Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Don’t Look at This Chart if You Are Bullish on Stocks, the Economy

Wednesday, November 7th, 2012
By for Profit Confidential

Bullish on StocksThe corporate earnings growth of companies in the Dow Jones Industrial Average is falling at a staggering rate—something I started warning about during the second quarter of this year. Sadly, the trend of declining corporate earnings growth will only continue.

All the pieces are falling into place now. In these pages, I have been rigorously warning about rising key stock market indices; in the third quarter of 2012, the Dow Jones Industrial Average rose 11.4% on the news of QE3 and hopes that corporate earnings growth would hold. But that optimism was crushed when companies like International Business Machine Corporation (NYSE/IBM), Caterpillar Inc. (NYSE/CAT), and United Technologies Corporation (NYSE/UTX) announced their third-quarter 2012 earnings projections for the fourth quarter of 2012 and 2013.

It would be nice if those were the only companies that fell short on their earnings, but unfortunately many more companies are failing to meet their corporate earnings targets.

Other Dow Jones Industrial Average firms had negative news to share. 3M Company (NYSE/MMM) reported a fall in third-quarter revenue and slashed its target for full-year corporate earnings. Exxon Mobil Corporation (NYSE/XOM), the world’s largest oil company and a component of the Dow Jones Industrial Average, reported quarterly corporate earnings that were seven percent lower than the same quarter last year ago. The reason? Exxon says production has been declining and becoming a challenge for the company. (Source: Reuters November 1, 2012.)

Another Dow Jones Industrial Average company, Pfizer Inc. (NYSE/PFE), reported a decline of 14% in third-quarter corporate earnings. The company’s total revenue fell 16%, with U.S. sales falling by 18% and international sales dropping by seven percent. (Source: Associated Press, November 1, 2012.)

Looking at the broader picture, the Dow Jones Industrial Average appears even weaker in the near term. Below is the chart of Dow Jones Industrial Average, which clearly shows the breakdown in the index’s advance.

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Dow Jones Industrial Average Chart

Chart courtesy of www.StockCharts.com

What’s interesting to note in this chart is that the Dow Jones Industrial Average has fallen below the uptrend it started in June. The support level that was formed with the September break to the upside (following the announcement of “QE3 unlimited”) has been broken as well. From a technical analyst point of view, these are two bearish omens.

As I have been warning for some time, corporate earnings growth is crucial for any stock index to rise. If earnings pull back, there is no real reason for key stock indices to increase.

Many troubles lie ahead for the Dow Jones Industrial Average. The world’s most followed stock market index looks weaker both technically and fundamentally.

Michael’s Personal Notes:

Germany’s central bank is the second biggest holder of gold bullion in reserves, second only to the U.S. The German central bank owns 3,395.5 tonnes of gold, comprising 72.4% of its entire reserves. (Source: World Gold Council, October 2012.)

But all of this gold bullion is not held by the Deutsche Bundesbank, the central bank of Germany. The majority of Germany’s gold is stored in other central banks: 66% of it is held by the Federal Reserve; 21% is held by the Bank of England; and eight percent is held by the Bank of France. (Source: Market Watch October 31, 2012.) Germany holds the majority of its gold in these other central banks for “security and convenience” purposes.

Recently, this caught the attention of the general public, politicians, and the media in Germany. They are demanding that the government audit Bundesbank and bring all the German-owned gold back to the country. (Source: Market Watch October 31, 2012.)

Why is all this happening?

On the surface, the gold held by the central bank in Germany is only worth 144 billion euros; meanwhile, the gross domestic product of the country is much higher than that—almost 20 times larger than the Bundesbank’s gold holdings. (Source: Business Standards November 1, 2012.)

So, why care about the gold held by the central bank? The issue in my opinion is much bigger than it appears.

The “Bring Back Our Gold” movement in Germany illustrates three things that I have been talking for far too long in these pages—way before anyone started to talk about it.

Firstly, countries want gold with them rather than anywhere else. Gold in hand is better than debits or credits saying “You have this much gold.”

Secondly, this is a prime example of how people are losing trust in a monetary system that creates money out of thin air. The demands for auditing the German central bank are a clear signal people don’t trust what the bank says.

Lastly, maybe Germans are scared that other regions and their neighboring eurozone members will weigh heavy on the shared currency, the euro, and, if the currency dissolves, the country will need its gold in hand to base the new measure of exchange on.

What do I get from all of this? The public appetite is turning to gold—and why shouldn’t it? Many central banks have ruined the wealth of their citizens by flooding their economies with monopoly money and manipulated interest rates.

This movement by the people of Germany to bring back the gold to the country and audit their central back is unique, but not unexpected. I will not be surprised if the trend of demanding an audit of central banks and citizen movements of “Bring Back Our Gold” hit other countries.

Where the Market Stands; Where it’s Headed:

Technically speaking, a huge top has been put in for the stock market. The right shoulder of a classic head-and-shoulders pattern may finally be in. We are very close to the end of a bear market rally in stocks that started in March 2009.

What He Said:

“Home sales down 8.4%, could be the bottom,” read the headline in last Friday’s USA Today. What do they know that I don’t? They know what realtors and their associations tell them, and that’s about it. Unfortunately, the real estate news is predominately written by reporters—not real estate investors with years of experience to share. The hard facts about the real estate market in the U.S. are truly scary. How can the U.S. economy escape the hard landing in U.S. home prices? As we’ll soon find out, it simply can’t!” Michael Lombardi in Profit Confidential, January 31, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for the worst of times ahead.

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  • Bill Gates

    "We are very close to the end of a bear market rally in stocks that started in March 2009."
    Mr Bombardi, you have been talking about the above for more than a year now. Are you sure this time?

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles