Europe is smoldering like a fine cigar. It will take a while to burn to the end, but make no mistake, the whole Eurozone is burning.

The combination of the quick start and afternoon pullback resulted in a doji candle.

With weak earnings from the banks and minimal economic data to embrace, I took a bearish position yesterday.

In order to solve the mess that is the European financial system, a country will inevitably have to leave the Euro zone.

If you're asking yourself if you should also be selling, you should think about the people who are selling right now...

The euro has fallen sharply lower by 3% this week, which has corresponded to a similar rise in the dollar. The rise from the dollar brought havoc to the commodities and stock market alike.

It was another rough day for the financial markets, as the Dow fell 1.1%. Here are three stocks that bucked the trend.

The euro crashed again yesterday. After a brief period of stabilization, the euro formed a bear flag then broke decisively to the downside.

The price of gold inched closer to $1,600 an ounce today. What might happen if the yellow metal falls below $1,600?

Yesterday stocks fell on "European pessimism" and that's after stocks rose Friday on "European optimism." But nothing happened over the weekend to change Friday's viewpoint...

A 32% interest rate is unheard of in a normal market. But as many investors and traders understand, the market is far from normal these days.

If you're anything like the average investor (and I sincerely hope you're not) then you were once again fooled into bullishness by the non-news of the non-event coming from the Euro-zone.

But like curing a hangover with "the hair of the dog" this central bank gift will do more harm than good in the long run.

The concern over Italy and the Italian bonds has taken the euro lower. And generally speaking a weak euro is bad for the stock market.

Italy, Greece, Portugal and Spain are all in big trouble... Fortunately for you there's a great way to profit from their unfortunate mess.

"Debt crisis" and "bankruptcy" have become commonplace terms in most of Europe. And it's not just local businesses that are underwater and can't make interest payments either; it's countries.

Right now, my biggest concerns go back to these three things I am looking for during this rally...

It seems unlikely that Greece can undo decades of bad spending decisions with a simple bailout by its European neighbors.

During strong trends, leadership stocks, sectors and indices are often defined by large rises on above average volume and miniscule declines on low volume - while the opposite is usually true during bear trends.

The stock market always seems to believe best and discount the worst. Any reprieve in bad news is taken as good news. Any good news is good news. No news is good news. Sometimes, even news that is bad, but not AS bad as expected is taken as good news.

Economists have been extremely inconsistent with their economic projections over the past few months, as their views and outlooks seem to be swayed by their emotional response to the economy and stock market.

The market lost ground again last week. Despite early optimism from Europe and a rise in bank stocks, the bulls could not muster any meaningful rally. And the bears quickly resumed the selling pressure, defended 1175 on SPX, and dragged the market back to within 3% of this year's low.

Volume was also high in the decline, which indicates that there still is a large base of investors who are more than willing to sell at lower prices.

In case you weren't paying attention, the Swiss just closed up shop on the Franc.

Until last week, the Swiss Franc traded freely - tied only to the Swiss government and financial system.

And since the Swiss government is generally much more robust, less debt-ridden and generally more prosperous than most other developed world governments, investors fled the Euro in record numbers, pushing up its conversion rate against other world currencies.

The market tanked on Friday and it appears ready to tank again on Monday. Volume was high as SPX shrank nearly 3% and the bulls lost 1175 support. The declines were everywhere, but financials once again fell the most.

Financials are down 18% in the last three months and 25% in the last six. Big banks have taken the brunt of selling this year and for good reason. Economic conditions have weakened and European nations could still leave the euro zone or declare bankruptcy.

The Lisbon Treaty was signed by EU member nations in 2007, as a sort of make-up treaty to correct some of the mistakes from previous EU treaties. Turns out, there's a "no bailout" clause in the Lisbon Treaty. Who knew?

And by the time you read this edition of the Daily Profit, Germany's Constitutional Court will have voted as to whether the EU's bailout fund for Greece et al violates Germany's democratic constitution.

The market was slammed again on Friday. Volume was light, due to the holiday, but the indices slipped by over 2%. Once again financials led the charge lower and the big banks like JPM, WFC, GS and C were down nearly 5% while BAC lost 8.3%. And the worst of the decline is not over.

The FHFA sent lawsuits to 17 banks. And the amount that was sought is in the billions of dollars. But the fear on the street is that if banks pay one settlement for a fraudulent mortgage, hundreds more cases will follow. And with $5 trillion in questionable loans, the banks are on the hook for a large sum of cash.

Europe's zombie debt crisis continues to reappear - almost on a monthly basis. Like a bad horror movie with sequels, prequels, re-makes and homages, this story just won't die.

