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by John Nyaradi

It was quite a week with revolution coming to Tripoli, Libya, and Madison, Wisconsin, while the economic and earnings news could only be described as dismal.

Market tremors early in the week caught the “buy on the dip” crowd off guard while Congress worked to avert a government shutdown this coming week and the “new austerity” threatens to trigger a double dip recession at home.

With Brent Crude oil now at $112/bbl, a 2 1/2 year high, and West Texas Intermediate (USO) close to $100, we see new headwinds blowing against the “Bernanke Put,” and so, all in all, I’m beginning to feel like a driver in the picture, like we’re on a road with no way out.

The View From 35,000 Feet

Libya was the big news, of course, with revolution and the world rallying against a bad guy who has been a thorn in the side of the Western world for decades. Of course the important issue from an economic standpoint is oil, since Libya is #18 on the list of oil producing nations and contributes 2% to world supplies with as much as 80% of their exports going to Europe and Italy, in particular. Libyan oil is light and sweet and easy to get to Europe and any alternative is going to cost more and boost prices on the Continent.

Of course, with oil prices escalating, at home we’ve seen gas prices rise more than 15 cents a gallon in recent weeks, and many analysts are calling for $4 or even $5/gallon gasoline at American pumps. It’s simple economics to know that increased energy costs add a “tax” to American consumers who will have less dollars left over to spend if more dollars are going into the tanks of our cars.

Meanwhile, the protests continue in Wisconsin which is just a harbinger of problems to come in other states as states and cities slash budgets to balance deficits, since, unlike the federal government, they aren’t allowed to print money. Now we have “The Wisconsin 14,” the 14 Democratic Senators who went AWOL to protest the Governor’s proposals, and all of this is eerily reminiscent of other marches in Madison some 40 years ago during the height of the Vietnam war.

In the United Kingdom, GDP was revised yet further downward, confirming the start of a double dip recession in the British Isles, while United States 4th Quarter GDP was revised downward to 2.8% from initial estimates of 3.2% for the 4th Quarter, putting us perilously closer to the flat line here at home.

Goldman Sachs (GS) estimates that the proposed spending reductions in Congress could cut GDP by a further 1.5-2% and so, there we are, trillions later, with the threat of another recession looming ever closer on the horizon.

The recession has already returned to the housing industry (ITB) (if it ever really ended) with the Case/Shiller Index pointing out a continued decline in housing prices of 3.9% in their latest report last week.

Earnings continue to be overall positive, however, Hewlett Packard (HPQ) and Wal-mart (WMT) were punished last week for missing expectations, and one can only wonder, if Wal-mart can’t make it, who can?

But not all news was bad, with consumer confidence rebounding, a decline in weekly unemployment claims and a rise in durable goods orders offsetting the negative news.

What It All Means

Now we come to yet another intersection, and is it one where all roads lead to nowhere?

The trillions that have been thrown at inflating the economy are being erased by the rapidly rising price of oil, proposed government cutbacks on the Federal level, reduced spending on the state level and the continuing erosion of the value of most peoples’ most significant asset, their home.

It’s unlikely that the rolling revolutions on the southern shores of the Mediterranean are going to end anytime soon, and if the contagion should spread to Saudi Arabia or escalate in Bahrain, the situation will become yet dicier.

Gross Domestic Product is defined as (Private Consumption + Gross Investment + Government Spending + Net Exports) and so if one takes a big bite out of a big component like Private Consumption (gasoline prices) or Government Spending, (proposed state and Federal cuts) the results are simple eighth grade mathematics.

We now are perilously close to a double dip recession at home, and I think this dismal possibility grows more likely by the day due to the factors mentioned above.

At Wall Street Sector Selector, we continue to hope for the best but are positioned for the worst and stand ready to react to the rapid changes we continue to see in today’s dynamic markets. The important thing to remember is that there are always opportunities no matter what kind of market environment we face.

The Week Ahead

Lots of big reports are due out this week with the climax coming on Friday with the February Non Farm Payrolls Report.

Economic Reports

Monday: January Personal Income, January Personal Spending, February PMI, December Pending Home Sales

Tuesday: January Construction Spending, February ISM, March Car Sales

Wednesday: February Challenger Job Cuts, February ADP Employment Report, March Fed Beige Book

Thursday: Initial Unemployment Claims, Continuing Unemployment Claims, February ISM Services

Friday: February Non Farm Payrolls, February Unemployment Rate

Sector Spotlight

Winners: (NYSEArca: TLT) Long Government Bonds (NYSEArca: SLV) Silver

Losers: (NYSEArca: TUR) Turkey (NYSEArca: ITB) Homebuilders

Disclosure: No positions in ETFs or stocks mentioned. Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.

Source: Market Tremors and the Threat of a Double Dip Recession