Welcome back to our Monday “look ahead.”

Decelerating growth and job gains, along with a developing manufacturing recession, will be the headlines this week, as the FOMC (Federal Open Market Committee) announces further interest rate cuts (or not) at 2:00 p.m. on Wednesday, October 30.

Between a Congress now burdened with impeachment proceedings, continuing trade wars, and a global slowdown, markets are expecting a further 25 basis point reduction in the Fed target rate on Wednesday (the third such reduction since July), totaling 75 basis points in all, as the Fed did in 1995 and 1998.

We, too, expect a further rate accommodation, but that doesn’t mean that more hawkish Fed officials will not prevail and put a halt to further rate cuts (this one or the next one), pending trade outcomes.

After all, the stock market is up, and that seems to be the Fed’s untold benchmark for rate reductions.

Nevertheless, be on the lookout for a Fed Red Day on Wednesday.

Here’s what else to watch out for this week…

Fed Red Recap

Fed Red Days (described here) are days when the Fed drops rates, yet no one salutes. That is, equities fall rather than rise on the very day the Fed cuts rates, which is ostensibly good news.

The problem with the last two rates cuts is that investors really didn’t salute on the days the rates were cut.

Rather, market participants seemed more anxious about the why rather than the when of rate cuts.

That is, the why was the more troubling, as despite what the Fed says, rate cuts are emergency measures, pure and simple. Investors are worried, and riding this wall of worry up.

More Bad News

Annualized Q3 2019 GDP (quarter/quarter) is surveyed to print (and tumble) this week at 1.6%, down from 2.0% last quarter.

That’s not good news, and it’s quite a drop from the lofty 3.5% prints in December 2018 and again last June. Those percentages are well in the rearview mirror now.

Bad news aside, QE supported stocks are making every effort to plumb new highs – and that’s a conundrum, confusing and difficult to resolve.

The fundamentals are simply not supported by the technical signals, a reality not uncommon in a Twilight Zone.

Just how long can the markets deny a slowing, global economy?

Let’s Get Technical

The theme here, for our technical overview, presents the good news and the bad news when it comes to understanding these new equity highs despite factual and technical vulnerabilities.

As always, our goal is full disclosure, not just bear- or bull-whipping, so that you can be better informed.

CONUNDRUM #1: Consumers are Comfortable, Driving Market Higher

Good news: Bloomberg’s Consumer Comfort Index is riding high.

Bad news: Consumers are on a borrowing binge/spending spree that has historically ended badly.

CONUNDRUM #2: Technology Stocks Forge Ahead

Good news: Information technology stocks are hitting new highs.

Bad news: Earnings are just not supporting price.

CONUNDRUM #3: Earnings for S&P 500 Stocks are Soaring

The broader question regarding earnings, of which I’ve recently reported here, is how corporate profits are reported.

You see, there are true earnings and there are fake earnings (i.e. true earnings fewer adjustments – a scam I’ve revealed here).

Despite being fake, these earnings do push markets up.

Good news: S&P 500 12-month trailing earnings per share are reported at new highs (blue line below).

Bad news: Profits tallied by the NIPA (true profits, or “National Income and Profit Accounts” calculated by the Bureau of Economic Analysis) have peaked and are flat-lining (white line below).

Earnings for S&P 500 companies are up a whopping 50% in the last six years, according to Bloomberg data, while government data shows NIPA profits haven’t risen 10%.

Who to believe? Well, it doesn’t really matter, given that the market only pushes the fake earnings…

CONUNDRUM #4: Blue-Chips are at an All-Time High

Good news: Blue-chip stocks are hovering at an all-time high.

Bad news: Momentum isn’t keeping up as far more reliable technical sell signals begin to trigger.

CONUNDRUM #5: The S&P 500 Index is Riding at All-Time Highs

Good news: Stocks are riding high, no doubt about it.

Bad news: Broad overhead resistance is building as uptrends slow in velocity and duration.

CONUNDRUM #6: All-Time Highs – Again

Good news: The SPDR S&P 500 ETF Trust (SPY) has been soaring again.

Bad news: But a peek beneath the surface shows continuing, negative money flows out of the SPY ETF as investors flip to safe haven investments, like bonds (not so safe) and precious metals (far safer).

And there you have it – more conundrums in the Fed-driven Twilight Zone of the new abnormal…

Reader Q&A/Comments

In this backdrop, we’ve been getting lots of reader questions, many of which we encapsulated and addressed here.

In addition, we’ll now answer some specific queries as well.

71-year-old John B., for example, is worried about inflation vs. deflation and protecting his cash positions. John, many of these questions are addressed here and here.

L.Z. made a bold prediction that rates in the U.S. won’t go below zero. L.Z., I tend to agree. If the U.S. were to go negative, that would be the ultimate sign of “we’re cooked,” and there would be fewer investors flows into our currently “positive” (albeit weak) yield safe-haven.

Instead, we can expect more money printing, which is already in full swing.

Our thanks as well to Major Roy K. for his personal and Dutch perspective following our article on Germany’s frustrations with the ECB. As Roy indicated, Holland’s former ECB President is equally concerned with (and voting against) many of the ECB’s “excess.”

In short, not everyone in the EU has forgotten reality.

Finally, Mindy shared an excerpt from another analyst who argued that the risk of a recession (as well as the risk of a high-yield bond sell-off) is much lower than what many others (including ourselves) are claiming, based primarily on more expected tailwinds from re-financing schemes.

She asked for our take on this.

Mindy, fair question. If central banks continue to monetize the debt markets and keep rates stapled to the floors of history, the “refinancing tailwind” (i.e. debt roll-over scheme) that you alluded to can indeed keep a recession at bay longer than natural markets would ordinarily or otherwise allow.

And as we all know, these are not natural markets.

Nevertheless, we set forth a number of reasons why we think a recession in the next year or two is fairly inevitable here.

But in that same piece, we also admitted that even our forecasts are no match for central banks fighting their last fight to stave off a recession. We, too, are humbled before the power of central bank money printers and rate suppressors – and timing their expiration is a fool’s errand.

We are in uncharted waters where risks outweigh reward, yet ironically, face a Fed with a little more “reward” left in it.

That said, what we can do is watch the market’s reaction to increased central bank stimulus – as this is the last chapter of their broken book/experiment.

As the steroids wear off, so, too, will these market highs. All we can do is translate our signals back to each of you as this unfolds.

Speaking of unfolding, capitalism as we used to know (and love) is also unfolding, and I have a very special surprise for you coming next – namely the one company (and its founder) who I believe truly represents the very worst of the “new abnormal.”

Keep your eyes peeled on the inbox. I’ll be revealing the name soon. Can any of you guess which company I’m thinking? There are a lot to choose from…

In the interim, stay informed, stay calm, and stay the course.

Sincerely,

Matt Piepenburg


Comments

9 responses to “There’s Another “Fed Red Day” on the Horizon – Here’s Why You Should be On the Lookout”

  1. Interest rate cut will have risk to increase inflation. Trade war has already caused inflation causing problems all over the world and it will become impossible to fight with. Market keeps going up because of most of the financial institutions are always suggesting to buy, hold and make money as well as taking heavy membership fees as cash. However their suggestions at new high mostly after they themselves get impressed with huge profits.
    Rate cut may further artificially bloon up prices.

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