Markets pricing in new recession

Disappointment with last week's eurozone summit and a lack of new initiatives from the Federal Reserve unleash a torrent of selling pressure focused on commodities like gold.

By Anthony Mirhaydari Dec 13, 2011 6:07PM

Image: Stock market (© Digital Vision Ltd./SuperStock)Stocks and other risky assets have plunged this week as traders returned -- after a weekend of studying last week's disappointing eurozone summit -- in the mood to sell. After researching the finer points of European Union governance, Wall Street realized that the incrementalism and obsession with fiscal austerity demonstrated last week were, in retrospect, no palliative.

 

The European debt crisis hasn't ended; it's entering a dangerous new stage after leaders flubbed a critical opportunity. And Tuesday's Federal Reserve announcement, which featured no teasing of any new stimulus measures, reminded everyone that central banks cannot solve the structural problems plaguing the global economy.

 

As a result, markets around the world are starting to price in a new, deflationary future. And they're using the U.S. dollar to do it.

 

 

The sell-off picked up steam during the European session Monday after analysts at all three major credit rating agencies pooh-poohed the results from the EU's summit last week. Moody's warned of negative credit rating action against European Union countries in the months to come and said last week's summit offered few new measures as crisis remains in critical and volatile stage.

 

Not to be outdone, S&P's top economist was out in force, noting that the eurozone governments may need "another shock" to shake them out of their complacency and take decisive action. 

 

And finally, analysts at Fitch commented that the euro summit did little to reduce pressure on European debt. According to them, it seems that a "comprehensive solution" -- one that doesn't just rely on stricter enforcement of recession causing budget austerity -- is not on offer. The gradualist approach being followed, they continued, imposes additional economic and financial costs which mean the crisis will continue at varying levels of intensity through 2012 and probably beyond. Ouch.

 

All of this increases the chance of negative rating actions against the eurozone in the weeks to come -- an event that will precipitate the crisis and risk pulling the U.S. economy down into the recession that Europe seems to already fallen into.

 

 

If these were the fundamental reasons risky assets sold off, there were a number of technical reasons as well. Mainly, the selling focused on dollar-sensitive assets including gold, crude oil, and foreign stocks as the greenback strengthened vs. the euro -- setting off panic selling among leveraged hedge fund types betting on gold denominated in euros.

 

 

Although currency fluctuations were the acute cause of this weakness in dollar-sensitive assets, all are also very sensitive to the deteriorating economic growth outlook as well. Gold is an inflation hedge as well as a safe haven asset. Lower global growth is deflationary, damaging the yellow metal's desirability.

 

Really, the euro is in trouble either way. If the ECB prints, it will be seen as a euro negative since the bank would be embarking on overt currency devaluation. If they don't, and the crisis intensifies, it will also be a euro negative since funds will flow out of the banks within the currency union to be parked in Asia and the United States on fears of a eurozone breakup.

 

Overall, after the ridiculous counter-trend rebound rally seen during the Thanksgiving holiday, and the consolidation trading that has marked the beginning of December, it looks like the medium-term bear market that started back in May is about to embark on its next big downswing.

 

As I've been doing since early November, I recommend investors maintain a defensive positioning. 

 

For conservative long-term investors, the best advice is to hold off on new stock purchases and increase your allocation to cash.

 

For short-term traders and my newsletter subscribers, there remains plenty of opportunity on the short side focused on materials, financial, and foreign stocks. The Direxion 3x Emerging Market Bear (EDZ), which is up nearly 12% since I recommended it on November 9, remains one of my top picks. Less leveraged alternatives include the ProShares UltraShort Emerging Markets (EEV) and the ProShares Short Emerging Markets (EUM)

 

As for individual ideas, I continue to like both Century Aluminum (CENX) and Teck Resources (TCK) as short plays. As always, you can track my stock picks here.

 


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.

 

The author can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.



 

