The financial damage is massive and the question boils down to how far the contagion can spread throughout Europe (and elsewhere).  Austerity measures throughout Europe are now backfiring.  France put in Hollande as a move back to the left as Sarkozy’s austerity measures were just going to be too great for the population to want.  Inflation before cutbacks!  Live well today, let the kids figure it out when hey get older!  Hell, even The Netherlands could not agree on a budget and they have their act together financially just about as well as any of the top nations.  Angela Merkel’s party suffered a regional election loss in recent weeks as well.

Greece will not likely be the only casualty here.  Portugal, Spain, and Ireland are all at risk.  Sinn Fein has been making policy statements about austerity and the Euro inclusion and went as far as issuing a video to call for a NO vote in the Austerity Treaty referendum.  Spain has a serious capital shortfall in its banks if the reports over the size of the property value losses versus face value of loans is even only one-third true.  Portugal is just totally irrelevant to Europe, but it is upside down and at risk.  And Italy is just simply “too big to bail” with its debt and spending issues that lie ahead.

The fallout is running top to bottom… safe havens to PIIGS… We are seeing all the new 52-week lows come into play in some positions while many others are still above those recent lows.

iShares MSCI Germany Index (AMEX: EWG) is down 2.2% at $19.87 against a 52-week low $16.96; iShares MSCI France Index (AMEX: EWQ) is down 2.4% at $18.61 against a 52-week low of $17.88. The there is “the Euro currency ETF” via the CurrencyShares Euro Trust (AMEX: FXE) with a drop of 0.9% at $125.03 (new 52-week low) as the Euro is at the lowest point since July 2010.  iShares MSCI Italy Index (AMEX: EWI) is down 3.8% at $10.26 and only one-penny above the $10.25 52-week low.

Ireland… The Bank of Ireland (NYSE: IRE) is down 2% at $4.90 against a 52-week low of $3.99. The New Ireland Fund, Inc. (NYSE: IRL) is down 1.1% at $7.79 against a 52-week low of $6.49.

Greece… National Bank of Greece SA (NYSE: NBG) is flat at $1.52 against a 52-week low of $1.45; Global X FTSE Greece 20 ETF (AMEX: GREK) is down 3.5% at $9.99 at a new 52-week low (prior $10.25 low). The election in mid-June will likely be the key determining factor here.  If not, the situation is still not over and Greece is going to be an ongoing flight risk.

Spain… iShares MSCI Spain Index (AMEX: EWP) is down 3.3% at $22.81 and under the prior 52-week low of $22.87.  Banco Santander, S.A. (NYSE: STD) is down 3.5% at $5.58 against a 52-week low of $5.52 and Banco Bilbao Vizcaya Argentaria, S.A. (NYSE: BBVA) is down 4% at $6.02 against a 52-week low of $5.96.

Vanguard MSCI Europe ETF (AMEX: VGK) tracks the  MSCI Europe Index, which is made up of approximately 460 common stocks of companies located in 16 European countries-mostly companies in the United Kingdom, France, Switzerland, and Germany.  It is down 2.6% at $39.85 against a 52-week low of $38.40.  The SPDR EURO STOXX 50 (AMEX: FEZ) tracks the STOXX Europe 50 Index and it is down 2.9% at $26.93 against a 52-week low of $26.10.

This is sort of funny on the surface if you don’t think about the financial and human tragedy that is unfolding.  It is not exactly as though the global economy rose this much when they launched the Euro.  Little reward, massive pain!

Sadly, Europe is starting to feel like Latin America of the 1980s and early 1990s all over again.

JON C. OGG

At issue may be a stock market stabilization, or perhaps it is a stabilization aimed solely at the commodities and those companies which profit from either the rise of commodity prices or the rise of the demand for those commodities. It was just yesterday evening that Dennis Gartman of the Gartman Letter was talking up gold miners as his method of choice to play the current bounce in gold.

