Stocks Crushed as Economic Fears Grow

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Stocks were on the slide again Thursday, undoing Wednesday’s bounce thanks to poor German economic data that puts both Germany and Japan at risk of possibly being in recessions right now. Exports dropped at a nearly 6% annual rate, coming on the heels of a report earlier in the week of industrial production slowing at a pace not seen since the depths of the recession.

Combined with a deepening slowdown in China where power generation is falling for the first time since 2009, the global economic outlook looks grim. The world’s largest economies (save the U.S.) are hitting a wall.

Things are getting schizophrenic, with stocks suffering their worst decline in six months after posting the largest positive swing since 2011 in the previous session. In the end, the Dow Jones Industrial Average lost nearly 2% while the Russell 2000 lost 2.5%. Crude oil dropped to $85.26 a barrel — a level not seen since early 2013 — while gold moved higher.

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It might be too early to say this out loud, but the risk of recession is growing.

For one, measures of corporate profitability here at home are already dropping at recessionary levels heading into the third-quarter earnings season. Skeptics are looking for companies to blame weak forward guidance on the recent strength of the U.S. dollar.

Two, inflation expectations are falling at a pace that, in the recent past, has been associated with new bond buying stimulus from the Federal Reserve.

Only this time, the QE3 program that started in 2012 is just a few weeks away from ending. This is coming at a time when the job market is rapidly tightening, with the unemployment rate at 5.9 percent. That’s a level the Fed didn’t think would happen until the end of the year. And it’s also just two-tenths of a percent away from the Congressional Budget Office’s estimate of full employment.

So it’s unlikely the Fed will be able to justify any new stimulus anytime soon. And while the doves at the Fed continue to jawbone about the prospect of holding short-term interest rates near zero percent well into 2015, it’s worth noting that the most significant pullbacks of the bull market to date — in 2010 and in 2011 — occurred when the Fed’s bond buying was stopped in the context of zero percent interest rates.

With monetary policy at the zero bound, it’s the flow of stimulus into the bond market that matters.

With the two cornerstones of this bull market — Fed bond buying and corporate profits — under pressure more downside is yet to come.

In response, I’m recommending conservative investors increase their cash allocations since every asset class is suffering from increased volatility, even long-term Treasury bonds.

For the more aggressive, there are plenty of opportunities for profits on the short side. Among ETFs, the VelocityShares Daily 2x VIX Short Term ETN (TVIX) is up nearly 16% for Edge subscribers today.

And if you’re a risk taker, put option contracts are on fire as large-cap stocks collapse out of long, easy uptrends. Examples include Ford (F), which issued a profit warning on weak overseas results, pushing up the October contracts I recommended to Edge Pro subscribers by 515%.

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New recommendations include November puts against Google (GOOG), which just dropped back below its 200-day moving average — a long-term trend level that hasn’t been breached in a big way since 2012.

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Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm.


Article printed from InvestorPlace Media, https://investorplace.com/2014/10/stocks-goog-f-tvix/.

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