A Perfect Storm Threatens Stocks

As if the fiscal cliff folly in Congress was not enough, now war looms in the Middle East as well? It’s reminiscent of Superstorm Sandy (which oh by the way was a catalyst for recession too) with the confluence of a deep dip in the jet stream on an arctic low pulling in a hurricane into our most populous region. Seriously, the perfect stock market storm seems to be forming over the New York Stock Exchange (NYSE: NYX) and NASDAQ (Nasdaq: NDAQ).

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

Perfect Storm

Earlier this week, I warned that the fiscal cliff issue is doing damage to the economy right now, as it stifles business investment. I said that we should be pushing for a compromise to be reached as soon as possible, because economic risk is not restricted to 2013 – the issue is hurting our economy today. Still, based on the initial posturing of both Democratic and Republican leadership, it appears to me they’ll hold course right on up to the deadline, if not beyond it, even despite the ratings warning from Standard & Poor’s (of McGraw-Hill (NYSE: MHP)).

With the next elections two years away, and the presidency not up for grabs for another four years, I suppose our elected officials believe there’s a cushion for us to forget any fumble that might occur in Washington this year. The President seems assured by his reelection, and seems to believe the American people have given him a mandate. So, he’s more likely to hold firmly to his position this time around, and not cave on the tax issues at hand. Meanwhile, Republicans are certain that their base must have those tax breaks, or else they risk losing seats to Tea Party Republicans or fracturing their own party. This issue has been enough to sink the stock market since the election, with the SPDR S&P 500 (NYSE: SPY) off 5.1% since. The SPDR Dow Jones Industrial Average (NYSE: DIA) and PowerShares QQQ (Nasdaq: QQQ) are down 5.0% and 5.6%, respectively.

Today, though, we have even more to worry about. As if the impending Iranian conflict was not enough, now we have a serious scuffle playing out in Gaza that could spark into something much larger if the newly seated leader (read radical) in Egypt, the desperate despot in Syria, and the Iranian madman get itchy trigger fingers. Despite economic concerns on the fiscal cliff issue, this geopolitical tension has oil prices holding up. The iPath GSCI Crude Oil TR Index (NYSE: OIL) is down by a relatively modest 3.3% since the election, though the shares of petroleum bellwether ConocoPhillips (NYSE: COP) are off 6.2% since.

So take shelter folks. Continue to reduce beta exposure and hedge against overall market decline. Despite the drop in gold of late, I continue to favor it along with silver and other hedging instruments for the longer term. I would rather withhold from discussion for now another short-term hedging instrument, which I will discuss very shortly (so follow my column to keep informed). I’ll dedicate a specific article to this very important instrument in the very near future, but at this point I’m not ready to discuss it. You should consider hard assets, including real estate and gold, and also instruments like the SPDR Gold Trust (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV). I believe the concerns about deflation are overdone, as they ignore the damage that I expect to be inflicted upon the world’s fiat currencies ahead. Until the next time, keep your head down and your exposure hedged.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.