Fed May Cut Its Fed Funds Rate – Why Not To Cheer

INVESTOR’S first read.com – Daily edge before the open deal 
DJIA:25,650
S&P 500:2,783
Nasdaq Comp.:7,558
Russell 2000:1,524
Tuesday, March 12
, 2019   8:28 a.m.
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gbifr79@gmail.com
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Summary:
Fed Chair Jerome Powell has hinted at a cut in its benchmark federal funds rate this year.  That would mean one thing, he no longer sees the economy as “rosy” or “in a good place,” he sees a recession. In fact, a cut in the fed funds rate has preceded each of the last three recessions.
The DJIA was distorted yesterday by a 22.53-point drop in Boeing’s(BA) stock price. After two take-off crashes by its 737Max 8 planes, three countries have grounded flights. The distortion will continue today as a third country, Australia, has grounded the 737. Again, to calculate the impact of a stock on the DJIA, divide its change by 0.14748.
While a pristine blue chip benchmark, the DJIA is a price-weighted average and therefore can be distorted by moves in its higher priced stocks.
Yesterday, the 22.53-point drop in Boeing’s stock lopped 153 points off the DJIA, i.e., if Boeing was unchanged for the day the DJIA would have been up 329 points rather than 177 points.
At 400, Boeing has 10 x the impact on the DJIA as Pfizer (PFE), 9x the impact as Coke (KO), 8x Intel (INTC), 5x Merck (MRK), Exxon/Mobil, 4x JP Morgan, Procter& Gamble (PG), 3x IBM, Caterpillar (CAT), Johnson& Johnson (JNJ), 2x Apple (AAPL) to mention a few.
The day ended with the DJIA up 0.70%, but the S&P500 up 1.25%, and the Nasdaq Comp. up 1.84%.
The market must be allowed to find a comfort level to discount serious uncertainties, without interference from the Fed.
TECHNICAL:
Yesterday’s surge takes a flash crash off the table, or rather delays it.  These crashes come like a thief in the night and without warning. Investors who are not prepared in advance will be down 10% in a heartbeat with more to come.
        I will warn of a flash crash on occasion, and it may not happen, but if it does, anyone heeding the warning will be grateful.
The Street is still double-timing to Fed Chief  Powell’s hype.  He was on 60-Minutes Sunday night, saying the economy is “in a good place” and denied any weakness. I don’t believe what I am seeing.
Hey ! I hope he is right. If he is wrong, he will have hurt a lot of investors, because he is pumping stocks up beyond reason with his comments.
The Street has one eye on  news on the U.S./China trade talks, and the other on the economy. The latter is a tough read due to distortions caused by Q4’s stock market crunch and the government shutdown.
This is not a pretty picture – too many uncertainties that can’t be resolved near-term. Fed Chief Jerome Powell downplayed recession fears on 60 minutes last night shrugging off auto loan defaults, and irregular trend in retail sales.  But really, what is he going to say ?    I am not getting good vibes from this man.  I think he needs to walk around the block with his eyes open.
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Fed Damned if they did and damned if the didn’t:
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 as :”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.
      Good news on tariffs will spike the market. That would be a good opportunity to raise cash, a lot of it.
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RECESSION ?
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.

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.
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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.

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 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.
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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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