Forget the Economy; These Companies Are Still Earning Big Money

Gold Investment Guide

Alcoa, Inc. (NYSE/AA), the first stock in the Dow Jones Industrial Average to report third-quarter earnings, missed analyst expectations. The Street was hoping Alcoa would earn about $0.20 a share. The company earned $0.15 a share. But let’s look closer.

Alcoa’s net income in the third quarter of this year more than doubled to $172 million from only $61.0 million last year; nothing to sneeze at.Gold Investment Guide

And if we look even closer, we see that the world’s largest aluminum company is reflective of other large American companies. Alcoa, after posting consecutive quarterly losses in late 2008 and into 2009, slashed 20,000 jobs and closed non-profitable smelters. It cut costs, focused on profitability. And the profits started to roll in.

What the market wants is fast, big growth. We had that in 2009 and 2010. Company profits across the 30 large Dow Jones components have been very strong over the past two years.

Analysts are expecting the S&P 500 companies to report a 14% increase in third-quarter profits. Sure, that’s the slowest pace since late 2009 and a lot lower than the 19% growth in the earnings these companies experienced in the second quarter of 2001, but again, nothing to sneeze at. I think it’s steady and healthy earnings growth.

Corporate America has $2.0 trillion socked away in their coffers. That number will grow as these companies continue to post double-digit earnings growth. We’ll be surprised at how well corporate America will fare the remainder of this year even as the U.S. economy continues to deteriorate.

Michael’s Personal Notes:

September 2011 was the worst month for gold bullion prices in about three years. Gold was down 10% in price in September, which equates to almost $200.00 an ounce.

I want my readers to know that a 10% correction in gold bullion prices is not a big deal…and that a healthier correction would have been in the 15% to 20% range. Such a decline in gold prices would serve to drive speculators and “weak hands” from the gold bull market that started in 2001.

Is the price correction in the ongoing bull market in gold over? I hope so. But I wouldn’t be surprised to see some back-filling…some more downside before gold bullion makes a serious attempt to break through the $2,000 an ounce mark.

I would have been more comfortable if gold bullion prices broke down towards $1,500 an ounce in the recent correction—the metal only reached a low of $1,598 per ounce on September 26, 2011, before moving back up.

My message: I wouldn’t be surprised to see gold prices pull back again. I’m not convinced the correction is over.

Where the Market Stands, Where it’s Headed:

In October of 2007, after a 20-plus year bull market, a bear market was born. Phase I of that bear market brought stocks to a 12-year low on March 9, 2009. On that date, we entered Phase II of the bear market, a period in which stocks rise as the bear attempts to lure investors back into the stock market. This is where we are.

Phase II of secular bear markets tend to last years. With the 1934-1937 bear market rally, the duration was 35 months. So far, we’ve been in this Phase II bear market for 31 months. I believe that stock prices will mover higher before this Phase II bear market rally is over.

Phase III of the bear market will see stock prices approach their March 2009 level, possibly breaking below them and creating new multi-year price lows.

What He Said:

“Any way you look at it, the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second, and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. “As for the stock market, it continues along its merry way, oblivious to what is happening to homebuyers’ wealth. (Since 2005, I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. Dire predictions that came true.

Gold Bullion’s Price Action: Time to Separate the Men from the Boys

By Michael Lombardi, MBA

In the depth of a bear market in gold prices, back in 2001, a bull market in gold was born. Gold bullion traded for about $300.00 an ounce in late 2011, early 2002, and yours truly became a staunch advocate of gold at that time.

Since the beginning of the bull market in gold, we’ve seen an often repeated pattern: gold bullion prices advance sharply, profit taking comes in, the “weak hands” (as I call them) dump their gold as the price for bullion falls, prices bottom out, and the bull market continues. This pattern has been repeated for 11 years now.

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After reaching an all-time record high of $1,921 an ounce on September 6, 2011, gold bullion prices have fallen back to $1,630 an ounce this morning. Could gold prices fall further? Sure they could. A 20% correction in the price of gold bullion could bring the metal down to $1,536 an ounce.

But is it the end of the bull market in gold bullion? Of course not! But remember, gold is up $333.00 an ounce over the past 12 months—26%—so it has plenty of room to give back some dollars and still be in a bull market.

We’ve been down this route many times before. The human memory is very short-term in nature. In early 2003, the price of gold bullion fell 16%; in the summer of 2006, the price of gold fell 21%; from the spring to the fall of 2008, gold prices fell 28%; in the spring of 2009, gold prices fell 15%—and each time the price of gold bullion recovered and moved higher by the year’s end. In fact, for 11 years running, the price of gold bullion has closed each year higher in price than it started the year.

Separating the men from the boys—that’s what corrections in bull markets are all about: seizing the moment as an opportunity, as opposed to panicking and selling one’s holdings. This time is no different.

Michael’s Personal Notes:

An icon has moved closer to becoming a casualty of the Internet.

In its heyday, Eastman Kodak Co. (NYSE/EK), often referred to as just Kodak, was a company to be reckoned with. Founded by George Eastman in 1892, the company’s name became synonymous with the word “film.”

But, as the years passed, and technology advanced, Kodak’s business suffered. People take pictures with their mobile phones today. Or they take pictures with cameras and download the images onto their personal computers or Facebook page as opposed to printing the pictures.

This year, Kodak is headed for its sixth annual loss in seven years. In 2010, the company lost $678 million. Most disturbing for me, last week the 131-year-old company drew down $160 million from its revolving bank credit line—not a good sign.

