INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,006
Friday September 20, 2019 9:28 a.m.
Politico’s Morning Money featured an article this morning, “Economists see sustained low growth, but no recession.”
The article quoted economists from the IMF, World Bank, central banks, rating agencies, mainstream economists, Fitch’s Global Sovereign Group, and the OECD, all giving reasons for continued growth albeit at a slower pace.
At the end, Politico adds this addendum, “Be smart: Economists almost never see recessions coming. Ahead of the global financial crisis [2007 – 2009], economic leaders from the Fed, Treasury Department and major retings agencies gave no warning of what was to come.
This time may be different. However, the question for investors is, can they afford to be wrong after 10 years of economic growth and a bull market that is by historic standards vastly over valued ?
The question for reasonable investors, how much risk can you afford – 10% – no sweat …..20% – “ugh”…. 30% – horrors….40% ?
Nasty corrections happen , bear markets happen, and most of the time they strike when just about no one expects them.
Yesterday’s rally failure suggests sellers are waiting to hit buyers at slightly higher levels. Today’s market will start on a positive note, but bulls must push up beyond DJIA 27:306, S&P 500:3,021 and Nasdaq Comp. 8,243 to get the market moving upward again.
Minor Resistance: DJIA:27,306; S&P 500:3,001; Nasdaq Comp.:8,190
Thursday Sept. 19 “Follow the Bouncing Ball”
Our economy is much like a golf ball bouncing on a pavement, each bounce is pronounced but recovers less than the one before it, eventually there is no bounce and you have a recession.
Determined not to let this happen, the Fed cut its fed funds rate, the second in three months, to range between 1.75 percent and 2.09 percent, down from 2.0 percent to 2.25 percent, a clear indication it is concerned about a recession.
Fed Chief Jerome Powell indicated additional cuts may be necessary if the U.S. economy slides further.
The economy has been a mixed bag for nine months with manufacturing in a recession but employment still strong. Consumer sentiment bounced in September from a three-year low.
Bottom line: The Fed must fear a recession to act as strongly as this, and there has never been a recession without bear market.
It doesn’t help that the 36-member Organization for Economic Co-operation and Development just slashed its forecasts for global growth, warning of “entrenched uncertainty” with downside risks mounting.
CEO confidence has been in a tailspin hitting a three-year low, as reported by Axios Markets The Business Roundtable survey of 138 CEOs recorded its biggest quarter/quarter decline since 2012.
U.S./China trade talks will resume in coming days. Expect a lot of market-moving hype about potential progress, which will stands to produce new highs in the market, further inflating the bubble.
Wednesday Sept. 18 “Fed in a Quandary”
Last week President Trump urged the Fed to cut rates to zero, or lower. I wrote that would be insane.
Monday, I speculated the Fed won’t cut its benchmark fed funds rate today at all, something the Street has been hoping for, having run stocks up over the last two weeks.
While the Duke University/CFO Global Business Outlook finds 53% of those surveyed expect a recession within a year. The 10 year business expansion that began in July 2009 is not going without a fight, and that may cause the Fed to pass on a rate cut today.
The University of Michigan’s consumer sentiment index bounced in September, albeit from a three-year low, U.S. industrial production edged up in August and a 0.3 percent rise core consumer prices (excl food and energy) in August brings year/year increase to 2.4 percent.
Pre-open trading in futures is a ho-hummer, so it looks like the Street expects a rate cut or doesn’t care.
The Fed and U.S. banking system is struggling to cope with a scarcity of bank reserves, which Axios reports have been declining for the last five years. Axios.com’s “Markets” also reports the Fed could indicate it plans to stabilize the level of reserves today resulting in an increase in bond purchases on the order of quantitative easing (QE) in the opinion of Gennadity Goldberg, senior U.S. rates strategist at TD Securities.
If there is a bottom line here, it is confusion, things happening that were unexpected and that spells uncertainty, a stable market’s nemesis.
Yesterday, I headlined, “A Bubble Waiting to Be Pricked,” an obvious reference to the fact stock prices are historically overpriced and vulnerable to a nasty decline.
