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to Lombardi customers, Profit Confidential provides a macro-picture on where the stock
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on that analysis, we look at what sectors are hot, what sectors to avoid. Our two most recent We respect your privacy and will never share your e-mail address.
and popular calls were telling investors to bail from stocks in 2007 (the bull market was over
and a bear market was setting in) and telling investors to jump back into the stock market in
March of 2009 (a bear market rally was started).

PROFIT CONFIDENTIAL Forecasts
Immediate term outlook:
The Next Step for the Stock Market The bear market rally in stocks that started March 9, 2009 remains
intact. Since March of 2009 we have been and continue to be
immediate term bullish on stocks. Gold bullion is up $1,300 an
No Comments ounce since we first recommended it in 2002 and we are still
bullish on the metal.
Posted by Michael Lombardi, MBA in bear market on February 24th, 2012
Short-to-medium term outlook:
National debt increasing at the rate of $125 billion per month will
For the benefit of my new readers, and as an update for my
eventually debase the U.S. dollar. Our concern is future
long-time readers, today I want to talk about exactly where I deterioration of the greenback, an expansive money supply and
believe we are in the stock market. rising U.S. national debt will eventually push domestic inflation
and interest rates higher, negatively impacting the American
After a 25-year bull market in stocks, which was fueled by a 25- economy and equities.
year decline in interest rates and a period of great financial
leveraging that accompanied collapsing interest rates, a Phase
I bear market (often referred to as the first down-leg) brought PROFIT CONFIDENTIAL Estimates
stock prices down sharply.
Total 2011 per share earnings for 30 stocks in the Dow
Jones Industrial Average:
$900
From its high of 14,164 in October 2007, the Dow Jones Industrial Average crashed to 6,440
by March 2009—a 55% drop. This phase of the secular bear market is behind us. Dow Jones Industrial Average Price/earnings multiple: 13.4
A Phase II bear market (often referred to as the “rebound,” “bounce” o r “sucker’s rally”) Dow Jones Industrial Average Dividend Yield: 2.6%
started in March of 2009. The Dow Jones Industrial Average has risen about 100% since
March 9, 2009. 3-month day U.S. T-bill Yield: 0.01%

The bear market has been doing an excellent job during this current phase of luring 10-year U.S. Treasury Yield: 2.0%
investors back into the stock market. Phase II bear markets give investors the false
impression that the economy has turned the corner and that stocks are a safe bet again—
exactly where we are today. This phase of the secular bear market is still upon us. Search

Given that 2012 is a Presidential election year in the U.S., given that the government and the
Fed have fought the natural forces of this bear market tooth and nail, the bear market rally, the Search
“bounce” in this secular bear market, has been long.

Phase III of the secular bear market is when stock prices come crashing down again,
bringing stock prices down to the point at which the Phase I bear market started or lower—in
this case, 6,440 on the Dow Jones Industrial Average, about 50% below where the stock
market sits today. If you missed Apple, shame
Yes, I’m sure many of my readers are sitting there, reading this, and thinking this can’t
on us. If you miss this...
happen. I also understand that I’m one of the few stock market analysts out there with this
opinion. But history is history. What I have explained above, the stark reality of where we are A rare situation could trigger triple-digit gains for
with the stock market, is how a secular bear market works. this $7 stock...in the next 90 days. An opportunity
so rare, we’ve only seen it happen a few times before.
In fact, this company is strikingly similar to Apple
The government can take on as much debt as it likes ($5.0 trillion and counting since
before its stock price took off.
President Obama took office) and our central bank can increase the money supply as much it
wants (an increase of about $2.0 trillion since the credit crisis began). But too much debt and
too much money printing always lead to rapid inflation and higher interest rates. Learn all about the next Apple here!
The natural forces of a secular bear market will eventually play themselves out.
Recent Articles
Michael’s Personal Notes:

http://www.profitconfidential.com/bear-market/ Page 1 / 8

There is no question in my mind that the Chinese economy will be the next great world China’s Gold Rush
economic power. While many still view China as mainly an export economy, the Chinese
economy is already beginning to show that it is much more than that.
By Michael Lombardi, MBA

