Fed Rate Cut to Depend on Friday’s Economic Reports

INVESTOR’S first read.com – Daily edge before the open
DJIA: 26,004
S&P 500: 2,879
Nasdaq Comp.:7,792
Russell 2000:1,519
Thursday June 13, 2019
   7:52 a.m.
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gbifr79@gmail.com
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TODAY:
      What would prompt the Fed to cut its discount rate next Wednesday ? Politics for one, but they can’t be that obvious.
A better answer: Friday’s economic reports, which  will be key – they must show weakness to justify a rate cut.
      Retail Sales have been soft for months, Friday (8:30 a.m.) must be strong. Industrial Production (9:15 a.m.) has been weak and must show a rebound. Business Inventories (10:a.m.) cannot rise, since it indicates goods are not selling. Consumer Sentiment (10:00 a.m.) must improve.
Weakness in these reports suggests we are already in the early stages of a recession, so the Fed will have an excuse to cut its rate.  It’s their last chance before September 18, since there is no presser in July and no FOMC meet in August.
But really, what does a cut in rates do for the economy ?
Just the Fed’s decision not to cut rates in 2019 has driven the 30-year mortgage rate down to 3.82%  from November’s 4.94%, and homes are selling. Two homes on my street sold in a matter of days and above asking.
The housing industry is getting a new life after rising rates by the Fed over two years crushed sales and re-financings.
But how much of a boost would the rest of the economy get by a cut  ?  Individuals, businesses and governments, are already debt heavy, why would they  borrow more ? Granted, Corporations would use lower rates to borrow to buy back their stock, but an across-the-board stimulus to the economy is a stretch.
TECHNICAL
        At this point, it is hard to tell if a rate cut is already built into the market, which jumped 4.9% after Fed Chief hinted at a rate cut on June 4, in fact his comments reversed  a 7.6% May plunge in prices.

Minor Support: DJIA:25,878;S&P 500:2,871;Nasdaq Comp.:7,763
Minor Resistance: DJIA:26,072; S&P 500:2,885;Nasdaq Comp.:7,801

