INVESTORS first read.com – Daily edge before the open deal
S&P 500: 2,784
Thursday, February 21, 2019 9:07 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.”
ECONOMY: Can the Fed bail out an economy they weakened with QT rate increases ? Economic reports in coming months will give us answers.
As leading indicators go, the stock market is the most visible. Between September and January, it was signaling recession, Since the Fed’s policy change in January, the market is saying – “Not so fast.”
The economy takes center stage today. Last month the Fed panicked, reversing a policy of raising interest rates to one of “wait and see.”
Former Fed Chief Janet Yellen and economic advisor to Alianz, Mohamed El-Erian speculate the next move by the Fed could be a reduction in its benchmark fed funds rate.
The reason for the Fed’s abrupt about face is becoming clear – the U.S. and global economies are flirting with recession.
We may get a hint of how things are shaping up this morning, though data may still be tainted by the government 35-day shutdown December 22 to January 25.
Durable Goods (8:30) growth for December slipped to +1.2% from +1.5%
Jobless Claims (8:30): down 23,000 to 213,000
Philly Fed Business Outlook (8:30): index minus 4.1 vs +14.0 (not good, in downtrend since May)
PMI Composite –flash (8:30) unchanged at 54.4 from January
Existing Home Sales (10:00)
Leading Economic Indicators (10:00)
Last year, the housing market was clobbered by rising interest rates. But the NAHB Homebuilder/Wells Fargo Housing Market Index for February jumped nicely, indicating the industry was turning around with lower mortgage rates a big help.
Sales of Existing Homes slumped in December, so the report today may confirm if the NAHB’s optimism is justified.
The Leading Economic Indicators (LEI) will be the most important report of the day. It has been a consistent early warning of pending recessions with a lead time ranging between 8 and 21 months (ugh). It has been flat over the last five months, but again, it may be skewed by the shutdown.
Obviously, the Fed was spooked by something.
Five senior Fed officials will be on the speaker circuit tomorrow. James Bullard, President of the St. Louis Fed, will speak at 1:30. Next to Fed Chief, Jerome Powell, Bullard has the greatest clout. He has demonstrated he can move markets in the past.
JUST IN: Bullard was interviewed at 8:30 on CNBC – highlights were:
-2019 GDP growth 2.25% (“Slowing, but not terribly”)
-Unemployment remain the same
-implied interest rates won’t increase.
Should investors be selling now ? The stock market has recouped three-quarters of its Oct./Dec. 20% loss, and the Mueller report is due in a matter of days, which may adversely impact the administration’s ability to govern.
With so many decisions on Wall Street made by computer algorithms, human emotions stand to play a smaller part in the buy/sell decisions, unless the programmer knows how to plug that in.
The biggest problem the Street has is it is spoiled rotten by a Fed-managed bull market, assurance that the Fed will step in if the market drops more than 15%.
The Fed can only do so much, as evidenced by 50% plunges in 1973-1974; 2000 – 2002; 2007 – 2009.
The Fed is in PANIC mode – respect that.
ON A BRIGHTER SIDE:
January’s 7.9% jump was the biggest in 30 years, The Stock Trader’s Almanac’s January Barometer, published since 1972, has successfully forecast the S&P 500’s year as a whole 86.7% of the time over the last 50 years. Odds are, a strong January will lead to a gain for the year. However, there is no guarantee that between January and year-end there won’t be one or more major corrections. In pre-presidential years alone there were major corrections in 1971,1979, 1987, 2011, and 2015. Pre-presidential election years are the best of the four years in the presidential cycle.
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.
DID YOU KNOW ?
>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. On December 10, 2018, Thomson Reuters was projecting Q1 2019 S&P 500 earnings growth of +7.3%. As of February 1, it has slashed growth for Q1 2019 to +0.7% with significant cuts for the rest of 2019.
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
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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.