INVESTORS first read.com – Daily edge before the open deal
S&P 500: 2,774
Friday, February 22, 2019 9:07 a.m.
Note: I will be changing my format in coming weeks with brief summaries of key topics up front for a quick read, then details below. I plan to address politics in a weekly blog, or more often depending on unravelling events, under the title of “Folly Sci 20/20.”
Yesterday’s economic reports confirmed my suspicions that the Fed hit the panic button in January with its abrupt policy change from steadily raising its fed funds rate to a “wait and see policy,” i.e., no more increases unless the economy overheats, which it won’t.
Former Fed Chief Janet Yellen and economic advisor to Alianz, Mohamed El-Erian speculate the next move by the Fed could be a reduction in its benchmark fed funds rate.
Yesterday’s economic readings suggest the economy is slipping across the board.
Existing Home Sales dropped 1.2% in January (y/y: -8.5%).
Leading Economic Indicators for January slipped 0.1%, though tainted by the shutdown.
PMI Composite (flash)slowed by 1.2 points to 53.7. While services rose, it is manufacturing that is of major concern.
Philly Fed Business Outlook Survey at minus 4.1 is in contraction for the first time since May 2016. And new orders the same since August 2016 at minus 2.4.
Durable Goods rose 1.2% in December, but core capital goods sank 0.7%.
Can the Fed bail out an economy they weakened with QT rate increases ? Economic reports in coming months will give us answers.
The Street will need to put the shutdown behind it and give the Fed’s change of heart a chance to nurture the economy back to health.
IMHO, a recession will still hit, but maybe not until early 2010.
St. Louis President James Bullard was interviewed yesterday on CNBC’s “Squawk Box,” and appeared to hint the Fed’s benchmark fed funds rate at 2.25% may be a bit too high, suggesting a rate decline may be in order if the economy deteriorates further.
Tasked with keeping inflation low and employment high, the Fed’s policy may have gone too far in December with its last rate increase. That hike on top of preceding hikes since December 2015 crushed the housing industry and sent tremors throughout the banking industry as refinancing of individual and corporate debt loom.
As for a recession, Bullard replied, “Slowing, but not terribly.” Really, what’s he going to say ?
Should investors be selling now ?
That depends on an investor’s tolerance for risk. At these levels, a sizable cash reserve would be wise. Traders can work the market, but sit close to the exit.
The Street has anxiously awaited good news on the U.S./China trade talks, so that is mostly priced into the market. Disappointing news is not !
The stock market has recouped three-quarters of its Oct./Dec. 20% loss, and the Mueller report is due in a matter of days, which may adversely impact the administration’s ability to govern.
The biggest problem the Street has is it is spoiled rotten by a Fed-managed bull market, assurance that the Fed will step in if the market drops more than 15%.
The Fed can only do so much, as evidenced by 50% plunges in 1973-1974; 2000 – 2002; 2007 – 2009.
The Fed is in PANIC mode – respect that.
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.
DID YOU KNOW ?
>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. On December 10, 2018, Thomson Reuters was projecting Q1 2019 S&P 500 earnings growth of +7.3%. As of February 1, it has slashed growth for Q1 2019 to +0.7% with significant cuts for the rest of 2019.
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.