Fed in Panic Mode – Raise Cash to 90%

INVESTOR’S first read.com – Daily edge before the open
DJIA: 26,346
S&P 500: 2,919
Nasdaq Comp.:7,903
Russell 2000:1,479
Thursday,  October 10, 2019
 8:56 a.m. 
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gbifr79@gmail.com
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TODAY:
      All Hell can  break loose politically as the nation sinks into recession. The stock market would  lead it off. That could be today, a week from now or as far out as January.
Why take a chance, there so much more downside than upside ?
Why else is the Fed, Administration and Street trying to prop the market every time we get a sharp down day.  They are scared of what will happen if this market breaks down.
Trade talks this week could trigger a sharp rally – fine. That is a chance to lighten up at higher prices. But they could disappoint and trigger a plunge now.
I see that as straight down 12% – 16% in several days once buyers step back, but more so when some big institutions break ranks and sell.
I blame the Fed for not letting the market correct to lower levels in anticipation of the serious negatives looming.
Worst case: DJIA 15,000. It wouldn’t stay there but for a moment when the news gets just so scary no one (except me) will want to buy stocks.
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Mirroring what I have been saying about the Fed’s manipulation of market sentiment, MarketWatch reported yesterday that, Deutsche Bank chief economist, Torsten Slok, is warning clients that stock market performance is “no longer being driven by economic fundamentals, but instead by [Federal Reserve] and [European Central Bank’s] promises of lower rates, more dovish forward guidance.” 
     Also yesterday, Fed Chief Powell told the National Association of Business Economists it would soon start expanding  its balance sheet to add reserves to the financial system through the purchase of short-term  government ddbt  rather than long-term debt in a effort to encourage banks to take on more risk.
Normally, this is bullish, but to pursue such stimulation before a recession/bear market has happened begs the question – WHY, if as Powell asserts, “the economy is in a good place,” are they taking these measures ?
U.S. getting hammered by protectionism
policy
It looks like the world is learning to get along without us. A good example is the 11-country Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP).  The 11 countries in the pact comprise 13.4% of the world’s GDP (US$13.5 trillion) making it the third largest  free-trade group in the world.
It includes most of the TPP, which the U.S. abandoned, but excludes 22 provisions the U.S. favored that other countries opposed.
As a result, the U.S. is on the outside looking in !

On the trade front, it should come as no surprise that Trump was quoted yesterday as saying, “China would like to make a deal very badly.”
This just confirms my conclusion that the Fed, Administration and the Street are in the game of hyping the market a soon as it attempts to go into a healthy correction phase.
        This simply sets up a flash crash when something triggers a massive sell off.

TECHNICAL
    The market will open mixed today as the Street hopes for progressmin trade talks.  Expect some progress, which would trigger a rally, but the big picture is murky.
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Minor Support: DJIA:26,289; S&P 500:2,913; Nasdaq Comp.:7,889
Minor Resistance: DJIA:26,467; S&P 500:2,937; Nasdaq Comp.:7,933
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Wednesday, Oct 9,  “Not an Elephant in the Room, It’s a Bear !”
Like I have been warning, every time the market takes a hit the Fed, Administration and/or Street steps in with a news release to prop the market up.
Yesterday, Fed Chief Jerome Powell hinted at another rate cur (3rd in less than a year), as well as the purchase of T-bills to pump more money into the system.
The market will jump at the open today on news from an unidentified individual with knowledge of  U.S./China trade talks  who said China wants to limit further tariff increases, an indication that it is open to progress on talks beginning today.
So why a “warning?”
Because these timely releases are just postponing the inevitable, a bear market, as the nation joins the world in a recession.
      What’s more, we are faced with a constitutional  crisis unparalleled  since the Civil War.
The Street cannot ignore that, investors cannot ignore that.  It grinds away at the confidence in our democratic republic, the rule of law, and confidence determines the multiple at which stocks sell.
       It’s all about the presidential election next year, delaying a recession/bear market until 2021.  Can’t happen !  We are in for some very rough times.
       Once the Fed, Administration and Street cannot prop the market, it is straight down, which highlights the senselessness and irresponsibility of propping the market and not letting it find a comfort level that discounts known and potential adversity.
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Tuesday, Oct. 8  “Market Has Not Yet Discounted Looming Negatives”

