INVESTOR’S first read.com – Daily edge before the open
S&P 500: 3,112
Thursday December 5, 2019 8:48 a.m.
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.
Moody’s Chief Economist Mark Zandi sees trouble in the job 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.
New jobs have been the mainstay of an extended economic recovery where a contraction in manufacturing is in its fourth month of recession.
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.
Expect a lot of volatility between now and year-end. As expected, The market is being whipsawed by inconsistent projections out of the White House on trade.
Minor Support: DJIA:27,601; S&P 500:3,111; Nasdaq Comp.:8,521
Minor Resistance: DJIA:26,697; S&P 500:3,117; Nasdaq Comp.:8,586
Wednesday, December 4 “Rally after This Correction Sets Up Bear Market”
Wait until after the next election for a trade deal between the U.S. and China ? That statement was made by President Trump yesterday mostly triggering a sharp drop in stock prices across the board.
Really ? I don’t believe that. I expect the December 15% tariffs on $160 billion of Chinese goods to be delayed and some sort of progress to be made before year end or sometime early next year. Today, Trump now says, trade talks with China are going well. Go figure.
A continuation of yesterday’s late-day rebound can be expected in early trading, but there is a risk of a drop to DJIA: 27,370, S&P 500:3,060, Nasdaq Comp.: 8,390 which would be a one-third retracement of the October 2 to November 27 rally.
This being the year end, stocks may not get down that much. A year end rally into early January could set up a major correction into March and possibly lead to a bear market. It depends on news flow, especially in an election year where polarization are hitting new highs, if not the market.
Will President Trump resign ? Clearly that is not what anyone is expecting. But investors need to consider the possibility. Initially, resignation would hammer stock prices, perhaps for five hours before stabilization. Beyond that, the market’s direction depends on economic news flow. A market as historically overpriced as this one, is vulnerable.
What to do in such an environment ? Have a sizable cash reserve. There has never been a recession without a bear market. Downside here is greater than upside. With the new normal in the market being vertical plunges in stock prices, investors without a cash reserve won’t be able to react quick enough to raise cash once a plunge begins.
Tuesday Dec 3 “Investors Need a Good Dose of the Truth From Fed and Administration”
The Street is beginning to expect a U.S./China deal on trade will be delayed until year end or early 2020. That shouldn’t surprise anybody, we have seen promises and projections delayed in the past so often it is becoming the new normal.
The key is the economy which has been hovering on the threshold of recession for a year.
This is a Fed-stoked bull market that is characterized by hype from the Fed and Administration every time the market takes a hit. A few more days like yesterday and the Fed will be hyping lower rates and an economy that in Fed Chief Powell’s words is “in a good place.”
A lie !
It isn’t in a good place if the Fed is slashing interest rates.
What’s more, the Administration will be hyping progress on trade (again).
Too much of a good thing has its downside. A 10 year-old bull market and economic recovery breed arrogance, denial and tunnel vision.
Bear markets happen, some investors ride them out recouping paper losses after a couple years, some raise cash to protect portfolio values and to invest at lower prices. The savvy pro is out all together and back in close to the lows.
What is a shame is, many get scared after a 30% plunge and sell out totally with huge losses and never get back in – too scared.
WHAT INFURIATES ME ABOUT THIS FED AND ADMINISTRATION IS THEY AREN’T TRUTHFUL AND INVESTORS ARE GOING TO GET CLOBBERED.
Expect more hype by the Fed and Administration in an effort to stop a further decline in the stock market. Why ? I have my suspicions.
I have been targeting the first week in January as the beginning of a bear market. While a bear may be in progress now, I hold to that expecting a year-end rally into early January, which most likely won’t top the November 27 all-time highs. This would be the most dangerous rally in this bull market.
Monday December 2 “Year End Portfolio Adjustments Cloud Picture”
So, here we are, year end, a time when stocks do weird things – go up when logic says they should go down and go down when they are expected to go up.
Much of this mish-mash is due to year-end adjustments made in portfolios by institutions to rid losers and add stocks that may look good in annual reports, even lure in prospective new clients.
It is also a time when the Street’s pundits issue annual forecasts for the coming year, a rather fruitless exercise since looking out 6 to 12 months is nearly impossible considering the many things that can happen that are not foreseeable.
At best, analysts can refer to possibilities that must be taken seriously like a recession or economic recovery, Fed actions, corporate earnings.
The big unknown is the outcome of the election in November. Will one party be in control, by how much, or will control be split down the middle ?
That spells uncertainty which suggests a stalemate or a down market.
With the economy struggling to avoid a recession, will one develop and when. There has never been a recession without a bear market, bear markets without a recession, yes.
With the market hovering around all-time highs, odds favor lower prices at some point next year. My expectations is for a turndown in early January.
But we have had five “turndowns” in the S&P 500since January 2018 ranging from 7.6% to 20.6%, any one of which could have been the beginning of a bear market.
But a rebound occurred after each decline. Will the next decline be followed by a rebound or a bear market ?
Wednesday November 27 “Bubble, Bubble, Bubble”
The dot-com bubble saw a fivefold increase in the Nasdaq Composite between 1995 and 2000 followed by a 77% plunge after the bubble burst. It took 12 years for the Nasdaq to get back to its 2000 peak price of 5,048.
In December 1996, Fed Chief Alan Greenspan referred to surging speculation in high tech stocks as “irrational exuberance.”
His warning came four years too early as investors enchanted by the open-ended potential for dot-com companies, scrambled to get on board before the train left the station without them. Most of these dot-com companies had little substance to justify anyone buying them, which proved to be true starting on March 12, 2000.