When several major institutions abandon their inflexible “buy” algorithms and sell. You’ll know it when you see it – straight down 12% – 16% in days.
Tuesday Sept. 17 “A Bubble Waiting to Be Pricked”
Yesterday, I headlined, “Any Chance the Fed Won’t Cut Rates Wednesday ??”
Clearly that is NOT what anyone on the Street expects, but clearly it is possible.
As noted yesterday, the core consumer price index rose higher than expected in August, up, 0.3% for the third straight month and 2.4% from a year ago.
Treasury yields jumped sharply last week in face of profit taking after a big Fed-induced bond rally this year.(bond prices move inversely to yield).
If the Fed does not cut rates, expect the market to take a big hit since it has risen sharply in expectation of Fed action to cut, as well as in anticipation of progress in the US/China trade talks next month.
Would it stop lending or borrowing ? Probably not, it may enhance it, since borrowers would scramble to get loans ahead of further increased borrowing costs.
In fact, the downtrend in rates probably discouraged borrowing as lower rates were anticipated.
Two weeks ago, I warned of the dangers of buying the long bond, noting a reversal to the upside in rates would crush the value of bonds.
I doubt that would happen, since we may already be in a recession, or at least the early stages of one.
Bubble bursting ? Too early to tell. October looms, anything can happen.
When it bursts, it will be straight down 12% – 16%. That is because, so many big investors would get a “sell” signal at the same time.
Monday Sept 16 “Any Chance the Fed Won’t Cut Rates Wednesday????”
The S&P 500 stopped short of posting a new high Friday, odds favor that it won’t today. The biggest issue remains the Fed, and will it cut its fed funds rate on Wednesday ?
The Street is almost unanimously expecting a rate cut, but Econoday.com points out that consumer prices are firming up. Core inflation rose higher than expected in August, up 0.3 percent for the third straight 0.3 percent increase putting the core rate of increase at 2.4 percent.
This remains a high risk market. Cas reserves of 30% – 50% are justified.
Friday Sept. 13 “The Recession Decider”
RECESSION – are we in one ?
We can’t really ask the National Bureau of Economic Research (NBER), the official “decider” of when a recession starts or ends, because that decision is announced 6 to 21 months after the fact.
Its decision is based on a host of factors over time, including production, employment, construction, income, trade and sentiment to mention a few.
The NBER does not accept the simplistic measure, of the beginning of a recession. – two consecutive quarters of declining GDP because there were too many false signals. With regards to the Great Recession of 2007 – 2009, GDP declined in the 1st, 3rd and 4th quarters, but none two back to back.
Be prepared on September 26th for the press to headline “RECESSION” if the growth of Q3’s GDP is less than 2.0%. That would be the 2rd straight decline in GDP following Q1’s +3.1% growth and Q2’s +2.0.
Based on the long lead time for NBER, a recession may have started months ago, since many key indicators are on the threshold of turning negative.
However, the best indicator for calling turns in the economy is the stock market, it tends to turn ahead of the end of expansions and recessions by 3 to 12 months.
July’s all-time high in the S&P 500 will likely be broken today, suggesting the beginning of a recession has not started, UNLESS the S&P 500 fails to make a new high.
If this attempt to break to new highs fails, July’s high of 3,027 could signal a recession has already started.
Yes, it acts like one. All the hype by the Administration on trade and the Fed on interest rates is driving stock and bond prices upward.
Currently this is the third probe by the market averages into this general area in a year. With its recent surge, the market has discounted a Fed cut in rates and progress in trade talks between the U.S. and China next month, so there is no room for disappointment in either.
Bubbles are orchestrated by outright greed and/or external events, in this case hype of a rate cut and progress in the trade talks. They are not representative of a rational conclusion of value. Once they burst, there is little time to sell.
The urge to buy is irresistible, money can be made quickly as long as the bubble is inflating.
The dot-com bubble burst in 2000 was followed by a 50% drop in the S&P 500 and a 78% drop in the Nasdaq Comp. CAREFUL !
Thursday Sept 12 “Trump Urges Fed to Cut Rates to Zero or Lower – INSANITY !”
What could be more enticing for investors than expectations of another cut in the fed funds rate on the 18th and promises of progress in US/China trade talks next month ?