Call it tunnel vison, confirmation bias or just plain denial, the Street simply does not want to face reality – the stock market is overvalued by historical benchmarks, the country is slipping into recession and our nation is faced with a number of wrenching  constitutional crises.
If the market were selling at a 30% discount, I would be urging readers to be preparing for a buying opportunity when the market is getting pummeled and no one anywhere wants to buy stocks.
       We have serious negatives, BUT the stock market hovers near all-time highs.
A freely trading stock market will find  a level that discounts known and potential positives and negatives.  We do not have a freely trading stock market, since the Fed and Administration step in with a news release about a rate cut or improved prospects for a trade deal every time the market sells off.
       Nothing wrong about preventing an unjustified sell off, but manipulation only delays the inevitable, worse yet it misleads investors into thinking it is safe to buy and at extreme levels at that !
If we get a sharp sell off from here, expect the Fed to talk of another rate cut, and the Administration to hype trade talk progress.
      let a bull market go.  But manipulation of news by the Fed, Administration and the Street has never been so persistent.
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Monday Oct. 7,  “No, Mr. Powell, the Economy is NOT “In a Good Place”     

After 10 years,  the economy is tiring, having risen from the depths of Hell 10 years ago, with U.S. and global economies coming within a hair of total meltdown  between 2007 and 2009 (the Great Recession)  and investors suffering the worse losses since the 1930s, S&P 500 down 57%.
There are just too many indications that we are in the early stages of a recession to mislead investors the economy is in “a good place.”
Puff piece statements like Fed Chair Jerome Powell’s press conference last week just suck investors into an overpriced stock market.
If the chair of the Federal Reserve says the economy is in a good place, investors think it is safe to buy.  These comments come at a time the S&P 500 is selling some 70% above historic benchmarks.
       Last Monday with the market at higher levels, I warned, “Ignore Fed and Administration  Hype –  raise  cash to 80%.”
I have seen price/earnings (P/Es) ratios at single digits, I have felt the wrath of 14 bear markets and  8 recessions – they happen, the Fed should acknowledge  it.
Septembers’ ISM manufacturers’ index  plunged the most since the Great Recession  (2007-2009).
The PMI “Services”  report and the ISM Non-Manufacturing “Services” report, are both on recession thresholds.
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TOP ECONOMIST STATES CASE FOR A RECESSION
Gary Shilling’s  “INSIGHT” lists many of the reasons why this economy is in a BAD place.

I have tracked A. Gary Shilling for decades and believe him to be one of the nation’s leading economists based on an incredible record for forecasting accuracy.
    Shilling’s October  INSIGHT listed reasons why RECESSION is underway now. To mention a few:

-OECD has slashed economic forecasts.
-N.Y. and Cleveland Fed model outputs have reached recession levels.
-Capital spending is falling
Transportation stocks  continue to drop. Transports tend to lead industrials in signaling trouble since materials need to be shipped before they are turned into  finished products.
Trade wars are causing business caution.
-Treasury yield curve is inverted.
-Corporate profits are sliding.
-The Fed is losing its battle against disinflation.
Consumer spending alone is holding back a full-blown recession.
-Growth of nonfarm payrolls and weekly earnings continue to slide, as well as consumer confidence.
Purchasing Managers’ index (PMI) for manufacturing has dropped below 50 signaling contraction.
-A low manufacturing capacity utilization is discouraging capital expansion.
-Eurozone and U.K. on edge of recession, China’s growth slowing.
-Shiller’s cyclically adjusted P/E  (28.9) is 71% above long-term average (16.9).
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Friday, Oct. 4 “Storm Clouds Limit Upside – Patience – Ignore Hype”
A lot of storm clouds on the horizon (recession, political uncertainty, bear market, international tensions). The Fed will try to counter that with another rate cut, and there will be promises of progress on trade.
These will trigger rallies, some dramatic.
I believe we are in a bear market and  the early stages of a recession. How intense both will get depends on  events down the road.  New negatives can delay recoveries. What happens between now and 2021 is key. It doesn’t look pretty.

Algorithm Investing

I rant about buy-oriented institutional algorithms  making most of the investment decision today, how a sudden change in their programming could cause a flash crash.
The Economist  reports algos account for 35% of the stock market, 60% of institutional equity assets and 60% of trading activity. Artificial intelligence (AI) is being used more and more to write programs. Careful guys/girls, the best computer is the human brain.
Myths
    I am repeating the following, since a 10-year bull market can block out memories that things can get far worse than anyone on the Street can imagine.
In 1969, who would have thought there would be four recessions and 5 bear markets in the next 12 years.  Stuff happens.

