INVESTOR’S first read.com – Daily edge before the open
S&P 500: 2,783
Thursday, May 30, 2019 9:09 a.m.
Neither the Street, the Fed or the administration want a recession/bear market now. Worse yet, they don’t want one during 2020, a presidential election year.
That means, all three will pull out all stops to prevent a recession, so get ready for hype and even a cut in the federal funds rate by the Fed.
These efforts can trigger rebounds in the stock market, but they can’t stop the inevitable – a recession/bear market.
The economic expansion started in June 2009 after the Great Recession/Bear Market took the world to the brink of total meltdown.
The recovery has been gradual with bumps along the way, but is now showing signs of drifting into recession.
The problems that will be faced if this recession spirals into a mini-depression is the government has few remedies to trigger a recovery.
The Tax Cut Jobs Act gave a 40% cut to corporations but only a 1%-2% cut to individuals. Further cuts are out of the question, even in a recession .
After an overstay of QE and zero-based interest rates, the Fed has a limited number of options to employ, including cutting interest rates, which never rebounded significantly.
CONCLUSION: The stock market has been forming a major top for well over a year. Tax cuts will prove to create major fiscal problems as they cut revenues the government needs to pay bills, and that shortfall will get worse in a recession as major programs people need are slashed.
Many investors and professionals either didn’t experience the savagery of the 2007 – 2009 recession/bear market, or don’t remember it after 10 years. The S&P 500 lost 57% of a rebound that started in 2002 ands rose 105%.
I see this bear market giving back 35% to 55%. It is possible we may experience two less severe recessions and bear markets like we did between January 1980 and November 1982.
The current stock market does not account for such uncertainty and is highly vulnerable to a big crunch.
Again, expect a lot of hype, lies and poor decisions.
Minor Support: DJIA:25,236;S&P 500:2,797;Nasdaq Comp.:7,567
Minor Resistance: DJIA:; S&P 500:; Nasdaq Comp.:
This is resistance to a rally after a sell off.
The Trump administration is highly sensitive to the direction of the stock market. With the market at risk of a major decline, we can expect news releases projecting positive developments in trade and whatever else they can dig up.
That would slow or temporarily halt the current plunge in stock prices.
I believe the market is adjusting for the fact we are gradually entering a recession for which the current level of stock prices is overvalued. Some on the Street see this; they are buying treasuries as evidenced by a plunge in interest rates.
With interest rates plunging as a result of this hurried buying, the Fed has no good reason to cut its fed funds rate except to try to head off a recession before next year’s election. Expect them to do so anyway.
At best, a fed cut would slow the intensity of the looming recession, but not prevent it.
A Head & Shoulders top is forming as a result of the December 2018 rebound. It is what it looks like a left shoulder forming in February and March, a head between late March and early May and a brief right shoulder in May. Technically, the right shoulder needs some more work to set up a plunge below the “neckline” (DJIA: 25,220, S&P 500: 2,780) and a projected plunge to DJIA 23,720 (S&P 500:2,654), and Nasdaq Comp. (7,000).
These patterns can be head fakes in which case a major rally results, but in this case where I see the case for real trouble, it’s worth respecting.
Don’t be misled b y the upbeat Consumer Confidence report, which showed 47.2% of consumers polled in May thought jobs were plentiful. The good news is that they are; the bad news is the index is at an extreme suggesting confidence cannot get much better.
Historically, it has topped out prior to the beginning of the last 7 recessions going back to 1967. The index is higher now than 6 of the last 7 recessions.
Monday (May 28)
The economy has been slowly edging into recession. While the Fed denies it, I expect it to cut its benchmark fed funds rate later in the year to try to head off a recession before the 2020 Presidential Election.
A cut would prompt a sharp rally until the question is asked, why did they do it ?
At that point, odds favor the correction would continue, probably into a bear market.
The market will be mixed at the open. If a rally begins, it should encounter resistance above Dow 25,736, S&P 500: 2,837, and Nasdaq Comp.: 7,678. Sellers appear to show up on rallies. Unless the Bulls can gain the upper hand, expect the slump that started in mid-May to continue, even gain momentum.
Last week I described why highly respected economist, A. Gary Shilling, believes we are in a recession. Included in his reasoning are a slippage in consumer spending, the deflationary impact of tariffs, declines in capacity utilization, industrial production, and commercial and industrial loans, an inverting of the yield curve, the prospect for declines in Q2 and Q3 GDP, and an uncomfortably high level of individual, corporate and government debt, a historically high ratio of publicly owned nonfinancial debt to assets, including speculative-grade and unrated firms, and disastrous fiscal policies caused by the 2017 tax cut jobs act that gave individuals a small cut but gave corporations a 40% cut.
