Use Trade Hopes Strength to Raise Cash

INVESTOR’S first read.com – Daily edge before the open
DJIA: 26,496
S&P 500: 2,938
Nasdaq Comp.:7,950
Russell 2000:1,485
Friday,  October 11, 2019
 8:56 a.m. 
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gbifr79@gmail.com
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TODAY:
Yesterday, I urged a 90% cash position saying, “Trade talks this week could trigger a sharp rally – fine. That is a chance to lighten up at higher prices. But they could disappoint and trigger a plunge.”
Obviously, few investors would be that cautious, and of course there are investments that will do well while others will get hit.
My stated reason was that, “All Hell can  break loose politically
as the nation sinks into recession. The stock market would  lead it off. That could be today, a week from now or as far out as January.
Why take a chance, there so much more downside than upside ?”
There are times to simply walk away from the market, though they are more easily seen in hindsight.
Odds are good that President Trump will be impeached by the House, though not convicted by a Republican Senate.
During such a process, confidence in the future takes a hit. Add to that the a presidential election at  the same time  these proceedings are underway and  uncertainty takes center stage.
Then there is the fact signs of an early stage recession are causing the Fed to scramble for damage control and prop the market up with reference to another rate cut  or another QE every time it starts to sell off, thus preventing a healthy correction.
Corporate earnings growth has slowed to a crawl at a time the market is overvalued by historical precedent.
Add them up and you get a good reason to have a healthy cash reserve.

What really stuns me is what is happening with world trade. The U.S.’ go-it-alone position on trade is opening the door for countries to develop trade relationships excluding the U.S..
A good example is the 11-country Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP).  The 11 countries in the pact comprise 13.4% of the world’s GDP (US$13.5 trillion) making it the third largest  free-trade group in the world.
It includes most of the TPP, which the U.S. abandoned, but excludes 22 provisions the U.S. favored that other countries opposed.
As a result, the U.S. is on the outside looking in !
Not good for the long haul.  
Of course everyone will always want to do business with the United States, it is just that we won’t be calling the shots like we once were.
Failure to come out of these trade talks with some smidgen of progress would crush stocks.
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TECHNICAL
    The market will open strongly today as the Street hopes for progress in trade talks.  Expect some progress, which would trigger a rally, but the big picture is murky.
There is a lot of overhead supply (sellers at higher prices) that will limit the upside unless something dramatic like an agreement to eliminate tariffs all together is negotiated.
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Minor Support: DJIA:26,610; S&P 500:2,947; Nasdaq Comp.:7,957
Minor Resistance: DJIA:26,737; S&P 500:2,967; Nasdaq Comp.:8,007
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Thursday, Oct. 10  “Fed in Panic Mode, Raise Cash to 90%

Why else is the Fed, Administration and Street trying to prop the market every time we get a sharp down day.  They are scared of what will happen if this market breaks down.
now.
I see that as straight down 12% – 16% in several days once buyers step back, but more so when some big institutions break ranks and sell.
I blame the Fed for not letting the market correct to lower levels in anticipation of the serious negatives looming.
Worst case: DJIA 15,000. It wouldn’t stay there but for a moment when the news gets just so scary no one (except me) will want to buy stocks.
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Mirroring what I have been saying about the Fed’s manipulation of market sentiment, MarketWatch reported yesterday that, Deutsche Bank chief economist, Torsten Slok, is warning clients that stock market performance is “no longer being driven by economic fundamentals, but instead by [Federal Reserve] and [European Central Bank’s] promises of lower rates, more dovish forward guidance.” 
     Also yesterday, Fed Chief Powell told the National Association of Business Economists it would soon start expanding  its balance sheet to add reserves to the financial system through the purchase of short-term  government ddbt  rather than long-term debt in a effort to encourage banks to take on more risk.
Normally, this is bullish, but to pursue such stimulation before a recession/bear market has happened begs the question – WHY, if as Powell asserts, “the economy is in a good place,” are they taking these measures ?
U.S. getting hammered by protectionism
policy
     On the trade front, it should come as no surprise that Trump was quoted yesterday as saying, “China would like to make a deal very badly.”
This just confirms my conclusion that the Fed, Administration and the Street are in the game of hyping the market a soon as it attempts to go into a healthy correction phase.
        This simply sets up a flash crash when something triggers a massive sell off.
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Wednesday, Oct 9,  “Not an Elephant in the Room, It’s a Bear !”
Like I have been warning, every time the market takes a hit the Fed, Administration and/or Street steps in with a news release to prop the market up.
Yesterday, Fed Chief Jerome Powell hinted at another rate cur (3rd in less than a year), as well as the purchase of T-bills to pump more money into the system.
The market will jump at the open today on news from an unidentified individual with knowledge of  U.S./China trade talks  who said China wants to limit further tariff increases, an indication that it is open to progress on talks beginning today.
So why a “warning?”
Because these timely releases are just postponing the inevitable, a bear market, as the nation joins the world in a recession.
      What’s more, we are faced with a constitutional  crisis unparalleled  since the Civil War.
The Street cannot ignore that, investors cannot ignore that.  It grinds away at the confidence in our democratic republic, the rule of law, and confidence determines the multiple at which stocks sell.
       It’s all about the presidential election next year, delaying a recession/bear market until 2021.  Can’t happen !  We are in for some very rough times.
       Once the Fed, Administration and Street cannot prop the market, it is straight down, which highlights the senselessness and irresponsibility of propping the market and not letting it find a comfort level that discounts known and potential adversity.
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Tuesday, Oct. 8  “Market Has Not Yet Discounted Looming Negatives”

