from John Nyaradi:
As Europe and Japan enter recession, can the United States be far behind?
Japan’s Cabinet Office recently reported that its second estimate of third-quarter GDP indicated contraction by 3.5%, consistent with its first estimate. Because second-quarter GDP contracted by 0.1%, the nation’s economy is now in recession. According to America’s Economic Cycle Research Institute (ECRI), Japan’s last recession (which began in the summer of 2008) ended in March of 2009. Japan had previously suffered through severe recessions during 1997-1999 and 2001-2002. Japan’s Ministry of Finance reported that the nation’s exports declined to 5.15 trillion yen in November from 5.36 trillion yen in October.
Turning to Europe, on Dec. 6, European Central Bank President Mario Draghi reported that the euro-zone economy is expected to contract by 0.5% during 2012, compared with economists’ expectations that it would contract by 0.4%. Beyond that, the euro-zone’s economy is expected to contract by another 0.3% during 2013, despite an earlier outlook for expansion by 0.5%. This signals a significant, prolonged recession. Eurostat reported that during the third quarter of 2012, GDP contracted by 0.1 in the euro zone. On a year-over-year basis, euro-zone GDP declined by 0.6% and EU27 GDP contracted by 0.4%.
Potential strategies include:
1. Seeking safety in U.S. Treasury Bonds. If U.S. equities decline as a result of recession, bonds should rise in price. Good ETFs for bond-market exposure include iShares 7-10 Year Treasuries (NAR:IEF) or, for more aggressive investors, iShares 20+ Year Treasuries(NAR:TLT) .
2. Buying bear-market ETFs. If the bear returns, bear-market ETFs are designed to rise in price as the underlying indexes fall. Inverse U.S. index ETFs include ProShares Short Dow 30 (NAR:DOG) and ProShares Short S&P 500 (NAR:SH)
3. Riding out the storm in cash. Cash offers protection from losses but exposes one to the dangers of inflation and offers no growth or income which people are going to need as they enter retirement so this safety net might not be so safe over the long term.
With the forecast for recession at 100%, it’s highly likely that investors will need to be more active and knowledgeable than ever, however, every market presents opportunity and today’s is no exception. A strategy that allows one to seek profits in both up and down markets seems to be the order of the day, and to that end, Wall Street Sector Selector remains in “red flag”mode as we approach the end of 2012.
ALBERT EDWARDS: The Fiscal Cliff And Hurricane Sandy Are Smokescreens For America’s Economic Problems
According to Edwards, “the ECRI recession call should be listened to more closely,” even though it’s come under a lot of fire.
In fact, Edwards says that now that the fiscal cliff has taken over the headlines, everyone may be incorrectly attributing new weakness in the economic data to the cliff’s effects, when in fact, it’s just what one would expect before any typical recession.
The bearish SocGen strategist’s argument goes like this:
Certainly if the US has already slipped into recession, this would help explain why our preferred measure of whole economy profits declined, albeit marginally, in Q3. We have always monitored pre-tax, domestic, non-financial, whole economy profits particularly closely because this measure of the underlying profitability of the business sector is probably the best leading indicator ofdomestic business investment, and that has also been weak recently.
Many have attributed the weakness in investment to uncertainty about the fiscal cliff. But if underlying profits are under pressure, then so too will be investment. So although much of the S&P eps downgrading by analysts is being attributed to severe weakness abroad, what the latest whole economy profits data show is that the domestic business situation is also weak. The ECRI recession call should be listened to more closely.
Edwards continues, highlighting the frightening decline in NFIB Small Business Optimism last month (emphasis his):
“Something bad happened in November…and it wasn’t merely Hurricane Sandy”, the NFIB chief economist Bill Dunkelberg is quoted as saying ? see chart below and link. Even scarier than the decline in the headline measure was the 37% slump to an all-time low in those firms who believe economic conditions will improve over the next six months. That 37% drop is twice the previous record 18% decline, which occurred in the immediate aftermath of the Lehman’s collapse…For those who might immediately retort that this is a sentiment indicator that should be used as a contrary indicator you are wrong. It is a good leading or at worst coincident indicator.
Didn’t see that coming.
The SPX is breaking down,, to the point of violating its month-old bullish trendline. This is the spot where we should be 100% short. Tomorrow may not provide an entry, so take care to have at least a partial short position here.