We will get a better read on the economy this week with key reports being, Consumer Confidence (10:00 a.m.), Thursday Corporate Profits (8:30), Pending Home Sales (10:00 a.m.) and Consumer Sentiment Friday (10:00 a.m.).
Housing has been a drag on the economy, but the Fed’s policy ease in January has helped with a sharp drop in mortgage rates. House on my street have sold within days and at higher prices than expected.
Street Needs to Trash Algos….and “Think”
About Recession/Bear Market
The thing a lot of investors and professionals on the Street know is that bad stuff happens, the market takes a hit then recovers. What they don’t know (or remember) is that bad stuff can keep happening relentlessly pounding stocks down beyond the ouch point to the “I can’t stand it anymore point” where everyone is afraid to buy or worse yet just sell out, thinking the market will go lower.
It has been a long time since the last bear market (2007 – 2009) when the S&P500 dropped 58% in face of a global meltdown.
Since then, a lot of the Street’s decision process has been relegated to computer algorithms. While that reduces human emotions from the process, it removes the ability of people to anticipate and respond to changing events here and abroad.
Bad stuff CAN continue to happen. There were four recessions and four bear markets between 1970 and 1981 a period that was marred by Mid-East war, the OPEC Oil Embargo, the energy crisis, stagflation (low growth/high inflation, double digit interest rates, military coups, AND the Watergate scandal resulting in the resignation of President Nixon.
Anyone paying attention has to realize we are currently faced with the potential for more than one debilitating event to happen. President Trump is at risk of impeachment (or resignation), governance of our country is chaotic with a number of constitutional crises likely, war with Iran is possible, an extension of our 10 year old economy/bull market is unlikely, and individual, corporate and government debt is a precarious levels.
I think we are in a bear market and on the cusp of a recession. I also think we are mired in a political crisis that will be highly disruptive.
Depending on how all these things unwind, we could be face with one huge recession/bear market, or several mini recession/bear markets.
Thursday (May 23)
Flash Crash ? Bulls Must Step in or It’s 1,200 DJIA Points Down Just for Openers.
I said it yesterday (read below), The Street is oblivious to risk, spoiled by 10 years of Fed-fueled bull market. We are looking at a greenstick fracture that only needs a nudge to trigger a vertical plunge to DJIA 23,500 (S&P500: 2,600 by fall.
According to A. Gary Shilling’s June INSIGHT, a recession has already started, even though housing is getting a boost from the fed-induced drop in interest rates. Shilling is one of the nation’s most highly respected economists with a host of great calls on the economy, bond and stock market.
His 28-page INSIGHT is difficult to summarize here, just so packed with supporting analysis, charts, and graphs.
Included briefly his reasons for being bearish on the economy: the deflationary impact of tariffs, the slippage in consumer spending, a recession signal by the N.Y. Federal Reserve recession model, declines in capacity utilization, industrial production and commercial and industrial loans, an inverted yield curve, the bubble (a peak) in the employment, unemployment numbers, the prospect for a sharp drop in Q2 and Q3 GDP, and DEBT (individual, corporate and government).
Shilling refers to the Fed’s Financial Stability Report than points to the vulnerability of corporate balance sheets “reminiscent of the subprime mortgage meltdown in the mid-2000s.”
Risks emphasized by Shilling include: a high level of complacency created by a decade of risk-taking and corporate borrowing through junk and BBB credits, as well as junk bonds and leveraged loans, extended to firms with poor credit profiles.
The ratio of debt to assets for all publicly owned nonfinancial firms, including speculative-grade and unrated firms is close to the highest levels over 20 years.
Then too, there is the disruption and devastation of the trade wars, war in the Mid-East and a disastrous fiscal policy caused by the 2017 Tax cuts that gave corporations a 40% tax cut vs. a insignificant cut for individuals in and around 1%.
Big losers in April include: auto dealers, clothing stores, health and personal care, electronics and appliance.
OK, that’s a brief summary that should open eyes.
CONCLUSION: No one likes a bear, but warnings are necessary to help investors avoid taking big hits to their portfolios.
We are on the threshold of a nasty crunch in stock prices, possibly a bear market. The usual snapback in stock prices this time may not happen. At some point, in a bear market, there is no immediate rebound until the market has bottomed out after a drop of 35% -50%.
Our country has huge problems, most created in the last two years. Expect the Trump administration to release whatever positive projections it can dig up to reverse the downtrend in stock prices. Take it with a grain of salt.
Wednesday (May 23)
Only An Algorithm Can Be This Naïve
Before algorithms dominated the Street’s decision process, humans pondered current and foreseeable events to get a feel for whether stocks were over or undervalued. They tracked a host of indicators, but also used their instincts based on years of experience to come to conclusions.
Algos track a host of indicators, probably a lot more than the human brain can track, but where the human brain excels is the ability to weigh in on the unknown.