To show just how much implied upside there is we found some large cap gold stocks that have upside of about 100% and many of the big players have implied upside of well over 50%.  The key ETFs for these miners show just how widespread the damage was during the last sell-off.  The Market Vectors Gold Miners ETF (AMEX: GDX) trades at $43.35 against a 52-week trading range of $39.08 to $66.98 and that is down about 35% as a group from the highs.  The Global X Silver Miners ETF (AMEX: SIL) trades at $18.00 against a 52-week range of $16.54 to $29.05 and that is down almost 38% from its high in the last year.

We included the implied dividend yields but due to foreign issues and ADRs causing currency translations and due to some payouts not being quarter like U.S. companies do, we would urge you to only consider the dividend as a footnote and something you should be verifying on your own.  Besides that, who buys gold (and silver) miners because of their dividend yields only?

We have evaluated the following large-cap gold stocks: Barrick Gold Corporation (NYSE: ABX); Goldcorp Inc. (NYSE: GG); Newmont Mining Corp. (NYSE: NEM); AngloGold Ashanti Ltd. (NYSE: AU); Kinross Gold Corporation (NYSE: KGC); Agnico-Eagle Mines Ltd. (NYSE: AEM); Gold Fields Ltd. (NYSE: GFI); Yamana Gold, Inc. (NYSE: AUY); IAMGOLD Corp. (NYSE: IAG); Harmony Gold Mining Co. Ltd. (NYSE: HMY); Eldorado Gold Corp. (NYSE: EGO); and Royal Gold, Inc. (NASDAQ: RGLD). We have covered also two of the larger silver players of Silver Wheaton Corp. (NYSE: SLW) and Pan American Silver Corp. (NASDAQ: PAAS).

Barrick Gold Corporation (NYSE: ABX) traded at $37.60 and has a market value of $37.6 billion.  The consensus target price from Thomson Reuters is $59.10 and the 52-week range is $34.82 to $55.95.  Barrick has a dividend yield of 2.2%. The implied upside to the consensus target: 57% but we would note that the target is above the 52-week high.

Goldcorp Inc. (NYSE: GG) traded at $34.90 with a market value of $28.2 billion.  The consensus target price from Thomson Reuters is $60.42 and the 52-week trading range is $32.16 to $56.31.  Goldcorp’s most recent yield was listed as 1.6%. The implied upside to the consensus target is 73% but we would note that the consensus target is still above the 52-week high.

The question here is simple… Are junk bonds being sold off by too much?

In many cases the high yield junk bond sector is like investing in equities.  Unlike Treasury bonds, for now at least, junk bonds carry credit risks that the bond market does not.  The difference is that you can easily find dividend yields of 7%, 8%, and even higher.

iShares iBoxx $ High Yield Corporate Bond (AMEX: HYG)- was down 1.4% at $87.59 against a 52-week $77.90 to $92.67.  The indicated yield here is 7.25% based on the last payment.

SPDR Barclays Capital High Yield Bond (AMEX: JNK) was down 1.3% at $38.19 against a 52-week range of $34.09 to $40.89.  It had a 7.2% indicated yield based on its last payment.

PIMCO High Income Fund (NYSE: PHK) was down 0.9% at $12.64 against a 52-week range of $10.52 to $14.88 and its yield was about 8.3% based on the last dividend.

Other closed-end funds were down 3% and more on Thursday:

Invesco High Yield Investments Fund, Inc. (NYSE: MSY) was down close to 3% at $6.07 against a 52-week range of $5.25 to $6.83 and with an 8.8% yield.

Western Asset High Income Opportunity Fund Inc. (NYSE: HIO) was down over 3% at $6.11 against a 52-week range of $5.34 to $6.58 with a yield of close to 8.4%.

BlackRock Corporate High Yield Fund V, Inc. (NYSE: HYV) fell by over 3.3% down to $12.02 against a 52-week range of $10.10 to $13.13 with a yield of 8.6%.