I’ve been talking about how the Chinese economy is experiencing real wage inflation and
Over the last few years, the China government has implemented
that, in just a few short years, there will be no great cost advantage to manufacturers setting
new measures to make its currency—the yuan—an open
up in China as opposed to other major industrialized nations.
currency to be used by investors globally. Ten years ago, it was
very difficult for even large investors to trade in the Chinese yuan.
This means that the Chinese economy can’t rely on its cheap labor as the sole means of That is no longer the case today and the People’s Bank of China
attracting investment, because their labor costs will soon be comparable to labor costs of has given every indication that China wants the yuan to be
other developed nations. So what are the Chinese doing about this? considered on level with the U.S. dollar and the euro. With that
in mind, let’s look ...
Just this week, China opened its first car assembly plant in the European Union, in Bulgaria.
Yes, a Chinese car manufacturer chose Bulgaria as its base from which to sell cars in the Read More
European Union, because of its low labor costs, low taxes, and well-educated workforce.

Where have we heard that before! Only a few short years back, it was U.S. and European car
manufacturers and companies setting up in China. The tables have turned. The Chinese
economy has grown up. What My Gut Is Telling Me Right Now About
the Stock Market
The plant will be jointly operated by China’s Great Wall Motor Company and Bulgaria’s Litex
Motors, just as other multinationals created joint ventures within China. The plant will By Mitchell Clark, B.Comm.
eventually assemble 50,000 cars per year, and will initially sell in Bulgaria and neighboring
Eastern European countries. The plan is to expand into the European Union. The single greatest threat to your investment portfolio isn’t a
Greek debt default (although that’s a big one). The major threat is
Within the Chinese economy, all Chinese automakers are expressing their desire to gain geopolitical and it has to do with the potential for war with
long-term strategic positions within Europe and the U.S. Iranand, to a lesser extent, Syria. Investment risk in the stock
market remains very high at this time. I repeat my earlier view
This is just the latest venture into Europe. In 2010, China’s Geely Automobile Holdings that a conservative investment stance is warranted. Of course,
bought Volvo from Ford Motor Company (NYSE/F), while the Chinese economy’s largest because the stock market has run so strong since the beginning
carmaker, Chery, owns a share of a Fiat plant in Italy. of the year, it ...

When people ask where the next great multinational companies will come from, dear reader, Read More
don’t forget about China. The Chinese economy has grown to the point where powerful
companies have now emerged and are ready to take on the world.

These Chinese companies are not just talking about it; they are taking action and making Why the Great Wall of China’s Still Standing
moves across the globe. The long-term picture for Chinese companies looks very bright.
They have the money and are investing throughout the world in order to maintain strong
By George Leong, B.Comm.
earnings growth.

The Great Wall of China is not crumbling down as some are
The Chinese economy and the companies within it are going to challenge the multinationals
starting to suggest following news that Chinese premier Wen
of both the U.S. and Europe. It might be a good idea, dear reader, to look at up-and-coming
Jiabao cut the country’s gross domestic product (GDP) target to
companies within the Chinese economy, the next great multinationals.
an eight-year low of 7.5% for 2012. As I have said in previous
commentary, China is stalling and clearly impacted by the debt
Where the Market Stands; Where It’s Headed: and muted growth in Europe, particularly the eurozone, but the
country is not in a downward spiral, as 7.5% growth is
It’s just a matter of time before the Dow Jones Industrial Average moves decisively above the comparatively good. GDP growth in ...
13,000 level. Stock advisor bullishness has pulled back a little (which is good for stocks) and
economic news sounds encouraging for investors; maybe stocks are “not such a bad place” Read More
to park one’s money is the thinking I’m hearing from investors.

