Forget Greece…Why the Stock Market Really Went Down

By Michael Lombardi, MBA — Today’s Profit ConfidentialcolumnWhile everyone and his mother (if she invests in stocks) was blaming Greece’s financial woes yesterday for global stock markets running back to earth (the Dow Jones Industrial Average fell 213 points Tuesday), my spin is different.Stocks did not tumble yesterday because of the “Greek Crisis.” They dropped for another reason.
I have been writing about the doomed euro since the global recession started. The recession, I predicted, would hit Europe harder than it would the U.S., and it did. This view was cemented for me, as I travelled to Europe each of the past three years, surveying the economic hardship that has gripped the region.Anyone who thought the euro would take over from the U.S. dollar as the reserve currency of the world was out to lunch. I think even Hugo Chavez, President of Venezuela, has come back in from lunch. Wasn’t he the one who thought up the idea some time ago of taking
euros as opposed to dollars for Venezuela’s oil?In my opinion, the stock market long ago discounted the financial problems in Greece, Portugal, Spain and Italy. These countries are in big financial problems. They simply do not have the tax base coming in to cover their expenses, nor can they continue to finance their
national debt (something like where the U.S. is going).When credit reporting agencies cut the credit rating of countries (like Standard & Poor’s did yesterday to Greece), those countries that are downgraded will need to pay more interest on their bonds to attract money. My concern is that, if a country’s currency is devaluing quickly because the currency is in crisis, this event leads to higher domestic inflation in the country whose currency is in trouble and that leads to even higher interest rates.

Hence, my dear reader, the problem is not Greece, Portugal, Spain or Italy. It is the beginning of higher global interest rates that is the real problem. The smart money knows higher interest rates are ahead…the stock market smells it. And that will become the real big
problem for investors when the second leg of the bear market kicks in.

Michael’s Personal Notes:

I don’t watch TV. Any TV. In fact, the only time I turn the TV on is at 5:00 AM each morning to see the weather report for the day, so I can determine if I need a jacket or not for the day.

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While I may be narrow-minded, I just don’t see what value TV brings to society today. There’s too much violence on the tube and the government has never made it a priority to monitor the violence our kids see on TV. “Find the killer or bad guy” shows continue to be very popular. People getting stabbed, people getting shot, people getting blown up in cars — and seeing the blood — is all okay on TV.

We have reality shows of people who basically have meaningless lives (they do very little for society) and we have shows on how to marry a millionaire. Great message for our kids. Marry for money, not for love. (My mom complains regularly that it never worked for her.)

I’m sure I’ll get plenty of e-mails today telling me I’m over the top, but I just find TV a waste of time. Watching a program I will forget about the next day (let alone learn anything from) is just a big waste. That time could be used exercising, spending time with loved ones,
reading to enhance my literacy and knowledge, or working on a hobby that gives me long-term satisfaction.

I guess that is why TV and movie stars are rich and the majority of people watching TV are not — the ones on the TV went out and did something with their lives and became actors or actresses who demand big money for the millions of unmotivated people that watch TV each day and night.

Ask yourself this question: is Martin Sheen really worth the $800,000 he gets for every 30-minute episode of “Two and a Half Men?” Is he saving lives or making our society better? Of course not. But there is no way my own mother will ever miss an episode. The power of TV.

Where the Market Stands:

The Dow Jones Industrial Average opens this morning up 5.4% so far for 2010. I was surprised to see traders take the Dow Jones slightly below the 11,000 level. A wake-up call for investors getting too cozy with a market that was just rising every day? Maybe. In my
opinion, the bear market rally that started in March 2009 is still in force.

What He Said:

“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher — because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi in PROFIT CONFIDENTIAL, June 2, 2005. Michael recommended Google stock as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5,
2007, when Google reached $700.00 U.S. per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s
recommendation was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment. Today, Google trades at $530.00 per share; gold bullion trades at $1,160 an ounce.