When you get a free fall on these you often cannot ever catch the ultimate bottom all at once.  In fact, the performance of these during the recession and during certain times of panic selling as we have seen in each of the last two summers has been dismal.  The trick is the timing.  Rewards usually await for those who catch junk bonds after they start to bottom out.

JON C. OGG

The market value is still the largest of any public company at $501 billion, but the market value is now down almost $100 billion from the actual peak.  We have reported on two recent occasions how weak iPhone sales projections from analysts seem to be the big concern.  Both reports indicate that the iPad will save the day, and the latest earnings report showed that China really saved the day (with purchases rather than cheap labor).

The consensus analyst target on Apple is now above $708.00 and that implies another 32% upside if the analysts are right.  Some analyst calls even target $1,000 (and higher) for Apple stock.  At that rate, it becomes cheaper to buy Apple’s products than it does to buy 1 share of Apple stock.

Maybe this is the peak valuation concern coming into play as well.  Microsoft Corporation (NASDAQ: MSFT), which ultimately may have saved Apple with a Gates-led investment, reached up close to the $600 billion or so at the peak in 2000.  Cisco Systems Inc. (NASDAQ: CSCO) also reached about $350 billion.

General Electric Co. (NYSE: GE) peaked somewhere around the $475 billion valuation.  Exxon Mobil Corporation (NYSE: XOM) also peaked out above $500 billion during the energy bubble run-up, but that has not been seen since and the current market value is about $385 billion or so.  The common theme is that all of these values have come crashing down.

There is one thing to consider here in the ’mega-cap valuations and that is that Exxon Mobil is the only stock that had a low valuation like Apple still has.  In fact, Apple now trades at only about 10-times the Fiscal 2013 earnings estimates now that it has pulled back over $100.  Its multiple is even less than that if you back out the $100+ billion treasure trove that the company has.

The focus ahead has to be on Apple TV.  iPad and iPhone sales may only be able to go so far, and now it will be up to the new devices.  One concern we have is that the story of the Mac is a lost one.  Honestly, when was the last time you heard anyone focused on Mac sales in the last few months?  It is all about iPads and iPhones, which are actually cannibalizing what would have been Mac sales, and the talk remains around Apple TV.

One issue to consider is that certain funds have had to lighten up in Apple shares.  The large institutional sales orders have not been very evident in recent months, but the reality is that Apple started to become too heavily weighted for many non-index fund managers.  To prove this in the NASDAQ 100, the PowerShares QQQ (NASDAQ: QQQ) has close to an 18% weighting in Apple.  We have seen one estimate that only about one-third of the share selling was tied to large funds and hedge funds, although that no longer be the case since that data is 45 days old (or longer).

What seems to be at work is simply a change of heart.  The stock was weak ahead of May and the stock was still above $600 as recently as April 27.  Still, the psychology of “Sell in May and go away!” has been exaggerated due to the woes of Europe, the slowing growth of the BRIC nations, and weakening U.S. economic data.

Another concern may be that Microsoft Corporation (NASDAQ: MSFT) is being favorably treated going into the Windows 8 launch later this year.  All of the companies in technology are talking this up.  It is even possible that investors are unloading shares just so they can buy up Facebook shares after the IPO on Friday.

Apple is not expensive at all.  The question is whether or not it can be maintained.  When you are paying 10-times for future earnings today, that implies that you are paying for earnings out about ten years on a static basis.  All that is happening after the massive run that has been seen over the last decade is that the growth rate cannot be maintained indefinitely.

This sentiment won’t last forever, but the focus is elsewhere for the time being.  Will Apple hit $500 or even lower?  Maybe.  As long as the market does not really tank and as long as we do not enter a second recession, the consensus is that Apple’s stock still has a lot of room to rise after the dust settles.

JON C. OGG

As you may have expected, gold demand actually shrank in the first quarter of 2012 according to this gold data and the drop was down 5% from the high demands of the first quarter in 2011.

