Why the Pathetic New Consumer Confidence Reading Is Good News!

The New York-based Conference Board’s household sentiment index has slumped to the lowest level since March of 2009…

But hold on…don’t dismiss it as more bad news! It’s actually good news.

Sure the U.S. unemployment rate has held at about nine percent for about 30 months now. Sure, 8.75 million jobs were lost in the recession that ended in June 2009. And, with only about two million jobs created since the recession ended, the unemployment picture is not looking good. How can consumer confidence not be taking a beating?

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There’s also the poor housing market. The S&P/Case-Shiller Index reported yesterday that home prices in 18-out-of-20 major U.S. cities fell again in August. It’s difficult for consumer confidence to rise when one-out-of-five U.S. home is worth less than the mortgage on it.

But think about this…

What happened to the stock market when consumer confidence hit bottom in March of 2009. We all know that stocks rose almost 100% from March of 2009.

And this exactly what I have been writing about for a month now. A couple of weeks ago, the number of bearish stock advisors hit a high not seen since March of 2009 (Source: Investors Intelligence). Now consumer confidence is at its lowest level since March of 2009.

It is during times of extreme bearishness and negative consumer confidence that the stock market rises. No, I’m not predicting that the stock market is going to double from its current level. But I am saying that investors, stock advisors and consumers are usually wrong when the majority of them have the same opinion. The stock market has historically done the opposite of the herd mentality. And I believe this time will be no different.

The more negative the consumer confidence reading, the more stock advisors who have turned bearish, the more the chances the stock market will climb the “wall of worry” higher. And that’s exactly what I believe is going to happen now. The poor consumer confidence reading released by the Conference Board Tuesday is good news for the stock market.

Michael’s Personal Notes:

Quietly, with little fanfare, the U.S. dollar has fallen to its lowest level against the Japanese yen since World War II. Yes, the country we beat in World War II—its money is now worth more than ours!

But it’s not just the yen that has been rising against the U.S. dollar. So far this month, the U.S. dollar has lost 4.4% of its value against a basket of industrialized country currencies. Actually, I’m surprised the U.S. dollar hasn’t fallen more in value against other world currencies.

Let’s face the unpleasant facts again:

The Federal Reserve has kept short-term interest rates near zero for almost three years now. On top of that, the Fed has purchased $2.35 trillion in assets to help spur the economy. The “official” national debt sits at about $15.0 trillion. When you include off-balance sheet government obligations, our debt stands at between $100 trillion and $200 trillion depending on whose report you believe.

Yes, the stock market has been rallying as of late. But we all know the U.S. economy is very fragile, very sick. We have a currency that returns zero interest rates issued by country that is awash in debt. And there are plenty of U.S. dollars in circulation to boot, thanks to the Federal Reserve’s expanding balance sheet.

From March of 2009, when U.S. stocks fell to a 12-year low, to today, the U.S. dollar index (a measure of the value of the U.S. dollar relative to a basket of six currencies: euro; yen; pound; Canadian dollar; Swedish korona; and Swiss franc) has fallen 16%. During the same period, the price of gold bullion has risen by approximately 80%.

“Michael, what is the long-term play here for investors?” What I see few people talking about is the effect of the debt crisis in Europe on the U.S. dollar. When Greece’s problems started to flare up in 2010, we saw investors running to the U.S. dollar. And we had a corresponding spike in the value of the U.S. dollar in the summer of 2010.

But today, the crisis in the Europe is graver than last year. Greece is bankrupt. Italy and Spain are not far behind. Citizen rallies against austerity cuts in Europe are becoming larger and more violent (70,000 Greeks protested against government cuts on October 19, 2011). And, against the backdrop of all this, the U.S. dollar is not rising, which is obviously negative for the greenback.

My strategy has remained unchanged. I’m exiting U.S. dollars for gold. If I’m right about future inflation, the value of the U.S. dollar will only continue to deteriorate, while the price of gold bullion rises even further.

Where the Market Stands; Where it’s Headed:

The stock market opens this morning slightly above where it started 2011. I continue with my opinion that we are in a bear market rally that started in March of 2009. The strong combination of investor pessimism, an expansive monetary policy, and stronger than expected corporate earnings will see the bear market rally continue to climb the proverbial “wall of worry.”

What He Said:

“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years about how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming?  No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we started experiencing in 2008 long before anyone else.

Gold & Silver Setting up for an Attractive New Entry Point

By Mitchell Clark, B.Comm.

