The stock market is in correction mode and as long as the trend is down, capital preservation should be the top priority. It is notable that in this earnings season, several bellwether companies have missed estimates and they have disappointed the market. Furthermore, most corporations have lowered their forward guidance. These are negative developments which imply that a global business slowdown or recession may be around the corner.
In the investment business, nothing is set in stone but when a market sells off on extremely positive news, that is usually a bad sign. For instance, only a few weeks ago, Mr Draghi pledged to save the Euro and Mr Bernanke unleashed an open-ended QE. However, rather than stage an impressive advance on such bullish news, the stock market failed to rally and Wall Street has now sliced through its September low. Furthermore, given the ongoing slowdown in the global economy, it is conceivable that stock prices may continue to slide for several weeks or months. In any event, during this downtrend, investors should defend capital and avoid purchasing risky assets.
Over in the commodities complex, both copper and crude oil are back below the 200-day moving average. This should come as no surprise to our readers as we have been saying that given the weak state of the world's economy, a sustainable commodities rally is improbable. In our view, the industrial commodities will continue to struggle and if the US enters into a recession, this sector may face intense selling pressure. Thus, this is not the time to have exposure to the commodities complex.
Turning to precious metals, the charts reveal that both gold and silver are currently correcting their recent gains. Nonetheless, we have been stopped out of our positions in physical bullion and we do not have any exposure to this asset class. In our view, if the US enters a recession and its currency rallies, the prices of gold and silver will depreciate. So, if you still have positions in physical bullion, you may want to exit on any further US Dollar strength. Contrary to popular belief, we are of the view that both gold and silver will suffer during an economic recession and if deflationary fears escalate, their prices may weaken considerably.
In the currencies patch, it is interesting to note that despite the Fed's QE-ternity initiative, the US Dollar is refusing to break down and this is a sign of extreme strength. Remember, the American central bank is creating $40 billion out of thin air each month, but the world's fever chart is not declining. This implies that the ongoing private sector debt deleveraging is thwarting the Fed's inflationary agenda. Once again, the why is irrelevant and price action is all that matters. At present, the US Dollar Index is sitting just below its overhead resistance and a close above the 80.21 level will usher in the next uptrend. If the US Dollar manages to clear that level, it will imply that the Fed's QE program is not working and strength in the greenback will be bearish for all risky assets.
Finally, over in the bond market, US Treasuries have weakened a tad but given the state of the economy, this selling should be transitory. If the US economy slows down or contracts, long dated US Treasuries will probably rally and the yields may decline to record lows. Consequently, we currently have a modest exposure to this asset-class. Elsewhere, high yield corporate bonds are still an interesting option for income-seeking investors, although they may also suffer during a recession. Thus, if you do not need the income or are unwilling to withstand near term volatility, now may be a good time to exit this space.
Shekhar Gupta
CEO
Capt. Shekhar Gupta [ Pilot, DIAM, M.Ae.S.I., MAOPA [USA] ]
shekhar@aerosoft.in
Blog : http://shekharaerosoft.blogspot.in/
Shekhar is a Professional Pilot with more then 8 years experience of Flying on 14 different types of Air crafts in 10 different countries with accident free flying record. Shekhar is good in Flying Training as well as in Ground class for Pilots. Shekhar started his flying career from Skycabs [Colombo ] and worked for many Airlines Training Companies from different part of the world. He trained more then 350 Pilots who are flying world wide. He is a member of Aircraft Owners & Pilots Association [ USA], Royal Society of Aeronautics [ UK], Delhi Flying Club, Aeronautical Society of India, MP Flying Club Indore, Aeronautical Research Society. He is a frequent flyer on AA, Air India, British Airways, Cathey Pacific, Delta Airlines, Emerites, Ethihad, Jet Airways, Kingfisher and many more. Shekhar is an active member of www.MissionToCanada.com set up by Govt. of Canada and Air Transport Association of Canada.
His recent passion is Aviation SEO for which he takes classes for IIT & IIM students in India and others in abroad. And www.AirAviator.com a new proposed virtual Air Charter Services.
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The Latest Exports Data Is Troubling
Business Insider
As we said previously: "Exports have made up roughly 40% of corporate profits since the end of the last recession. The recent announcements by CAT, FDX, NSC, UPS and others, all discussed the rising weakness with international trading partners ...
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Bloomberg
By Emma Charlton - 2012-10-27T06:00:00Z. The pound strengthened the most in more than three months against the euro after data showed Britain's economy expanded at a faster pace than analysts forecast last quarter, pulling the nation out of a recession.
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New York Times
By ANNIE LOWREY. Published: October 26, 2012. WASHINGTON — For the first time since the Great Recession hit, American households are taking on more debt than they are shedding, an epochal shift that might augur a more resilient recovery.
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New York TimesRecession over? Not around here, it isn't
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THE recession may be over for now, but business owners in Worcestershire say they are praying for signs it has gone for good. Shopkeepers, independent traders, car garages, big companies – they all say they are still counting the pennies despite the ...
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Wall Street Journal (blog)
My print column examines a debate among U.S. economists about whether seasonal adjustments are working as they should, filtering out the usual month-to-month variation in economic indicators — or whether they've been distorted by the recent recession, ...
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During the past four years, America has suffered its worst recession, which started under the Bush administration, since the Great Depression. According to www.presidentialdebt.org, President George W. Bush added $3.1 trillion to the national debt ...
See all stories on this topic »Global recession could be around the corner if US drowns
China Daily
The stock market is in correction mode and as long as the trend is down, capital preservation should be the top priority. It is notable that in this earnings season, several bellwether companies have missed estimates and they have disappointed the market.
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CFO.com Magazine
Revenues of non-financial companies surpassed recession levels for the first time in the second quarter, according to a study of almost 2900 non-financial publicly traded firms with market caps of $50 million, according to Cash Flow Analytics data.
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