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Last night, Cisco Systems, Inc. (NASDAQ/CSCO) lowered its current quarter revenue and earnings forecasts and the stock got slammed 15% in after-hours trading. Major market futures were down one percent on the news.
Is this a fickle market or what? One downgrade in revenue/earnings forecasts after hundreds of companies reported third-quarter earnings that surprised on the upside and, bang, the market reacts negatively. Or at least that’s what the market would like you to think.
The few past trading sessions have been “blah” for the stock market. Profit-taking? Maybe. But take a look at the bond market for the real answer.
The yield on the bellwether five-year U.S. Treasury has moved up to 1.20% from 1.08% only a week ago. What’s happening? Wasn’t the Fed’s Quantitative Easing Part II supposed to bring down long-term interest rates? So far, it hasn’t worked.
Here is what happening with the market right now…something you’re not going to read anywhere else:
Interest rates in the U.S. are starting to rise. I’ve been writing, warning, about this for months. And it is starting to happen right now. Look at the standard 30-year U.S. mortgage. No one is buying houses, but the rate just keeps rising—now at 4.47%.
Bond investors are getting whacked and this may be only the beginning.
Of course, as interest rates rise, the severely oversold U.S. dollar is rallying back. A stronger greenback puts price pressure on gold and on the stock market, pushing those markets down.
But, have no fear. I’m sure the Fed will give us QE3, QE4 and more. Remember, not a single investment goes up or down in a straight line. Once in a while, the U.S. dollar rebounds whenever it gets severely oversold. We’ve seen this happen many times since the greenback started to decline in value in 2002. I look at each rally in the U.S. dollar, and the corresponding decline in gold and stock prices, as an opportunity to get back into those latter markets.
This time, the dollar is rallying as interest rates “unexpectedly” rise. I’m watching the situation closely for my readers. Are we looking at the start of a new long-term trend in rising interest rates? (Remember, interest rates move in 20- to 30-year cycles.) Or is the spike in rates a temporary thing, because QE2 hasn’t really taken effect and because QE3 and QE4 haven’t been announced?
Stay tuned. It’s getting really interesting for the markets now. The biggest profits for investors are yet to come.
Michael’s Personal Notes:
You’ve got to hand it to General Motors Co. Somebody over there must be very, very smart.
They go bankrupt. They force their unions to lower wages. They get suppliers to take haircuts. They get the government to loan them money and to become investors in the company. And all of a sudden, they are making billions of dollars again.
How come I can’t do that with my business? Oh, I know why; it’s because I’m not “too big too fail.”
GM made a whopping $2.16 billion its third quarter. This is the same company that lost $30.0 billion in 2006. What a turnaround! Now if GM is successful in its November 17 IPO, the U.S. government’s ownership of GM will fall to 43% from 61% (according to the prospectus). President Obama can claim bragging rights on this one.
But what about the unions? It’s an old cycle, my dear reader. When the current contracts are up, the unions, who will cry that they got the short end of the stick during GM’s restructuring, will be asking for much higher wages. Smells like inflation to me.
Where the Market Stands, Where it’s Headed:
The market stops moving higher for a couple of days and immediately I hear cries that the rally is over. Talk about short-term thinking! I doubt that the bear market rally that started in March of 2009 is over. In fact, this baby has legs left.
The Dow Jones Industrial Average starts this morning up 8.9% for 2010. Add in a dividend yield of 2.5%, and stocks have returned more than 10% this year. Sorry bond investors.
What He Said:
“I see a deal when it’s a deal. And right now there’s a good ‘for sale’ sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.00-an-ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi in PROFIT CONFIDENTIAL, March 14, 2007. Gold bullion was trading at under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories have gained in excess of 100%.