The decrease in gold demand was expected due to import taxes in India and high gold prices, but what is interesting is that gold’s demand value was up 16% year over year. The figure was put at $59.7 billion globally and the Council noted an average gold price up 22% year over year to $1,690.57 for the quarter.

The issue that helped support gold were increased demand in China, as well as continued central bank purchases, and inflows into exchange-traded funds.

China’s investment and jewellery demand reached 255.2 tonnes, up 10% on the previous year’s levels, and China accounted for 30% of the global jewelry demand.  Conversely, jewelry demand was down 19% in India, with Indian investment demand down a whopping 46%.  The World Gold Council predicts that China will become the largest source of demand for gold in 2012.

Central bank buying was 80.8 tonnes with purchasing gains in Russia and Kazakhstan.  Mexico was the largest addition with a single purchase of 16.8 tonnes.

Demand from ETFs and other investment products was 51.4 tonnes worth about $2.8 billion.  The SPDR Gold Shares (AMEX: GLD) site lists that it holds 1,276.6 tonnes with a total value of just over $63.5 billion as of May 17.

Market Vectors Gold Miners ETF (AMEX: GDX) measures the companies which explore and mine the world’s new gold.  Shares are up almost 4% at $41.11 after bottoming out just above $39.00 over the last two days but this mining ETF was actually up at $50.00 as recently as April 2.

JON C. OGG

What has changed in the last two weeks is Europe.  Two weeks ago it was not expected that France was going to suddenly issue a citizen-wide veto of the austerity measures.  Now that Sarkozy has effectively lost to Hollande in French elections, France is taking a socialist step and is effectively boycotting its austerity measures.

The move in France followed an inability for the Dutch to reach a budgetary agreement, and now we have Spain back in trouble.  To add insult to injury, the new Greek politicos are just wanting to break the agreed-to austerity measures that allowed it to avoid default (as if you should be surprised there!).  Now we have Ireland even calling anti-austerity sounds with an implied return of Sinn Fein in the public.

So, back to bonds… The 10-Year Treasury Note is now yielding 1.81%.  If you go back and review the charts, the 1.80% acted as a yield floor in February of 2012 and in December of 2011.  In September and October of 2011 the floor was closer to 1.70% as an absolute low, but when that came off the 10-year note yield rose 30 basis points in just over a week. The 10-Year note was yielding 2.20% as recently as April 5, 2012 and had risen to 2.40% as recently as March 20, 2012 (after having risen 40 basis points in just 9 trading sessions).

Now we have a 30-Year Treasury “Long Bond” yield back at almost 3%.  For the “Long Bond” yields to be back at the real lows it has to drop to about 2.90% and ultimately about 2.80% as the floor in September, October, and again in December of 2012. The 30-Year yield was at 3.40% as recently as April 4, 2012.

Credit Suisse just lowered its S&P 500 target to 1,450 from 1,470 this morning and it has increased the odds that both Greece leaves the Euro and also that the Euro could dissolve entirely.

iShares Barclays 20+ Year Treasury Bond (AMEX: TLT) has risen almost $10.00 per share since March 20, 2012 and that shows just how much interest has been there from what are normally equity investors who are preferring to Buy exchange-traded Treasury debt products.  Its yield is currently about 2.85%.

Junk bonds have lost their luster again, and it was only a week or so ago that the index was hitting a new high.  SPDR Barclays Capital High Yield Bond (AMEX: JNK) recently peaked above $40.00 and it is now at $39.50.  Investors have also turned away from the high-payout MLP sector as the JPMorgan Alerian MLP Index ETN (AMEX: AMJ) product recently peaked at almost $42.00 and it is now under $38.70 despite what is a high ‘yield equivalent’ for investors.