The market fell by nearly 1% yesterday. Volume stayed high, but was nowhere even close to the levels of last week. And in sharp contrast to Monday's session, energy and bank stocks were murdered.

The big banks felt the worst the bears could offer yesterday as BAC (-4%), JPM (-2%) and C (-4%) led the charge lower in the financial sector.

More notable than the drop in big banks or big oil stocks was the inability of the bulls to maintain SPX 1197.

We certainly live in interesting times.

Today, I'm wondering if the market was worried that the Fed would announce QE3 at the yesterday's conclusion of the most recent FOMC meeting. I mean, how else do we explain the 429 point ramp job the Dow Industrials put in?

It may not have been a majority, but there were a significant number of economists who were expecting the Fed to announce the next phase of quantitative easing, or QE3, yesterday.

It didn't happen...

Will stocks go up from here, or will they continue their fall?

That's the question right now, and many mainstream news agencies correctly point out that the answer largely hinges on what the Federal Reserve Chairman Ben Bernanke says later today with regard to monetary policy.

Imagine: the world's largest and most powerful economy ALL tied to the words and deeds of an academic in Washington DC.

How did we get here?

When it comes to conspiracy theories, and the theorists who theorize them, I definitely fall into the armchair variety. Sure, conspiracy theories can be fun (like The Da Vinci Code), and sometimes there may even be a little meat in the conspiracy bone. For instance, there's no evidence to say that former Treasury Secretary Henry Paulson let Lehman Brothers fail because he didn't like CEO Richard Fuld. But after engineering a buyout for Bear Stearns, I feel strongly that Paulson got personal.

And we can't be sure that the Chicago Merc raised margin requirements on silver to protect big banks short positions. But it makes some sense...

So, I couldn't help but get a little conspiratorial after Friday's dismal jobs numbers. Not one economist got even close to the real number (18K). And after the ADP Payroll number came out, estimates for the government's NonFarm payrolls went up.

Now, we know pretty much any government statistic is suspect. They are usually calculated to give a rosy picture. And the NonFarm Payroll number is especially variable because, as a Bloomberg article notes:

The Labor Department, which houses the Bureau of Labor Statistics, adjusts the employment figures each month to account for things like teachers falling off school payrolls in June and workers finding temporary employment with retailers during the December holiday season.

"There was a big adjustment this month," Labor Department Chief Economist Betsey Stevenson said on a conference call with reporters. "It's an art and a science doing seasonal adjustments and it's really hard to predict."

At a time when we've already seen weak economic data for a couple months, wouldn't it be a good time to be less aggressive with seasonal adjustments? Or does the weak employment number support the Obama administrations budget battles in Congress? It seems to me that austerity is a tougher sell when it could easily push the economy into recession.

The market continued its decline yesterday, although the momentum waned. Despite hitting new lows the indices bounced nicely into the close and protected their March low. Volume was also high

I’m always looking for unique ways to invest in gold, and legendary investor Dennis Gartman recently discussed a way to build a gold position in other currencies…

What do I mean by other currencies? Well, as Mr. Gartman says, “If you buy gold, by definition you have gone short of the U.S. dollar.”

Now, I’m as bearish on the dollar as anyone over the long term, but just like no bull market goes up in a straight line, no bear market drops straight through the floor.

And right now, the dollar is absolutely in the gutter – even relative to other at-least-as-crappy currencies like the Euro or the Yen.

Here’s a one year chart of the dollar index – which plots the exchange rate of the dollar against a basket of other (fiat) currencies.

Well that didn't take long. Just a day after it was reported that Greece will benefit from a debt restructuring that will require current bond-holders to take a financial hit, Ireland's finance ministry is demanding a similar restructuring for its bonds.

Of course, this is what happens when you open the door to restructuring. In a union, all rules must apply equally. You just can't give preferential treatment to one country and not expect others to demand the same treatment. The European Central Bank should have known this. And its failure to see this one coming is making the situation even more unstable.

Nearly a month ago, after the last Fed meeting, we started to discuss the likelihood that the U.S. economic recovery was slowing down. After all, the Fed had just lowered its GDP forecast for 2011 and acknowledged that inflation was picking up as a result of QE2.

 

The S&P 500 was above 1,360 at the time.

More and more, strategists, commentators and investors are coming to the same conclusion: it's all about the U.S. dollar. When the dollar rallies, stocks and commodities sell off. When the dollar falls, then our favorite assets can rally.

 

It almost doesn't matter what the time-frame is. Evidence is mounting that even hourly moves for stock prices get their direction from the dollar's latest move.

