Street’s Bullishness Based on Hopes of 2020 Earnings Rebound

INVESTOR’S first read.com – Daily edge before the open deal 
DJIA:25,709
S&P 500:2,808
Nasdaq Comp.:7,630
Russell 2000:1,549
Friday, March 15
, 2019   8:48 a.m.
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gbifr79@gmail.com
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Summary:
THE MARKET:
Street is gambling that there won’t be a recession. I think it is a gamble and the odds are not in their favor. BUT, if I am wrong, I will admit it ASAP here.
It looks like the market averages are  on the verge of tracing out a sideways trading range.  While the top and bottom of that range has yet to be determined, it will probably be between S&P 500 2,700 and 2,850.  Due to Boeing’s distortion, the DJIA’s range is more difficult to establish, but most likely will be between 25,000 and 26,200.  After that, the market can range generally between those levels until it breaks out in one direction or another. What are they smoking ?
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EARNINGS: A Morgan Stanley study shows  a downturn in S&P 500 earnings growth has consistently triggered a plunge in stock prices. Analysts have been slashing 2019 earnings projections. The Street is betting on a rebound in 2020. If they start slashing projections for 2020, we have the next leg of the bear market.
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ECONOMY: While reports on Durable Goods, MBA Mortgage Apps, the Atlanta Fed  Business report, and Construction Spending  were positive, they didn’t reflect a dynamic recovery in the economy.  We need a couple months to get a handle on the trend.  Thursday’s Jobless Claims offered little, New Home Sales are still struggling.
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TRADE: At this level, a resolution to the U.S./China talks is most likely priced into the market, aside from a one-day spike when a deal is announced.
What is not priced in is “no deal” or a disappointing deal, what’s more, further deterioration in the economy is not  priced in either, because that raises the risk of  recession (see below).
Both sides want a deal. Trump is on a wrenching losing streak and needs a win even if it means concessions, China’s industrial output is at a 17-year low. ………………………………………………………………….
BREXIT: Politico urged Americans not to freak out about Brexit, quoting Allianz’s Mohamed A. El-Erian who said  disorderly   Brexit would be disruptive for the UK in the short-term…but less disruptive for Europe and, constitute only a blip in the  US and most of the rest of the world. Thursday Britain’s Parliament approved  U.K. Prime Minister Theresa May’s bid to delay Brexit until late May.
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BOEING (BA): I still think Boeing’s  (BA) stock (374 pre-open) is at further risk, with the next support at $300. That would be 73 points down from here, which would take 495 points off the DJIA. (see Boeing below)
      Bloomberg Evening News reported $600 billion in orders are at risk, and China could be a beneficiary. While Canada and the United States grounded the Boeing 737 Max 8 jets, Boeing’s stock rose 1.73 points.  The stock traded  heavily three of the last four sessions with a floor in the mid-360s.  Down only 16.4% from its all-time March high of  446 BA sells at 21 x earnings and yields 2.18%.
Arrogance ?  I don’t think a 16% decline discounts the risk here. How long will it take until we are sure the answer we are given is right ? Can even Boeing, Southwest or American be sure.
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Fed Damned if they did and damned if the didn’t:
Based on what I am seeing in reports on the economy, we need a couple months to put the government shutdown, and Q4’s crunch in the market and economy behind us.      We also need to see if the Fed’s change in policy from one of raising interest rates to one of “wait and see” can head off a recession.
      I think the failure of the Fed to acknowledge the seriousness of weaknesses in the economy was a huge blunder. Their referral a month ago to the economy as :”rosy” was simply not true. As a result that assessment plus a U-turn on policy triggered a stampede in the stock market.
      Now, if  the Fed is right and the economy heats up, they will have to return to a policy of raising rates which will turn the market down from inflated levels.
If they are wrong and the economy slips into recession, stocks will turn down from inflated levels.
Either way, the Fed has increased the risk for investors.      Good news on tariffs will spike the market. That would be a good opportunity to raise cash, a lot of it.
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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.
> While Q4 corporate profits are very impressive, analysts are dramatically slashing estimates for 2019. FactSet now sees Q1 this year at minus 3.2% down from minus 2.7% a week ago; Q2 at plus 0.3% down from plus 1.0%; Q3 at plus 1.9%  down from plus 2.4% and Q4 at plus 8.5% down from plus 9.9%. For the year they see an earnings gain of plus 4.1% down from plus 4.8% a week ago..     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.
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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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 THE PRESIDENCY PROBLEM
Special Counsel Robert Mueller, the Southern District of New York ands the State of New York are  closing in on President 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.
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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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