As I have been writing, there is no real “economic” reason for the market rally. The economy
isn’t getting better. In my opinion, under the surface, the economy is deteriorating. What lie
ahead are inflation and higher interest rates. The stock market has been kept alive the past Two Reasons to Worry about the S&P 500
three years by interest rates that are unnaturally low and an unprecedented expansion of the
money supply. By Sasha Cekerevac

The final stage of the bear market rally…that final blow to the upside…is being set up. The overall market, as represented by the S&P 500, has had a
tremendous run from the October lows. Even through all of the
What He Said: never-ending struggles with the European crisis, unemployment
still high, and a slowing world economy, the S&P 500 has
“Bonds could now be a buy: Bonds rise in price when interest rates fall, as their return makes managed to gain over 27%, approximately, over the last six
them more valuable. After a bear market in bonds that has lasted for months, the action in the months. That is a tremendous amount over a short period of time
bond market, as I read it, indicates that the bear market in bonds could be over. I’ve always and the question I get asked all of the time is: what happens
preferred quality when buying bonds, going with government bonds over corporate bonds. If now? I’ll give you ...
you have some cash lying around, bonds could be a great deal.” Michael Lombardi in
PROFIT CONFIDENTIAL, July 24, 2006. The yield on 10-year U.S. Treasuries fell from five Read More
percent in the summer of 2006 to 2.4% in October, 2011—doubling the price of the bonds
Michael recommended.

Extra
Corporate Insiders Bailing Out of
Medium-term Economic Picture Worsens
Stocks
By Michael Lombardi, MBA
No Comments
There is rapid inflation in the system, dear reader, but let’s not
Posted by Michael Lombardi, MBA in stock market on February 16th, 2012 speak too loudly about it. I’ll keep this note to a whisper as we


turn our attention to the just-released Institute of Supply
There are many reasons to be skeptical about this past Management’s factor index. The institute’s survey of
January’s market rally. One of the most important key indicators manufacturers throughout the U.S. includes a discussion on
flashing a warning sign is the fact that the stock market’s big commodity prices. Commodity prices are a critical component of
rise in January occurred on very light trading volume. manufacturers’ costs, because they are the inputs used to
produce all of the goods that consumers purchase in this
But there’s another key indicator that is also flashing a red country. For February of ...
warning sign: insider selling.
Read More
Insiders are officers, directors and the largest shareholders of
corporations. It is critical to follow whether insiders are buying
or selling their company’s stock; it could be an indication that they expect to see their
company’s stock rise or fall in price. Want to Buy Low/Sell High? What You Need to
Know
When insiders are buying, investors usually think it is time to buy. When insiders are selling,
it could mean something is up, and so investors might consider selling.
By Mitchell Clark, B.Comm.
Argus Research has posted some alarming numbers from their corporate insider key
indicator concerning the overall market, to which investors should pay attention. Their ratio The spot price of gold really needs to hold above $1,700 an
showed that insiders are selling their shares at a pace not seen since July 2011. If you ounce in order to maintain its positive short-term price
remember, dear reader, the market proceeded to fall dramatically in August, September and momentum. There is good underlying strength for gold long-term
October of 2011. and, to illustrate it, just pull up a five- and 10-year chart on the
spot price. The outlook for gold remains positive and the same
goes for silver. Like other sectors of the stock market, there is no
Their key indicator, the corporate insider sell-to-buy ratio, stood at 5.77-to-1, which means
rush to be taking on new positions in mining stocks. It’s still
that, for every 100 shares corporate insiders bought, 577 shares were sold by insiders of the
one ...
company for which they work. If companies listed on the New York Stock Exchange are taken
in isolation, this key indicator gets worse…8.2-to-1.
Read More
To put some perspective on this key indicator, in November of 2011, before the over 25%
market rally began, the sell-to-buy ratio stood at 0.81-to-1, which means that, for every 100
shares insiders bought, only 81 shares were sold.
Fourth-quarter Earnings Season Round-up
The recent corporate insider selling was confirmed by Trim Tabs Research. Their key
indicator showed that insider selling for the month of January was five times insider buying, By George Leong, B.Comm.
which, has thus far—for the month of February—increased at an alarming 15 times. For their
key indicator, the interpretation is that, in the January market rally, for every 100 shares bought Spain announced that that it was going to miss its deficit targets
by insiders, 500 shares were sold. From February 1 to 13, the selling is accelerating rapidly: for 2012. Greece got another $170 billion in cash to avoid
for every 100 shares bought, 1,500 shares were sold. defaulting. The financial mess in the eurozone and Europe is
real. I expect more shocks down the road from Europe; but, while
Insider selling, in isolation, cannot be the sole key indicator on which a buy-or-sell there is renewed optimism towards the U.S. economy with an
recommendation can be made. These numbers confirm the bear market trap that is currently improving jobs sector, corporate America is still a concern.
playing itself out with this market rally. It seems that, while a few people were buying in While it’s true there have been stellar performances from Apple
January’s market rally (as evidenced by very low trading money), the smart money (corporate Inc. (NASDAQ/AAPL) that are worthy of an ...
insiders) were selling into this market rally. Sounds like the smart money is the one to heed,
dear reader. Read More