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Wednesday  (Jun 12)
Jump ball today
though there were patient sellers during the last two days. This makes sense since the market rebounded  more than 6.5%  in six days in response to Fed Chair Powell’s strong hint the Fed will cut its fed funds rate in the near future.
I expect the cut to be on the 19th, otherwise it won’t happen until September 18, since there is no press conference after the July 30-31 meet and no meeting in August.
That leaves a week for traders to decide how they will play a likely rate cut on the 19th.  I may be one of the few who is calling for a cut this soon, though a softening economy and an election next year give the Fed a green light.
      Sharp plunges, some of the flash crash variety, come unexpectedly, so investors should have a sizable cash reserve to offset the adverse impact of a plunge, as well as, provide buyers a chance to pick up  stocks at lower  prices.
AS ALWAYS, be prepared for undue hype out of the Fed and White House.
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Tuesday  (June 11)
The market action between May and June this year is a carbon copy of the market action between October and November 2018.
What happened in November 2018 is the market averages tested the October low, rallied sharply then plunged more than 16% to the December low.
A repeat of last  year’s pattern would take the market averages down to about DJIA: 24,650, S&P 500: 2,760, and Nasdaq Comp.:7,350 where the market would rebound briefly before a plunge of 15% -18%, that is “if” we get a repeat.
That pattern would be broken if the DJIA rises above 26,600, the S&P 500 above 2,940, and the  Nasdaq Comp.:8,100.
Bottom line: There is a chance we are close to a whipsaw pattern of trading that will result in a plunge in  prices in 4 to 6 weeks – no guarantees, of course, just keep an open mind and don’t chase stocks that have already rebounded, a good part of which may be short covering.
The Fed will attempt to prevent any major decline in prices going forward, but has already demonstrated it is politically biased.   All these Fed Governors sport high level pedigrees. Along with that is an ego and a sensitivity to the kind of visible criticism that President Trump  can vent.    Independence ???
I have no problem with Fed action to prevent a recession.  My blood boils when the Fed manipulates the market with “hints” that a cut  in their Fed funds rate is in the offing at a time the market is trying to adjust to the possibility of a recession.
       That announcement came the day after the market hit a four month low after breaking down from a top formation.   That’s MANIPULATION !
The markets MUST be allowed to trade freely.  By its action, the Fed prevented the market from finding a level that discounts the negatives present and foreseen.  What’s worse, it may just have sucked a lot of buyers in at a time a recession looms. At these levels, the market averages do not discount the recession the Fed sees.
I have been forecasting the Fed will cut its benchmark fed funds rate  on the 19th.  
Its July 30-31 meeting will not be accompanied by a press conference, so it is unlikely they will cut the rate then. If they announce an unscheduled press conference it would be a tip-off. They do not meet in August which leaves September 18, a long wait if they are trying to head off a recession.
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+Monday  (June 10)
  The stock market continues on a tear following Fed Chief Jerome Powell’s “hint” of  a cut in its fed funds rate in the near future.
Before rushing in, investors should question why the Fed sees the need for a rate cut.  I can answer that, they see signs of  looming recession.
If their concerns are justified, why would anyone be buying ?
Clearly a price/earnings ratio (P?E) of 29.6 is not a good reason. That exceeds the P/E in December 2007 of 20.7 by 40%.
What’s more, cuts in the funds rate have preceded the last 7 recessions anr for the obvious reason – the Fed saw a recession coming and began the process of trying to ease its impact.
By its action, hinting of a rate cut in the near future after the market had begun adjusting for the coming recession was irresponsible.  It sucked a lot of investors into the market, people thinking just because the Fed is dropping rates it was safe to buy.
THE PROBLEM HERE IS A 29.6 P/E DOES NOT DISCOUNT THE UGLINESS OF A RECESSION.
I believe markets should be allowed to trade freely without micro-managing by any organization, especially the Fed.
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Friday   (May 7)
       I believe we are  in the early stages of a recession.
I believe the Fed will cut its fed funds rate on June 19.
I believe the market will rally sharply in response
I believe that rally will be followed by the next leg of a bear market that
started on April 23 when  the DJIA  hit  26,695 (S&P 500:2,936).
The only hope the bulls have is if all tariffs are withdrawn, unlikely. Progress on tariffs can add to a rally, but not a reversal of a bear market.
Current levels of stock prices DO NOT DISCOUNT A RECESSION. That will take a 35% + plunge from here.  Hype out of the Fed and White House can only suck investors in at inflated prices.  _BEWARE !
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Thursday  (Jun 6)
The market’s rebound has broken several “technical” barriers, including a minor downtrend line and a “Head & Shoulders top,” suggesting more upside.
But, this market is tiptoeing through a minefield and anything can happen.
Good news about Tariffs can juice it even higher, bad news about the economy, indicating a recession is a better good bet than previously thought would reverse an overbought market to the downside.
These are uncharted waters, and the waters are murky at best, fraught with rip currents and rogue waves at worst.
Memories tend to be short with a 24/7 news cycle that pummels viewers with overload. It’s been 11 years since the bear savaged investors and the economy to the point only a handful of  gutsy investors were willing to buy grossly oversold stocks.
Unfortunately, many sold out at the bottom and never got back in.
I see little respect for what can happen today, and part of that is due to the fact this Fed, headed up by Jerome Powell has assured the Street it will be there to goose stocks if there is a risk of a big decline.
I don’t believe Ben Bernanke or Janet Yellen would be as much a worrywart about a 7%-8%* drop in the market to hint about a rate cut to stem the tide, or was it politics that drives him.
I believe in letting the market find its comfort level.   I think we are already in the early stages of a recession, so artificially propping up the stock market  only puts investors at greater risk.
The biggest negative facing CEOs, money managers, business owners, the consumer and investors  today is CREDIBILITY,  Too much lying at the highest levels.  How can CEOs plan when they do not know what to expect next ?
A huge price will be paid for that, and this stock market with prices simply a matter of opinion, are vulnerable.
* incorrectly referred to as S&P 500 plunge of 10.2%
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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 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.
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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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