Where the Market Stands; Where it’s Headed:

The stock market is severely oversold and due for a bounce. For the four days ended September 22, 2011, the Dow Jones Industrial Average experienced its biggest four-day drop since 2008. About $1.1 trillion in value was wiped from stocks last week.

I believe that a bear market rally in stocks that started in March 2009 continues to preside.

What He Said:

“If I had to pick one stock exchange that would rank as the best performer of 2007, it would be the TSX (Canada’s equivalent of the NYSE). Interest rates in Canad are mainly very low and they are not expected to rise anytime soon. Americans looking to diversify their portfolios, both as a hedge against the U.S. dollar and a play on gold bullion’s price rise, should consider the TSX. Most brokers in the U.S. can buy stock on this exchange.” Michael Lombardi in PROFIT CONFIDENTIAL, February 8, 2007. The TSX was one of the top-performing stock markets in 2007, up just under 20% for the year.

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Gold: Getting Ready for the Coming Correction

By Michael Lombardi, MBA

I’ve learned many things about investing over a career that has spanned 30 years. One of the biggest lessons is that not a single investment goes either straight up or straight down.

When an investment is rising in price (bull market), there are usually dips and corrections on the way up. Just look at the long-term secular bull market in stocks that started in the early 1980s and ended in 2007—there were many times stocks “took it on the chin” during that 25-year bull market run.

On the other side of the equation, not a single investment goes straight down either during a bear market. Just look at the U.S. new-home-builder stocks.

As these stocks started collapsing in 2006 with the real estate market, there were many rallies in the prices of home-builder stocks, as the new long-term downtrend in these stocks entrenched itself. Investors lacking experience would have bought on these rallies thinking that the home-builder stocks were showing life again. Most investors fail to realize the strength of a long-term bull or bear market.

And that brings me to gold bullion.

Long-term readers know I’ve been a big believer in gold investments since late 2001, when gold traded at about $300.00 per ounce. Each time that gold prices pulled back (five percent to 10% corrections); I would suggest dollar cost averaging down—buying more gold investments on price weakness of the metal.

Over the past 12 months, gold bullion has risen an astonishing $611.00U.S.per ounce—up 49%. The rise from $1,700 to $1,800 to $1,900 an ounce has been too swift and quick for me.

I’m warning my readers to expect a correction in the price of gold bullion. That correction could bring the metal back to $1,600, even $1,500 an ounce. However, I would view a pullback in the price of gold bullion as an opportunity…an opportunity to buy more gold investments at lower prices. My investing in gold preference would be the stocks of junior and senior gold-producing companies.

I believe we are in a long-term bull market in gold that will eventually see the metal at $2,500, even $3,000 per ounce. I’ve had this opinion for years and I continue to view any price correction in the long-term bull market in gold as an opportunity.

Michael’s Personal Notes:

Should you follow Warren Buffett and make an investment in Bank of America Corporation (NYSE/BAC)?

Bank of America common stock has collapsed from $15.31 in January of this year to $7.91 today, a drop of 48%. The nation’s biggest bank was experiencing a vote of non-confidence from investors. In my opinion, it brought on Buffett as a big investor in the bank to show “a vote of confidence” in the stock and the bank.

But the average investor cannot get the deal Buffett received for his $5.0 billion. Buffett’s Berkshire Hathaway investment was in preferred stock of Bank of America. These preference shares will pay Berkshire Hathaway six percent per annum. An investor buying the common stock of Bank of America gets a dividend yield equal to less than one-tenth that.

As an inducement, Buffett can buy another 700 million common shares of  Bank of America at $7.14. The stock sits at $7.91 today. Buffett is already “in the money.” Regular investors will not be able to get this deal in the open market.

Finally, Bank of America can give Buffett back his $5.0 billion at any time…but they will have to pay a “goodbye fee” of $250 million to get rid of him.

Personally, I’m not a big fan of Bank of America stock. I believe the company has plenty of problems. It could take years to turn it around.

Buffett’s recent investment in Bank of America makes sense for him. The average investor can’t get the same deal Buffett did. And I notice Buffett didn’t buy any of the common shares.

Where the Market Stands; Where it’s Headed:

The stock market sits today at about the same place it started 2011. Investor and stock advisor sentiment is quite negative. Monetary stimulus continues to be expansive. The yields on stocks are attractive compared to government bond yields. These three factors alone provide a positive backdrop for stocks.

However, economic conditions are very fragile. Consumers, worried about the economy, are increasing their savings as opposed to spending. The depressed housing market continues to be a drag on the economy. Jobs are difficult to create in a country that has lost its manufacturing base.

The immediate-term market conditions remain favorable to stocks and that’s why I believe the bear market rally will bring stocks higher. However, the short-term to long-term outlook is quite negative, hence why I continue to believe that all we’ve really been experiencing since March 2009 is a rally within the confines of a general bear market.

What He Said:

“The proof the party is over in the U.S. housing market could not be clearer to me. The price action of the new-home-builder stocks is telling the true story—these stocks are falling in price daily (and the media is not picking it up). Those who will hurt the most when the air is finally let out of the housing market balloon will be those buyers that bought in late 2005. In fact, the latecomers to the U.S. housing market may end up looking like the latecomers to the tech-stock rally that ended so abruptly in 1999.” Michael Lombardi in PROFIT CONFIDENTIAL, March 1, 2006. 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.