INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,337
For Monday, February 24, 2020 Sent Sunday evening at 5:55 p.m.
NOTE: I am sending Monday’s blog tonight, since I will be unable to send it early Monday morning. This means that I will not have access Monday morning to include here.
This is a very dangerous market, especially since speculative fever is over the top. This is classic bull market top stuff. It is a bubble and will burst at any time. The Fed and Administration will do everything in their power to prevent a bear market before November, but the new normal is a flash crash, a precipitous 12% – 18% plunge in prices without any warning except from a few of us, one of which is InvesTech Research (see below).
InvesTech Research came out swinging in its Feb.21 issue. It blasted the Fed for the “Powell Pivot,” its about-face 13 months ago resorting first to stimulative rhetoric until it cut its fed funds rate in July followed by two more cuts, as well as pumping money back into the system and undoing half of the monetary normalizing underway that started in 2017.
The “pivot” headed off a recession and bear market but created the potential for asset bubbles in the stock market and real estate.
Driven by rate cuts, InvesTech’s Housing [Bubble] Bellweather Barometer is surging to extremes not seen since the 2005 real estate bubble burst that preceded the 2007-2009 Great Recession/Bear Market.
Corporate sales are not as easily manipulated as corporate earnings, InvesTech points out, noting that the Price/Sales Ratio of the S&P 500 has surged to a level not seen since the dot-com bubble burst in 1999-2000.
It’s widely known that the Price/Earning Ratio of the S&P 500 is extremely overvalued with the Shiller P/E higher than at any time over 100 years except the 1999-2000 dot-com bubble.
Additionally, InvesTech notes that the percent of IPOs with negative earnings recently reached that same extreme level as in that 1999-2000 bubble burst.
With all the hoopla about Tesla (TSLA), few know it now sports a valuation higher than that of Honda, Fiat Chrysler, GM and Ford combined.
While the media hypes a historically low unemployment rate, job openings are collapsing. While service employment is still increasing, goods-producing jobs are tumbling.
InvesTech recommends a 35% cash reserve. If all this sounds familiar it is to readers here.
Bottom Line: I am in good company with my warning of downside risk. Granted, the Fed will do everything in its power to prevent a recession/bear market in a presidential election year, including more rate cuts.
This is a big week for reports on the economy. The Chicago Fed National Activity Index comes at 8:30 Monday, the Dallas Fed Mfg. Survey at 10:30.
Aside from the Fed standing ready to cut rates if the economy weakens, we can expect the Administration to hype the Hell out of any report that suggests improvement and downplay any that doesn’t.
Minor Support: DJIA:28,951; S&P 500:3,381; Nasdaq Comp.:9,546
Minor Resistance: DJIA:29,097; S&P 500:3,349; Nasdaq Comp.:9,600
Friday February 21, 2020 “Can Phase One Optimism Continue ?”
Yesterday, I wrote that any further weakening in the economy would spark another Fed cut in interest rates, but that was before the release of the Philly Fed Business Outlook for manufacturing and the Leading Economic Indicators (LEI) both of which exceeded expectations by a wide margin. The Philly Fed showed a dramatic surge in business optimism and the LEI a rebound after more than a year of no-growth.
How much of the rebound in these indicators reflects a rebirth of optimism after Phase One of the China trade agreement will be better known several months from now.
So far, the stock market has indicated some lack of buying in early trading, which suggests it is fully priced. But, the stock market “is” a leading indicator of economic recession and recovery itself, so one has to question whether its overvaluation has discouraged buyers at these levels.
What if the economic rebound is not just an initial reaction to the announcement of Phase One of the China trade agreement and the economy gains traction ? That may force the Fed to increase rates, not good for an overvalued stock market.
Bottom line: Where the economy and stock market go from here is a day-to-day challenge. Yes, the stock market is historically overvalued, but the bubble phenom can enable it to become yet more overvalued.
But institutions are holding fat gains. Any threat of a recession and they will surely want to lock in gains and clearly not be buying at lofty levels, all of which suggests a major recession/bear market..
One has to accept the level of risk they can afford and raise cash accordingly. ……………………………………………….
Thursday February 20 “Prepare For Another Fed Rate Cut”
Pardon me, when I return to my warning about the bubble in stock prices, which stands to inflate from bubble to a pre-burst status.
A flash crash at any time.
Actually, we have had several bubble bursts since early January 2018 which preceded a 12% plunge in less than two weeks. The bubble re-inflated again in June then burst in early October followed by a 20% plunge in Q4.
So yes, they do burst and will burst again. Timing is difficult.
January, a year ago the Fed decided it had couldn’t let a normal self-correcting economic cycle take its course and intervened with hype of easier money and three cuts in its fed funds rate starting in July.
It worked, at least for now, but especially for the stock market which soared more than 44% in 14 months.
While a recession was delayed, a recovery is suspect.
I believe the Fed will cut rates again regardless of what it says and that it would clearly look like they were trying to ensure President Trump of re-election in November.
