December Retail Sales So Bad It Must Be An ERROR

INVESTORS first – Daily edge before the open deal 
S&P 500: 2,745
Nasdaq Comp.:7,426
Russell 2000:1,545
Friday, February 15
, 2019    7:31 a.m.
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)

Meanwhile economic indicators continue to soften, which is why the Fed panicked in January, reversing its QT policy of raising rates. December retail sales plunged 1.2%, the worst  since 2009 shortly after the recession ended.
Analysts think the number is so big, there must be a reason not rerlated to the economy.
I feel very uncomfortable with the Fed micromanaging the economy and stock market. Essentially, since  they are sending the  a message to the Street that it is safe to load up on stocks knowing, but not publicly acknowledging, the economy at risk.
If a recession develops late this year or early next, the market will plunge from the lofty levels the Fed created with its abrupt 180-degree reversal in January.
The potential is here for the unexpected. The potential is also present for a blow up of the entire Trump administration.
An astute group I met with yesterday (mostly former Republicans) raised an interesting point.  What would happen if we are confronted with a huge global crisis ? Is our government staffed to meet the challenge ?
Worth noting, recessions followed decisions by the Fed to stop raising rates, and especially force them down.
      Also worth noting. 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 hit a low of 3.7 percent in November, jumped to 3.9 percent in December and to 4.0 percent in January. Now, averages include months below and above 3.8. What’s more, we won’t know when the current recession if we have one begins because that conclusion is.reached by the Nat’l Bureau of Economic Research (NBER) long after the fact.
I think  we are in the early stages of a recession, that the Fed sees it and panicked last  month by abruptly abandoning its QT policy of raising rates in favor of wait and see.  Whether it can salvage this 9 year/8 month economic expansion is the question of the day.
The Street believes the Fed has its back, that any decline will be stopped by some action by the Fed.  We have had three bear markets in the S&P 500 exceeding 50% since 1974, so lot’s of luck on that one.
What if 10 years of bull market has drawn the Street into a false sense of security, a cult-like confidence that significant facts can be overlooked/ignored, that there is nothing to worry about, that any dip in prices, even a 20% correction is a buying opportunity ?
Economist, A. Gary Shilling’s INSIGHT refers to a Duke University survey that finds nearly half the CFOs polled expect a recession by year-end.  One-quarter of the economists polled by the Wall Street Journal in January see a recession this year, up from 13% a year ago.
While Q4 corporate profits are very impressive, analysts are dramatically slashing estimates for 2019. On December 10, 2018, Thomson Reuters was projecting Q1 2019 S&P 500 earnings growth of  +7.3%. As of February 1, it has slashed growth for Q1 2019 to +0.7% with significant cuts for the rest of 2019.
The Street may be looking beyond 2019 to 2020 when it sees a rebound in earnings.  That’s sheer insanity.    By then, a recession will be underway.  When the Street sees its folly, it will slash 2020 earnings like it is slashing this year’s.