Currently, the market is ignoring a number of critical factors that could vastly affect the overall perception of what stocks are worth.
The big one is the prospect of the disruption of an impeachment process and uncertainty of the 2020 presidential election. Add to that, a looming recession and bear market, trade wars, war, and an overvalued market and you have enough to keep anyone awake at night.
What is driving stock prices today is not the tangible value, a dividend return, but rather the expectation stocks will keep rising in value somewhat in line with the growth in earnings and companies buying back their own stock, but mostly because institutions have nowhere else to invest.
This is all well and good as long as we don’t hit a prolonged losing streak where a lot of bad stuff hits the fan relentlessly pounding stocks and investor confidence down.
It happened in the 1970 and early 1980s where four recessions and five bear markets in 11 years combined with war, Watergate/impeachment, stagflation, the OPEC oil embargo hammered stocks relentlessly driving the price/earnings ratio for the S&P 500 below 8X (1980).
Stuff happens, and this stock market is ignoring how bad things can get, mostly because computers can’t be programmed for the unthinkable, and also because few analysts/money managers weren’t around in the 1970/1980’s.
Since so many Street algo decisions are based on the same indicators, they will eventually get a sell at the same time and whoosh – a flash crash of 12%-18% before anyone can say “ouch.” Instead of an immediate rebound we get another leg down as new negatives hit the market.
The best computer in the world is the human brain, not the fastest, not the ability to process zillions of things, but the best to ponder possibilities not yet quantifiable.
Cash will be king some day. It doesn’t have to be 100%, but enough to protect an investor in line with their tolerance for risk.
Tuesday (May 20)
Look for an attempt to rebound today. There is formidable overhead supply that will limit the upside barring unexpected good news. Nasdaq stocks are under pressure, what are all the bees going to do if the Queen dies ?
The big picture is clouded, but many on the Street don’t see it, or let’s say they haven’t tweaked their algos to respect what often happens in late stage bull markets – news that progressively gets worse, bit by bit.
Does anyone who is paying attention think for a moment angst about the future, near and longer term, won’t surge past the ouch point to the I can’t stand it anymore level where investors break ranks and bail out.
This will get ugly, very ugly. Project into the future, can the Street simply ignore total chaos at the highest levels of our government ?
The Street wants to party all night. That’s not how it works, not how it has ever worked, especially when the managers of money think we are in a new era where recessions don’t happen not with the Fed quick to prevent troubles.
The Fed’s quiver of quick fixes is empty. Yes, I expect a cut in the Fed funds rate, but they did that prior to the last three recessions.
Right now the Fed is a eunuch. They’ll try, clearly they don’t want a recession in an election year. But they can’t stop the looming chaos in confidence that is just around the corner, multiple constitutional crises.
Warning: Beware of a rally failure. Chasing the rally at the open is risky.
Wednesday (May 15)
Ask yourself two questions.
Is a bear market possible beginning in the next 6 months ?
Is a recession starting within the next 9 months possible ?
If your answer is no to both, think again, or risk getting blindsided.
No one is bearish and that is bearish. The Street is blinded by the euphoria of a 10-year old bull market, propped up by an administration-friendly Fed, which may just cut its benchmark interest rate to head off a recession in time for the 2020 elections.
Bear markets begin ahead of recessions, the lead time varies from several months to a year. I don’t see the next bear market beginning slowly, since most analysts/money managers track the same indicators plug them into an algo and wait for an answer. Aside from free-thinkers who will anticipate problems in advance, most on the Street will get a defer purchase/sell signal at the same time and whoosh down the market goes giving anyone with no cash reserve a chance to react.
My message here is, establish a cash reserve of 30% and ignore the temptation to go all-in, because no one knows when the plug will be pulled. Worst case, an opportunity to make a little more is lost, but a flash crash leading to a bear market does not lead to two years of more getting back one’s losses.
We have had ugly corrections in recent years, all but one were flash crashes.
Apr./May 2011 the S&P plunged 12.6% in 8 days
Aug. 2011: – 15.8% in 6 days
Jly./Aug. 2015: – 11.5% in 18 days
Dec. 2015/Jan.: – 12.9% in 13 days
Jan/Feb. 2018: -11.8% in 10 days
Oct./Dec. 2018: – 20.2% over 3 months
All were followed by recoveries. The difference with a bear market will be, new negatives will hit the market after a sharp plunge and at the point when it is ready to rebound. That’s when a second leg begins leading to lower lows and ultimately a decline of 35% – 48%, or so.
In most cases, the bear will be accompanied by a recession and a rush by the Fed to trigger a recovery with lower interest rates and pumping money into the economy. But rates are still low and the ability of the Fed to pump money into the economy limited this time, so a recovery stands to take longer.
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.
>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.com
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.