INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,168
Monday December 16, 2019 9:22 a.m.
The market will celebrate the prospect of trade deals (USMC , China phase One). Can we believe it ? U.S. trade representative, Robert Lighthizer insists it is a done deal.
While some industry analysts doubt it, the Street is a believer. China will buy $40 billion of U.S. farm products over 2 years and not require U.S. companies to reveal patent secrets in exchange for access to Chinese markets, U.S. concessions to be announced.
We have been here before. The timing is questionable in light of fact the U.S. House votes on impeachment this week.
The market will get more overvalued each day it rises in response to comments by the Fed or Administration regarding the economy or trade.
But the Street wants the party to continue just like it did before the bubble burst in 2000. The problem will be, no one will believe it is last call until after the fact when it is too late to avoid serious portfolio damage.
Bull market tops and bear market bottoms always trace out similar emotional patterns. Amazing !
Minor Support: DJIA:28,135; S&P 500:3,168; Nasdaq Comp.:8,734
Minor Resistance: DJIA:28,028; S&P 500:3,182; Nasdaq Comp.:8,607
Friday December 13, “RISK Level High – Will Trade News Disappoint ?” ”Yesterday’s blog noted a “USMC trade deal may be announced in coming days, but may already be priced into the market. Expect it to be followed by optimistic news on the U.S./China trade negotiations most likely a postponement of the December 15 date for new tariffs on $160 billion of Chinese goods.”
That’s pretty much what has happened, though the possibility exists that there my be a rollback of some existing tariffs.
The market celebrated the news with a 200-point jump in the DJIA yesterday, but traders may be selling into the news today.
The risk of jumping in today is that the market’s high valuation has discounted a lot of trade progress expectations, then too, promises like this have led to disappointment so often in the past.
Even so, humans being human, the temptation to jump in is hard to resist. All this will combine with a host of forecasts by the Street about 2020.
Risk level – very high.
Thursday December 12 “No More Cuts in Interest Rates”
Yesterday, the Fed announced it will hold interest rates at the current level (1.50-1.75), which surprised no one.
It has achieved its goal, delaying the inevitable, a recession after 10.5 years of economic expansion.
What hasn’t changed is the fact the stock market remains historically overvalued. But, it can become more overvalued as it did in the dot-com bubble bull that ran from September 1998 to January 2000 when the bubble burst hammering the S&P 500 down more than 50% and the Nasdaq Comp. down 78%.
The entire bull market has been driven in a big way by corporations buying back their own stock, putting a floor under any attempts to move downward and pressing stocks upward providing a major benefit to top management where shareholdings are the largest and options reward management.
Strangely, in face of a generally buoyant market, the Wall Street Journal just reported that private investors have withdrawn $220.8 billion from stock mutual funds and invested the proceeds in money market funds and bond funds.
In his “Great Stuff” newsletter, Banyan Hill alerts readers to the Fed’s flooding of the repo market with billions of dollars, warning if the repo market dries up, there is no lender of last resort for institutions, hedge funds, and Real Estate Investment Trusts, adding that something is decidedly wrong, a large financial institution, a large bank or hedge fund or more are in trouble.
Expect a lot of volatility between now and year-end as institutions adjust portfolios for what they expect in 2020. …………………………………………………………
Minor Support: DJIA:28,267; S&P 500:3,177; Nasdaq Comp.:8,757
Minor Resistance: DJIA:28,057; S&P 500:3,121; Nasdaq Comp.:8,719
Wednesday December 11 “Stock Market Will Tell Us When we Are in Recession”
In addition to news flow from the Fed, Administration hype, trade, impeachment, and pundit projections on the economy and stock market, the market will be buffeted by year-end tax selling and institutional portfolio switches to dress up year-end reports for clients.
If the Street appears to ignore this news flow, some of which should not be ignored, it is because computer algorithms are calling the shots and events have to stray far from the base to rattle the cage.
Right now the economy is on the threshold of recession with manufacturing well into recession but housing and services hanging tough.
Those who thought a recession would hit by now (myself included) have been wrong which does not mean investors should be sure the coast is clear to load up on debt and stocks.
Recessions happen, and there has never been a recession without a bear market, the latter starting several months before the former starts.
Generally, it is thought that a recession is marked by two consecutive declines in GDP. That may be most of the time, but the real scorekeeper for the start and end of recessions in the National Bureau of Economic Research and they dbase decisions on a lot of factors beyond the GDP alone.
What’s more, they don’t render a decision that a recession started or ended until months after the fact.
BOTTOM LINE: The stock market will tell us when we are in a recession. A rally after the initial decline will fail to follow through, yielding to yet another decline, and so on in spite of what the Fed, the Administration and the Street pundits say.
By then the market will be down 30%, and it will be too late for investors to do much but ride it out. That’s why, so late in the game, it is smart to have a healthy cash reserve.
Tuesday December 11 “Street Not Sure Which Path to Take Path – Most or Least Travelled”
The Federal Open Market Committee (FOMC) meets today with a report forthcoming tomorrow by Fed Chief Jerome Powell.
I expect he will hedge his position saying it will lower rates if the economy falters, but stop short of saying it will raise rates if the economy heats up.
