October 8, 2009
In Today's Issue: Don't Tell This Fellow $1,000 Gold is Expensive...
This Stock's Going Up Because It's Going Up... The Scoop on the
Retail Sector... What to Expect Next Earnings Reporting Season
** Don't Tell This Fellow $1,000 Gold is Expensive
-- by Michael Lombardi, CFP, MBA
The rally in gold bullion prices is really getting amusing for two
reasons.
First, we have far many more analysts saying that the run-up in gold
bullion will be short-lived than those saying that gold will continue
to rise in price. The naysayers never learn. I read about analysts
saying that gold prices were topping out when the metal was at
$500.00 an ounce, then $700.00, then again at $900.00. These
analysts should take a technical analysis course entitled, "The Trend
Is Your Friend."
Our phones here at Lombardi Publishing still are not ringing with
customers asking to buy gold investment newsletters. In fact, we are
having a hard time selling them. As a contrarian, this tells me that
the general investing public has no clue what is going on in the gold
pits, or they simply do not believe that the rally in gold prices is for
real.
The gold bull market is for real, alright. In fact, it has been a bull
market for gold since 2002/2003. I started recommending gold-
related investments to my readers back then, when gold was trading
at $300.00 an ounce. We've been in a bull market in gold for six
years and I'm convinced that the yellow metal will continue to rise.
Nothing has really changed about my opinion on why gold bullion
prices would rise, it's only been confirmed. The ever-increasing debt
of the United States has been a concern of mine for years. The credit
crisis of 2008 only exasperated that concern, as the government
spent trillions on bailing out the economy.
Throughout history, countries that experience high debt levels have
eventually seen the value of their currency erode. The United States
went from being a creditor nation to a debtor nation. And that was
really the turning point for America's economic future -- a slow
process, but a reality.
When companies borrow more debt than they can service, they
eventually file for bankruptcy. And if the U.S. government were a
business, it would be bankrupt. Our government, for all its good
intentions, is collecting less revenue (taxes), because the economy is
soft. At the same time, it is in the uncomfortable position of soon
having to borrow money just to pay the interest on its debt. That
spells trouble.
The Chinese are not stupid. They see the coming crisis in the U.S.
dollar (an event I have been predicting for the past five years) and
they are moving their own citizens into gold bullion. China is
already the world's biggest gold producer. China also sits on over a
trillion U.S. dollars, which it received for all the junk "made in
China" products it has shipped to the U.S. Is it not in the best interest
of China to see gold prices rise?
Don't tell this market commentator that gold is expensive at $1,000
U.S. an ounce. Tell me that when gold reaches $3,000 an ounce.
Michael's Personal Notes:
Monday is Columbus Day in the U.S. and Thanksgiving Day in
Canada. To all my American and Canadian readers, a safe and happy
holiday. I've convinced my kids (even though they are getting "a bit
too old for this stuff") to walk in the Columbus Day parade in
Manhattan on Monday. Me? I'll be walking, thinking about gold,
walking, thinking about gold, walking...you know how it goes.
Where the Market Stands:
If you have been reading the business papers and the popular
financial advisors of today, this is what you'll walk away with: "The
market rally is done; the market rally has lost steam." I don't buy it.
Sure, we've had the markets go up, down and sideways over the past
couple of weeks; nevertheless, Dow Jones 10,000 is well within
reach. Until this market proves otherwise, I may be one of the only
fools out there who's predicting that the Dow Jones will soon cross
the important 10,000 level. This morning, the Dow Jones Industrial
Average sits 11% higher than where it started the year.
What He Said:
"If the U.S. housing market continues to fall apart, like I predict it
will, the stock prices of major American banks that lend money to
consumers to buy homes will come under pressure -- these are the
bank stocks I wouldn't own." Michael Lombardi, in PROFIT
CONFIDENTIAL, May 2, 2007. Michael was one of the first to
predict the demise of banks before the credit crisis began. From May
2007 to November 2008, the Dow Jones U.S. Bank Index of the
world's largest bank stocks was down 65%.
** This Stock's Going Up Because It's Going Up
-- Ahead of the Street Column, by Mitchell Clark, B. Comm.
In the third week of August, I wrote in this column about an exciting
small Chinese company that's growing its business providing traffic-
management technology to big Chinese cities. The company's name
is China TransInfo Technology Corp. (NASDAQ/CTFO) and the
business is still very much at an early stage of development.
Of course, business must be booming, because the stock has turned
out to be one of the best performers on the NASDAQ. The stock is
up over 40% since I wrote about the business in August and that's
without reporting any material news.
I just love the infrastructure investment theme in the Chinese
economy. I don't want to speculate on China in non-U.S. dollars, but
fortunately, we have a lot of domestically traded Chinese stocks
from which to pick.
For a company like China TransInfo, its business is to set up
geographic information systems to help monitor and regulate the
flow of traffic in cities. The company is also developing electronic
toll collection technology for highways (China loves building roads).
In its last reported quarter, ended June 30, 2009, China TransInfo's
revenues increased 87% to $9.6 million. Net income for the second
quarter of 2009 increased 30% to $2.8 million, with fully diluted
earnings per share growing 15% to $0.13. The company finished its
second quarter with $9.2 million in cash and working capital of 34.5
million dollars.
A company like this is considered very small potatoes on Wall
Street, yet a lot of individual and institutional investors have bid up
the price of the stock. If you analyze the stock's trading pattern over
the last several months, you'll notice that it's hardly experienced any
downtime at all.