The banking sector surged in the first quarter but it has pulled back substantially.  The Financial Select Sector SPDR (AMEX: XLF) peaked at $16.20 and it is now down at almost $14.90 for what is getting closer to a 10% correction.  The highly volatile and leveraged Direxion Daily Financial Bull 3X Shares (AMEX: FAS) peaked around $110.00 per share at the end of March and start of April and it is now challenging the $94.00 price.  Banks and financials are back out of favor, mostly due to fears about Europe dragging them down.

The real question is whether or not this is the signal of the next recession or whether this is a trade for the “Sell in May and go away!” theme that investors are more worried about.  All growth indicators from non-farm payrolls, purchasing managers, and manufacturing and services activity readings are pointing so far to what is just slower and slower growth.

In the United States, Q1-2012 GDP was up at only +2.2% as government spending was down by 3% in the quarter.  Europe is in all but a deep ‘official recession’ per most of its latest economic reports.  The growth in China and Brazil has seen a tempering throughout this year as well, with other key emerging markets like India and others in South America still seeing slower and slower growth.

The good news against the recession argument is that economists after the last earnings season still seem to be calling for positive growth in U.S. GDP in the second quarter at least as of now.  If that holds true and if the U.S. can avoid getting pulled down by Europe, then perhaps the U.S. will avoid an official recession even if this current growth is rather pathetic.  We also have an election and it is a near certainty that both Presidential candidates are likely going to say whatever they can get away with to win the election in November.

If Q2 does not show negative on the GDP front in the United States, then technically no recession can be declared until early in 2013.  That would coincide with what Ben Bernanke has warned about the financial cliff facing the United States at the end of 2012 and it is when the new tax structure takes place.

The market is definitely voicing concern here.  Is that a recession warning?  It depends upon your own outlook and upon your own interpretations.  It must also be noted that the current drop in stock prices is getting to be where stocks are getting close to ‘oversold’ on the short-term charts even if the fundamentals are of concern.

As a final reminder, stop kidding yourself about the notion of a double dip recession.  We have enjoyed close to three-years of positive economic growth.  If a recession comes again soon, it will just be ‘the next recession’ since a double dip recession has to occur with a couple or a few quarters of the prior recession.

JON C. OGG

The short-only equity ETF saw inflows as well this week as the market was soft earlier in the week, but that will obviously ebb and flow as the markets rise and fall.  The top ten short positions are as follows (largest first): Goodyear Tire & Rubber Co. (NYSE: GT); OpenTable, Inc. (NASDAQ: OPEN); Energizer Holdings Inc. (NYSE: ENR); Rockwell Collins Inc. (NYSE: COL); Green Mountain Coffee Roasters Inc. (NASDAQ: GMCR); Citigroup, Inc. (NYSE: C); Ericsson (NASDAQ: ERIC); Allegheny Technologies Inc. (NYSE: ATI); Best Buy Co. Inc. (NYSE: BBY); and Johnson Controls Inc. (NYSE: JCI).  Without rounding up or down, these top ten short positions account for only 32% to 33% of the entire ETF’s short positions.

Here is the ETF’s philosophy in a nutshell: “The portfolio management team implements a bottom-up, fundamental, research driven security selection process. In selecting short positions, the Fund seeks to identify securities with low earnings quality or aggressive accounting which may be intended on the part of company management to mask operational deterioration and bolster the reported earnings per share over a short time period. In addition, the portfolio management team seeks to identify earnings driven events that may act as a catalyst to the price decline of a security, such as downwards earnings revisions or reduced forward guidance.”

One thing is nearly certain here.  If investors are looking for an ETF product that bets against high valuations or against what may be market aberrations, they may have found their vehicle.

Now, here is the flip-side of this ETF.  There are two sides to every coin.  If you get into a serious bull situation this can lose incredible amounts of money.  Sometimes it is the most troubled stocks which rally the most, and it doesn’t take a rocket scientist to figure out what likely happens to the price of this ETF in that situation.

