Nearing The End Of The Line

by: David Urban

Stocks rose last week on the back of good but underwhelming earnings releases from companies like Coca-Cola (NYSE:KO), American Express (NYSE:AXP), and IBM.

Intel's (NASDAQ:INTC) net income was down 4.3% from a year ago but lowered forecasts for the coming quarter on the back of economic weakness from Europe spilling over around the world. Another blue chip bellwether, Johnson & Johnson (NYSE:JNJ), cut forecasts for similar reasons.

In a story that is playing out across the board, companies are reporting slowing growth as economic uncertainty emanating from Europe consumes the world. 2nd quarter GDP forecasts in the United States were lowered to 1.3% from earlier estimates of 2% growth, calling into question second half forecasts which show a strengthening economy.

Federal Reserve chairman Ben Bernanke testified before Congress regarding monetary policy and offered a dismal view of the economy but remained coy on details concerning further monetary stimulus.

The danger from additional quantitative easing measures is that it may push the US economy even closer to a Japanese style liquidity trap.

The Federal Reserve has options at its disposal like lowering the rate paid on deposits at the Federal Reserve to negative rates in an attempt to flush money back into the system but that may backfire if the money moves into Treasuries instead of lending where it is desperately needed.

Overseas, South Korea officials are probing the four biggest banks over a rate fixing scandal. No this is not LIBOR but the 91-day certificate of deposit, used as a benchmark for lending, borrowing, interest swaps, and other instruments. The probe seeks to uncover if the banks kept the CD rate artificially high in order to push up lending rates.

In Japan, the Bank of Japan removed a yield floor and cap on the purchases of securities with one year or less as they move forward with a bond purchase program aimed at boosting economic growth rates.

Greek leaders continued to work towards a decision on further austerity cuts before the Troika arrives next week to review their progress. Greece needs to make a debt payment in August (their last until February of next year) and is looking for the Troika to fill the hole until their economy can right itself.

On Friday the ECB stopped accepting Greek sovereign bonds and other debt backed by the government as collateral forcing Greek banks, many of which are reliant on central bank funding, into the emergency liquidity assistance ((NYSE:ELA)) programme.

The Philadelphia Fed business activity index came in at -12.9 in July with new orders falling for the third consecutive month.

Looking ahead, investors should take a moment and look back at the earnings reports released last week. Many companies reported slower growth despite beating earnings estimates. The problems in Europe continue to drag down economic growth around the world and Greece is a concern as they have a debt payment due in August. Growth forecasts for the second quarter have fallen from 2% to 1.3% as businesses worry about the post-election environment and problems in Europe.

Investors should be hedging their portfolios through short ETFs at this time in preparation for the coming selloff. Technically, the Dow Industrials and Utilities are in the process of putting in triple tops and completing the final portion of a Three Peaks and a Domed House pattern.

It is time for investors to look at short ETFs like the ProShares Short Dow 30 (NYSEARCA:DOG), ProShares Short QQQ ETF (NYSEARCA:PSQ), ProShares Short S&P 500 (NYSEARCA:SH) to hedge their portfolios for the coming selloff.

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

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