Add a new acronym to your growing list. It’s FOMO, short for “Fear Of Missing Out.” Yes, fear of missing a chance to make more money, ergo buying stocks regardless of excessive valuation. The idea for doing such a foolish thing is an investor expects to sell their stocks to greater fool at a higher price.
Today’s market is looking like another inflating bubble in route to a burst. It too has been fed by an economic expansion lasting 10 years and a historically extreme price/earnings ratio, 30.8 versus a historic norm of 16.6.
What to do:
Since these manias tend to chug on relentlessly like the pink rabbit, it is best to simply raise a healthy cash reserve, even though that is the last thing you want to do. At some point the bubble will burst with a 12%-18% vertical plunge in the market, just for openers.
Tuesday November 26 “Fed’s Powell: Economic Glass More Than Half Full ?”
Speculation is rising from hot to Scorching as the smaller company Russell 2000 jumps more than 2% in a day to all-time highs. This is more bubble stuff and almost impossible for investors to ignore.
Gotta get in on this, is the mindset, hock the jewels and bet the ranch. Who could blame anyone when the market keeps running from overvalued to incredibly overvalued, but who cares as long as it keeps rising. Beyond classic late stage bull market, this is out of sight and much like the dot-com bubble in 1999-2000.
Fed’s Powell says the economic glass is more than half full. I am awaiting economist A. Gary Shilling’s “INSIGHT” to confirm whether Powell is right or wrong.
My bearishness is based on two things. One, Shilling’s well documented conclusion that our economy is in the early stages of recession, two, the extreme overvaluation of the S&P 500.
There has never been a recession without an accompanying bear market.
Does the market “know all” ?
Not if you consider we have had 8 bear markets since 1980, two of which were in excess of 50%.
Monday, November 25 “Risk Rises as Bubble Inflates Further” I would refer to the Stock Trader’s Almanac more often if my space here was not limited. Give it to yourself for Christmas. Not only does it contain more relevant information about everything you need (and want) to know about seasonal and timely trading, but it is accompanied by regular commentary. (Contact:800-762-2974)
The “Best Six Months” for owning stocks (Nov.1 to Apr 1) is one of its outstanding discoveries. It highlights a few year-end phenoms like the tendency for market weakness before Thanksgiving Day and strength after.
The “Santa Claus Rally” was discovered in 1972 by founder Yale Hirsch whose jungle, “If Santa Should Fail to Call, Bears may Come to Broad and Wall,” sums it up in a few words.
Monday November 254 “Risk Rises as Bubble Inflates Further”
“The Only Free Lunch” on Wall Street occurs in late December as stocks hitting 52-week new lows selectively cough up over-sold bargains that will rebound after the tax selling abates. December 20 is projected to be the bottom this year..
We live in uncertain times, both the economic expansion and bull market are long in the tooth. I have to go back to late 1972/early 1973 to find a time that I feel parallels the current time for economic. Stock market and political drama. Clearly we are witnessing a bubble in the stock market and it just keeps inflating. CAREFUL ! The lure to go all in, even borrow to buy stocks becomes irresistible at these junctures.
Friday November 22 “Tariffs to Start Hurting Companies”
Here’s where push comes to shove. Axios AM reports that “Big retailers are refusing to accept tariff price increases from their brand suppliers, telling the companies they will have to either eat the tariff costs or find another buyer.”
This stands to adversely impact the smaller companies that can afford it the least. The next round of tariff increases will hit on December 15.
While I expect that date to be pushed into 2020, the ability for corporation managements to plan for the future must be next to impossible.
A tariff increase would be the final straw in the efforts to avoid a recession.
I have never seen investors ignore serious warning signs to this extent.
It must be computer algos that are programmed to ignore bad news, or are not programmed to understand the dangers that exist for not adjusting for potential adversity.
Looking back, I assume many money managers and analysts will regret letting an algo do their thinking for them.
Bull markets do end. Bear markets happen.
Thursday Nov. 21 “Too Many Lies and Misinformation”
Reuters reported Wednesday that the phase one trade deal may be pushed into 2020. Whoa ! Didn’t Trump’s economic guru Larry Kudlow announce last week that the U.S. and China were “getting close to reaching a trade deal….that “It’s not done yet, but there has been very good progress and the talks have been very constructive.”
Misleading statements like these go back at least to February with Kudlow’s hype on trade progress like “fantastic”, good headway”, “positive surprises”, “lots of momentum” raising hopes for investors only to be dashed by news of no progress.
While the Fed is truthful, it falls short of being forthcoming. The economy is not in a good place.
What happens when the Street discovers this endless spew of nonsense is no less that a Ponzi scheme to buy time until November 2020.
Too much is at stake for investors, some who have been chased into stocks in search of a return, others up in years and unable to afford a huge hit to their portfolio, yet others caught up in the cruise control bull market mania, only to get skewered by a massive plunge to reality in the stock market as a recession, already underway, becomes reality.
IT IS NOT TOO LATE TO RAISE CASH, A LOT OF IT, EVEN THOUGH RETURNS ON CASH ARE NEXT TO NOTHING.
The stock market sells at a price/earnings higher than any in the past except the dot-com bull market top in March 2000, which was followed by a 50% plunge in the S&P 500 and 78% plunge in the Nasdaq Comp.
BOTTOM LINE: This stock market does not discount any negatives, not a recession, not a stall in earnings, not impeachment, or an endless haggle over trade.
Does the market “know all” ?
That’s what “they” say. But the record says something different with eight bear markets since 1980, two with drops in excess of 50%.
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
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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.