The ETF’s Net Expense Ratio is currently 3.29% but the fund noted “The Advisor has contractually agreed to keep the Fund’s Total Annual Fund Operating Expenses from exceeding 1.85% for at least a year from the date of the Prospectus. This agreement is limited to the Fund’s direct operating expenses and, therefore, does not apply to “Acquired Fund Fees and Expenses.”  The fee breakdown is as follows per the ETF fact sheet:

• Management Fee 1.50%
• Short Interest Expense 1.44%
• Other Expenses 0.22%
• Acquired Fund Fees 0.13%
• Gross Expense Ratio 3.29%

JON C. OGG

Target Date funds offer a great product in theory.  If you know you have a 25-year or 40-year timeline before retirement, you can just let the money manager in charge of the fund have a predetermined mix of stocks and bonds for your portfolio.  Still, many advisors call this a cookie-cutter model and many have highlighted that investors really do not understand what they are buying when you look at the true mix of assets under stocks and bonds.

Now the SEC is seeking comment on the results of investor testing regarding target date retirement funds. The SEC said that it plans to consider the comments before acting on a proposal it issued back in 2010 intended to enhance the information provided to individuals investing in such funds. That proposed rule would generally require target date retirement funds to more prominently disclose the fund’s asset allocation at the target date.

FULL DETAILS

JON C. OGG

Faber also noted in the Bloomberg interview that investors should be very careful at this stage because he believes that earnings may begin to disappoint and also that profit margins could deteriorate.”  He called the economy as having bottomed out but also said that growth is far from robust.

On the broader stock market Faber said, “I’m not ruling out that stocks can continue to go up but I doubt they will go up at the same rate as the first quarter. And if you look at the technical under underpinnings of the market, they have deteriorated… we have an overbought condition in the market if we measure the number of stocks above the 50-day and 200-day moving average.”

Gold investors who own the SPDR Gold Shares (NYSE: GLD) may want to note that Faber is now not recommending more gold purchases and is only recommending to hold current positions.  Faber noted, “”As you know, I have been very positive about gold and I still accumulate gold every month. But I think that we had an intermediate peak at $1921 on September 6 of last year. Then we dropped sharply to $1,522 an ounce on December 29, 2011. Since then we’ve had a feeble recovery. I think that the correction period is not yet over. I’m not selling my gold because I don’t trust governments and I don’t trust the Federal Reserve, nor would I trust the ECB or other money traders in the world. They are all going to print money. I still recommend to hold gold.”

Today’s Bloomberg interview may still seem a bit less-doom with only a light boom.

FULL BLOOMBERG INTERVIEW

JON C. OGG

Apple’s dominance is only exacerbated by the notion that its performance is compounded because it is the largest S&P 500 Index (NYSE: SPY) component by far.  This almost does not seem possible to say, but Apple is up a whopping 50.5% or so in 2012 while the S&P 500 Index is up about 12%.  That shows that Apple’s gain accounts for about 15% of the entire S&P 500 Index gain so far in 2012.

There are reports showing Barclays figures showing that this is the largest single contribution of the entire index from one single stock back to 1991.  Barclays also noted that the last double-digit contribution was from Microsoft Corporation (NASDAQ: MSFT) back in 1999.  Apple is worth about 40% more in the S&P that Exxon Mobil Corporation (NYSE: XOM).

What is amazing is that the 51% gain is not the top performance from the index and a screen from Finviz.com shows that Apple was only the #10 performer so far this year.  Sears Holding Corporation (NASDAQ: SHLD) is up 112% year to date even though it is riddled with problems.  The move is followed with the #2 performer as Bank of America Corporation (NYSE: BAC) with a 71% gain so far this year.  The #3 spot was taken Netflix, Inc. (NASDAQ: NFLX) with a 66% gain despite its ongoing concerns.

The argument is strengthening that Apple is not just a tech stock nor that it is a consumer products giant.  Maybe it really should be considered its own asset class.

If you think this is too dominating over the S&P 500, what if that one call for Apple going to $1,650 per share by the end of 2015?

JON C. OGG