An opportunity is now being created in precious metals if the current correction continues. Most precious metals have been falling in price, as financial markets continue to reassess the expectations for economic growth. With lower expectations for global economic growth, the demand outlook for raw materials and spot prices are also going down.An opportunity is now being created in precious metals if the current correction continues. Most precious metals have been falling in price, as financial markets continue to reassess the expectations for economic growth. With lower expectations for global economic growth, the demand outlook for raw materials and spot prices are also going down.

The price of gold has, in my mind, been worthy of a correction for quite some time now. In fact, I think it would be a very healthy development for the long-term trend. It wouldn’t surprise me if the spot price of gold were to retreat and consolidate around the $1,600 level. It’s trading around $1,700 now and $1,600 should provide a good base.

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Perhaps an even better commodity to concentrate on would be silver. This precious metal is more useful in terms of its industrial uses and many argue that it hasn’t kept up with the spot price of gold and could therefore be a better trade. The spot price of silver just broke the $37.00-per-ounce level and there’s no reason why it won’t retreat further to the $30.00-per-ounce level if the current trend in capital markets continues.

This is a very difficult stock market and individual investors are loath to participate. While expectations for the future continue to be reduced, the fundamentals for gold and silver remain mostly intact and are therefore worthy of new positions when spot prices find a new base.

It’s a wait-and-see stock market and a wait-and-see spot price market for precious metals. I think the focus for speculative investors should be on gold and silver and that risk-capital investors will have an attractive new entry point very soon.

As for the rest of the stock market, share prices remain very vulnerable before third-quarter earnings season begins. Over the last little while, equity investors have had to endure tremendous shocks to the system: sovereign debt problems in Europe; the downgrade of U.S. sovereign debt; natural disasters in Japan; no improvement in housing prices; and no improvement in employment…the list goes on. I think it’s fair to say that the equity market has held up quite well all things considered.

What we know is that mature economies are now in a period of very little to zero growth over the next 12 months. We also know that developing economies are slowing down and the probability of another recession is going up. The trading action in financial and commodity markets reflects falling expectations for economic growth and an expansion in the time horizon for recovery. Predicting outcomes in this environment is a crapshoot—nobody knows how or when the economy will get better.

With belt-tightening going on at the individual consumer level and at the government level in virtually all mature economies, we should be in a slow growth environment for quite a long time.

Precious Metals Sector Deal-making Padding Investor Wallets

By Mitchell Clark, B.Comm.

There have been a lot of mergers and acquisitions in the mining industry lately and the consolidation is only going to increase with gold over $1,800 an ounce and silver over $40.00. The buying and selling of entire companies adds to the attractiveness of the mining sector, with the bonus of a potential takeover of one of your holdings at a premium price.

gold precious metals

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According to Ernst & Young, which compiles a lot of research on the metal and mining industry, the first half of 2011 saw a total of 19 megadeals in the mining industry, each worth over a billion dollars. This is twice the number of deals compared to the first half of 2010 and the average transaction value has more than doubled. North American took the lead as the most attractive region for mergers and acquisitions. Ernst & Young cited that the average mining company debt is at an all-time low, while cash flow and profitability are at all-time highs. With good availability of capital and historically low debt levels across the sector, the firm expects robust third and fourth quarters for mining company mergers.

Precious metals is the one sector of the stock market in which I would consider taking on new positions with enthusiasm, even though as a group, share prices have already advanced significantly this year. We’ve seen this advance especially in smaller companies with established production. Small operations see their business model improve significantly when the spot price of the underlying commodity moves higher, largely because junior miners are typically unhedged. At $1,800 an ounce for gold, virtually any producer of the commodity is making money hand over fist as cash costs for production typically average around $500.00 an ounce.

There is a unique set of circumstances that have come together at the same time for precious metals (gold and silver in particular). A number of factors have contributed to the major move in spot prices. These include a declining U.S. dollar, the sovereign debt crisis in Europe, huge increases in the global money supply, interest rates at record lows, the U.S. sovereign debt downgrade, stagnant supplies of precious metals, and consistent demand for the commodities.

I think it will take some kind of catalyst for the spot price of gold to move above $2,000 an ounce and stay there. It’s likely that this catalyst will be related to sovereign debt, which is an issue that hasn’t gone away. All that’s happened so far is that European sovereign debt has been bailed out with another round of new debts. It’s a vicious cycle of debt that will probably be responsible for the breakup of the euro currency sometime this decade.

Accordingly, the fundamentals for gold (and silver) continue to be robust.