Why It's Different This Time

PROFIT CONFIDENTIAL

September 14, 2009

In Today's Issue: Why It's Different This Time... From Exports to Consumer-driven Demand -- An Economy in Transformation...

Economic Data Showing Promise... Questioning the Gold Bull

** Why It's Different This Time

-- by Michael Lombardi, CFP, MBA

Okay, so we all know that gold bullion closed above $1,000 an ounce on Friday for the first time since March 2008. The media didn't make a big deal of the event this weekend, nor did most investors. After all, didn't gold try two other times this year to get above $1,000 only to see the metal's price fail miserably?

While most news stories in the business newspapers were accounts of how the government made a big mistake in not bailing out Lehman Brothers one year ago, the really big news, in my opinion, is gold's new $1,000 price level.

There are many theories I have read about how "unknown" forces are trying to keep the price of gold below $1,000 so as not to cause a run out of dollars and into gold (and I'm not sure I believe these theories), but the fact is that gold has quietly passed the triple-digit price level again. I continue to believe that gold bullion prices have much further to rise.

The following comments about gold prices and China, from Bob Appel, one of our top market analysts, tell the story very well:

"We are living in historic times. Beyond 9/11, beyond the stock market's biggest crash since 1929, we have what this advisory (and others) likes to call the "gold wars." In the 1970s, Nixon removed the greenback from its former gold backing and, by so doing, signaled to the other Western nations that it was OK and fine to run your own currency, backed solely by your own good name, much the same way that the credit card companies run their "air miles" dollars.

(And we think the comparison is especially apt because, in the last 24 months, several cards have reneged on those same air miles dollars.)

Since the 1970s, gold has increased by thousands of percentage points and the greenback has dropped like a stone. But, for the Western central banks, this is a game they simply cannot withdraw from. They have literally bet the farm on their ability to subdue gold to make their own currencies shinier. And it is a game they appear to be losing.

As this is written, spot gold is back above $1,000, trying again to make a clean break above the critical $1,007 technical level. You are watching the gold wars unfold in real time."

Bob goes on to talk about how China is able to control the gold price in 2009. Specifically, now that China is encouraging its citizens to buy gold bullion, should China decide to increase its own gold purchases in an effort to replace part of its U.S. dollar reserves, the dollar will de-stabilize.

Dear reader, there have already been three big economic stories this fast-moving decade. Early in the decade, we saw the tech bubble burst. Then, mid-decade the air came out of the biggest real estate bubble in history. Then we experienced a credit crisis and economic collapse not seen since the Great Depression. Get ready for Act Four: The coming boom in gold bullion prices. Make sure you take part in this final scene.

Michael's Personal Notes:

Business activity at giant FedEx Corp. is very important, as FedEx is a leading indicator of business activity. If FedEx's business volume is active or rising -- an indication that companies are getting busier with shipping goods -- that is good for the economy. Hence, I found it very encouraging the other day when FedEx decided to boost its quarterly earnings guidance, as the company said that it is experiencing unexpected increased business for international shipments of goods.

Where the Market Stands:

The Dow Jones Industrial Average: up a big 9.5% since the beginning of the year and only 394 points away from my prediction of Dow Jones 10,000.

What He Said:

"'Home sales down 8.4%, could be the bottom,' read the headline in last Friday's 'USA Today.' What do they know that I don't? They know what realtors and their associations tell them and that's about it. Unfortunately, the real estate news is predominately written by reporters -- not real estate investors with years of experience to share. The hard facts about the real estate market in the U.S. are truly scary. How can the U.S. economy escape the hard landing in U.S. home prices? As we'll soon find out,it simply can't!" Michael Lombardi in PROFIT CONFIDENTIAL, January 31, 2007. While the popular media was predicting a bottoming of the real estate

market in 2007, Michael was preparing his readers for the worst of times ahead.

** From Exports to Consumer-driven Demand -- An Economy in Transformation

-- Ahead of the Street Column, by Mitchell Clark, B. Comm.

One of the best investments this year has been to own a basket of large-cap Chinese stocks. My favorite way to do this is through an ETF and I've written extensively about the iShares FTSE/Xinhua China 25 Index (NYSE/FXI) as being one of the best in the marketplace.

This large-cap index of the biggest 25 companies in China has outdone itself by appreciating some 87% since the March low. And it's done so in a very consistent manner. Pull up a year-to-date chart on this security and you'll see its straight-line growth.

