How To Play The Coming Recession

U.S. Treasuries have always been seen as a "safe" investment, backed by the full faith, and credit of the U.S. government." Yet with worries about the debt ceiling, and the possibility of a downgrade of U.S. debt, we have seen the continued move down in yields on U.S. Treasury debt. Many market pundits can not explain this move, but there is very one simple, albeit very negative reason why. We are starting the first leg of another recession, just two years after the "Great Recession" ended, at least if you believe the U.S. government. This morning, we saw a weaker than expected July ISM, coming in at 50.9. Economists expected a reading of 54.6. The whisper number was 52.0, and it missed even that number. Let's face it. Economic fundamentals are nothing short of atrocious. Unemployment in this country is over 9%, jobs are NOT being added, and there were real concerns in the private sector that a deal would get done in Washington over the debt ceiling and cutting the deficit. The yield on the 10 year U.S. Treasury is hovering around 2.7%, well above the crisis yields of 2% seen during the "Great Recession," but it does not exactly say the economy is humming right along. As the economy strengthens, the yield on U.S. government goes up, as investors demand more for their money. Money flows into riskier assets, such as stocks, commodities and such, and we have asset price inflation, which ultimately leads to inflation for the consumer, and the Federal Reserve tightens, and on goes the business cycle. This is nothing new to Wall Street. What is new is the speed of the cycle. We were out of the recession in June 2009 (again, if you believe the U.S. government). It's August 2011. Two years between cycles is extremely fast, much faster than anyone expected. Of course, there is also the train of thought that we never left the recession. The second half of 2009 and 2010 were strong for economic growth, asset prices and all things that looked like the economy was getting better. However, it was all funded by the economic stimulus packages that Washington passed (now gone), quantitative easing (QE1 & QE2) from the Federal Reserve and a little more confidence from the consumer. All of those are now either gone or wavering. Sure there is the possibility that the Fed comes in with QE3, or that the consumer will get more confident now that the debt deal is almost close to being done. Perhaps the recent weakness we have seen in the past few months is almost 100% the cause of Washington not being able to get their act together. It probably does have something to do with this, as we have heard from companies like Caterpillar CAT, Dunkin' Brands DNKN and UPS Inc. UPS that confidence was waning because of what was going on in Washington. Only time will tell, but it does appear, at least for now, that the ugly "r" word (recession) is starting to appear again more and more in commentary, blogs, articles and day to day conversation. The Fed has said that it will to do what it can to prevent the U.S. economy from falling back into a recession. Unfortunately, the Federal Reserve can not cause companies to hire, which is one of their two mandates. The long-run economic picture of the U.S. remains murky. "You've got a weak economic profile and rather more inflation in the economy," said Marc Mr. Ostwald, a strategist at Monument Securities to the Wall Street Journal. It looks as if we are inline for another recession. In other words, it is going to be a bumpy few years. Sit back, put your seat belts on, and make sure your trays are in their upright and locked positions. ACTION ITEMS:

Bullish:
Traders who believe that the U.S. economy will rebound once a debt deal is done might want to consider the following trades:

• If the economy starts to print better than expected numbers, we could see high beta names such as Baidu BIDU, Apple AAPL and Google GOOG move higher.

Bearish:
Traders who believe that the economy is likely to get worse before it gets better may consider alternate positions:

• U.S. Treasuries continue to remain the safe haven, as the bond market appears to be pricing in an another recession. iShares Barclays 20+ Yr Treas.Bond ETF TLT and low growth names such as Altria MO, will hold up better than higher risk equities.
  
  

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