But, the Street is mesmerized by a giant “myth.”
The Myth
-that economies grow forever.
-that lessons from the Great Recessions were learned – can’t happen again.
-that stock markets always recover quickly from bear markets
-that the current excessive stock market valuations will last forever
-that the Fed will come to the rescue when the stock market takes a big hit.
-that single digit P/Es will never return.
-that untethered chaos, civil and political unrest, and violence are not possible in the U.S..
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Thursday,  Oct. 3  “Fed Rate Hype, Administration to Hype Trade Progress. Brief Rally ? Nimble Traders Only”

What’s happening with the economy should not have surprised the Street. The early signs of recession have been there for many months and reported here  daily.
This plunge should not surprise the Street.  With the DJIA at 26,820 on Monday, Sept. 30  I headlined, “Ignore Fed and Administration Hype, ..adding  Cash reserve of 80%”
Why would I go to that extreme – 80% cash ?
We all know the Fed will shortly announce more rate cuts, the Administration and/or Street will hype  progress on trade and trigger a rally.
However, at some point, their efforts to prop the market will fail and then it will be straight down.  Why risk it ?

Investors must be prepared for the stock market and political environment to enter a very dark period where a bear market can take the major market averages down 35% – 60%. The severity of the bear market depends on what new negatives hit the market as it is tumbling.
The Street is spoiled by a 10-year bull market. They want to keep partying.
But, the Street is mesmerized by a giant “myth.”
The Myth
-that economies grow forever.
-that lessons from the Great Recessions were learned – can’t happen again.
-that stock markets always recover quickly from bear markets
-that the current excessive stock market valuations will last forever
-that the Fed will come to the rescue when the stock market takes a big hit.
-that single digit P/Es will never return.
-that untethered chaos, civil and political unrest, and violence are not possible in the U.S..
This can get ugly, real ugly. All that is needed is for one or several major institutions to break ranks and sell, others to follow.

The upside is, all this carnage will produce an unprecedented  buying opportunity. Investors must be prepared for it, even if they must leave the party before “last call.”
I issued my bear market bottom “BUY” on March 10, 2009 as the DJIA at 6,800. I would like to do that again when all this unwinds.

IMPORTANT NEWS TODAY
The current plunge in stock prices was triggered by  Tuesday’s report  for Bad reports would confirm a recession and hammer stocks. Also at 10 o’clock we get Factory Orders, which should stink.
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Wednesday. Oct. 2  “Ignore Fed and Administration Hype”
Yesterday’s abrupt reversal and crunch is an example how vulnerable this overpriced market is. I think it was more a matter of buyers walking away when the ISM report hit, than overwhelming selling.  That’ll come at lower levels when doubts and fear mount.
        We had the same freefall in late July/early August. No one wants the bull market to end and will stay as long as possible, but are quick to run for cover when it looks like a bear market or severe correction will strike.
There is sizable support between DJIA: 25,500 and 26,200’ S&P 500:2,850 – 2,920; and Nasdaq Comp.:7,770 – 7,830.
That’s where buyers showed up in August. That band of support will be broken at some point.
Conclusion
:  Expect one or several sharp rallies to be triggered by optimistic comments by the Fed, the Administration, the Street.
The Fed will promise or hint at lower interest rates, the Administration will claim progress in trades talks, and the Street will forecast an earnings rebound in 2020.
We are dealing with something we have not dealt with for 45 years – a dysfunctional government as impeachment proceedings move forward.
This is NOT something the Street’s algorithms were programmed for.  Expect these algos to be tweaked in coming weeks and that stands to be for less buying as well as some selling.
The whole idea here is to prop the market up and delay a recession until after the 2020 election.   Nonsense !  We  are in the early stages of a recession, it will get worse next year.
Confidence drives stock prices.  Confidence will take a huge hit in coming months, and that will eventually take a huge toll on stock prices.
TECHNICAL: There will be the typical knee-jerk buying reaction by institutions  today, but yesterday’s surprise plunge was a jolt to confidence. Playing rallies here is for the nimblest of traders.
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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.
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George Brooks
Investor’s first read.com
A Game-On Analysis, LLC publication
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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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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