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  • First Government Shutdown In 17 Years. If Only It Will Last?

    At the very core, this U.S. government shutdown means that about one million federal employees will be told to go home without pay. Non-essential services will be stopped until further notice. This will be mainly due to a lack of funds. (Source: Committee for a Responsible Federal Budget, September 24, 2013.) National parks will be closed; museums will be shut along with many other services.

    What government services will be available? Social security and the Medicare payments will be sent out to those who already rely on it. For those who are applying for it during the U.S. government shutdown, they will not have their applications processed for the time being.

    As bad as all of this may sound, this U.S. government shutdown isn't the first one we've seen. Since 1976, there have been 17 instances when the U.S. government wasn't able to come to a decision on funding. Mind you, many U.S. government shutdowns only lasted over the weekend, so their effects were minimal. The last two long U.S. government shutdowns were 17 years ago and they lasted a total of 27 days. (Source: Ibid.)

    With all this, there are many different opinions. With so many people sent home, the U.S. government shutdown is an immediate money-saver. But on the other hand, those who aren't getting paid are likely pulling back on spending and that will affect gross domestic product (NYSE:GDP) growth for the U.S. economy.

    As all this happens, I stay far away from making political predictions, as after all, that's all we are dealing with here-two political parties pitted against each other resulting in a U.S. government shutdown.

    But in the midst of all this "noise," dear reader, we must not forget the big picture: the U.S. national debt has sky rocketed, the government continues to post a budget deficit year after year, and the national debt continues to rise.

    The U.S. has been incurring a budget deficit for a number of years now. This year, the fiscal year of 2013, will be the same. Sure, the budget deficit isn't going to be one trillion dollars like it was in the last four years, but it's still close to a trillion dollars.

    Over the year, I've made various economic forecasts in these pages that have generated strong responses from my readers. One such prediction (that I started making just a few months ago) has garnered more reader feedback than ever. That prediction: the U.S. national debt will double from its current $17.0 trillion to $34.0 trillion, or about 210% of GDP, where Japan's debt-to-GDP multiple stands today.

    How can this happen and what does it mean for the small investor? Follow on to today's "Michael's Personal Notes" (below) for the answer.

    Michael's Personal Notes:

    I often write about the crisis faced by the municipalities, cities, and states across the U.S. as they continue to register budget deficits year after year. Cities like Detroit and others in California have already filed for bankruptcy. When all of this was happening, I kept asking: when will the U.S. government bail out the troubled cities?

    Well, it's started to happen…

    The U.S. government will be giving the city of Detroit $150 million for "demolition and redevelopment purposes." In addition, it will also provide the city with almost $140 million to better its transit system. Another $25.0 million will be granted to the city to assist in its streetcar project. (Source: Newsmax, September 27, 2013.)

    The economic situation for "Motor City" has gone from bad to worse. But I ask one question: if the U.S. government "helps out" Detroit, won't other cities struggling with a budget deficit feel shortchanged? After all, they are in dire need of money too!

    Take San Jose, for example. The city has been posting a budget deficit since the 2002-2003 fiscal year. The cumulative budget deficit since then to now has accumulated to a total $680 million. (Source: San Jose's Mayor Office web site, last accessed September 30, 2013.) And it just doesn't end at the city level. States have also been caught in the same budget deficit trap.

    Credit rating firm Fitch Ratings, in assigning a revised credit rating to Connecticut, said, "The Negative Outlook reflects the state's reduced fiscal flexibility at a time of lingering economic and revenue uncertainty. The enacted budget for the new biennium delays repayment of deficit borrowing, adds to an already high debt load, and fails to rebuild the state's financial cushion." (Source: "Fitch Rates $900MM Connecticut GO Bonds 'AA'; Outlook Negative," Fitch Ratings, September 30, 2013.)

    But back to my original concern and the theme of today's issue of Profit Confidential: how can the U.S. national debt ever get under control if the U.S. government now starts helping municipalities, cities, and states that have budget deficits? The answer is it can't.

    What does it matter to you?

    In upcoming issues of Profit Confidential, I will be writing about how the U.S. is following the exact path of the Japanese economy. Both countries experienced the biggest boom-bust cycle since the Great Depression. Both responded by aggressively lowering interest rates and printing more paper money.

    Today, Japan's debt-to-GDP is 210%, while that multiple stands at 105% to 110% for the U.S. (Japan's bust happened 20 years before the U.S. bust.) I think by following what happened to Japan on the way to 210% debt-to-GDP, and seeing which investments did well during that period and which didn't, will be of utmost importance to my readers-and that's what my research team is working on right now. In upcoming issues, you'll read about what individual investors can learn from Japan's "example" to better profit and protect themselves from today's debt-crazed U.S. government.

