Weekly Market Brief

Get Real

The final phase of a bull cycle is the most deceiving. It is the time when things are at their best, optimism runs wild, equities can do no wrong and any warning signs are dismissed as equity price action valiantly defies the reality that is to come.

It is also a time when complacency makes a comeback as big rallies emerge following initial larger corrections. 2018 was a year of big corrections. 10% in February, 20% in Q4. Now a 25% rally. Not signs of a stable bull market. It is precisely the aggressive counter rallies near the end of cycles that can be the most awe-inspiring and reason defying, yet they can also be the most dangerous while being the best opportunities to sell at the same time.

Let’s get real: The liquidity machine can hide reality only for so long and that is: Things keep slowing down. Cycles don’t turn on a dime, they take time and that is what we are seeing unfold and the signs are plentiful. From Japanese industrial production going negative the past 3 months to home sales in the Hamptons slowing to the slowest level in 7 years.  I’m using these couple rather random examples to illustrate a point: The slowdown is as broad as it global:

Oh yes, even Friday’s Q1 GDP report reeked of deceit and the headline is hiding the slowdown in plain sight:

“The economy isn’t doing nearly as well as that 3.2% annual growth rate for gross domestic product reported Friday by the Commerce Department.

The heart of the real economy — private-sector consumption and investment — slowed sharply in the first quarter to a 1.3% annual rate, the slowest growth in nearly six years.

“On the outside, it looks like a shiny muscle car. Lift the hood, however, and you see a fragile one-cylinder engine.”

Business investment also slowed, to 2.7% from 5.4%. Investments in structures, such as factories, offices, stores and oil wells, fell for the third straight quarter. Investments in equipment — computers, airplanes and machinery — barely grew, rising 0.2%.:

A GDP print so outsized to reality it made made a mockery of the NY Fed GDP model:

Forecast 1.5% but see a 3.2% result. Sure.

For added entertainment I present the Atlanta Fed model which projected 0.4% growth just 7 weeks ago:

This is banana republic like GDP forecasting. Blue chip consensus was 1.5% but the 3.2% result was “boosted by one-off factors big improvement in the trade balance, a big build-up in inventories, and a big pop in state and local government spending”

Not sustainable and not reflective of the true state of the economy. Yet we still see earnings beats from lowered expectations, but earnings will also have to catch up with the slowing reality:

So far investors haven’t cared about that emerging reality, they have cared about liquidity, dovish central banks, buybacks and a China deal.

The prevailing fantasy: We can keep this up forever because the Fed has our back and a China trade deal will solve all problems:

Get real:

$MMM:

$UPS:

$INTC:

Oh yes, rising wedges do matter.

Think these 3 companies are not reflective of global growth? They sure are.

But they just had to jam into semis all year ignoring this reality:

In process forcing capitulation in equity shorts:

Right at the moment of historic low volatility across asset all classes:

…while believing volatility will never be great again:

Get real.

This is a dangerous combination that sets up for another volatility event to emerge.

For now the relentless 2019 market trend remains fully intact, individual stock bombs notwithstanding. Are we ready to blow-off as I asked this week? It looks so at the moment, but if that is so the sustainability of any such move has to be carefully evaluated as indices such as $NDX are highly overbought and confined to ever tightening rising wedge patterns:

In the spirit of keeping things real some key technical observations and charts in the video below:

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33 replies »

  1. Pingback: “Get Real!”
  2. Great article for 30k ft. view of current financial situation. Thank you.

    1) A a point of reference:
    https://www.hussmanfunds.com/comment/mc190408/
    You Are Here
    John P. Hussman, Ph.D.
    April 2019

    “Across history, one of the central lessons of market cycles is that while valuations are enormously informative about long-term and full-cycle investment returns, they can often be useless in gauging investment prospects over shorter segments of the market cycle.”

    “What drives market outcomes over shorter segments of the cycle is the psychological inclination of investors toward speculation or risk aversion. When investors are inclined to speculate, they tend to be indiscriminate about it,”

    2) The Fed was tightening as recently as Dec., ’18, but then the markets started mean-reverting, and the Fed “caved”. Due to ridiculously high global debt loads, the economy can’t handle FFR>2.5%, or QT. The Fed “balance sheet” will now not be completely tapered and rates will likely now be cut. The Fed is done raising rates for this (credit vs. business) cycle, IMHO. BTW, not fully unwinding the balance sheet is the same as debt monetization. Welcome to a banana republic world, where the 1% obtain all of the real wealth while the 99% are left with the crumbs (and, of course, the debt).

    I think it’s important to have an explanation for WHY the Fed caved. Why the stick save in the markets?
    Some theories:
    a) The “wealth effect” of higher stock prices mostly enriches the top-tiers and elites, the 1%, since most don’t now own equities. The Fed’s “got their back”. Main St., not so much. The Fed is pro-capital/corps/elites. and con-labor/wages/average wage-earners. Don’t agree? Why then the massive income and wealth inequality since Alan Greenspan and before?
    b) The Fed’s credibility is at stake (like it wasn’t in 2000 or 2008?).
    c) DJT wants the gravy train of easy money, liquidity and higher asset prices to continue until at least after the Nov., ’19 elections. I have a hard time with this one since GOP presidential terms have been coincidentally timed with severe market crashes and the Fed is basically the financial arm of the progressives. I expect DJT to experience another “unfortunate” market crash within 6-8 weeks of the elections, if not before.
    d) The Fed is setting up for another power grab during the next financial crisis. They currently can’t (legally) buy stocks and corp. bonds (see Hussman’s article). However, continuing the trend of the Western world “turning Japanese”, I see this as next phase. No free markets. We’re currently approaching full command and control, centrally planned economy. The Fed’s power is already to great, and they’re operating in may respects outside of their constraints. See article here:

    https://www.theamericanconservative.com/articles/trump-is-right-to-blow-up-the-fed/
    Trump is Right to Blow Up the Fed
    The Federal Reserve is out of control, acting in ways and with powers that were never explicitly granted by Congress.
    By Christopher Whalen • April 9, 2019

    “Rather the Federal Reserve is out of control, acting in ways and with powers that were never granted to it. Quantitative easing, “Operation Twist,” and the explicit 2 percent inflation target are just three example of how the Federal Reserve Board is operating outside of its legal authority.”

    “May you live in intersting times.”

    BTW, this time is not different.
    “The four most dangerous words in investing are: ‘this time it’s different.'” – Sir John Templeton

  3. The Msft chart is simply incredible. A perfect reflection of why the current “euphoria” is as extreme …or even more than at the top in 2000.

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