I was very confident I was going to be right about calling for a fifth consecutive year of trillion-
dollar budget deficits, but I’m surprised myself at how quickly I would be proven right.
These Companies Are Raising Their Dividend
Yield
Just a few weeks ago, I commented on the Congressional Budget Office’s (CBO) forecast for
budget deficits in future years. (See: Getting Used to Trillion-dollar Annual Deficits.) Again, I By Sasha Cekerevac
want to reiterate, this was not and still isn’t a criticism of the CBO, because it has to project
budget deficits based upon the current laws and tax cuts in place. With the volatility we’ve seen in the markets over the past few
years, investors have become hesitant to put their money into
At the time, I warned that the then 2013 budget deficit of only $585 billion was not going to the market. There are many good reasons to be cautious; more
materialize. The only way this number could be reached would be if taxes increased money printing, the U.S. administration is determined to lower
dramatically, which, considering such a weak economy, was not going to transpire…is what I the value of the dollar, scandals, and the banking crisis. These
argued. When President Obama released the budget this week, he asked Congress to are just a few issues that keep many investors up at night.
extend the payroll-tax cut and the unemployment insurance benefits until the end of 2012. Through all of this turmoil, an investor looking for income simply
can’t get it in the ...
Should President Obama win the election and his budget pass into law (highly unlikely), then
the projected budget deficit for 2013 will be $901 billion. Compound this with the 2012 budget Read More
deficit now expected to come in at a worse level than previously projected of just under $1.3
trillion from a previous estimated $1.1 trillion.

Since the 2013 budget deficit has now moved from $585 billion to $901 billion, I’m sticking to
my forecast of the budget deficit for next year surpassing the $1.0-trillion mark by a large
Popular Tags
margin.

The proposed budget sees the top individual tax rate rise to 39.6% from 35%. The budget austerity measures blue chips China's GDP China's Growth
would treat dividends like regular income and remove other tax benefits from the wealthy. consumer confidence consumer spending corporate
(There is no way that Congress is going to approve such a spike in taxes.) While the budget earnings corporate profits credit crisis debt crisis dividend
acknowledges that Medicare spending will increase dramatically from 2013 and on, it offsets
this by saying that defense spending will fall.
paying stocks dividends DOW Dow Jones Industrial Average
Dow Jones Industrials earnings season ECB
The defense spending cut has a lot to do with closing out the campaign in Afghanistan, but economic slowdown European Central Bank European debt crisis
the tensions with Iran have been escalating dramatically. A war with Iran could throw these european economy european union eurozone
budget deficit projections right out the window.
financial crisis GDP growth gold bull market gold
The Republicans will release their recommended budget soon. They are going to target investments gold prices gross domestic product home


