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.

Bank of America (NYSE: BAC) stock is up 6.3% in pre-market trading this morning after the bank reported improved earnings.

The European debt crisis has spread to Germany and Russia. But this time, stocks aren't budging.

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.

Wednesday's large decline was the result of only one thing: the higher interest rate on Italian debt.

The market was destroyed yesterday. Volume wasn't meaningfully high, but it was better than the past few sessions. The market ripped lower yesterday morning following concerns that Italy was near a default. And the indices continued to trickle lower into the close.

Most indices finished 2% lower in yesterday's bloodbath. But even that percentage seemed low since most of the stocks I followed declined over 4%.

I can't argue against the strength of yesterday's decline. The selling pressure was strong and it was a continuation of Friday's sell-off. But I can't believe the selling was due to Italy.

When I saw the headline that “Greek Aid Package to be decided by June” my first thought was “Great! That’s tomorrow…”

 

But of course, first impressions can be deceiving, as can misleading headlines.

 

The deadline for a(nother) Greek bailout is the end of June, which means we get to hear about for another month. I’m sure you’re very bit as excited about that as I am.

Investors have done an impressive job of shaking off a litany of negative storylines and jumping back on the bullish trend to higher stock prices. But let's not lose sight of the fact that S&P 500 bounced right where it should have, at 1,250. Today, it is challenging the next resistance/support level, at 1301.

 

The Apple Complex of tech stocks, which I referred to as a measure of investor sentiment, is also rallying. As TradeMaster Daily Stock Alerts' Jason Cimpl told his members this morning:

 

Yesterday's swift turnaround is a constant reminder that buyers still dominate the long term trend. The bulls have been stopped by 1301 resistance this week, but if they take it back, I'm looking for 1335 and then it's off to fresh highs. Today could be a gap and crap scenario, but the bulls have proven their ability to fend off negative ambiance and move the indices higher.

I can't say I'm surprised that Bank of America (NYSE:BAC) was not allowed to raise its dividend payment. And while BofA didn't specify the reasons its plan was rejected, I think we know pretty much why.

For one, Bank of America is still struggling with mortgage issues. And it's setting aside cash to cover potential "put-backs" of mortgage backed securities it sold. Plus, Bank of America is barely profitable. Its main source of earnings right now is coming from loan loss reserves that are returned to its balance sheet and counted as earnings.

Starting last week, we saw some of the market's biggest momentum trades sell-off on basically positive earnings reports. I'm referring to Apple (Nasdaq:AAPL), VMWare (NYSE:VMW), F5 Networks (Nasdaq:FFIV) and many of the other tech companies that are helping companies lower costs or are associated with the surge in handheld gadgetry.

But last night, Qualcomm (Nasdq:QCOM) reported good numbers and the stock is actually higher. NetFlix (Nasdaq:NFLX), too. Though not in the same sector, Caterpillar (NYSE:CAT) is also up after good numbers.

Could we be seeing a shift from the "sell first" mentality that emerged last week?

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.

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.

Santa's come early for the bulls. I can't think of any better gift than today's ADP payroll number. It's probably tough to miss the news that private sector payrolls rose 93,000 in November, according to payroll services company ADP. That bodes well for Friday's November Nonfarm Payroll number.

One of the big drags on the economy and stock market has been unemployment. And frankly, it will continue to be, perhaps for years. The Fed's best guess about unemployment has the rate holding above 7% into 2013.

Ireland will never be able to afford to pay back the debt it owes. Its debt problems are but a microcosm of much of the rest of the western world. What is playing out in Ireland today will one day soon play out here across the pond in the United States.

So we should pay close attention, because for reasons I will reveal below, the scenario is hugely bullish for commodities of nearly every stripe.

To sum up Ireland’s problems, it recently received a bailout from its chums in the European Union so that the country would avoid default on the many and sundry debt obligations already under its belt.

The recent bailout adds another $115 billion to the already $867 billion they owe, bringing the grand total to $982 billion.

Here in the land of $13 trillion debt loads, anything without a T in front of it starts to sound pretty insignificant.

Welcome back! I hope everyone had a most excellent and relaxing Thanksgiving holiday.

Let’s get started with a discussion on retail sales. As we know, GDP growth came in a bit stronger than expected for the third quarter, largely because of stronger consumer spending growth

The Bank of Ireland is about to have a new majority shareholder. Ireland's government is expected to raise its stake in the Bank of Ireland from 36% to something constituting a majority.

The Irish government is also expected to raise its stake in Allied Irish Bank to, potentially, 99%.

If this sounds like Ireland is taking a page from the U.S. bank bailout strategy you're right. When you're facing the potential of a run on the banking system, the government is essentially the last entity that can to step in and provide a backstop.

Over the long term it doesn’t matter. The dollar can rise, fall, go to zero - or a billion. It won’t matter. Because the dollar index is really just a mirror, reflecting the dollar’s different exchange rates of a basket of other paper currencies: the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swiss Franc, and the Swedish Krona.

So, it’s entirely possible for all of these currencies to fall in tandem over a long period of time, and although the dollar index would remain flat, the price of gold would rise.

All of these currencies are backed by nothing more than their promises to pay back sovereign debt slower than the rate of inflation.

Europe is already having trouble with this promise, which is why Greece bond rates skyrocketed earlier this year, and it’s why Ireland’s bond rates are soaring today. It’s why Portugal recently threatened to abandon the Euro.