In China, the latest economic data suggest that its export sector still remains quite weak. Export business is improving, but at a very slow pace. Interestingly, this country's domestic industrial production grew just over 12% in August and retail sales increased by over 15%. All this, while consumer prices dropped 1.2% from the comparable month last year.

What's interesting about these figures is that they represent a new trend in the Chinese economy. There is a transformation taking place and it's similar to America's economic history. While exports are always important to any country, China is beginning to increase its own domestic demand for goods and services. The wealth that was created by exports in the past has set the groundwork for a new domestic economic engine that is beginning to feed upon itself.

China will always be a huge exporter in the global economy, but I believe China's economy is beginning to slowly transform itself into a domestic, consumer-led economy, much like in the U.S. This means that China will be able to keep its economic engine running and have less reliance on the rest of the world. It also means that, as an investor, you want some exposure to the domestic Chinese marketplace. You want to own some Chinese businesses that sell directly to Chinese consumers.

The iShares FTSE/Xinhua China 25 Index recently broke through to a new 52-week high of over $43.00 a share on the New York Stock Exchange. This index set an all-time high of around $70.00 a share (on a split adjusted basis) in October 2007, and I think this basket of stocks is just going to keep ticking higher over the coming quarters. I certainly wouldn't bet against it.

We're getting to the point now that, if China isn't doing well economically, neither will the rest of the world. Already, the Chinese equity market is helping to set the tone on the daily trading action on Wall Street. We're going to see a lot more Chinese companies list on U.S. stock exchanges over the coming quarters and this will be really good for domestic investors. Going forward, I wouldn't create a new equity portfolio without some exposure to this burgeoning economic engine that just doesn't seem to quit.

** Economic Data Showing Promise

-- Calling the Trend Column, by George Leong, B. Comm.

While President Obama tries to sell his healthcare reforms, it appears that his expensive economic stimulus plan is working its way through the economy. Both the treasury and Federal Reserve have come out and said that the recovery was in place for later this year and into 2010. On the corporate front, Procter and Gamble (NYSE/PG) suggested its sales will pick up in the second quarter of 2010, which coincides roughly to when I feel the U.S. and global economies will begin to ramp up.

The ability of stocks to rally and avoid any major selling since the

rally began in early March is positive. Markets continue to rally with

steady gains, as the major stock indices have closed higher for five

straight sessions. The encouraging sign is that the trading volume

over the last two sessions has been strong, which helps to confirm

the rally, as more investors enter the buying. During a rally, you

want to see mass-market participation.

At this point, the near-term technical picture is bullish, with above-

average Relative Strength. Technology and small-cap stocks are

showing the strongest technical strength. There is some near-term

selling pressure, as markets are overbought. The charts show a

breakout at the recent top on higher volume, which is bullish in my

view for further gains.

Investor sentiment continues to be bullish. Investor sentiment on the

NYSE has been bullish in 103 of the last 106 sessions (97% during

this time) back to April 9. The readings have been extremely bullish

at over 90% since July 14, when the DOW was trading at 8,359 and

the NASDAQ at 1,799. In the technology area, the NASDAQ has

shown bullish investor sentiment in 83 of the last 106 sessions or

77% and in each session since July 14. The positive sentiment will

help add support to stocks. The sentiment charts show an upward

trend.

We continue to see encouraging positive signs. China reported a rise

in its industrial output and investment. A positive for stocks is a

continued rebound in the Shanghai Composite Index, as Chinese

stocks have closed higher for five straight sessions and the index

looks to make a run at 3,000. The renewed buying in China and

Europe will help U.S. markets.

In addition, the closely monitored Paris-based Organization for

Economic Cooperation and Development (OECD) said that the

economies are improving in the 30-country OECD region and there

are some signs of recovery in the seven major economies. The

OECD composite leading indicator (CLI) jumped to 97.8 in July

versus 96.3 in June. For the seven major economies, the CLI was

97.5, up from 95.9 in June. For the United States, the CLI was 96.0

in July, up from 94.4 in June. Across China and Europe, the signs

point to an economic recovery.

The key over the next several weeks will be the focus on the

economy, as we await the end of the third quarter. Key economic

data to watch for this week include PPI (Tuesday), Retail Sales

(Tuesday), CPI (Wednesday), Capacity Utilization and Industrial

Production (Wednesday), Housing Starts and Building Permits

(Thursday), and Philadelphia Fed (Friday).