different tax cuts and revenue priorities, so both parties will debate their philosophical prices inflation rate institutional investors investing in gold
approaches to the electorate on how to best move forward in this country.
investing in real estate investing in stocks investment risk investor
sentiment IPOs job creation jobs market large-cap companies
What is frightening is—I’m almost certain—that no matter what budgets and tax cuts either
large-cap stocks market sentiment Market Veiw micro-cap
party presents, neither will prevent annual trillion-dollar budget deficits in the next few years.
They’ll say they’ll tackle the issue, but, in future years. (Stop me if you’ve heard that one stocks mining stocks NASDAQ national debt NYSE oil stocks
before!) penny stocks price of gold quantitative easing retail sales retail
sector retail stocks rising interest rates silver silver stocks
All I know is that taking the budget deficit projections in this budget right to 2016, and giving
myself an error cushion of just five percent on the budget deficits, will ensure that our debt-to- small-cap stocks Sovereign Debt stock-picking
GDP will be roughly in the vicinity of 130% by the end of either President Obama’s second stock advisors Stock Market Condition Stock Market Picks
term or the new President’s first term. Welcome to Greece…
stock market rally stock market risk stock market success
stocks Stocks Trading Tips technical analysis The Leong
These unprecedented trillion-dollar budget deficits mean more money printing and a
Side of the Market U.S. banks U.S. debt U.S. Deficit U.S. home
continued rise in the price of gold bullion and will certainly put upward pressure on interest
rates…faster than we can imagine. Protect yourself, dear reader. (Also see: Could the U.S.’s prices U.S. real estate market U.S. recession U.S.
Credit Rating Be Downgraded Again?) Treasuries unemployment rate Wal Mart
Where the Market Stands; Where it’s Headed:

I wrote yesterday morning about how I was getting uncomfortable with so many stock
advisors turning bullish and—bang—the Dow Jones Industrial Average has its worse day of
Categories
the year, down almost 100 points yesterday.
Gold Stocks Real Estate Market
Stock Market Gold Investments
Dear reader, we need to get ready for big one-day drops for the stock market. They will Bear Market Debt Crisis
become the norm when Phase III of the bear market starts. But I still believe there is more life Bull Market Chinese Economy
left in the bear market rally (or should I say sucker’s rally) that started in 2009. U.S. Dollar Economic Analysis
Euro Benchmark Stocks
What He Said: Interest Rates Dow Jones Industrial Average
U.S. Deficit
“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a
small fraction of the general public have taken a position in gold. Why? Because gold’s not
trendy…buying condominiums for investment is! If you are an investor, you need to seriously Receive the latest updates from our
look at investing in gold stocks because gold bullion prices will likely continue to rise.” correspondents by subscribing to
Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was our RSS Feed.
trading under $300.00 an ounce when Michael first started recommending gold-related
investments.

How the Massive Global Economic
Slowdown Will Affect Us
No Comments

Posted by Michael Lombardi, MBA in economic analysis on February 10th, 2012

There can be no doubt about it; we live in an increasingly global
economy. As I’ve been writing often, dear reader, how the rest
of the world is faring with the global economic slowdown will
be a big factor in how the U.S. economy does in 2012.

China’s Lunar New Year holiday is equivalent to North
America’s Thanksgiving; it is a gauge for retailers on how
confident the consumer is, and how the following year will
develop, since it is one of the busiest shopping seasons of the
year.

As I’ve been saying, in spite of digging deeper into debt, the U.S. consumer was unable to
muster a strong holiday season. The economic slowdown affected China’s Lunar New Year
as well.

Although holiday sales grew 16% in China, this was the slowest rate of growth in three years.
Large retailers to jewelers admitted that sales were disappointing and, while some refused
to forecast for 2012 because of the uncertainty, others pointed to the economic slowdown in
Europe and the U.S. as affecting consumer sentiment. (See: 2012 Economic Growth
Forecast Slashed Across Most Countries.)

This was further confirmed by China’s Ministry of Industry and Information Technology, which
sees China’s industrial output as slowing to 11% in 2012, from 13.9% in 2011…but admits
that there are significant downside risks to the forecast due to the global economic
slowdown. This is consistent with the message from China’s central bank.

Remaining in Asia, South Korea’s central bank cut its economic forecast for the first half of
2012, after experiencing 3.6% growth in 2011. The central bank noted the global economic
slowdown as one of the factors tempering its outlook.