In 2001, you could buy an ounce of gold for $250. Today, gold sells for more than $1,400 an ounce. That’s more than 460% gain.

Again, you know this information. You might even be getting sick of hearing it repeated by gold vendors, gold bugs, or talking heads on TV who mention it with the rapt excitement of someone reporting actual news.

So, in an effort to illuminate a different aspect of the gold story that you probably haven’t seen anything about, I’m going to focus on other currencies.

Because I’d be surprised if you’ve heard ANYTHING about gold’s price as expressed in a different currency.

Take a look at the chart below, which shows the percentage gains of gold priced in dollars and six other major currencies.

Yesterday, both the U.S. dollar and stock prices moved lower. That’s pretty unusual. Also yesterday, Intel (Nasdaq:INTC) posted an absolutely blowout quarter. This morning, in pre-market, the stock is up just a nickel.

Now, Intel has sold off on positive earnings reports over the last few quarters. But this time, Intel beat all expectations. Earnings were up 48% over last year. And yet the stock appears unable to move higher. I will call that unusual, as well.

As we discussed yesterday, recent weakness was a dip to be bought. But we should also understand that anticipating more upside is really about anticipating the news flow, and investor reaction to that news.

Of course, I didn't know that Portugal would get a great response to a bond auction, thereby lessening worries that debt problems were spreading. I also didn't know that Wells Fargo would upgrade the financial sector on renewed dividends and "superior" earnings growth.

So how do we view a stock market that can’t hold its early highs, sells off to slightly negative territory mid-day, and then recovers roughly 50% of the decline by the close? Is that bullish behavior? Is it bearish? Or is it just plain weird?

 

While there’s certainly no shortage of weird out there – like the 7% rally for Lennar (NYSE: LEN) today when housing data appears to be getting worse – we have no choice but to see yesterday’s action as bullish. After all, the major indices finished in the green.

Just to be clear, “lexicon” is a fancy word that means vocabulary – and “food riot” is a phrase that refers to a group of angry, hungry, violent people who destroy property because they feel (among other things) that food prices are too high.

And yes, to answer any questions from the peanut gallery in my office, I do believe we’ll see food riots in these United States of America sometime in the next year and a half.

I’m belaboring this point because I want to be crystal clear with this prediction, not because I especially like making predictions. Quite the opposite, actually – I detest making predictions because it’s so easy to be wrong on the scope, specifics, time-frame, location, etc.

In that vein, if I am wrong about this prediction, it will probably be a matter of my timing rather than anything else.

There’s little doubt that the world’s superpowers are now fighting a new war. It’s not a cold one, or a hot one. No tanks, bombs or poison gas. At least not yet.

But open hostility between Europe, Brazil, China, India and the United States blanket the headlines nearly every day.

It’s a long-awaited answer to the question, “Do deficits matter?”

And the answer is a resounding, “Yes of course they do, don’t be silly - why in the world wouldn’t they matter?”

The week is not getting off to a good start for European stocks. Portuguese bonds ticked above the “bailout threshold” of 7%. Readers may recall that both Greece and Ireland requested aid once their bonds breached 7%. For its part, Portugal says it doesn’t need to tap into the EU’s emergency fund. But it’s not always about need. Sometimes it’s about appearance. That was the motivation behind the Treasury’s force-feeding of TARP funds to U.S. banks. And if Portugal can get its rates down, and ease fears that its problems will spread to Spain by taking some loans, it will do so.

Ask anyone on the street if Europe is in trouble, and they’ll say “yes!”

But ask them exactly why, and exactly how much trouble?

They might answer, “Because of debt problems...and I’m not sure.”

That’s about the most information you’ll get from any mainstream media source. Most news stories about European debt problems will mention the problem, and then immediately quote a bunch of European central bankers and politicians about who’s to blame, and/or why it’s not really that big of a deal.

For instance, this story about the “Euro Crisis” in The Wall Street Journal today doesn’t give ANY specific information about which European countries owe what to whom.

As the ratings agency Moody's reviewed the credit ratings of Greece, Spain and Ireland over the past month, investors have moved out of risky European debt, and into gold. This was followed by today's membership admission of the euro zone's newest member, Estonia, as the 17th member of the club and a country which as traditionally had it's own bouts of debt crises and deficit reduction challenges.

According to metals trader Matthew Zeman of LaSalle Futures Group out of Chicago, "All commodities are going to benefit from the fear of future inflation, and investors will continue to pile into hard assets." Gold appreciated in price by 29.7% in 2010.