September 9 Post

Hi Again,

 Insiders, especially CEOs, do not sell stocks of their companies because a recession is coming; they do that when they have reason to forecast a bleak future for themselves. When insiders are buying it is good to buy the stock and the reverse is also true.

New York (CNN Business)The leaders of Corporate America are cashing in their chips,doubts  grow about the sustainability of the longest bull market in American historyCorporate insiders      have sold an average of $600 million of stock per day in August, according to TrimTabs Inv. Research, which tracks stock market liquidity. August is on track to be the fifth month of the yr in which insider selling tops $10 billion. The only other times that has happened was 2006 & 2007,

the period before the last bear market in stocks, TrimTabs said.

 

The Institute for Supply Management’s purchasing managers index fell to 49.1 in August from        51.2 in July. A reading below 50.0 signals contraction in the industry. This was the first contractionary reading since August 2016. A similar manufacturing index from IHS Markit            fell to its lowest level in nearly a decade on Tuesday. However, “ISM is no stranger to false signals,” Renaissance Macro’s Neil Dutta presciently observed back in 2016.    While a sub-50 ISM is bad news for folks in the industry and a troubling sign       for the economy, these indices need to fall a lot further before they signal that     the U.S. economy is in recession. “A PMI above 42.9 percent, over a period of time, generally indicates an expansion of the overall economy,” the ISM said. In a note to clients           on Monday, Pantheon Macroeconomics’ Ian Shepherdson noted: “It's entirely possible for manufacturing to be in recession—as it is now, and as it was in from Q1 2015 through  Q2 2016—while GDP growth runs at 2% or more.” “Manufacturing now accounts for only      about 12% of GDP, 15% of capex, and less than 9% of payrolls,” Shepherdson added. (Yahoo

Finance, 9/4/19)

 

The golden question is “Are we going in to a recession?”.  What is the definition of a recession?

Two consecutive months of negative GDP growth. At times certain parts of the economy or

geographical parts of the country could be in a recession. When defense spending was cut

in the 1990s after the end of the cold war, places like Southern California went in to a

recession. These days, 2/3 of the economy is in the service sector and it has been growing

monthly for the past 110 months up to September 2019 (including August 2019). Some

analysts believe that if manufacturing and other sectors affected by trade wars start laying

off employees, it will impact consumer spending (70% of GDP) and we will find ourselves

in a recession. So far we have not had a single quarter of negative GDP growth.

 

 

 

Once again let us consider what technicians have to comment on the immediate future of

the stock market. Technician Carter of CNBC states that first we will test the lows of June

2019 and then we might test the December 2018 lows (S&P 500 at 2350); and if we go to that

level, it would mean that what we had was a “bear rally” and we were not in a bull market.

Several technicians have been showing that the S&P 500 chart is forming a big “wedge”.

On 8/29/19, Sven Henrich, technical analyst, stated that this “wedge mega phone” broke to the

downside, we could have a big crash but if we move to the upside, we could have a huge

rally to the upside. In other words, in 6 to 12 months, we would be at a much higher or a much

lower level than today. Analyst Northman stated that we are currently seeing a “screaming

sell signal” as 9 economies are already in a recession. If the S&P500  falls to 2300, that is a

21% “crash” or a correction. I monitor the VIX index at all times. It is quite interesting how

The fear level increases and decreases in the market. Many analysts believe that if the VIX go

Over 30 it would be very bad for the market. Then again I will not be surprised if people ignore

all this and send the market skyrocketing on the upside. One year before the dot com crash happened, it was very obvious that market was way overvalued but it kept on going up. I prefer

companies with good values and if possible a PE below 20 but never one with a PE over 50.

Just before the dot com crash, the PE on yahoo was at 1,000! Then google replaced yahoo as

the main search engine and yahoo never regained its previous high.

 

On 8/16/19, on CNBC, Former Chief Economist for the IMF (World’s Reserve Bank) and former Governor of the Reserve Bank of India (23rd) stated the following:

(1)In the past, the bond yield curve inverted as investors wanted a higher return on the short

term than the long term which was the basis for using the inverted yield curve to predict a

recession but now the yield curve is inverted as heavy influx of foreign and domestic cash flows

in to the 10 year treasury is making the 10 year yield fall below the 2 year treasury (2) If Trump

does a temporary deal with China as a cosmetic venture, the market will lose confidence

(3) Current conflicts: USA vs China, Trump vs Fed Reserve and Fed Reserve vs market

(4) Other economies have an impact on the US but the US is not that much affected

(5) For decades monetary stimulus on housing and autos had a major impact on the economy

but now that effect has gone down significantly as we saw during the last recession.

Interestingly the current Chief Economist at the IMF is also Indian but she was a professor

at Harvard.

 

On 9/6/19, Fed Chair Powell talking from Switzerland stated that the probability of the US

economy going in to a recession is very low and he expect the growth rate to remain between

2% and 2.5% till 2020. He also expects inflation to be around 2% (his target). If it goes below

2%, the Feds might take action. Feds fear deflation more than inflation.

 

Over the past 6 months, gold(GLD) and utilities (XLU) did very well-they are both up about 20%

In 6 months!  

 

We are going through a unique period in time. The yield on the 30 year treasury used to be

Over 3% for decades and now for the first time ever, the yield is at 1.91%. International tourism

spending in the US is one of the few areas where the US is running a surplus with $251B.

Seasonally adjusted GDP is expected to be down to 2% in 2019 from 2.9% in 2018. The main

reason for declining yield on bonds and the rise in the dollar is the huge capital inflow from

other countries in to the US. Total sovereign debt is at $60 trillion and 25% of those bonds are

in countries with negative interest rates so cash keeps flowing in to the US. However for the

longest time, the bond market has been on the verge of a bubble. Mark Yusko of Morgan

Creek Capital, on 8/15/19 stated that over the past decade or so many companies bought

back their own stock by issuing bonds as interest rates were low but these companies might

have a problem issuing new bonds to replace the maturing bonds. 

 

The bottom line is that the probability is high that we might see a rally right now but with

Everything going on globally, it is hard for me to believe that the market will not have a volatile

Time over the next 4 months. However volatility provides opportunities. The Chart of the Dow

Is very bullish for the moment with a “w” forming.

 

GE- I stopped covering GE in this newsletter. Investment discipline is more important than

making money in the market. When there is  “credible” (subjective) evidence of accounting

fraud, one should sell your holding of that company. In my opinion, the charges leveled against

GE is credible. We cannot disregard the evidence solely due to the fact that with this

Information, short seller stand to gain millions of dollars. There could come a time when it is

safe to get back to GE.

Have a great month!

Fernando