This stock has gone up and is going up because of bandwagon
momentum traders. There is a lot of enthusiasm about the company's
business prospects, but it hasn't reported any material news since its
second-quarter earnings report. No, this stock is going up because it's
going up. This can mean only one thing -- the bull market is back on.
** The Scoop on the Retail Sector
-- Calling the Trend Column, by George Leong, B. Comm.
Predictions vary on the outlook for the retail sector. Some feel that
the bottom is here or near, while others including myself believe that
there will be continued struggles ahead of us in the fourth quarter.
It's true that there have been some positive signs, but I feel the hurt
will continue for at least the next several quarters or more. Retailers,
even some of the discounters, continue to fight to win customers.
Prices are being slashed to eliminate excess inventory and this is
impacting operating margins, which have been on the decline.
Bellwether Wal-Mart Stores, Inc. (NYSE/WMT) warned that the
global recovery will be slow. It is focusing on its growth in China
and India.
Some argue that some retailers have beaten earnings estimates, but
keep in mind that the bottom line was improved primarily via cost-
cutting efforts. The problem is that there are limits to how much you
can cut from costs. At the end of the day, retailers will need to
increase their sales in order to drive profits instead of doing the latter
by cost-cutting. Until I see this happening, it will continue to be a
difficult environment in which to invest in retail stocks.
More evidence of the sluggish sales in the retail sector emerged
recently with soft retail data. Investors are hopeful that the worst is
over and that the recession is ending soon, just in time for the busy
Christmas shopping season, but it may be more hope than reality.
According to the National Retail Federation, the key holiday sales
are estimated to fall one percent for the November and December
months.
My concern continues to lie with the declining home prices and their
negative impact on wealth and consumer spending. We need to see
property wealth return before consumers begin to buy furniture and
other big-ticket items for their homes.
Moreover, there needs to be an improvement in jobs. The September
non-farm payrolls were weak and the consensus is that the
unemployment rate will reach 10% by early 2010 before improving.
As long as people have to worry about losing their jobs, they will
hold off on spending on non-essential goods and services. This is a
problem and could hamper the economic recovery.
Also keep in mind that the positive impact from the $800-billion
stimulus program is drawing to an end. There are less economic
incentives offered and this will surely impact whether a person
spends.
In addition, debt levels are continuing to expand, and will become
more of a concern going forward, as consumers watch their
disposable income fall. A good majority of people have fixed
budgets, and higher financing costs will reduce money available for
other purchases.
There is concern that retail sales heading into the third and key
fourth quarters will continue to be weak, especially given the post-
Thanksgiving shopping period heading into Christmas, which for
many retailers is the prime shopping period of the year.
Watch for the retailers in the fourth quarter. If you are currently
holding retail stocks, here is what you may want to consider. Given
the bearish sentiment towards retail stocks, you could write some
covered call options to generate some premium, thus reducing the
overall average cost of the stock in question.
** What to Expect Next Earnings Reporting Season
-- The Financial World According to Inya Column, by Inya Ivkovic,
MA
Price declines early this year gave us an opportunity to accumulate
holdings at a low price. For those with good nose for quality stocks,
it was a way of building a portfolio with the risk vs. reward balance
potentially tilted in their favor. That is how it can be on the buy
side's front line. These are the best of times when investors can buy
companies and even entire sectors at seriously depressed prices.
Usually, it is also a happy time when the buy side rules.
But if prices remain depressed for too long, the excitement is bound
to wear off after a while. Particularly after the position sort of gets
maxed out, like a credit card, at which point it would be
irresponsible to keep on loading up on the stock, regardless of how
cheap it might be, because the last thing an investor needs in volatile
markets is a down and beaten stock that is all alone and has no one to
play with. But sometimes that is what happens -- a fundamentally
sound stock can remain out of love for two or three years, sometimes
more.
There are two roads to take at this point. The investor holding a dead
whale could decide to stick by his stock-pick and, when it eventually
doubles or triples in price, which is definitely a possibility if the
company has been truly fundamentally sound, the investor would
come off as the "brainiac" who had insight and instinct no one else
did. But there is also a 50/50 chance the stock will remain the dead
whale and all the investor will have are chunks of its portfolio
declining, because he was too stubborn to admit he made wrong
decisions.
As the market went through its extreme swings the last year and a
half or so, many money managers found themselves in a similar
position; that is, quite a bit offside. They ended up there because
there were quite a few conservative and counter-cyclical companies
that endured the market crash and the ensuing mayhem reasonably
well, but when the dash into equities started back in March of this
year, those same stocks appeared never to have gotten on the
bandwagon.
Soon, the third-quarter earning reporting season will commence. The
published data will be a goldmine of information. What we are very
likely to see will be the companies and funds that led the pack last
year coming in among the last this quarter. It is possible that there
will be exceptions to this forecast; that is, stocks and funds that
either did well or badly during both comparable periods. However,
such non-events will be far and few between. This is in part due to
the fact that those individual investors and money managers who
played the down-market well would have needed to completely
revamp their portfolios in the second quarter just to keep up with the
previous downers that will likely be leading the herd back up this
quarter. Of course, this is not an easy feat at the best of times, let
alone in the current markets.
What else will this quarterly earnings season tell us? For investors
holding mutual funds, it will be almost like confession time. Mutual
fund investors will finally be able to learn how their managers
performed in the medium term and how many promises they kept
from the sales and marketing materials they have sent you. This time
around, perhaps more than ever, investors will have the opportunity
to see if the emperors are wearing new clothes, or any, for that
matter.
---
Copyright 2009; Lombardi Publishing Corporation.