Hang on tight. If the economic data continues to show promise, the

rally could continue.

** Questioning the Gold Bull

-- The Financial World According to Inya Column, by Inya Ivkovic, MA

Dennis Gartman, author of "The Gartman Letter," has long been

skeptical about the gold bull, perhaps now more than ever, as gold

futures have crept up above $1,000 per ounce for the third time in

the past 18 months. The question on everyone's minds is whether

gold has plateaued and whether the next move could be just another

disappointing bust. Historically, whenever there was too much

interest in gold, futures prices would almost inevitably turn

southbound. On the other hand, inflation concerns and a weak dollar

have been gold's traditional confidence boosters. So, who is right and

which way could gold prices turn in the near future?

Not surprisingly, gold bugs insist that the price of gold will only

keep going up, as the bullion approaches the $1,000-per-ounce mark.

Some are vocal enough to scream down the Street that gold will hit

amazing levels of $5,000 per ounce. Why else would the life-long

gold hedger, Barrick Gold Corp., after so many false promises,

finally announce the unwinding of its hedge book? The world's

largest gold producer must have realized that this could be its last

chance of getting a piece of gold's price bonanza pie.

To this I only have to say the following: no one can successfully

time or divine the market or, in the case of gold, predict with any

degree of precision where inflation is going and how the dollar will

perform in the near and longer terms. Additionally, the fact remains

that, in the past 18 months, gold futures have taken a stab at the

$1,000-per-ounce mark three times, failing to break through it each

time and losing some ground in the process, too. There are also

market observers who predict that what has fuelled gold prices as of

late -- that is, world central banks' concerted efforts to keep the

liquidity taps flowing -- may no longer be there, or at least not at the

same level of intensity.

Finally, there are even those among gold bugs who feel that their

camp is getting overcrowded. Mainstream investors have been

buying gold en masse ever since the credit and financial crisis hit, as

their excitement about gold was fed by their fear of volatility and a

global economic downturn. But some may be thinking now that they

could have overacted just a bit and might decide to decrease their

exposure to gold, which, if it happens on a more voluminous level,

could push the price of gold further down.

What is the sentiment towards gold in the market? According to the

Commodity Futures Trading Commission's recent weekly data, total

outstanding futures contracts in gold and their prices have been

increasing steadily. But, by the same token, contracts held by

speculators that are often perceived as the best gauge of the

investment sentiment (e.g. institutional investors that do not take

deliveries of gold), have been betting increasingly on gold prices

going south. Note that their short vs. long positions have hit a

seriously bearish 9-to-1 ratio, which means that bear bets outnumber

bull bets nine to one.

That said; note that sentiment-type indices, those that track gold

recommendations among ordinary investors, while stopping short of

ringing endorsements, indicate that modest, yet bullish sentiment

towards gold prices remains. So, while gold experts appear to be less

enthused about the direction of gold prices, ordinary investors like it

that much more. Most contrarians would take this gap as a sign to

listen to the latter group and expect gold prices to continue

increasing.

What do I think? Bear in mind, this is one person's opinion only, but,

for what it's worth, I believe that gold's fundamentals remain strong

and will continue to support the bullion's upward momentum. By

"gold fundamentals" I mean the global macroeconomic environment,

which works for gold either way. How so? If the world's central

banks close their liquidity taps, the massive amounts of money that

are already in the financial systems will likely generate inflation,

(potentially even hyper-inflation), which will force interest rates to

go up and currencies to weaken, sending panicked investors back to

gold as the traditional safe haven. And even if the liquidity taps were

to stay open, they cannot remain so for very much longer. All those

budget deficits, particularly in the U.S., will have to be deleveraged

one way or the other, neither of which will be pleasant and either of

which will likely push prices of gold up.

In the short term, however, all this panicky talk about gold bubble

bursting is bound to get speculators and institutions out of gold (I

cannot ignore the fact that there are currently nine short contracts for

every long one), which is, in turn, bound to push gold prices down.

But I don't believe that, if gold prices were to go down, they would

do so by hurling themselves off a cliff and into the abyss. If the

pullback comes, I expect it to be a healthy correction under the

$1,000 mark, but not below $900.00 per ounce. And once

speculators unwind their short positions, gold prices will be ready to

start rising again. In other words, if the pullback in gold occurs in the

short term, I would consider it a signal to buy more gold.

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