67Comments
Dec 13, 2011 6:44PM
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Wall Street bet on a recession and will do anything to make sure it happens. That's why the things happening don't make sense to investors. The markets are being manipulated by the big boys and they always get there way!!!
Dec 13, 2011 8:17PM
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Smile Countries can learn something from their citizens. You can't afford everything you want and you can't borrow more than you can pay back. Even if you can print money to devalue the debts you ran up there's only a matter of time before you have to take responsibility for those actions. So slow down the economies, stop the presses and get used to a more conservative approach to everything including investing and living large.
Dec 14, 2011 2:36AM
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In order to get a new recession, we have to get out of the old one first. There are many who feel that we haven't done that yet. Once interest rates go to market level, we 'll see just what government tampering has accomplished.
Dec 14, 2011 10:39AM
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Another expert opinion by the man who was predicting a bull market just 2 months ago.  Flip a coin and you are more likely to be right than these so called experts.
Dec 14, 2011 8:19AM
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This will not get any better than what it is. The Economy world wide will crash. It is designed to crash. the problem is only the top got bailed out of their debt. We the PEOPLE of the world have assumed that debt and passed off to our grandchildren. We the People of the world because we have not reduced that forced debt the economy will never recover. We have been cut out of all bailouts and it is we that are the economy.
Dec 14, 2011 2:58AM
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Why the Euro zone keeps putting square pegs in round holes, I can't understand it. This Socialist utopian order is not working. The red flags keep popping up and the Euro zone keeps dismissing them. Whatever happened to single nation sovereignty? Let Greece decide their own fiscal fate, not Europe even if it's bad. Why are the tax payers of France and Germany paying for the mistakes of  Italy, Portugal and Ireland. With a few exceptions, look at European GDP, it's abysmal. Look at Poland's economy, it's growing, if they elect to join the Euro they are going to flush all their future economic prowess down the toilet. They are naively being poisoned to join the Euro because their cash is needed to inject more money into the Marxist  furnace. The whole Euro zone system will surely collapse if this Xanadu mind set isn't dissolved. By the way, how is Switzerland doing these days compared to their European brethren? There was a reason  they passed on the Euro "Shangri-La" pipe dream.
Dec 14, 2011 12:28PM
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Did the last recession end? I guessed I must have missed something.Smile
Dec 14, 2011 7:29AM
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The problem is we have idios trying to tell idiots how to run the world!!!!!!!!!!!
Dec 13, 2011 8:12PM
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What do you mean new recession?  Where do they get these nit wits?
Dec 13, 2011 9:34PM
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If I knew what was going to happen, I would say.  Truth is, I don't know for sure what is going to happen.  But I believe if the market takes a steep dive, the FED will start printing like mad again.
Dec 14, 2011 12:16PM
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"Markets pricing in new recession"? I thought we are in one - no wait that was declared to be over in '09. I'm confused (and broke too). So is this a new recession, or a new depression, or a depressioned recession, or a recessioned depression - button, button who's got the button? Santa's got it easy this year, looks like everyone's gettin' that lump of coal. 'least we'll be able to stay warm - wanta buy some matches?

 

Peace 

Dec 13, 2011 10:18PM
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That's all the Markets are, is doom and gloom.  They are happy one day and then the next day they doubt the news they hear the day before.  My solution is to stop the media on Wall Street totally and then let's see how these boneheads buy and sell stocks!  Then they would have to do their own research instead of depending on every fly on the wall reporting everything they hear or say to the media.
Dec 14, 2011 1:00PM
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My you people are naive. We have been in a recession since 2008. We are on the brink of a depression and probably a revolution of sorts to follow. What fish bowl have the analyst been living in????
Dec 14, 2011 8:48AM
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The second my portfolio gets back to cost basis i will dump stocks and look at Wall Street in the rear view mirror. If they cant return any money in two decades the time to get out is now!!! Cd'S have out preformed stocks for years. Right now we have lost all or any gain back to 2008 and then we have to go back to 1999.

Dec 14, 2011 8:42AM
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They created a debt based economy and blame us for carrying too much debt. Go figure?
Dec 13, 2011 11:01PM
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$12.50 an hour jobs replacing $25.00 jobs could be called a recession or a screw job to workers. They need to get housing back on track for equity loans to owners with good credit. Low interest rates to people done in by the housing boom goes nowhere without credit. Banks and their next to nothing interest rates  eliminates saving with them. Leadership without leaders leaves us stuck in fantasy land for the rich.
Dec 14, 2011 1:21PM
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At some point this insanity has to stop. These guys just continue to change their story at the drop of a hat. The real issue here is there are too many people (companies) with extremely high powered fast computers involved in minute by minute trading. This is basically screwing the average person with a standard 401K package. I'm not much on government intervention but at some point this type of trading has to be stopped. There should be a term of owernship on every stock purchase. This would eliminate these firms from day trading and the stock market would stabilize. I don't know about the rest of you but I am sick of these guys spewing their garbage input about the stock market. They are completey clueless and everything they say at this point is speculation.

Dec 14, 2011 12:42PM
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new  recession.?we  have  been  in  a recession  for  a  number  of  years. 
Dec 14, 2011 9:02AM
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RANDALL

 

 

It is actually worse than what you are saying!!

Dec 14, 2011 1:28AM
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E-GADS, I don't believe I'm saying this but ol' Tony has it right! After Europe thuds, and we look back at the US, which is in the toilet. Then, we will realize, the only ones doing well right now is the short traders, the Big Corporations (hoarding all their cash),those greasy oil speculators, and those creepy guys trying to buy all your grannys gold. BOOMERS if you don"t get out now, you deserve what you get!!
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