INVESTOR’S first read.com – Daily edge before the open
Thursday September 12, 2019 6:48 a.m.
What could be more enticing for investors than expectations of another cut in the fed funds rate on the 18th and promises of progress in US/China trade talks next month ?
That’s what makes for an expanding Bubble in stock prices.
But, that’s what will eventually decimate portfolio values when the bubble bursts.
I don’t know. The Administration and Fed hype is relentless, driven by fear that 2020 will be a recession/bear market year, making Donald Trump a one-term president.
Yesterday, Trump urged the Fed to cut interest rates to zero or lower.
That is insane.
Negative interest rates have never proved they would stoke economic growth or stir inflationary pressures. Low interest rates punish savers and people who rely on some semblance of a return on their money. Many cannot afford to invest in the stock market. Low interest rates adversely impact Bank profitability and in turn, lending.
What is the message here ? Are we headed for a global depression ?
Is that why the Fed reversed its policy in January ?
The S&P 500 is attacking this area for the fourth time in a year, each within 2.6% to 3.0% of the July 31 peak.
Stocks are historically overvalued by anywhere from 25% to 45%. No wonder why the Administration and Fed are petrified at the prospect of a bear market.
But by these efforts to avert a recession/bear market, the Administration and Fed are setting investors up for a horrendous drubbing.
The acions of the Administration and Fed are simply inflating the bubble more and more at a time stocks are more overpriced than at any time in history, except the dot-com bubble burst in 2000 which led to a 50% drop in the S&P 500 and 78% drop in the Nasdaq Composite.
This is classic “bubble” stuff. If the Fed does NOT cut rates on the 18th, and or, if the October trade negotiations break down or look like a ho-hummer, the bears will take over.
Odds of new highs are good, but NOT sustainable.
Minor Support: DJIA:27,109;S&P 500:2,998;Nasdaq Comp.:8,158
Minor Resistance: DJIA:27,217; S&P 500:3,017; Nasdaq Comp.:8,183
Wednesday, Sept. 11 “What a Bubble Looks Like”
This is what a bubble looks like. While it can burst at any time, it expands and expands in response to news items as frantic investors panic fearing they will miss out on making more and more money……..forever and ever.
It’s just human nature to get overwhelmed with greed. The higher the market runs the greater the drive to make more money even though markets driven by greed are hitting new highs and becoming more and more overvalued.
Odds favor the market hitting new highs in coming days in anticipation of another Fed rate cut and Administration hype about a trade deal in October.
All this will give be a field day for the press, with news headlines sparking even more urgency by investors to jump in with both feet with every cent they can scrape up. With interest rates low and going lower, many investors will borrow in order to leverage their stock buys.
Signs of recession are popping up all over the place, yet the lemmings continue their panicked march to ruin.
This has been a Fed-stoked bull market and the 25% surge since December has been all about Fed hype about interest rates capped off by one rate cut last month and another hoped for on the 18th.
When this bubble bursts, the pop will be heard world wide, the result nothing short of horrendous – straight down initially 12% – 18% as much of Wall Street bails out at the same time.
Tuesday Sept 10 “Street Marches to Tweet Hype”
Right now, it’s all about managing news flow, from the Administration and the Fed. At year-end we saw Fed Chief Jerome Powell turn a plunging market around with an about face on Fed policy and rhetoric about the possibility of lower interest rates if the economy needed it. Down 20.2% in Q4, the S&P 500 surged 25.7% in four months.
At every turn, President Trump has used his tweet power on trade to stabilize markets that appeared to be on the verge of selling off.
His tweet power is highlighted by a JP Morgan study concluding that Trump’s tweet on markets increasingly moved markets.
Together, Trump and the Fed have managed to prop up an overvalued stock market and delay the inevitable – a recession/ bear market.
The two know that if this market becomes unhinged, it will decline 35% -45% as all the Street’s algos are reprogrammed to raise cash.
One of the cruel characteristics of bear markets is that stocks get pummeled by a relentless string of unexpected negatives and an increasingly gloomy outlook to the future.
Eventually, one or several selling climaxes over-discount these negatives and you have a bear market bottom, a time when no one wants to buy stocks.
That scenario is impossible for most to envision now since the Street’s investment policy is on automatic pilot – BUY.
For many months I have warned of a recession and bear market with expected results – disbelief. That’s what happens at bull market tops.
But it is also that investors don’t want the party to end, they’re making money, sometimes easily and want that to continue.
It is obvious why the Administration and Fed are desperately trying to hold the stock market up. For one, when this one breaks down, the plunge will be brutal. Then too, a recession/bear market in 2020 would sink Trump’s chances of reelection.
Monday Sept, 9 “Street Wish List – Rate Cut, Good trade news – October”
The market has attracted buyers who are hoping for a Fed rate cut on the 18th and positive developments in October coming out of the US/China trade talks.
Fed Chief Jerome Powell said Friday that the US economy “remains strong”…. “Labor market is in a good place” …..that “the labor market is in a good place.”
If so, why is the Fed cutting its fed funds rate ?
Why would it encourage more borrowing when Politico reports “
High Debt Levels Are Weighing on Economies, adding “Debt Owed by governments, businesses and households around the globe is up nearly 50% since before the financial crisis [2007-2009] to $246.6 trillion.”
If stock prices bear any correlation to earnings, it is worth pointing out that FactSet now projects a decline of 0.4% in S&P 500’s Q2 earnings and a decline of 3.5% in Q3. For CY 2019, it sees earnings rising only 1.9%. What’s more, projections for 2020 have dropped from double digits to earnings growth of 8%, as of this day.
