INVESTORS first read.com – Daily edge before the open
S&P 500: 2,485
Russell 2000: 1,337
Monday, December 31, 2018 9:11 a.m.
Wishing you the best in 2019
Sept. 21, 2018 : Raise cash to 50% (DJIA: 26,656)
Nov. 8, 2018: Raise cash to 75% (DJIA: 26,180)
Dec. 26, 2018 Doom Thick Enough for a Rally (DJIA: 21,792)
A tweet over the weekend by Trump indicating the United States and China are making progress in trade talks is jacking stock-index futures up at the open.
But, I would expect buyers to be hitting the market anyhow. Institutions are flush with cash and stocks after a 16% plunge in the S&P 500 this month, 20% since early October, are giving institutions a chance to pick up stocks at handsome discounts.
Just how big a push we can expect in early 2019 depends on what happens to the host of uncertainties/negatives that turned stocks down in October. Odds favor a spike in early January, then a decline into March.
In short they are: a trade war, government shutdown, looming recession, a lower growth rate for the GDP and corporate earnings, rising interest rates, aging economy, likely constitutional crisis, housing industry crunch, debt at all levels, international hotspots, global slowdown, Trump.
Any one of these resolved successfully, can bump prices higher, but that means the market averages would be going from historically overvalued to very overvalued, this in face of sharply lower projected earnings in 2019.
HOW MUCH HIGHER FROM HERE:
Presently, without major breakthroughs on uncertainties:
S&P 500: 2,615
The market averages must get past the following levels first;
S&P 500: 2,570
Nasdaq Comp.: 6,850
There is a ton of cash that institutions must put to work. This buy power stands to drive the market higher into early January, where the next leg of a bear market will develop.
So much depends on the uncertainties which are bedeviling money managers’ and corporate decision makers’ decision process.
Presently, I see a rally running into 2019 as a “death rattle,” a fake-out that sucks a zillion investors into the market, only to betray them with another “trapdoor” effect plunge to new lows.
I think a recession has already started, as evidenced by the prolonged slump in the housing industry and industries that depend on it (appliances, furnishings, building materials and related employment).
The question now is, to what extent does a 15% decline in the S&P 500 discount the uncertainty and impact of a recession.
With the prospect of a recession looming in 2019, odds favor a turndown
from slightly higher levels in early January.
I do not think a 15% decline in the S&P 500 adequately discounts a recession, or a host of other uncertainties/negatives, as outlined below in “Bearish Case.”
The market should start running into resistance today at:
S&P 500: 2,527
It just keeps getting worse. Yesterday a U.S. Court of Appeals for the D.C circuit ruled in favor of Special Counsel Robert Mueller’s action to subpoena an unnamed foreign entity (Russia, Saudi Arabia ?) for something that happened abroad, but directly affects the United States.
The court procedures were so secret, an entire floor in the court house was in lockdown until a decision was rendered,
The Trump Foundation was forced to dissolve in face of a lawsuit accusing it of “willful self-dealing” in an abuse of power resulting in a “shocking pattern of illegality” that also includes Trump’s 2016 presidential campaign.
Special Counsel Robert Mueller is closing in on Trump, et al, and this is going to get ugly, real ugly.
The daily disclosure of wrongdoing by this administration will weigh heavily on the market at a time the economy is going in the tank and the stock market on the verge of a bear market.
THE PRESIDENCY PROBLEM
An even bigger issue is about to hit the Street right between its eyes and that is, what will happen to stock prices when President Trump is removed from office, or he resigns ?
It’s coming and it won’t be pretty, in fact odds favor what will be released will stun everyone, even those in denial about what has been happening to our republic.
There are other issues that can crush the market (debt, fiscal crisis, depression), but extended dysfunction in the highest office in our country has the potential for immeasurable damage to stock prices.
When it gets really ugly, when stocks are in a tailspin, reason yields to outright fear, pounding market averages to the “I can’t stand it anymore” point where investors just want OUT!
This is usually at or near the bear market bottom, but not before damage on the magnitude of declines like 50.5% (1998-2000) and 58% (2007-2009).
Investors must be prepared for the possibility of this happening. If it doesn’t play out that way, be very grateful.
Nine of the last 10 recessions have occurred with a Republican in the White House, and increasingly, it looks like it’ll be 10 for 11.
President Obama inherited the worst recession/bear market since the 1930s, Trump inherited a solid economic recovery, yet in the first 23 months the S&P 500 rose 54% under Obama and only 40% under Trump.
So, which party is better for the Street ? Go figure.
Investors must be ready for a resignation by President Trump who would cut a deal to trade his presidency for a get out of jail “sort of free” card, in face of incredible string of illegal activities.
The deal would include family members.
Who would succeed Trump as President ?
It is possible, Vice President Pence would also be at risk and forced to resign, since he was Chair of the President-Elect Trump campaign, which is now under intense scrutiny.
According to the Succession Act of 1947, the Speaker of the House, Nancy Pelosi, would be next in line to become President if both Trump and Pence are forced out of office, and that would cause a monstrous firestorm.
What if Pence resigns first and Trump appoints another Vice President who would then become President ?
