INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,373
Friday February 14, 2020 7:58 a.m.
I am going to run yesterday’s post again for weekend readers, since it is so relevant. I experienced the bubble manias in the 1960s, 1970s, 1990s and mid-2000s first hand and remember them well.
As those bubbles expanded, a market top was the last thing investors expected. Corrections were short-lived as buyers pounced on any concession in price then went on to pay up for stocks believing a market top couldn’t happen.
Today’s bubble is much like the Nifty Fifty (one decision blue chip stock craze) in the 1970s. Only one decision was made – BUY. Aside from Eastman Kodak and Polaroid, most of the 50 are still around.
They sold at extreme price/earnings multiples until the 1974-1975 recession/ bear markets lowered the boom with a thumping that took eight years to recover from.
Today the S&P 500 sells at extremely high P/Es relative to past market tops. While corporations are aggressively buying back stock to shrink the bottom line producing a windfall for top executives and those lucky enough to have options for exercise, there comes a time when the BIG money locks in gains and stops buying stocks that are so overvalued.
We saw it in Q4 2018 when the DJIA and S&P 500 dropped 20% in face of a looming recession. It took a major Fed policy change to head off the recession and trigger a huge rebound in the market which has evolved in the inflating bubble we have today.
I can only warn of the consequences of overstaying this bull market. Timing the burst of bubbles is next to impossible to read. The burst rarely follows classic technical market top formations.
On a given day, buyers will simply not show up and down the market will go 12% to 18% for openers. Initially, investors jump in thinking they are getting a gift with lower prices only to find out later that they have been had.
READ BELOW: BUBBLES 1960S “ONICS,” 1970S Nifty Fifty… ……………………………………………….
Minor Support: DJIA:29,301; S&P 500:3,361; Nasdaq Comp.:9,697
Minor Resistance: DJIA:29,477; S&P 500:3,381; Nasdaq Comp.:9,734
Thursday February 13 “Bubbles: 1960s “onics,” 1970s Nifty Fifty: Late 1990s Dot-Com Mania, 2020: ?????
Yesterday’s market surge was attributed to a reduced threat of Coronavirus, as well as Street’s perception that Sen. Sanders’ good showing in New Hampshire raises his odds of being Democrat candidate in November and very beatable by President Trump.
The truth is, today’s late-stage bull market is a BUBBLE, fueled by fears of missing out (FOMO) and the inebriated conviction that the party will last forever. It will burst as all bubbles in the past did but timing is next to impossible. One day big buyers will not show up and stocks will simply plunge.
This happened in 1999 – 2000 when the Street hysterically bid up dot-com/tech stocks that had no chance of surviving as entities. All that was needed was dot-com in its name and investors rushed in to buy without thinking.
Most went out of business as dot-com stock prices dropped to “zero.”
It the 1960s, a name ending in “onics” was all a stock needed to soar relentlessly until the 1966, and 1968-1970 bear markets zapped their appeal.
In the early 1970s it was the “one decision,” “Nifty Fifty” stocks that the Street believed should be bought and held indefinitely until the bear markets of 1973-1974 defrocked them of their bullet proof veneer. It took 8 – 10 years for them to recoup their losses.
Today the bubble sports a better quality company though they are historically extremely overpriced well beyond values seen at prior market tops.
I sense the Street knows the end is near and is pumping the market up to eke out as much as possible before reality day.
What to do ?
Resist the temptation to go all-in and have a cash reserve, because no one knows when the break will come and when it does it will be straight down because the BIG money won’t be there to prop the market up and drive it higher.
This is Kool Aid stuff and every bit as addicting to investors who want to wring out more and more stock market scores, and corporations buy in more of their own stock before they run out of sight.
It’s becoming a dumb/dumb market, the less you know the more money you can make. It’s history repeating itself over and over again.
Wednesday February 12 – no blog posted
Tuesday Febuary 11, Cash Is Actually an Investment
A new high for the S&P 500 and Nasdaq Comp. with the DJIA close behind.
It is clearly an institutional buying bubble, as the NYSE market composite, Dow Jones Transports and the “unweighted Value Line Composite” lag behind.
There is nowhere else to put one’s money, thus a stampede to gobble up stocks before they run higher.
Make sense ?
YES, if you are a professional under pressure to perform for clients.
YES, if you are desperate to make more and more money to simply survive the relentless drain on daily costs.
NO, if you are aware how historically overvalued stocks are and cannot afford to take a 15% – 30% hit.
The Administration is pressuring the Fed to cut rates further, which if the economy is in a good place doesn’t make sense, except it would help Trump get re-elected.
Not all indicators are bullish, not everyone surveyed is bullish on the economy, so a rate cut this summer is possible.
The higher it goes, the more severe the crash.
Since not all savvy investors are chasing stocks, they will at some point be a no-show. The BIG money is not stupid, it didn’t get rich paying up for stocks.
Monday February 10 “All Is Not Just Peachy – CYA”
A closer look at the economy suggests all is not as well as we are led to believe.
InvesTech Research’s Feb. 7 bulletin notes that the ISM Manufacturing Index posted its first expansion in five months thanks to early reactions to Phase 1 of the China trade deal.
However, InvesTech explains, the Chicago Purchasers Manufacturing Index (PMI), a leading indicator , plunged 5.4 points to 42.9%, the second lowest in this 10.6-year cycle. All five components of the index declined.
Additionally, the U.S. Leading Economic Index (LEI) declined in December crossing below its 18-month moving average, a warning signal. Over the past 16 months, the LEI has been flat.
Alternet.com published results from the Washington Monthly’s Feb. 7 economic/political letter – summarized highlights include:
–wage growth lags despite the low unemployment rate with growth at plus 0.9%
accounting for the impact of a 2.1% inflation
-the Tax Cuts Jobs Act (TCJA) did not produce a $4,000 pay raise for Americans, Worse yet, 91 of the Fortune 500 companies paid no federal taxes. (essentially corporations got a 40% tax cut while the general public got 1% – 1.5%). The corporations spent the windfall on stock repurchases to shrink their bottom line, pump up their stocks and assure profitable exercise of executive stock options.!
-The TCJA did not produce a 4%-6% growth in GDP, and Q4 growth was only 2.1%
-The trade war cost American households $1,277 in 2019 according to the publication. (I cannot confirm that and going forward that cost may be less if other savings result)
-Reportedly, the trade war generated a 24% increase in farm bankruptcies in 2019.
OK, the Washington monthly is a liberal publication, but there is a major league imbalance here with a huge gap between high net worth individuals and lower net worth/earning Americans.
THAT IS ECONOMICALLY UNHEALTHY.
With some 70% of the GDP coming from consumer spending and household debt increasing to $14 trillion with auto loans, credit card and student loans debt the biggest contributors.
Very little can be done about this imbalance, it is a result of changing times and a reduced bargaining power by employees in negotiating wages and salaries.
What’s worse and still not acknowledged is that automation and Artificial Intelligence will severely impact employment going forward leading to the nation’s greatest employment crisis ever. .
WHAT IS AT ENORMOUS RISK NOW IS THE OVERVALUED PRICE PAID FOR THE STOCKS OF COMPANIES WHOSE FUTURE DEPENDS ON THE AVERAGE SPENDER WHICH LESS BUYING AND BORROWING POWER GOING FORWARD.
ALL THE PLATITUDES AND OPTIMISM ABOUT THE ECONOMY ARE UTTER
RUBBISH, aka, BULLSHIT.
Suddenly, all this will come home to roost, as the BIG money walks away and sellers panic with an initial plunge of 12% – 18%. Depending on what news hits the market when it tries to bounce from these levels, another 30% down will be slashed from the market averages.
I do not know when this bubble will burst. I have warned about it at lower levels and have been wrong. When it bursts, it will be straight down because the BIG money will not be there to catch stocks and selling will accelerate.
CLEARLY, EVERYTHING LOOKS JUST PEACHY ! HOW ON EARTH CAN ANYTHING GO WRONG ?
