INVESTORS first read.com – Daily edge before the open deal
Friday, March 1, 2019 8:59 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.”
The Stock Market:
Pre-open futures trading indicates a triple digit open. Driven by a timely Fed policy change and expectations of a favorable conclusion to the U.S./China trade talks, the market is on a tear.
With the bull raging like this, the temptation to go “all-in” is hard to resist. Humans being human. Euphoria like this is why it is so hard to “buy low and sell high.” It is so very, very easy to invert this bromide and buy high. Why not ? Everyone else is buying.
Selling out is what the BIG money does, but others can at least raise some cash at these junctures, just in case the market spikes and heads down, which is what it may do if a great deal on tariffs with China is announced.
The latest AAII Sentiment Survey indicates 41.6% of investors surveyed are bullish, which coincides with market peaks/corrections in the past. Basically, this survey measures extremes in sentiment, and enthusiasm for stocks is close to a tipping point.
Good news on tariffs will spike the market. That would be a good opportunity to raise cash, a lot of it.
DJIA TODAY: Must hold above 25,875 or pattern turns short-term negative raising possibility of bigger correction.. Bulls need break above resistance at 26,100.
S&P 500 TODAY: Must hold above 2,775 support or pattern turns short-term negative raising possibility of bigger correction. Bulls need break above resistance at 2,795.
Nasdaq Comp. TODAY: Must hold above 7,510 or pattern turns short-term negative, raising possibility of bigger correction. Bulls need break above resistance at 7,565.
The Street is hopeful for a favorable outcome from the U.S./China trade negotiations, but the summit between Trump and North Korea’s president Kim Jong Un failed to arrive at an agreement. Kim wanted all sanctions lifted, but was only willing to offer partial denuclearization. I don’t think the Street cares about North Korea, and it may have already discounted a favorable outcome on trade, but not an unfavorable result.
– It doesn’t make sense that the market is soaring, because Fed did a total about-face on policy, because they were scared that the country, the world, was on the edge of a recession. What if the Fed is right ?
– Stocks are entering “pricey” levels where the market cannot handle any bad news,
and there is the potential for a lot of it.
-The Street continues to revise earnings for 2019 sharply down
-Recent reports on the economy raise odds a recession (See below)is looming
–Debt (individual, corporate and government) has risen sharply due to years of low interest rates. It not only must be repaid, but additional debt to fund needs is out of the question.
-There is still risk in the successful negotiation of a trade deal with China, as well as progress dealing with North Korea.
-The Trump administration’s ability to govern may be damaged by the Cohen testimony and findings of the Mueller investigation, the renewed U.S. House investigation and Southern District of New York.
This was a big week for indicators on the economy. It wasn’t great, but was skewed by December’s crunch and the shutdown. Some indicators were muted, some showed a bounce from depressed levels.
Bottom line: We need more time. If the Fed’s change in policy can revive the economic recovery, a recession is put off until 2020. If not, a recession will be underway by year-end.
A survey by the National Association of Business Economics reveals that 50% of those surveyed see a recession by the end of 2020, 75% by the end of 2021. 10% see it starting this year.
I think it has already started.
December was a disaster for reports on housing manufacturing and retail, January not much better with troubling reports on Existing Home Sales,
Leading Economic Indicators, PMI Composite, Philly Fed Business Outlook, Survey Durable Goods, Chicago Fed National Activity Index, Dallas Fed Mfg. Survey’s production index, Housing Starts, and the State Street Investor Confidence Index, and the GDP which grew at a 2.8% annual rate. However, Consumer Confidence, the Richmond Fed Mfg. Indexes, and yesterday’s Pending Home Sales Index (+4.6% in Jan.), and the Chicago PMI Index (up 8 pts. to 64.7) offered hope for a recovery. The Q4 stock market plunge and December/January government shutdown adversely impacted confidence. Time is needed to see if the Fed’s change in policy will help avoid a recession.
“KEY” ECONOMIC REPORTS TODAY:
Friday – PMI Mfg. Ix. (9:45); ISM Mfg. Ix. (10:00); Consumer Sentiment (10:00)
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.
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.
> While Q4 corporate profits are very impressive, analysts are dramatically slashing estimates for 2019. FactSet now sees Q1 this year at minus 2.7% down from minus 0.7%; Q2 at plus 0.7% down from plus 1.6%; Q3 at plus 2.2% down from plus 2.7% and Q4 at plus 8.8% down from plus 9.9%. For the year they see an earnings gain of plus 4.9% down from plus 5.6%. 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
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.