Warning: A Midsummer Market Nightmare

Includes: AMLP, EUO, MKC, SEF
by: TrimTabs

By Dan Dorfman

In the late 1500s, William Shakespeare brought us A Midsummer Night's Dream. Now, more than 415 years later, Michael Larson, editor of the Florida-based Safe Money Report, one of the country's more prominent bearish investment newsletters, offers us his own Wall Street version of that play. Call it, say, a midsummer market nightmare, or a resumption of last summer's debacle, notably in July and August, when the Dow dived about 2,000 points on fears of a contagion of the European debt crisis and the June end of QE-2.

Alas, Larson sees another bummer of a summer, with the Dow tumbling over next the several months to the 12,000-12,200 range, largely triggered by a swelling global economic slowdown.

"Investors cannot simply close their eyes to what's happening overseas," he says: "That's a recipe for disaster because many risks are being papered over by non-stop central bank printing and unworkable bailouts." Taking issue with the steady barrage of optimistic "things will be okay" comments from European officials, Larson adds it should also be kept in mind that Europe's underlying debt problems are far from over. Ditto, he says, the fallout spreading throughout the European economy, with double-dip recessions official in Italy, Belgium, Spain, the Netherlands, the Czech Republic and the United Kingdom.

With Europe mired in a spreading recession and Asia slowing, as well, Larson observes that if the U.S. slows further like the rest of the world is doing, earnings and stock prices here are bound to suffer. In fact, he points out, the ill effects are already being pretty powerfully felt. Indicative of this, he says, U.S. stocks are getting hammered (evident by a recent string of six straight losing sessions during which the Dow plunged 444 points), commodities are imploding, bank stocks are falling world-wide and some European markets are selling at multi-year and even multi-decade lows.

The general view among most economists is that the next couple of quarters will see U.S. GDP growth on the order of 2% to 3%. That's, much too optimistic, says Larson. His expectation: "Ugly under 1% growth over the next two quarters as things overseas affect us."

If he's right, of course--and that's a big if--stock prices would surely take a thumping. Larson points out we're already seeing clear signs of market deterioration, what with a lot of sectors heading down or threatening to break down. Included are energy, transports, semiconductors, many financials, agriculture, heavy industrial miners and gold miners.

So how can investors protect themselves in the shabby market environment he envisions? Larson's recommendations number a trio of exchange-traded funds, including a couple of those ultra-risky inverse funds, and a spice stock.

First, to capitalize on a skidding Euro, he suggests ProShares UltraShort Euro (NYSEARCA:EUO), a leveraged inverse ETF that he views as a worthwhile hedge, given the massive risks piling up overseas and which is designed to rise 2% for every 1% decline in the value of the Euro against the dollar. Needless to say, if the Euro should rise on any cheerful tidings from Europe, you're going to lose money. In other words, it's not for widows and orphans.

For those investors seeking higher income (which is everybody)--more than you would get in plain-vanilla Treasuries--Larson favors Alerian MLP ETF (NYSEARCA:AMLP), which owns shares of master limited partnerships, companies that store and transport energy products and pay out above-average dividends. Alerian currently yields 6.1%.

Short Financial ProShares (NYSEARCA:SEF)--a bet that financial stocks will head lower--is yet another inverse ETF that Larson is pitching. This ETF is designed to rise 2% for every 1% decline in the value of financial stocks.

McCormick & Co. (NYSE:MKC), a spice and seasonings maker, whose shares recently broke out to an all-time high of $57.13 (up from its 52-week low of $43.36), is one of our bear's top stock picks. "It's a steady-Eddie business and the company is firing on all cylinders," he says.

Larson's final thought, another integral part of his current strategy, is his strong recommendation that investors "take profits off the table now."

Or, put another way, watch out for that midsummer market nightmare.

Note: The opinions and views in this column do not necessarily represent those of TrimTabs Investment Research

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.