Ireland recently joined Greece, Portugal and Spain to round out the PIGS acronym of debt-downgraded European nations.

It's a legacy Europe won't soon escape for a variety of reasons. But I'm not going to talk about the largely boring reasons why Europe has no chance of escaping massive debt obligations - I'm more concerned with the immediate investment implications of such a downgrade.

To help predict what might come next, it's sometimes helpful to look back. Over the last eight months, buying silver after a Euro nation had its debt downgraded gave you an average one month gain of 2.6%.

Investing in gold is often called a “fear trade.” In times of crisis, it’s believed that gold will hold its value, and even rise, while the value of paper currencies and other assets fall.  

 

If you bought SPDR Gold ETF (NYSE:GLD), which seeks to track the price of physical gold, 2 years ago, you’d be up around 36%.   

 

The S&P 500 is down around 15% during that time.   

 

You probably already know that gold hit a new all-time high yesterday at $1,200 an ounce. And even though other traditional measures of fear – like the volatility index (VIX), bonds and even stocks – didn’t move much today, the move in gold can’t be ignored.  

Has anyone else noticed that volatility has picked up in the stock market?   
 

It started on April 23, when the S&P 500 closed at 1,217. On that day in Daily Profit, I mused how investors were looking past the Icelandic volcano and the SEC charges against Goldman Sachs and simply buying stocks.   

 

I also discussed the possibility of a trend change that day. And I think it may be prudent to revisit that discussion today... 

If you've been looking for a dip to buy, your opportunity may be coming soon.

Stocks got whacked yesterday, and the S&P 500 dropped below an important support point at 1,188. Aside from the past few weeks, that support level hasn't come into play since September 2008, when the stock market was crashing. Before that, you'd have to go back to the October 2005 lows to find when 1,188 was in play. 

There were several catalysts for yesterday's drop. Debt problems with Greece and Portugal are weighing on investors. And Goldman Sachs testimony before Congress didn't help either.

It's been revealed that Deutsche Bank (NYSE:DB) has been informed by the SEC that it, too, is being investigated for mortgage-related fraud. It appears that no charges are pending at this time, but this gives investors another thing to worry about.

“It was the last wish of the Icelandic economy that its ashes be spread over Europe.”   

 

I wish I could take credit for that gem.   

 

Flights are grounded once again in Europe as more ash from Iceland’s unpronounceable volcano drifts over the continent.  

 

Europe is providing a major downer for the stock market these days. It’s not the grounded flights, however. It’s debt problems with Greece (again), and potentially Spain, Italy, Portugal and Ireland. 

That was quite a show Maguire Properties (NYSE:MPG) put on yesterday after it reported 4^th quarter earnings. It opened down, around $2.50 a share, and then marched steadily higher for the rest of the day to close at $3.54.   

 

Maguire’s cash reserves are rising after it walked away from a few underwater properties and sold a couple others. Investors seem to be saying the stock is on more solid ground now – volume was monstrous.  

 

While I’d love for Daily Profit readers to have participated in yesterday’s gains, I stand by my recommendation to take your profits on the stock before earnings. Earnings are a big uncertainty. Maguire could just as easily have dropped yesterday. There’s always risk when investing, and perhaps more so with a stock like Maguire. It would have been irresponsible of me not to have you take profits before earnings. 

Stocks continue their upward climb. As TradeMaster's Jason Cimpl  told us earlier in the week, the S&P 500 has kept its date with 1,150. And it looks poised to move higher.   

 

The retail sales data from February is positive. Despite two crippling blizzards on the East Coast, sales still rose 0.3%. And if you strip out autos, sales were up 0.8%.   

 

Normally, it makes no sense to ignore auto sales because they are obviously an important gauge of consumer spending, but in light of the recalls from Toyota (NYSE:TM), it’s reasonable to assume that some auto sales were simply postponed due to the uncertainty.    

 

Sales were especially strong for electronics and at restaurants and bars. Sounds like consumers are celebrating their new iPhone purchase over a beer. That’s probably led to a surge in drunk-texting.   

 

Retail sales from January have now been revised lower two times, from an initial reading of +0.5% to the current +0.1%. Funny thing about this rally – economic data is consistently revised lower, and no one cares. The only exception I can think of is 4Q 2009 GDP, which was actually revised slightly higher.  

 

Economic data has been improving. But it says more about the bullishness of investors that they are consistently overlooking negative data. That gives me more confidence that we will be seeing new highs for the major indices soon.   

 

Now, let’s wrap up our week with some Reader Mail… 

I got this letter in my inbox yesterday:   

 

Good morning Ian,   

 

I followed your instruction and bought MPG at 1.50 per share, today, it goes crazy. Thanks a lot.    

 

I really like to read your articles.   

 

Sue   

 

I first discovered Maguire back in September, 2009. As part of my daily routine, I check in on the stocks that are moving the most every day. You can find this information on Yahoo! Finance by clicking on this link:  http://finance.yahoo.com/gainers?e=us.  

 

This list simply shows the stocks that are putting in the biggest moves of the day. It’s almost always dominated by small cap stocks. You’ll also usually see a few regional banks that are up 15% on 3,000 shares traded. I’m always curious why these big moves happen to small banks on ridiculously light volume, but I digress…