India’s government forecast 2012 as the year of slowest growth since 2009—three years ago.
In a 180-degree turn, India’s central bank has expressed that it will stop raising rates to fight
inflation, as the attention has now turned to possibly cutting rates, because of inflation


slowing as well as economic growth due to…wait for it…the global economic slowdown.

Over to Europe now, where the dominant economy that drives the eurozone, Germany, saw its
exports fall in December at the fastest pace in three years due to the economic slowdown.

Once again, dear reader, the fact that Asian economies experienced the slowest economic
growth in three years and the fact that Germany’s exports fell at the fastest pace in three years
is no coincidence. It proves the economic slowdown and how interconnected we are
economically.

Seasonally adjusted exports fell 4.3% in December in Germany, far worse than the one
percent that economists had expected. Industrial production dropped off 2.9%, which is
clearly pointing to an economic slowdown, as confirmed by Germany’s central bank. It is
evident that exports to the rest of the eurozone are slowing, but a global economic slowdown
also factored into the equation.

In Italy, the central bank is looking for a decline of 0.4% in GDP growth for 2012. Preliminary
numbers suggest that Italy’s GDP was far worse than expected in the fourth quarter due to the
economic slowdown.

Clearly, a massive economic slowdown is evident throughout countries in Asia and Europe.
This will without a doubt affect the U.S. economy and eventually American stock markets. As
far as I can see, the major U.S. stock markets are not pricing in the economic slowdown as of
yet. All hail to the current bear market sucker’s rally!


It’s not too late for this country…

On that historic day when Standard & Poor’s stripped the U.S. of its elite AAA status last year,
because of its large government debt and budget deficit, it has been forgotten that the rating
agency placed a negative outlook on the country’s rating.

The negative outlook centered on the fact that our country had no concerted medium- or long-
term plan to reduce the debt, let alone the budget deficit. Of course, such a plan will be
difficult to conceive or even implement in an election year, but the budget deficit is
nonetheless estimated to be $1.3 trillion this year.

Standard & Poor’s came out this week warning that the U.S. faces another rating cut in the
next six to 24 months if a credible plan is not put in place to tackle the relentlessly rising
government debt and the budget deficit.

Standard & Poor’s acknowledges that not much can be done about the U.S. fiscal problems
until after the elections, but at least it is putting the current/new administration on alert,
warning them that if one of their first mandates is not creating a plan to bring the budget
deficit under control, then another downgrade will follow.

Yes, after the downgrade of the U.S. credit rating last summer, demand for U.S. bonds went
up and interest rates continued to fall. This was due to a confluence of events: the crisis in
Europe; the Arab Spring; and the privilege of being the reserve currency.

Privileges are earned, not given. Just because we have the reserve currency now, doesn’t
mean we will retain it in the future; not with trillion-dollar budget deficits. In order to continue to
earn that right, we need to address the ballooning government debt (and trillion-dollar budget
deficit), which stands at over $15.0 trillion. In addition to this, our unfunded liabilities are at the
very least $55.0 trillion.

I commend Standard & Poor’s for drawing attention to one of the most important issues
facing our country. The problem is that tackling the debt and budget deficit means tackling
entitlements: Medicare and Social Security are the major ones.

This will cause an uproar among Americans, which is why politicians don’t want to touch it; it
will greatly reduce their chances of being re-elected.

With budget deficits of at least a trillion dollars being created annually, clearly we are on a
path that is unsustainable. We need true leaders to stand up, discuss the issues in a
concise manner, and make very difficult decisions that will steer us onto a path of fiscal
discipline—budget surpluses, not budget deficits—on the road to reducing the government
debt.

It is not too late for this country, but if we continue down this budget deficit path, one day it will
be. We cannot have our children inherit this mess. I cannot think of one responsible father
who, witnessing their child run into high debt (budget deficit), says, “Don’t worry son; just
increase the credit limit on your card and you’ll be fine.”

Investors in our government bonds will one day look at the trillion-dollar budget deficits and
escalating government debt and have little confidence that it can ever be repaid. Once that
occurs, no one will want our bonds, which will send interest rates rocketing higher.

