INVESTORS first read.com – Daily edge before the open deal
Tuesday, March 5, 2019 9:12 a.m.
The Stock Market:
After a surge at the open, the market took a big hit with the DJIA giving up 544 points high to low, before closing down 209 points.
Construction spending’s poor performance in December (down 0.6% vs projections for a gain of 0.3%), has to share the blame with concern that the U.S./China trade deal won’t be as advantageous to the United States as originally thought.
A correction/consolidation after a two month, 20% surge, would be healthy. At some point, we can expect a sideways trading range to develop as traders lock up some gains and investors, who saw their portfolio values melt in Q4, do some selling happy to get out without huge losses.
Some analysts believe a trade deal is already priced into the market. As noted here before, the market has rebounded into overhead supply, a level from which stocks plunged in December, so that is possible.
It is possible, investors won’t get an opportunity to sell into an announcement of a deal.
The S&P 500 is up 20% from its December correction low, selling would be normal, especially if yesterday’s plunge is followed up with a drop today.
We won’t know for a month or two if the Fed can head off a recession. I think it can delay one, but it is headed our way, and the stock market has not even begun to discount it.
The Street naively thinks the Fed can simply drop its fed funds rate and a recession will be averted and the stock market will soar.
However, prior to the last two recessions (2007-2009 and 8 months in 2001), the fed funds rate flattened out then started to drop BEFORE a recession started.
The problem here is the Street is spoiled by a 10-year bull market and economic expansion, they don’t want the party to end.
The big danger here is, investors will greet the beginning of the next big turndown with buying, thinking it is a great opportunity, after all the Fed has their back, big declines can’t happen ???
We have had three 50%+ declines in bear markets (2007-2009; 2000-2002; 1973-1974) and the Fed couldn’t stop them.
The storm clouds are there, be prepared !
Summary: No change from yesterday
Based on what I am seeing in reports on the economy, we need a couple months to put the government shutdown, and Q4’s crunch in the market and economy behind us. We also need to see if the Fed’s change in policy from one of raising interest rates to one of “wait and see” can head off a recession.
I think the failure of the Fed to acknowledge the seriousness of weaknesses in the economy was a huge blunder. Their referral a month ago to the economy a rosy was simply not true. As a result that assessment plus a u-turn on policy triggered a stampede in the stock market.
Now, if the Fed is right and the economy heats up, they will have to return to a policy of raising rates which will turn the market down from inflated levels.
If they are wrong and the economy slips into recession, stocks will turn down from inflated levels.
Either way, the Fed has increased the risk for investors.
The U.S./China trade talks are progressing with expectations of a summit in late March between Trump and Xi. Both countries are hurting as a result of the trade war.
China seeks the lifting of levies on $200 billion of Chinese goods, and tentatively plans to lower tariffs on U.S. chemical, auto and farm products, and work toward better protection of intellectual property rights.
According to Market Watch Sunday, the biggest sticking point is whether U.S. tariffs would be lifted immediately or gradually over time to ensure China doesn’t renege on any part of the deal.
Good news on tariffs will spike the market. That would be a good opportunity to raise cash, a lot of it.
The Street is hopeful for a favorable outcome from the U.S./China trade negotiations, but the summit between Trump and North Korea’s president Kim Jong Un failed to arrive at an agreement. Kim wanted all sanctions lifted, but was only willing to offer partial denuclearization. I don’t think the Street cares about North Korea, and it may have already discounted a favorable outcome on trade, but not an unfavorable result.
– It doesn’t make sense that the market is soaring, because Fed did a total about-face on policy, because they were scared that the country, the world, was on the edge of a recession. What if the Fed is right ?
– Stocks are entering “pricey” levels where the market cannot handle any bad news,
and there is the potential for a lot of it.
-The Street continues to revise earnings for 2019 sharply down
-Recent reports on the economy raise odds a recession (See below)is looming
–Debt (individual, corporate and government) has risen sharply due to years of low interest rates. It not only must be repaid, but additional debt to fund needs is out of the question.
-There is still risk in the successful negotiation of a trade deal with China, as well as progress dealing with North Korea.
-The Trump administration’s ability to govern may be damaged by the Cohen testimony and findings of the Mueller investigation, the renewed U.S. House investigation and Southern District of New York.
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. So far, the Street has ignored the issue. Bad news for Trump may not adversely impact stock prices, good news would jettison them, since it raises the odds that Trump would be re-elected in 2020.
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.
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 116 months, the second longest on record and 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 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.
>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
>Nine out of the last 10 recessions have occurred with a Republican in the White House.
> While Q4 corporate profits are very impressive, analysts are dramatically slashing estimates for 2019. FactSet now sees Q1 this year at minus 3.2% down from minus 2.7% a week ago; Q2 at plus 0.3% down from plus 1.0%; Q3 at plus 1.9% down from plus 2.4% and Q4 at plus 8.5% down from plus 9.9%. For the year they see an earnings gain of plus 4.1% down from plus 4.8% a week ago.. 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 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.
Investor’s first read
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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.