WELL, THAT’S WHAT IT LOOKS LIKE AT MARKET TOPS.
Friday Feb 7 “When Will The BIG Money Walk Away ?”
This is mostly an institutional playground, big hitters duking it out, big corporations scrambling to buy back more of their own stocks before the price runs away, but contributing to their own problem by running their stock up in the process and averaging the cost of acquisition higher !!!
If stocks were reasonably priced considering the Obama bull market is nearly 11 years old and economy a couple months short of that, as well, risk would be justified.
Insanity, greed, fear of missing out driving hope for another good year, but the persistent 3 a.m. wake up, cold sweat, angst that those in the know feel knowing the party may just be about to end with a double digit flash crash, as all the pros STOP BUYING and a vacuum sucks prices down trapping the uninformed, and those seeking to join the party at the top only to get crushed.
In a bear market these are the folks who sell out at the bottom, just like they bought in at the top. SURE, THE ECONOMIC NUMBERS LOOK GREAT, UNEMPLOYMENT LOW, JOBS BEING CREATED, STOCK MARKET UP.
HOW CAN I SAY THESE THINGS ?
BECAUSE THAT’S WHAT IT LOOKS LIKE WHEN THE PARTY IS OVER, THAT’S WHAT IT LOOKS LIKE WHEN A MAJOR BULL MARKET TOP IS FORMING !
WHEN ? HARD TO PREDICT WHEN BUBBLES BURST. WHY CHANCE IT.
The BIG money will keep pushing market leaders higher, others will be unable to resist the urge to load up even more, even borrow to buy stock.
Big scores in just a few days will be the topic of discussion. It won’t take long for investors to spend anticipated stock market gains ahead of time.
What is scary is computers can come unwound, go batshit and with so many algos calling the shots, who knows what to expect.
I have repeatedly warned about a digital meltdown, that a hard copy of ky should be maintained regularly in case it needs to be proved.
I think a thinking America, a Feeling America, an informed America, an hones America that demands the same from its leaders can do anything. That has to start to happen – NOW.
Thursday Feb 6 “Inflating Bubble – Inflating Risk
Back to a re-inflating bubble. Nothing has happened yet to prick it, and I am not sure what will. It’s the nature of bubbles. They can burst as a result of an event, or they just get sooo BIG they can’t get any bigger…and burst.
That’s where calling the shot defies analysis…….unless of course you keep warning it will burst which is what I have been doing.
Most of my 57 years in this business have keyed more on technical analysis but with a lot of weight given to fundamental, monetary, economic, political, psychological and seasonal analysis. Being able to address any one or all of these elements is what got me back on CNBC frequently in the 1990s.
In those days. It was one-on-one for 20 minutes, not a focus on a specialty.
The analyst had no idea what to expect, but wise to admit you did not have an answer.
There were other individuals who got on TV who were not from big firms but had great insight, but CNBC changed the format to a more showtime preso and it was not new nor improved – just boring, a lot of the same faces saying little of interest.
You should know that, because in this business there always several ugly balls up in the air, any one of which can come down unexpectedly to change the forecast. I endeavor to cover all in my pre-blog analysis, but try to boil it down into a faster read, which people hate to do today.
This market became historically overvalued over a year ago reaching valuations that turned prior markets down.
Something changed several years ago – the flash crash, sudden plunges when buyers didn’t show and seller panicked. These plunges come unexpectedly and require investors who don’t want to take a hit, or want to be prepared to buy some stocks lower or add to positions to have a cash reserve.
Memories tend to be short. With the bubble inflating like this I can only warn repeatedly of what will come and it will be ugly. The more the bubble inflates the less you will take me seriously.
The 12% -18% flash Crash will strike and only then will investors appreciate building cash rather than risk as the market spirals from overvalued to more overvalued.
Wednesday Feb 5 : “El-Erian: Rate Cuts are Counter Productive; Daco: More Rate Cuts Coming”
Allianz’s Mohamed El-Erian told Axios that, “Central bank stimulus may now be reaching a point where it’s ineffective if not counterproductive.”