Call it tunnel vison, confirmation bias or just plain denial, the Street simply does not want to face reality – the stock market is overvalued by historical benchmarks, the country is slipping into recession and our nation is faced with a number of wrenching  constitutional crises.
If the market were selling at a 30% discount, I would be urging readers to be preparing for a buying opportunity when the market is getting pummeled and no one anywhere wants to buy stocks.
       We have serious negatives, BUT the stock market hovers near all-time highs.
A freely trading stock market will find  a level that discounts known and potential positives and negatives.  We do not have a freely trading stock market, since the Fed and Administration step in with a news release about a rate cut or improved prospects for a trade deal every time the market sells off.
       Nothing wrong about preventing an unjustified sell off, but manipulation only delays the inevitable, worse yet it misleads investors into thinking it is safe to buy and at extreme levels at that !
If we get a sharp sell off from here, expect the Fed to talk of another rate cut, and the Administration to hype trade talk progress.
      let a bull market go.  But manipulation of news by the Fed, Administration and the Street has never been so persistent.
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Monday Oct. 7,  “No, Mr. Powell, the Economy is NOT “In a Good Place”     

After 10 years,  the economy is tiring, having risen from the depths of Hell 10 years ago, with U.S. and global economies coming within a hair of total meltdown  between 2007 and 2009 (the Great Recession)  and investors suffering the worse losses since the 1930s, S&P 500 down 57%.
There are just too many indications that we are in the early stages of a recession to mislead investors the economy is in “a good place.”
Puff piece statements like Fed Chair Jerome Powell’s press conference last week just suck investors into an overpriced stock market.
If the chair of the Federal Reserve says the economy is in a good place, investors think it is safe to buy.  These comments come at a time the S&P 500 is selling some 70% above historic benchmarks.
       Last Monday with the market at higher levels, I warned, “Ignore Fed and Administration  Hype –  raise  cash to 80%.”
I have seen price/earnings (P/Es) ratios at single digits, I have felt the wrath of 14 bear markets and  8 recessions – they happen, the Fed should acknowledge  it.
Septembers’ ISM manufacturers’ index  plunged the most since the Great Recession  (2007-2009).
The PMI “Services”  report and the ISM Non-Manufacturing “Services” report, are both on recession thresholds.
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TOP ECONOMIST STATES CASE FOR A RECESSION
Gary Shilling’s  “INSIGHT” lists many of the reasons why this economy is in a BAD place.

I have tracked A. Gary Shilling for decades and believe him to be one of the nation’s leading economists based on an incredible record for forecasting accuracy.
    Shilling’s October  INSIGHT listed reasons why RECESSION is underway now. To mention a few:

-OECD has slashed economic forecasts.
-N.Y. and Cleveland Fed model outputs have reached recession levels.
-Capital spending is falling
Transportation stocks  continue to drop. Transports tend to lead industrials in signaling trouble since materials need to be shipped before they are turned into  finished products.
Trade wars are causing business caution.
-Treasury yield curve is inverted.
-Corporate profits are sliding.
-The Fed is losing its battle against disinflation.
Consumer spending alone is holding back a full-blown recession.
-Growth of nonfarm payrolls and weekly earnings continue to slide, as well as consumer confidence.
Purchasing Managers’ index (PMI) for manufacturing has dropped below 50 signaling contraction.
-A low manufacturing capacity utilization is discouraging capital expansion.
-Eurozone and U.K. on edge of recession, China’s growth slowing.
-Shiller’s cyclically adjusted P/E  (28.9) is 71% above long-term average (16.9).
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Friday, Oct. 4 “Storm Clouds Limit Upside – Patience – Ignore Hype”
A lot of storm clouds on the horizon (recession, political uncertainty, bear market, international tensions). The Fed will try to counter that with another rate cut, and there will be promises of progress on trade.
These will trigger rallies, some dramatic.
I believe we are in a bear market and  the early stages of a recession. How intense both will get depends on  events down the road.  New negatives can delay recoveries. What happens between now and 2021 is key. It doesn’t look pretty.

Algorithm Investing

I rant about buy-oriented institutional algorithms  making most of the investment decision today, how a sudden change in their programming could cause a flash crash.
The Economist  reports algos account for 35% of the stock market, 60% of institutional equity assets and 60% of trading activity. Artificial intelligence (AI) is being used more and more to write programs. Careful guys/girls, the best computer is the human brain.
Myths
    I am repeating the following, since a 10-year bull market can block out memories that things can get far worse than anyone on the Street can imagine.
In 1969, who would have thought there would be four recessions and 5 bear markets in the next 12 years.  Stuff happens.

But, the Street is mesmerized by a giant “myth.”
The Myth
-that economies grow forever.
-that lessons from the Great Recessions were learned – can’t happen again.
-that stock markets always recover quickly from bear markets
-that the current excessive stock market valuations will last forever
-that the Fed will come to the rescue when the stock market takes a big hit.
-that single digit P/Es will never return.
-that untethered chaos, civil and political unrest, and violence are not possible in the U.S..
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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 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.
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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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