It gets complicated and divisive, and that wouldn’t be good for stock prices.
All this is possible, in my opinion – probable, and would most likely crush stock prices until resolved.
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 126 months, the longest on record and more than twice as long as the average length of 11 cycles since 1945.
Bear markets lead the beginning of recessions by 3 to 12 months. The current bull market at 130 months is four times the average of the last 15 bulls going back to 1957.
Any rally here MUST be overwhelmingly powerful and unrelenting. Like all rallies in face of major unresolved problems, it carries great risks.
News of the yield curve flattening, worse yet “inverting” has begun to weigh heavily on the stock market. The curve is measured by the difference between short, and long-term interest rates.
The curve flattens when the short and long-term rates are nearly the same. They invert when short rates exceed long rates.
An inverted yield curve has preceded 9 recessions since 1955.
However, this event’s forecasting problem is that there can be a lag time before a recession hits of one to three years. An inversion predicted the 2007 financial crisis by 24 months.
So what is a flattening or inverted really telling us /
It is indicating the Federal Reserve is tightening credit by forcing short-term treasury rates close to or higher than long-term rates.in an effort to slow growth in the economy so it doesn’t overheat and trigger a surge in the inflation rate.
It is also saying that investors expect a recession, which will result in lower rates and they want to lock those in before that happens.
Should we be concerned ?
Yes, because the Street gets spooked when the curve flattens, it is a warning that the Fed is getting serious about tapping the brakes on the economy, and buy programs cut back, or sell programs initiated.
This has probably already started, however I think the Fed may be concerned it has gone too far and may want to tap the brakes on its own policy !
Technical Note: Frequently, there is what I refer to as a mid-afternoon counter move (2:30 – 3:00 where the market rallies or declines against the prevailing trend for the day. This can be a fake out for investors thinking the market has turned (up or down).
Economic Status: Late stage expansion with recession starting in late 2019. Bull markets hit peak 6 to 12 months ahead of recessions. Republicans were in White House in 9 of the last 10 recessions. Their rosy projections ignore the likelihood of a recession within a year to 18 months. Housing and auto industries already in recession. The crunch can gain momentum ahead of schedule. U.S. fiscal crisis looms 2-3 years out.
- Gary Shilling just turned bearish in his November and December issue, headlining his issue of “INSUGHT“ with “Looming Recession ?” I have tracked Shilling for decades. He nailed the 2007 – 2009 Great Recession Bear Market before anyone else. For him to suddenly turn negative is a shocker. He details his reasons in a 50-page analysis that is overwhelming in detail and backed up with stats and graphs. No one in my experience has more economic/investing integrity than Shilling.
IMPORTANT NOTES: How high is high, how long is long
>Through September, this bull market is 116 months old, or 3.5 times longer than the average of the last 15 bull markets..
>Bear markets start 6 – 12 months ahead of the onset of a recession.
>Nine out of the last 10 recessions have occurred with a Republican in the White House
>The current economic expansion has lasted 123 months. That’s 65 months (2.1x) longer than the average expansion (58.4 months) going back to 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 3.8 Months.
> 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.
Bear Market Perspective
Officially, we are not in a bear market until the S&P 500 declines 20% (2,352). That would translate into DJIA 21,560 – “ouch” !
That’s the minimum drop for a bear, but the last two bears crushed the S&P 500 by 57% (2007-2009) and 50% (2000-2002).
Currently, my bear market target would be declines to:
DJIA: 18,500 (-31.4%)
S&P 500 : 2,150 (-27.0%)
Nasdaq Comp.:5,200 (-36.1%)
But, depending on what new negatives hit the market when it gets down there, the bear market could reach much, much lower levels.
EARNINGS GROWTH MYTH:
The Street is counting on earnings growth to reduce the overvaluation of equities. Look again.
A 20% increase in S&P 500 earnings this year will be tough to beat next year. The quarter versus year ago quarters in 2019 will make poor reading going up against the 2018 earnings, possibly earnings growth around 5%. But the Street is not factoring in the likelihood of a recession, which could mean negative growth.
At times, politics has little impact on the big picture. This time is different.
The case for the bulls has been weakening. The stellar earnings increases in 2018 in excess of 20% will be followed by increases less than one-third as great .
FactSet has been lowering its projections for 2019 in recent weeks.
It is possible the Fed has backpedaled from a policy of tightening credit through increases in its fed funds rate. But another rate increase in December keeps the squeeze on, and a projected two rate hikes in 2019 instead of four is clearly no help for an economy that is showing signs of serious weakening.
RISING INTEREST RATES:
>The Fed may be retreating from its policy of increasing its benchmark interest rate (federal funds), though more information is needed. It has raised rates eight times since December 2015. That policy has led to an ugly slump in the housing industry. It raised its benchmark federal funds rate in December to 2.25-2.50m percent and plans two more hikes in 2019.
>Year/year existing home sales down 8 straight months. New home sales fell 8.9% in October. Single family starts fell for third straight month to an 18-month low.
>The yield curve is flattening as short-term treasuries rise faster than long-tern governments just another warning sign of impending recession.