There is a one-in-three chance that the U.S.’s credit rating will be downgraded again.
Remember what happened when Standard & Poor’s first downgraded the U.S.? It sent the
stock market down dramatically. History has a tendency to repeat itself. (Also see: Getting
Used to Trillion-dollar Annual Deficits.)



The Dow Jones Industrial Average sits 130 points away from the 13,000 level…something
the world’s most widely followed stock market hasn’t touched in four years.

As I note above, the world’s major economies are slowing quickly here in 2012. Government
debt has gone wild. The budget deficit is out-of-control. Massive monetary stimulus will
eventually trigger inflation, which will cause interest rates to rise…and the stock market is
rising?

We are in a bear market rally that started in 2009. The purpose of this phase of the bear
market is to lure investors back into stocks. The bear is doing an excellent job of this. Enjoy
the rally, my dear reader. It’s getting tired and “long in the tooth” as they say.

What He Said:

“When property prices start coming down in North America, it won’t be a pretty sight, because
consumers are too leveraged. When consumers have over-borrowed so much that they have
no more room in their credit lines to borrow more, when institutions start to get tight on
lending, demand for housing will decline and so will prices. It’s only a matter of logic, reality
and time.” Michael Lombardi in PROFIT CONFIDENTIAL, June 23, 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.

Proof the Stock Market Rally’s
Getting Close to the End
Comments Off

Posted by Michael Lombardi, MBA in stock market on February 9th, 2012

There’s no doubt about it. The stock market had a fantastic
January! But here’s the bad news: companies in the S&P 500
that released their earnings reports in January (with 49% of
S&P 500 companies reporting so far), have had their worst
performance since the economy supposedly rebounded
(source: Financial Post).

Just 46% of those companies in the S&P 500 that have
reported fourth-quarter 2011 earnings so far have beat market
expectations—the lowest reading since the third quarter of
2008. Many companies were citing increased input costs and a new general economic
slowdown worldwide because of the eurozone credit crisis as factors that affected their
earnings reports.

While it will take a few more weeks for most S&P 500 companies to have the visibility
required to make more reliable forecasts for the current year, many analysts are now
expecting that revisions to the S&P 500 earnings will be mostly to the downside in 2012.

The Association of American Railroads (AAR) also released its latest report for January,
2012. After experiencing slow railcar growth in the second half of 2011, the AAR saw only
1.1% growth in January, from the same period last year.

The association further noted that, while auto-related carloads remained strong, grains,
chemicals and coal were flat to declining on a year-on-year basis.

For 2012, the AAR sees a higher rail pricing environment along with higher fuel surcharges
on the back of lower volume…which means that the U.S. economy is to remain relatively flat.

This AAR report confirms the negativity in the Baltic Dry Index, on which I reported on
yesterday. Both of them point to 2012 as being a difficult year.

That is why, dear reader, you should be very wary of the recent stock market climb. As I have
been writing since 2009…we have simply been experiencing a sucker’s rally within the
confines of a long-term bear market. The divergence between earnings reports and stock
prices cannot continue. Should S&P 500 earnings for 2012 be lowered again, then that will
affect the current price/earnings (P/E) ratio for the market as a whole.

This will undoubtedly put pressure on stocks and drive the S&P 500 index lower.

Let’s keep in mind as well that the strong market rise and strong performance put in by the
S&P 500 in January was on low volume. This means that many market participants were
hesitant, so kept their cash on the sidelines. After sifting through the hard facts above, it is
hard to see how that money on the sidelines will suddenly come rushing into the S&P 500.
Without this new money coming in, a true market advance cannot sustain itself.



A story of the Super Bowl, America, chariot racing, the Roman Empire, and our destined
future…

Super Bowl XLVI made U.S. television history by pulling in the biggest audience, at 111.3
million viewers (source: NBC). The game was seen by close to 47% of all U.S. homes.

It is no wonder that, with this many eyeballs, the average 30-second commercial sold for a
record $3.5 million (source: NBC). Rapid inflation here.