August’s Consumer Sentiment Index dropped below 90, the first time since 2012.
The ISM Manufacturing Index has dropped below the expansion level .
Why then is Fed Chief Powell saying the economy remains strong ?
Why not tell the truth – the economy is sucking wind ?
Granted the market would be going down not up, buy at least investors would not be so quick to rush in at all-time highs.
When will these guys start to tell the truth.
It’s all about preventing a recession/bear market in 2020, a presidential election year. The problem here is, when a recession does hit, the Fed won’t have any means to counter it. That can only mean one thing – an extended recession/bear market.
It’s early September, the restart of US/China trade talks won’t take place for more than a month. As we have seen in the past, a lot can happen between now and then.
Technically, the market has traced out a base in the DJIA 25,600 (S&P500:2,850) area and can run to new all-time highs in face of another Fed rate cut and hype about trade talks.
This does not preclude another leg down after this run, October has tended to punish stocks before the beginning of the historically positive November/April run up in stocks.
Expect the Administration, the Fed and certain prominent individuals on the Street to say anything to convince investors we are not in a recession and facing a bear market. They know a recession in 2020 would decrease chances of a Trump re-election.
Friday Sept. 6 “Rally Over ??”
Why would anyone want to rush in to the market that is significantly overvalued by historical precedent, selling close to an all-time high with the economy on the threshold of a recession ?
Most likely it is humans being human, not wanting to miss making some fast money, the kind of greed that precedes every bull market top.
Memories tend to be short, especially when those memories are ugly. It’s been 11 years since a bear market was sinking its talons into millions of petrified investors.
If the looming trade talks yield meaningful progress, the market will spike higher. But I think the smart money will be selling into that spike.
I sense that the Trump administration and Fed fear a bear market because it has the potential to be brutal and long-lasting, kind a combo of 1987 (minus 41%) and 2007-2009 (minus 55%).
The ’87 bear was not accompanied by a recession, but was triggered by computerized “program trading” run amok causing a technical breakdown, 20.5% in just one day (Black Monday Oct. 19).
The 2007-2009 bear market was triggered by the implosion of highly leveraged mortgages and credit leading to a recession.
What troubles me most is leverage and a reliance on computer algorithms to do the Street’s thinking and take action .
While there have been bear markets without a recession, there has never been a recession that was not accompanied by a bear market.
Thursday Sept. 5 “The Bubble Is Back ! Will They Ever Learn ?”
NO ! They never will. They never have, not in 2007, 2000, 1998, 1990, 1987, 1983, 1981, 1980, 1976, 1973, 1968, 1966, 1961.
Here we go again, trade war rhetoric, Trump says China wants to make a trade deal… “We’ll see what happens.” Right ! That said just when it seemed the stock market was about to plunge.
But that’s not all. Trump also said Iran wants to talk…they want to make a deal.
Not to be upstaged, the Fed’s Beige Book painted a positive picture even though the US ISM Manufacturing Index slipped below 50 (no growth) in August, its fourth straight month and Consumer Sentiment had its worst drop since 2012.
Maybe this is the time something good will happen, but I warned yesterday to beware of Bear Market Rallies Driven By Fed Comments and Trade War Bullshit.”
Here’s the problem with the “news whipsaw.”
It sucks investors back in the stock market which puts them at risk of getting clobbered if the news fails to turn out positive.
The administration and its soul mate, the Fed, will stop at nothing to head off a recession in 2020, which is fine if they can pull it off.
BUT DO NOT MANIPULATE STOCK PRICES, because people get hurt, big-time if the ploy fails.
Let the market find a level that discounts real and possible positives and negatives.
Wednesday Sept. 4 “Beware: Bear Market Rallies Driven By Fed Comments and Trade War Bullshit”
Early futures trading indicates the market will open higher. News of progress on US/China trade would crank the market up, as would statements by the Fed about another cut in interest rates.
We are in a global slowdown which will be labeled recession looking back around year-end.
Lower rates are not going to do it. Senseless rhetoric won’t either. Expect the debt laden consumers and businesses to walk away in coming months. Government debt does not allow for additional spending. Everyone needs to step back and re-load.
The Street is hanging tough, does not want a bear market, or thinks the damage to the economy and stock market will be limited.
Where they are going wrong here is, just when it looks like the economy and market will survive with minimal damage, things get worse, then get worse after that, a string of endless negatives that changes a 12% correction into a 35% – 45% bear market.
Just one recession warning sign, the ISM Manufacturing Index and the New Orders Index slipped below 50 (no growth) in August, the fourth straight decline. A survey of purchasing managers, the index encompasses inventories, employment, production, supplier deliveries, exports, imports, and prices.
US Consumer Sentiment dropped below 90 in August, the biggest monthly drop since 2012.
To make matters worse, Bridgewater Associates Ray Dalio is warning the Fed no longer has the tools to reverse economic downturns even if it cuts its fed funds rate for the second time September 18. Printing money and buying assets has a limited impact, according to Dalio, founder of the world’s largest hedge fund and consistently successful at managing money.
The Fed did a great job in helping the country survive a total meltdown in the 2008-2009 Great Recession/Bear market, but overstayed the recovery trying to micro-manage the economy and stock market. Now they are a financial eunuch with limited impact.
FYI: Oftentimes the market will run in reverse to the day’s trend between 2:45 and 3:20. Be careful not to get sucked in. For lack of a better name, I have call it the “mid-afternoon counter move.”
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 3.6% which was hit in May. 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.
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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.