That’s what makes for an expanding Bubble in stock prices.
But, that’s what will eventually decimate portfolio values when the bubble bursts.
I don’t know. The Administration and Fed hype is relentless, driven by fear that 2020 will be a recession/bear market year, making Donald Trump a one-term president.
Yesterday, Trump urged the Fed to cut interest rates to zero or lower.
That is insane.
Negative interest rates have never proved they would stoke economic growth or stir inflationary pressures. Low interest rates punish savers and people who rely on some semblance of a return on their money. Many cannot afford to invest in the stock market. Low interest rates adversely impact Bank profitability and in turn, lending.
What is the message here ? Are we headed for a global depression ?
Is that why the Fed reversed its policy in January ?
The S&P 500 is attacking this area for the fourth time in a year, each within 2.6% to 3.0% of the July 31 peak.
Stocks are historically overvalued by anywhere from 25% to 45%. No wonder why the Administration and Fed are petrified at the prospect of a bear market.
But by these efforts to avert a recession/bear market, the Administration and Fed are setting investors up for a horrendous drubbing.
The actions of the Administration and Fed are simply inflating the bubble more and more at a time stocks are more overpriced than at any time in history, except the dot-com bubble burst in 2000 which led to a 50% drop in the S&P 500 and 78% drop in the Nasdaq Composite.
Wednesday, Sept. 11 “What a Bubble Looks Like”
This is what a bubble looks like. While it can burst at any time, it expands and expands in response to news items as frantic investors panic fearing they will miss out on making more and more money……..forever and ever.
It’s just human nature to get overwhelmed with greed. The higher the market runs the greater the drive to make more money even though markets driven by greed are hitting new highs and becoming more and more overvalued.
Odds favor the market hitting new highs in coming days in anticipation of another Fed rate cut and Administration hype about a trade deal in October.
All this will give be a field day for the press, with news headlines sparking even more urgency by investors to jump in with both feet with every cent they can scrape up. With interest rates low and going lower, many investors will borrow in order to leverage their stock buys.
Signs of recession are popping up all over the place, yet the lemmings continue their panicked march to ruin.
This has been a Fed-stoked bull market and the 25% surge since December has been all about Fed hype about interest rates capped off by one rate cut last month and another hoped for on the 18th.
When this bubble bursts, the pop will be heard world wide, the result nothing short of horrendous – straight down initially 12% – 18% as much of Wall Street bails out at the same time.
Tuesday Sept 10 “Street Marches to Tweet Hype”
Right now, it’s all about managing news flow, from the Administration and the Fed. At year-end we saw Fed Chief Jerome Powell turn a plunging market around with an about face on Fed policy and rhetoric about the possibility of lower interest rates if the economy needed it. Down 20.2% in Q4, the S&P 500 surged 25.7% in four months.
At every turn, President Trump has used his tweet power on trade to stabilize markets that appeared to be on the verge of selling off.
His tweet power is highlighted by a JP Morgan study concluding that Trump’s tweet on markets increasingly moved markets.
Together, Trump and the Fed have managed to prop up an overvalued stock market and delay the inevitable – a recession/ bear market.
The two know that if this market becomes unhinged, it will decline 35% -45% as all the Street’s algos are reprogrammed to raise cash.
One of the cruel characteristics of bear markets is that stocks get pummeled by a relentless string of unexpected negatives and an increasingly gloomy outlook to the future.
Eventually, one or several selling climaxes over-discount these negatives and you have a bear market bottom, a time when no one wants to buy stocks.
That scenario is impossible for most to envision now since the Street’s investment policy is on automatic pilot – BUY.
For many months I have warned of a recession and bear market with expected results – disbelief. That’s what happens at bull market tops.
But it is also that investors don’t want the party to end, they’re making money, sometimes easily and want that to continue.
It is obvious why the Administration and Fed are desperately trying to hold the stock market up. For one, when this one breaks down, the plunge will be brutal. Then too, a recession/bear market in 2020 would sink Trump’s chances of reelection.
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 3.6% which was hit in May. 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.
Investor’s first read.com
A Game-On Analysis, LLC publication
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.