INVESTORS first read.com – Daily edge before the open
S&P 500: 2,709
Monday, February 12, 2019 9:07 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)
SPECIAL RECOMMENDATION: Serious investors and students of the stock market should all own the “Stock Trader’s Almanac.” No single source is packed with more valuable statistics, and stock market behavioral information, present and past, than this annual publication in its 51st year.
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TODAY: A tentative agreement has been reached by Congressional negotiators to avert another government shutdown, but the amount allocated for a “wall” falls short of Trump’s demands, coming in at $1.4 billion vs. $5.7 billion.
Futures trading indicates the Street thinks Trump will accept the deal with an indication of a 200-point open in the DJIA. I think that will fade as we get closer to the open. There has to be wiggle room here for Trump to save face, otherwise he will reject it. The recent shutdown lasted 35 days, the longest ever, and cost at least $11 billion, not factoring in losses by government contractors – disgraceful, utterly disgraceful !
In light of looming uncertainties, we are now in high risk territory (thanks to the Fed) where one or a couple of negatives can tank the market again.
The market is assuming positive outcomes of the following:
> news of Trump administration officials’ indictments
> a trade deal with China
> another government shutdown
>new economic negatives
>talk of a recession
>further downgrades in projections for 2019 corporate earnings
The 20% drop in the S&P 500 in Q4 was a warning.
The Street is ignoring a gradual weakening in the economy, which is likely the reason for the Fed’s about face on rate increases.
In addition to the problems in the housing industry, unfilled factory orders are down, unit sales vs dollar sales of vehicles are down, weakness in PMI and ISM non-manufacturing sales persists, consumer confidence and sentiment are falling and the Small Business Optimism Index was reported today to drop 2.9% in January.
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 years.
A buying panic followed Fed Chief Jerome Powell’s announcement of the FOMC’s 180-degree policy change, one of systematically raising its benchmark fed funds rate to a wait and see policy that may put rates on hold indefinitely.
The decision came at its January 30, FOMC meeting and after the market had rebounded sharply from a 20% October/December sell off. Horrible Timing !
Powell soft pedaled the fact that the U.S. economy is showing serious signs of weakness with the housing industry in a bear market, manufacturing struggling and both consumer confidence and consumer sentiment plunging.
Worse yet, he characterized the U.S. economic outlook as “Rosy.”
I think he misspoke. It isn’t rosy, it’s risky. The S&P 500 has recovered about two-thirds of the 20% it lost between October 8 and December 26.
A tentative deal on avoiding another devastating shutdown was announced today. The market will open on the upside, but stands to stall as the Street awaits Trump’s response. There is room for some give and take before Friday.
The Street cannot ignore what is happening. We have the potential for a constitutional crisis, and a host of other serious negatives developing that could impact stock prices.
I think the great bull market that started in Q4 last year is over, and that a bear market started with the Oct./Dec., 20% plunge in the S&&P 500.
The Fed is running scared for a reason. Respect that !
TIMING is EVERYTHING !
MAJOR RESISTANCE FOR THE MARKET AVERAGES STARTS AT:
S&P 500: 2,756
Nasdaq Comp.: 7,387
I have technically analyzed each of the 30 Dow industrials, converted the results to the DJIA using the Dow’s “divisor 0.14748, and arrived at support and resistance levels on short-term basis and concluded:
16 of the 30 Dow stocks had positive patterns with some upside potential, 11 had unattractive patterns, and 3 were neutral.
Any major jolt at these levels will trigger the “trapdoor’ effect, where stocks simply plunge like they did in October/November (S&P 500 down 20%).
Progress on U.S./China trade talks and an agreement on keeping the government open would push stock prices back up from overvalued levels to extremely overvalued levels.
Progress is being made. Both the U.S. and China are hurting from this nonsense.
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.
As I have emphasized so many times, the Street’s algos pretty much track the same stuff, but are still programmed with a bullish bias.
At some point, the Street will all bail at the same time. We saw this flash crash mentality in April/May 2010 (-13%); Aug.2011 (-16%); Jul./Aug. 2015 (-11.5%); Dec./Jan. 2016 (-13%); Jan./Feb. 2018 (-11.8%), and Jan. 2019 (-16.4%). Next time will be worse.
The big loser here is the person who needs a return on a fixed income investment.
ON A BRIGHTER SIDE:
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.
THE PRESIDENCY PROBLEM
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.
DID YOU KNOW ?
>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.
RISING INTEREST RATES:
>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 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.
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.
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 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 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.
I have decided to publish my political comments in a separate publication under a different LOGO and structure it differently, publishing a commentary a couple times a week, sometimes more, then publish the commentary history one day a week.
This will make easier for the reader and enable me to concentrate more on items. What’s more, I will be able to refer readers to web sites where they can get additional information.
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.