurants are full. A new condo building popping up at 432 Park Avenue is asking $6,000 per square foot and getting it. The housing market is hot.

In New Jersey and Boston, the housing market has improved, but it’s far from booming. People are simply happy to have jobs. The amount of money people make at the executive level (I find) is not what it used to be before the credit crisis hit. Students that are graduating with degrees are having a very difficult time finding jobs; hence they are taking transition service-oriented jobs.

Palm Beach, one of the wealthiest enclaves in America, has yet to recover from the credit crisis and from Bernie Madoff. In respect to this housing market, many multi-million-dollar estates are on the market, waiting for that sports figure, well-known entertainer or an Internet billionaire to come along.

In Miami, unemployment is a big problem. The housing market is improving, but only marginally. What’s really happened is that many foreclosures in the housing market have been absorbed. Getting financing to buy a home is difficult. Most people I talk to are still underwater on their homes (owe more than they are worth), but do not want to leave. In reality, I find it a terrible, terrible housing market.

My impression is that people in south Florida are just scraping by. Tourism is keeping Florida going. Take tourism away, and goodbye Florida.

From my various visits, my present impression is that America will not able to sustain another setback like the credit crisis of 2008. There is a growing disparity between the rich and poor with the latter living paycheck to paycheck. The housing market across the country is still in pain, with prices down about 30% since the crisis hit.

Retirees are taking part-time jobs to supplement their income, putting pressure on the strained job market.

I do not see the picture ending well. Years of zero-interest-rate policies and money printing represent attempts to help the economic situation and housing market in the immediate term, but they provide substantial long-term downside risk…as we will soon find out.

Where the Market Stands; Where it’s Headed:

Last fall, I circulated a report that stated the stock market would start to crash in the U.S. on or about April 13, 2012. I was exactly two week early. From the end of April to yesterday, the Dow Jones Industrial Average has collapsed 740 points, or about six percent.

But we should not be afraid. Yesterday, we got news that several members of the Federal Open Market Committee (the Federal Reserve) said that more monetary easing may be required. As I have been predicting for months, as soon as the stock market started to pull back, QE3 would be on the table again.

What a concept. Stock market and economy start to go down; we just print more money to get them both moving again. How long can this process go on for? How long can the Fed fight the natural forces of a secular bull market?

The bear market rally in stocks that started in March of 2009 is getting close to the end of its cycle. I have been warning my readers that the limited upside for the market may not be worth the risk.

What He Said:

“I see the coming recession being deep and difficult because U.S. consumers do not have the savings to spend their way out of the recession. The same thing happened in Japan. The Japan example proved that, when consumer confidence is shattered, even zero percent interest won’t spur consumer spending. The same thing could happen here.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

Gold and oil prices are having a really difficult time right now and I suspect that the falling price trend will continue for another month or so. The spot price of gold is going down because that commodity was due for a correction and because of strength in the U.S. dollar, which is trading up on worries about the eurozone. Oil prices are going down because of a massive of glut of oil in storage in the U.S. market and due to reduced expectations for global economic growth. It is the age of austerity and, frankly, I think it’s fair to expect a lot of change over the next 18 months, and by change I mean politically, economically and socially.

So far during the recent price correction, the stock market is holding up well. If the S&P 500 Index broke 1,300, I’d be more concerned, but because the market isn’t overpriced, institutional investors will continue to buy dividend yield when the market retreats. As for gold and oil prices; being commodities, they could experience significant price swings for the rest of this year, even as part of a long-term uptrend.

It’s going to be very difficult speculating on the long side in gold and oil stocks over the next several months. Oddly, it seems like the eurozone is calling the shots in U.S. capital markets. At the very least, the sovereign debt crisis is responsible for domestic investor sentiment.

I’m waiting for a bottom in spot gold; when it happens, I believe speculators should jump all over gold-related investments. The only caveat is the risks associated with the euro currency. Any breakup in the eurozone could have a cascading effect on currencies and the resulting “flight to quality” would skew the U.S. dollar above its fundamentals. As gold and oil prices tend to trade inversely to the U.S. dollar, spot gold could be down for a long time, because of the sovereign debt crisis and the resulting currency chaos.

So, it goes without saying that investment risk for investors remains very high at this time. All assets, even real estate values, are vulnerable with currency instability. I don’t know how things will play out in Europe, but the fact of the matter is, Greece never should have been admitted to the euro currency in the first place. In the end, a massive upheaval in the eurozone is likely over the next couple of years and investors need to protect themselves.

Near-term, gold and oil prices should experience more downside, as speculators pile into the trend. I see gold as a very important asset to own for the rest of this decade, but the price of gold will be skewed by the U.S. dollar trading as the only reserve currency. As for oil prices, I figure we’ll see price consolidation around $90.00 a barrel, which will be a boost for consumers and the industrial economy. (See The Winning Stock That’s a Positive Sign for the Economy.) Oil prices are the pulse of capital markets in terms of sentiment and expectations for economic growth. Right now, oil prices are saying things are slowing down.