Oxford Economics chief U.S. economist, Gregory Daco, is predicting a couple more rate cuts this year in face of an adverse impact of the Coronavirus.
BUT WAIT a minute ! What about the ADP jobs report today showing January jobs added exceeded estimates by a wide margin (202,000 vs 160,000 est.) ?
If the economy is gaining strength, will the Fed now have to raise rates ?
One of the first things you learn in this business is – “Don’t fight the Fed.”
While I generally respect the raw power of the Fed, I did not this time.
Because the Fed jumped the gun employing measures to stimulate the economy before it was vitally needed. When we finally slip into recession after 11 years of expansion following the Great Recession, the Fed will have few measures to bring the country out of recession.
A year ago the Fed abruptly reversed its policy of higher interest rates and proceeded to verbally talk the country out of a looming recession and bear market which was already underway with a Q4 drop in the market averages of 20%. Its three cuts on its fed funds rate in the second half of the year backed up all the hype that preceded the cuts.
Re-elect President Trump ?
Didn’t want to be criticized for a recession on their watch ?
This time around, they are delaying the inevitable, worse yet encouraging investors to jump into a market that is vastly overvalued.
This is classic bubble stuff and there is nothing anyone can do to convince investors how disastrous a fully invested position can be.
This is what it is like at market tops and always has been. Does anyone think the big money will stand by and watch their paper profits vanish in a bear market ?
My guess based on the decline in margin debt, they have already begun their exit.
For more than a year I have urged a 30% cash reserve, and much, much more at times of great risk. That’s in line with most of the analysts I have seen. It all depends on how much one can afford to lose.
Markets always rebound to recoup losses ? Problem with that is at bear market bottoms most investors are so scared of a further decline, they sell out – at the bottom.
The prospects are now increasing for a “Greater Recession/Greater Bear Market”, worse than 2007-2009.
Tuesday Feb 4, “High Risk in Buying the Open Today”
A three-day, 14% plunge in the Shanghai Composite Index was reversed yesterday triggering a sharp rally in global stock markets including those in the united States.
Yesterday’s rally wasn’t very impressive, but the prospect for today’s open is.
The sharp reversal in China’s stock market in face of the spread of the Coronavirus epidemic will run U.S. stocks up at the open, the key will be is the China impact only temporary ?
More important are the reports on the economy this week. Both manufacturing gauges (PMI, ISM) bounced in January after six month slides. The Construction Index rose 1.4% in December, but all of 2019 was down 0.3%, the worst since 2011.
Factory orders come at 10 a.m. today, the ADP Employment Report tomorrow at 8:15 and Employment Situation Report at 8:30 Friday.
TECHNICAL: Today’s rally is triggered on what is happening in China’s markets, however the longer term direction will depend on the economy.
There is major resistance at DJIA 28,800 (S&P 500: 3,284).
This is a risky rally to “chase”, especially at the open which may be the high for the day.
What No One on Wall Street Wants to Hear
>We are in the late innings of an economic expansion, so a recession is a good bet. The current expansion started in June 2009, has lasted 122 months, the longest in history, twice as long as the average length of 11 cycles since 1945.
> Of the 10 recessions since 1950, the average time between the low point in the unemployment rate and the start of a recession was just 3.8 months. The unemployment rate is 3.5% which was hit in September. Technically, we won’t know when the start of the current recession is official for months after the fact, since that conclusion is reached by the Nat’l Bureau of Economic Research (NBER) and they consider host of economic indicators.
>Bear markets lead the beginning of recessions by 3 to 12 months. The current bull market at 126 months is 4.2 times the average of the last 15 bulls going back to 1957
>Nine out of the last 10 recessions have occurred with a Republican in the White House.
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Investor’s first read, is a Game-On Analysis, LLC publication for which George Brooks is sole owner, manager and writer. Neither Game-On Analysis, LLC, nor George Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized or as investment advice as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment in keeping with their tolerance for risk.