> The onset of bear markets have led the beginning of recessions by 8.5 months going back to 1956, so don’t look for a recession to signal a bear market. The longest lead time was 13 months (1968 – 1969) The “mode” (most frequent) is 12 months.
> If companies were buying back their own stock at a record clip, pushing stocks higher, why then are insiders selling $8 of stock for every $1 of stock they buy ?
.> Companies took advantage of low interest rates to load up on debt in recent years for acquisitions and to buy back their own stock. Excluding banks, the tally is $6.3trillion. The downside of this comes when these companies will need to refinance this debt at higher interest rates when it comes due.
> The S&P 500 price to sales ratio at 1.92 is 19% higher than in 2007 before the devastating bear market, and is even higher than in March 2000 before the dot-com bubble burst leading to a bear market. Both bear markets dropped 50%.
> The Shiller P/E is 27.5 times earnings versus a mean of 16.6. Shiller’s P/E is based on inflation adjusted earnings over 10 years.
> The Total Market Capitalization to GDP stands at 147.3%, anything above 115% is considered “overvalued.”
> Thompson Reuters reports the S&P 500 sells at 17.1 times earnings and 16.8 times a year from now. All this versus a 10-year average of 14.3.
AGING BULL MARKET:
> The bull market is now nine years and six months old (117 months). That’s 3.5 times the average of the last 15 bull markets.
AGING ECONOMIC EXPANSION:
> Republicans – the recession party. Nine of last 10 recession have been with a Republican in the White House. Odds favor Trump will make 10 for 11.
> The current economic expansion has lasted 115 months. That’s 53 months (1.9 x) longer than the average expansion going back to 1945. Nine out of the last 10 recessions have occurred with a Republican in the White House.
> GDP expected to slow in 2019 to 2.7%, CAPEX to 5% from 7%.
> 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.
> Housing stocks have been in a prolonged slump since January.
>Year/year existing home sales down 8 straight months. New home sales fell 8.9% in October. Single family starts fell for third straight month to an 18-month low. The 30-year fixed rate mortgage rate is projected to hit 5.3% in 2019.
The iShares home construction ETF has dropped 30.5%, as interest rates rise. Not only is it major employer, its health affects other industries, especially furniture and appliances.
> Household debt increased for the 16th straight quarter to 13.3 trillion, that’s 19% above the post-financial-crisis low.
> Jamie Dimon, CEO J.P. Morgan Chase, thinks the benchmark 10-yearTreasury note , now 2.95%, should be 5%. The rate impacts lending for autos, mortgages and businesses.
> Personal loans have soared 18% to a record 120 billion, Personal savings as percent of disposable income at 3%, down from 9% in 2012.
> Low interest rates have encouraged US companies to go on a debt binge, amassing $6.3 trillion. With rates on the increase, refinancing will get more costly, according to S&P analyst, Andrew Chang, who points out that this amounts to $8 for every $1 in cash.
> Recently, 1,100 economists Warned that Trump is repeating biggest mistakes of Great Depression – tariffs, trade protectionism, according to conservative National Taxpayers’ Union.
> Former Fed Chair, Ben Bernanke, says economy to fall off a cliff in 2020, thanks to the $1.5 trillion corporate and individual tax cut and $300 billion increase in spending.
TRUMP’S TRADE WAR TANTRUM
> Trump’s tariff tiff costing US companies a bundle: The damage extends to manufacturers, input suppliers, fishermen, and numerous businesses who are finding it more difficult to sell abroad.
> Today’s businesses are complex, especially supply chains that can involve a thousand parts that make up a whole product, many of which are sourced from different countries, sometimes crossing back and forth across the same border a number of times.
> Trump is considering leaving World Trade Organization (WTO).
TRUMP ADMINISTRATION IMPLODING:
So far, the stock market has not wavered in face of the increasing likelihood, Trump and many present and former associates are in legal trouble.
7,546 !!! That’s the number of false and misleading claims made by Trump so far while in office. Geeeeez,
Why do Republicans deny someone else affordable healthcare ?
How sick is that ? What is their problem ? Want it all for themselves ?
Butina cuts plea deal – bad news for NRA and Republicans:
Alleged Russian spy, Maria Butina, has just cut a plea deal to cooperate with federal prosecutors (not Mueller), which is bad news for Certain Republicans who accepted Russian money through the NRA, which bankrolled Trump’s campaign to the tune of $30 million, as well as other Republicans, who may not be aware of the source. Clearly, they wouldn’t want that source to become public, if in fact that was the case. This was reported by Palmerreports.com Tuesday morning.
NEW TERM: Stochastic terrorist – terrorism that employs the use of mass media to provoke random acts of ideologically motivated violence that are statistically predictable but individually unpredictable like the CNN bomb scare and similar threats against Hillary Clinton and President Obama. That comes from PAlmerreports.com, as well as the following.
PENCE is TOAST, as well ? Trump had planned to replace Chief of Staff, John Kelly, with V.P. Mike Pence’s Chief of Staff, Nick Ayers, but suddenly Ayers backed out of both, citing the need to spend more time with family.