Strong Corporate Earnings and the Bear Market: How it Will Play Out

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o te
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i io
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St
S r
t o
r ng C
orporate
t
e E
a
E rnin
i gs a
nd t
h
t e
Be
B a
e r M
a
M rke
k t
e :
t H
o
H w
o
w i
t
i
t Wil
i l
l
l P
l
P a
l y
a
y O
ut
By Michael Lombardi, MBA
Remember this summer when the Dow
Jones Industrial Average had a couple of 400-
point loss days and we heard so many stock
advisors and analysts tell us we were headed
straight
into
a
second
recession...that
co
c r
o por
po at
a e ear
a nings
ng wo
w ul
o d
ul
plum
u met? St
S ock
c s
fell 20% from their May 2, 2011, high and all
of a sudden headlines started to appear
saying that we were in a bear market.
Well, these advisors and analysts jumped the
gun, as most fail to understand how a bear
market actually works.
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Le
L t's t
ak
a e
k a

a quic
i k
c l
o
l ok at
a some e
ar
a n
r in
i gs
g re
r ports
fr
f o
r m big
i
g Am
A eri
r c
i a
c n
a co
c mpan
a ie
i s ov
o e
v r
r the p
as
a t day
a
y or
r
two
w :
American Express Co. (NYSE/AXP) made $1.24 billion in the third
quarter, up 13% from the same period of last year.
AT&T Inc. (NYSE/T) reported a big profit of $3.62 billion in its last
three months.
Int
n el Co
C r
o p
r or
o a
r t
a i
t on
o (NY
N S
Y E
S /I
/ NT
N C)
C pos
o t
s ed a 17%
7
pro
r f
o it
i ga
g i
a n
i to $3.
3 47
4
billion in the third quarter.
Morgan Stanley (NYSE/MS) beat analyst expectations and made
$2.2 billion in the last quarter.
Even beleaguered Bank of America (NYSE/BAC) surprised and
reported a strong profit of $5.9 billion in the third quarter.
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All told, these few companies mentioned above added $16.43
billion to their coffers in the third quarter. Most of corporate
America is doing fine right now (see Three Big Money Profit
Stocks). And if they start to see earning growth slow, they'll simply
cut payroll again.
Where am I going with all this?
For the benefit of our thousands of new readers, here's where we
st
s an
a d tod
o a
d y
a .
y
A 20-plus-year bull market in stocks ended in October of 2007. A
bear market started in October of 2007 that served to send
stocks to a 12-year low on March 9, 2009...what I refer to as Phase
I of the bear market. On March 9, 2009, a bear market rally was
born. That rally, which is a classical Phase II of a bear market, has
been going on now for 31 months. Bear market rallies last three to
four years.

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Strong earnings growth is coming from corporate America.
Pessimism amongst stock advisors and investors is also very high.
Bear market rallies continue higher under such a scenario. A bear
market rally has only one purpose: to give investors the false hope
that all is well and that stocks are a safe bet. We're not there with
this mentality yet, but that's where we are headed. And when we
reach that point, that's when the bear market will start to head
south (Phase III) towards its March 9, 2009 low.
Sure, corporate earnings are strong. But the long-term structural
problems of the U.S. (i.e. underemployment of 16.5%; interest rates
that have bottomed and can only rise; a fiat currency in too much
supply; inflation) will eventually overcome corporate America and
the stock market.
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Mi
M c
i hael'
l s
s Pe
P rs
r o
s n
o al
l Not
o es:
s
As I write this morning, the price of gold bullion is down about $25.00 to $1,619 an ounce. Twice
since gold fell close to $1,600 an ounce it has bounced back strongly.
For die-hard gold fans, the number to watch, the support level for gold, is $1,500 an ounce. At that
level, I believe gold would be a screaming buy. At $1,500 an ounce, gold would have corrected a full
20% from its record high of $1,895 reached on September 5, 2011. At $1,500 an ounce, gold bullion
prices would be severely oversold. At $1,550 an ounce, a huge opportunity would present itself for
gold investments.
Ther
e e
r ar
a e
r plen
e ty of re
r a
e so
s ns go
g ld
l inv
n e
v s
e t
s me
m n
e ts are
r st
s ill th
t e place
c to be (s
( e
s e
e An
A s
n w
s e
w re
r d:
d Ca
C n
a I Sti
t l
i l
l
Make Money Buying Gold Now?). And the best way to make money in the 10-year old bull
market in gold is with the stocks of the junior and senior gold-mining stocks. I would look at any
price weakness in the gold-mining stocks as opportunity. One or two years out, we will look back
at the gold-mining stocks and realize what a bargain they were in the fall of 2011.
As I wrote yesterday, all the money printing by world central banks since the credit crisis hit in 2008
has greatly expanded the fiat money supply. And the more fiat money in circulation, the greater the
threat of inflation, as evidenced by Britain's inflation rate hitting a three-year high in September--
5.2% annualized! We could be getting close to a real buying opportunity for the gold-mining stocks
(see Gold Bullion's Price Action:Time to Separate the Men from the Boys).
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Wh
W er
e e
r
e t
h
t e
e M
ar
a ke
k t
e
t Sta
t n
a ds;
s Wh
W er
e e
r
e it
i '
t s
s Hea
e d
a ed
e :
The Dow Jones Industrial Average continues to hover at the same
level it opened at in 2011. Corporate earnings reports for the third
quarter of 2011 have been respectable thus far. Pessimism continues
to preside amongst investors and stock market advisors. On the
backdrop of continued earnings growth, I believe that stock prices will
ri
r se
s .
A bear market rally in stocks that started in March of 2009, although
old and "long in the tooth," as they say, presides.
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Wh
W at
a
t H
e
e S
ai
a d
i :
"When I look around today, I see falling stock prices...I see falling
house prices...and prices for retail goods stores declining. The media
has it all wrong blaming (worrying about) inflation. In my opinion, the
single biggest threat to the U.S. economy and to the Fed in 2008 is
deflation. You can bet the Fed will expand the money supply and drop
interest rates aggressively as deflation starts to rear its ugly head."
Mi
M ch
c ae
a l
e Lo
L m
o ba
b r
a d
r i
d in PROFIT CONFIDENTIAL
in PROFIT CONFIDENTIA , De
D ce
c m
e b
m er 17
1 , 200
0 7
0 .
Michael was one of the first to warn of deflation. By late 2008, world
economies were embedded in their worst state of deflation since the
Great Depression.
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Tha
h nk
n
k You
o
Fo
F r
o
r m
o
m r
o e
w
r
w inf
w.
w o
pr
nf r
o
o fm
i
rtc a
o
m t
a i
nf o
id n
e
o v
nti i
a s
l. ict
o o
m
ur
o
ur we
w bsite
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