For the halftime show, a few more people wanted to tune in because the featured artist was
Madonna. That brought total viewers from 111.3 million to 114 million.

The average Super Bowl ticket was $3,982 in the days leading up to the game (rapid
inflation). Face value of the tickets ranged from $800.00-$1,200 (rapid inflation again).

During the Roman Empire and Byzantine Empire, chariot racing was the most popular sport.
The chariot racers were divided into factions—teams—that fans wore the colors of and rooted
for: Blue, Green, Red and White.

Under the Byzantine rule, the hippodrome was built, which seated roughly 60,000 fans. An
imperial box was created for the emperor and his family. During the interval between races,
the crowd was entertained with various performers: singers; dancers; mimes; clowns; and
others. The cost of goods rose during the Byzantine regime, the first real form of rapid
inflation.

The races provided the fans with an opportunity to choose a team color, which gave the
illusion of control in an otherwise authoritarian society, as purchasing power fell due to rapid
inflation (source: Barbara Schrodt). The races took the citizens’ focus off the financial
problems of society as they looked so forward to their weekend sports.

There was a time during the Roman Empire, roughly between 300 B.C. and 400 A.D., when
the number of soldiers skyrocketed to over 300,000, from 20,000. During this time, as more
soldiers entered the ranks, their pay and pensions increased 350% (rapid inflation) from 124
Roman denarii (the denarius was the currency at the time) to 438 Roman denarii (source:
Kenneth Harl).

In a desperate attempt to keep their reign, the emperors paid the soldiers with a debased
currency, which fed rapid inflation. The amount of silver that went into every coin went from
2.19 grams at the height of the empire to just 0.04 at the end; it was also a low grade of silver
(source: Martin Armstrong).

The emperors, during this time, made financial promises to the people that clearly could not
ever be paid. Besides just the pay itself, there was the matter of future pensions, where there
was no money (unfunded liabilities). With government debt out of control, the currency was
debased, but rapid inflation was the resulting consequence, which destroyed the Roman
Empire.

With government debt in the U.S. at over $15.0 trillion and unfunded liabilities at a minimum
of $55.0 trillion (with that number probably larger), we have the same problem the Romans
faced many centuries ago.

World GDP in 2011 was $65.0 trillion (source: IMF). There is not enough money in the world
to pay for the U.S. government debt and, if we continue to expand our money supply (create
money), rapid inflation will be the result.

We are not addressing the issues and making the hard decisions to fix these problems as
rapid inflation creeps in. One day, the market will force us to make those hard decisions.

Worse, over 46 million people are on food stamps in this country, with youth unemployment
at over 18% (source: SNAP & BLS), while there are the privileged few who can afford to pay for
rapid inflation and tickets at the Super Bowl.

History really never changes; just the players change. To sustain the Roman Empire as it
grew and grew, money was printed; the rapid inflation came, the value of money deteriorated,
and the empire slowly ceased to be the world’s economic powerhouse of its time.

The same is happening in America right before our eyes. It will be a long process…but at
least this time we know who the next world economic power will be. Go East, young man, to a
land where citizens are encouraged to own gold…China.


I see more and more market participants turning bullish. Lawrence Fink, the head of
BlackRock Inc. (NYSE/BLK), the world’s largest money manager, said yesterday that
investors should be 100% in stocks. Stock advisors are turning more bullish each passing
day. Of course, this is all very negative for the stock market—it usually does the opposite of
what is expected of it. The bear market rally in stocks could be forming a base here from
which to make its final upward push before retiring for good.

What He Said:


“The U.S. reduced interest rates in 2004 to their lowest level in 46 years. And what did
Americans do with their access to easy money? They borrowed and borrowed some more,
investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of
bringing interest rates so low as to entice consumers to borrow more than they can afford)
will one day be regarded as one of the most costly errors committed by it or any other banking
system in the last 75 years.” Michael Lombardi in PROFIT CONFIDENTIAL, July 21, 2005.
Long before anyone was thinking of a banking crisis, Michael was warning that the coming
real estate bust would wreak havoc with the banking system.

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