As usual, he will say the economy is in “a good place,” even though the Fed has raised rates three times since August.
The Street is not sure what to do. The market is pricey, so buying carries above average risk especially with the market so news sensitive.
Democrats and Republicans appear to be ready to pass the U.S. -Mexico-Canada Agreement (USMCA) on trade with an announcement coming as early as next week. Additionally, I expect the Administration to announce the postponement of new tariffs of 15% on $156 billion on electronics, phones and toys scheduled to take effect December 15. Anything to the contrary would hit the market.
Finally, it is the year end when stocks trade irregularly as institutions and investors make portfolio changes looking ahead to a new year.
Monday December 9 “Lot of Balls Up In the Air, Any One of Which Could Come Down…”
Projecting the direction of the stock has always been complicated by the fact there are always several balls up in the air any one of which can come down to change the picture, sometimes dramatically, or so I have written often.
Today more than any time in memory, that is true.
One week our economy looks like it will plunge into recession, the next like the economic expansion that started more than 10 years ago will continue though irregularly for months on end.
Tariffs and trade policies continue to baffle strategists, one day the Trump administration says a deal should wait until after next year’s election, the next day it says a deal is close.
More recently, the rumors are that with last week’s blow-out jobs report, the U.S. can walk away from any deal with China, the latter feeling pain from a decline in exports.
Until a month ago, the stock market declined and rose sharply no less than seven times over 24 months before resolving the pattern on the upside mostly in response to Fed policy and hopes for a resolution of a deal on trade that would remove the tariffs that are beginning to hurt economies globally.
Manufacturing has been in a recession for four months, but services and homebuilding are still buoyant. The Fed has cut interest rates three time this year, but without more damage to the economy will not cut rates further.
It’s anyone’s guess what will happen on trade. My guess is a postponement of the December hike by the U.S. in tariffs until next year.
So far, the Street could care less about impeachment, even more than the presidency is at risk. That’s an arrogant way to deal with something that could have far-reaching consequences, but 10 years of economic prosperity and bull market tends to create a tunnel vision that obscures perspective.
Buying here is risky, but I can understand why that is hard to accept, with speculative fever rising.
A bubble ? Yes, however it’s a matter of how much it inflates until it pops.
One thing I am sure of, it will burst when just about everyone is bullish, when a “new era” in economic expansion and Dow 50,000 is universally accepted.
Friday, December 6 “Recession ? Not Yet However Market Fully Priced
New jobs have been the mainstay of an extended economic recovery where a contraction in manufacturing is in its fourth month of recession.
Yesterday, I quoted Moody’s Chief Economist Mark Zandi as seeing trouble in the jobs market referring to the ADP survey where 67,000 new jobs were created in November, well below the 190,000 projected by economists and below the 100,000 jobs needed each month to keep the unemployment rate from rising.
But the BLS Employment Situation report today tells a different story reporting 266,000 were added in November well above the projected 187,000.
While the BLS report also includes government jobs added, as well as Gm employees returning from a strike, the conclusion has to be the jobs sector is still strong assuming there was no distortion in the numbers and a revision downward in December.
While manufacturing is in its fourth month of contraction, the economy must be considered as struggling, but not down for a ten-count, not even an eight-count.
We may be on the threshold of recession, but are not there yet. Historically, the stock market tops out ahead of the beginning of recessions. We will have to let that one play out.
Credit the Fed’s three cuts in interest rates this year for extending the 10 year old economic expansion.
As for stocks, they are still very historically overpriced with hopes that a trade deal will prevent a major correction/bear market. Corporations will still goose their own stocks (and the market averages) with buybacks.
Good news, or lack of bad news suggests the Fed will not be cutting rates further any time soon, though the White House is pressuring it to do so.
What to do:
Investors without a sizable cash reserve should raise one in line with their tolerance for risk.
Thursday December 5 “Puppets on Wall Street Whipsawed Again By the Puppeteer”
Once again the Street is reacting to news flow about a trade deal, plunging when President Trump suggested it would be a good idea to wait until after next year’s election to strike a deal, then reversing himself and running stocks back up with a comment that a trade deal is close.
How naïve ! One would hope for more sophistication at such high financial levels.
It is an economy driven by both low interest rates and a waning momentum after 10 years of economic expansion.
It is a stock market driven by Fed nurturing and corporate buy-backs, which according to a Goldman Sachs (GS) report are on track to top $1 trillion in bids for SD&P 500 stocks this year.
Corporations are using cash and borrowings to fund their buybacks which have exceeded free cash flow for the first time since the 2007 – 2009 financial crisis.
While Goldman sees a slowdown in purchases, buybacks will continue to push stocks upward though may not be able to prevent a bear market where selling from other sources override the impact of buying by corporations.
The idea with buybacks is to increase earnings per share by reducing outstanding shares, as well as drive the price of stocks up for major shareholders and executives’ option exercise and share exit opportunities.
It will all be decided by the economy. Will it slip into recession ? If so, we will go into a bear market, how severe depends on what news hits it on the way down.
The alternative would be a sluggish economy with pockets of strength and weakness and possibly stagflation, inflation but no growth.
In any event, the stock market is historically overvalued witn more downside than upside potential.
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.
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.