 The Fed is running scared for a reason.  Respect that !
Savvy, nimble investors can  hit ‘n run as the Street fires out its latest “buy” recommendations, new accounts open, existing accounts are harvested, and commissions roll in.  The Street thinks it’s back in a cruise control, algorithm buy-and-fret-not-market.   Fever festers.  Careful !
DJIA: 25,507
S&P 500: 2,756
Nasdaq Comp.: 7,387
These where I expect resistance to begin to impede further advances. This has become a news sensitive market, with hopes and expectations about a government shutdown and progress on tariffs can have an impact.
As  noted below under “Bearish Case”, odds are good we are in the early stages of a recession. Also note below, what A. Gary Shilling, publisher of INSIGHT, has to say about a recession.
January’s 7.9% jump was the biggest in 30 years, The Stock Trader’s Almanac’s January Barometer, published since 1972, has successfully forecast the S&P 500’s year as a whole 86.7% of the time over the last 50 years. Odds are, a strong January will lead to a gain for the year. However, there is no guarantee that between January and year-end there won’t be one or more major corrections. In pre-presidential years alone there were major corrections in 1971,1979, 1987, 2011, and 2015. Pre-presidential election years are the best of the four years in the presidential cycle.
The National Bureau of Economic Research (NBER) is the arbiter of recessions drawing on a host of economic and monetary data to  track the beginning and end of recessions, rejecting the simple definition that a recession is two straight declines in GDP.     
I think we are is the very early stages of a recession, and that a bear market started last October.  The dominos are beginning to tumble. One at a time.
However, The Fed’s abrupt change in policy could buy time for the economy and delay the beginning of a recession.
A. Gary Shilling  believes we are headed for a recession and noted his reasons December issue, headlining his issue of “INSIGHT“ 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.
Shillings reasons for forecasting a recession are:
1. Output exceeds capacity
2. Stocks fall
3. Central banks tighten
4. Yield curve inversion near
5. Junk bond-Treasury yield spread opens
6. Housing activity declines
7. Corporate profits growth falls
8. Consumers are optimistic
9. Global leading indicators drop
10. Commodity prices decline
11. Downward data revisions
12. Emerging-market troubles mount
13. U.S.-China trade war escalation.
Special Counsel Robert Mueller is closing in on Trump, et al, and  this is going to get 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  is on the verge of a bear market.
      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 ?
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.
      Investors must be prepared for the possibility of this happening. If it doesn’t play out that way, be very grateful.
TRUMP  – Agent, Asset, or Facilitator ?
      IMHO, Trump is toast, he will accept a deal to resign. The 16 attorneys just hired are not to defend his occupation of the office of President, they are to limit his massive legal problems, possibly keep him out of jail.
It will take years for the scope of wrong doings to be aired, which I believe will shock Americans beyond belief.
President Trump is the single most destructive thing this country has ever faced, he is a human wrecking ball, gutting our country of its global security, self respect, respect, honor, goodwill, good deeds, sacrifices,  and achievements. As long as he is in the office of the Presidency, we and everything we hold dear are at risk. When the business is rotten at the top there is nowhere else to go but down.
He has made consummate lying, abusiveness, irrationality, and disrespect the new normal for Americans, and tragically our children.
Stock markets thrive on CONFIDENCE (or lack thereof), and the continuing blundering and lying coming out of the White House  is devastating to confidence in the running of our country in the next two years.
What’s more, odds favor the Mueller investigation will lead to a prolonged constitutional crisis that will also be a drag on the economy.
It doesn’t take heavy selling to drive stock prices lower, just a decision by money managers that they can get stocks at lower prices so they defer purchases allow normal selling to have an impact.
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 116 months, the second longest on record and  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 119 months is four times the average of the last 15 bulls going back to 1957
>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).
 >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.

      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.
The Fed has backpedaled from a policy of tightening credit through increases in its fed funds rate.  Following its January 30 FOMC meeting, Fed Chief Powell  implied no further rate increases are planned unless “data” requires it.
That’s a plus, unless the weakening in the economy is worse than reported.
>The Fed is 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% – 2.50% percent, but no further increases are planned.  That’s a positive unless this change in policy indicates the economy is in trouble.
>Year/year existing home sales down 12 straight months. New home sales  fell 8.9% in October.  Single family starts fell  for third straight month to an 18-month low.
> 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.
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 in 2019 will make poor reading going up against the 2018 earnings .  So far, the Street is not factoring in the likelihood of a recession, which could mean negative growth.
> 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 29.8  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.
> 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.
> 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 116 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 recovered after the Fed opted out of further increases in interest rates.

>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 is still down 17% from its January 2018 high of 41.48. Not only is the industry a 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.
> 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.
>  in 2018, 1,100 economists Warned that  Trump is repeating biggest mistakes of Great Depression – tariffs, trade protectionism, according to conservative National Taxpayers’ Union.
> Last year former Fed Chair, Ben Bernanke, 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. He has not indicated he has changed his mind.
> 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).
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.

George Brooks
Investor’s first read
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.













Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.