What concerns me is that the Fed has set the stage for a horrendous crunch in stock prices. It single handedly has inflated the bubble and sucked millions of unsuspecting investors into the market at overvaluation levels seen only once in 100+ years. Lambs led to the slaughter.
I believe in stock prices trading freely without interference by the Fed and less micro-management of the economy, as well. The Fed has consistently created economic contractions and recoveries with interest rate policy changes and that is interfering with normal economic cycles.
Wednesday Feb 19, 2020 “The Fed Holds The Trump Card”
While the Fed has stated it does not expect to cut rates again this year, it will if the economy begins to weaken, the result being President Trump’s re-election chances will be vastly improved.
The Fed’s about-face on policy a year ago headed off a recession/bear market, which would have been devastating for Trump’s re-election.
The Street favors re-election, so further Fed rate cuts should be bullish.
But investors can’t bet the ranch on that simplistic conclusion. If the economy is “in a good place” as Fed Chief Jerome Powell claims, why the need to cut rates ?
Then too, with a historically overvalued stock market, what else can the Fed do to pump it up, more importantly, what can the Fed do to trigger a recovery if the economy sinks into a recession and the stock market plunges ?
Bottom line: We are in uncharted waters, downside risk outweighs upside potential. What worked a year ago when the Fed stepped in to delay a recession/bear market may not work this time with the S&P 500 up more than 43% after its 20%, Q4, 2018 plunge.
A rate cut, or just a hint of one coming out of the FOMC minutes today, could trigger a rally. What’s more, how much more stimulus is left to push the an 11-year old bull market higher when it already is more overvalued than any bull market in the past 100 years except for the 1999 – 2000 dot-com speculative pig-out ? Easy does it .
Tuesday, February 18, 2020 “Cash “is” an Investment”
1) It is a cushion against portfolio losses in a major sell off/bear market (down 30% – 50%).
2) It is a reserve for emergencies avoiding the need to sell stock.
3) It is a reservoir that can be tapped to buy at lower prices in the event a major correction.
What an investors does not want to do is to be forced to sell after a major hit to their portfolio. For example, if they have a major expense looming like college expenses or a house, or uncovered medical expenses. Or they are withdrawing funds from an IRA or retirement account, nursing home or simply need funds when income sources vanish.
Why don’t investors want to maintain a cash reserve ?
1) They want to maximize return.
2) Fear of mission out (FOMO) on opportunities to score.
3) Greed, a normal human emotion. It intensifies as bull markets surge.
4) Hype – by the Fed, Administration, Street pundits and the Press which reports the market hitting new highs though it may only be by a miniscule gain.
5) Money managers. Financial advisers get paid for investment in stocks, not cash. The responsible, savvy and gutsy ones will raise a lot of cash as a bull market matures even at risk of losing an account.
Every bull market top I have experienced since 1966 has been marked by these issues, and they are not hard to spot. All one has to do is objectively track their own emotions.
-Are you spending next year’s projected winnings ahead of time ?
-Do you instantly reject any case for a bear market however reasonable ?
-You can’t wait for the market to open to check your stocks.
-You are foolishly buying a stock simply because you hope to sell it to some other fool at a higher price.
Doesn’t the stock market ALWAYS REBOUND TO NEW HIGHS ?
So far it always has. But the problem is it is only normal to be overwhelmed with fear when the stock market is plunging. The broad-based, blue chip S&P 500 declined more than 50% in the last two bear markets (1998-2000, 2007-2009).
Once a market drops 40% the “I can’t stand it anymore” pressure forces investors to sell, sometimes most of their portfolio and usually close to the bear market bottom denying them the opportunity to benefit from next bull market.
The buy/hold no matter what mentality has its downside. It can take years for the market to recoup bear market losses. A cash reserve would have minimized those losses, even provided an investor to buy-in at lower prices.
CONCLUSION: The market will jump and drop on reports of an increase or decrease in new cases of Coronavirus, but the market’s trend will be determined by other factors, primarily the outlook for the economy over the next 6 to 9 months.
January’s Industrial Production took another hit, dropping 0.3% (m/m)bringing the annual rate of decline to 0.8%. With only one exception over 50 years, this kind of weakness has resulted in a recession.
One year ago, a change in Fed policy prevented (delayed) a recession and triggered a surge in stock prices. If the Fed sees any new weakness in the economy, it will cut rates for the fourth and fifth time since last summer to prevent a recession/bear market in a presidential election year practically assuring President Trump his re-election even though it has vowed not to cut rates again.
Personally, I don’t think the Fed should be in the business of micro-managing the economy and stock market. This kind of meddling impedes both from making normal and healthy adjustments that ensure stable markets going forward.
A flash crash (3-day plunge of 12%+) can occur at any time. Like a rogue wave, they are unpredictable. Easy does it !! A cash reserve of at least 30% is simply smart. Under the circumstances, I’d prefer a 60% reserve.
Friday February 14 “BIG Bubbles….. BIG Burst
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… 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.
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.
Investor’s first read.com
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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.