    What He Said:

    "Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don't know. Big [cap] stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one hour waits…people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon." Michael Lombardi in Profit Confidential, February 7, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.

    Oct 03 8:01 AM | Link | Comment!
  • Upside Potential For Final Quarter Of 2013 Likely Less Than 5%

    October is here. Halloween and heightened stock market volatility are just around the corner. We have the ongoing debate over the budget, as the government was shut down yesterday, halting non-essential services.

    There's also the upcoming third-quarter earnings season this month. (Read "How Easy Money Is Hiding the Real Problems in North America.") As I have said in previous commentaries, I'm not that positive about third-quarter revenue growth.

    The S&P 500 and Dow Jones Industrial Average are down over two percent from their October 18 record-highs and could likely head lower on the charts. With the key stock indices up over 20% this year, you know that the fourth quarter will bring surprises and volatility to the stock market.

    This is not a stock market to just watch and wait for things to happen. You need to be proactive in your investment strategy and make sure your capital is protected for the future.

    So here's what to do.

    If you don't like volatility, then you may want to cash out. While you maybe made some decent gains, when you have enough and are happy with your gains, then exiting the stock market makes perfect sense. Having excess investable cash would be welcomed if the stock market corrected.

    In my view, the upside potential for the fourth quarter will likely be less than five percent. Of course, this is a rough estimate, but in my view, the downside risk in the stock market is higher based on the host of market uncertainties not only domestically but in Europe and China as well.

    If you are sitting on the fence, not knowing which way to go, consider sitting on the sidelines and waiting for a possible stock market correction to re-enter and add to positions instead.

    If you are familiar with stock market options, you could add put options to protect against downside weakness in your stocks or a segment of the stock market. The cost is what you paid or the premium for the option.

    You can also add call options if you are weary of chasing stocks but at the same time don't want to lose out if the market edges to new record-highs. The use of call options is manageable in the total maximum risk, but they allow you to take advantage of any upward moves in the market.

    While there are many factors to consider heading into the fourth quarter, just be proactive in your investment strategy.

    Oct 02 7:25 AM | Link | Comment!
  • How To Turn A Profit By Buying “Bad” Companies

    Groupon, Inc. (NASDAQ/GRPN) is up a sizzling 368% from its 52-week low of $2.60 on November 12, 2012. Many in the market thought Groupon was dead. I was not one of them; I actually saw a possible short-covering opportunity due to the massive short-selling position on the stock. All the company needed was some good news to drive the shorts to cover. Of course, this happened as Groupon reported positives in its business and strong results. The current short-selling position is 5.6% of the float as of August 30, versus 15.3% in February.

    I usually view these intensive short-selling buying opportunities as a contrarian play in a company that the stock market may have judged wrong.

    The key to short-selling buying success is to look for companies that have strong fundamentals but may be struggling with some poor results that can be dealt with. Of course, you won't always be correct, but if you minimize the losses and ride the gains, then you'll get good results.

    Facebook, Inc. (NASDAQ/FB) was another case of a company with some difficulties following its initial public offering. (Read "Why Social Media Stocks Are Back on Top, Getting Stronger.") The company had to convince investors that it could monetize its one billion users. Facebook focused on the mobile advertising market and was able to turn things around. The stock, under heavy short-selling pressure, quickly reversed course from its $18.80 low in October 2012, moving above $50.00 on Thursday.

    Electric-car maker Tesla Motors, Inc. (NASDAQ/TSLA) was also seen as a fad by Wall Street and investors, as short-selling swarmed the stock. Yet the company was able to generate some excitement with its sales and plans, and the stock took off from $26.00 in October 2012 to the current $190.00 range. And if the company can still deliver, I would expect more gains to come, as the current short position is at 34.5% of the float, or 21.56 million shares.

    While short-selling buying opportunities like Groupon, Facebook, and Tesla may be rare, they do happen.

    In the small-cap area, you may want to consider taking a look at Blyth, Inc. (NYSE/BTH), a seller of consumer goods via direct selling and catalogs. There could be a great contrarian opportunity here, with a major short interest of 5.41 million shares shorted as of August 30, 2013, or a whopping 56.8% of the float, according to Thomson Financial.

    In the youth clothing segment, consider looking at Aeropostale, Inc. (NYSE/ARO), which had a short position of 25.4% of the float as of August 30, 2013, or 14.58 million shares, according to Thomson Financial. The stock could surge if it reports better results.

    Oct 01 5:51 AM | Link | Comment!
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