"We
finished the year, and we reported that we had $17 billion of cash sitting at
the bank's parent company as a liquidity cushion. As the year has gone on, that
liquidity cushion has been virtually unchanged."
Alan Schwartz, CEO Bear Stearns, March 12, 2008.
Bust March 16, 2008.
With Friday’s losses,
by a rough count, global stock losses from all the recent carnage amount to about
8 trillion US dollars. About the same as the wreckage from the disaster of 2008-2009.
So was that it or is there more carnage to come? Who took the losses and what
happens next?
My guess is on more
carnage. The US yield curve is flattening again, suggesting a recession ahead. The
Dow Transports diverged from the Industrials, suggesting that the next
recession is already arriving. US inflation is rising, in part due to all the
Trump tariffs which are set to rise again on January 1, and in part due to a
strong US economy from the Trump tax cuts. While the Fed might delay their next
rate hike, their next move will still be up not down.
Finally political uncertainty
is rising everywhere, and nowhere more so than in the US elections, now just 11
days away. Will the week’s attempted mail bombings influence the voters, and
which way?
On Sunday we also get
a runoff presidential election in Brazil, and a state election in Germany’s
Hesse, where Chancellor Merkel’s party is expecting more pain. On November 4th
Trump’s new sanctions on Iran are intended to force Iran’s oil exports down to
nothing. Trouble lies directly ahead.
Below, reasons to
think this is just the start. Reality doesn’t matter until one day it does.
Last Defense Line Crumbles With S&P 500 on Verge of Correction
By Richard Richtmyer
U.S.
equity bulls just suffered a technical knockout.
The S&P
500 ended Friday’s session below its 50-week moving average, seen as a last
line of technical support after the index blew through short- and medium-term
averages during a jarring four-week plunge. When the market last closed beneath
this level, in 2011 and 2015, it confirmed that months-long corrections were
underway.
The
benchmark for U.S. equities fell 4 percent this week, at one point trading 10
percent below its September record -- the threshold for a correction -- before
closing down 9.3 percent from the peak. Stocks are on pace to post their
biggest monthly decline since 2009 as lofty corporate earnings expectations,
increased trade tensions and tightening financial conditions have investors on
edge.
The Wall Street analyst who called this stock-market rout sees another nasty drop for the S&P 500
By Mark
DeCambre Published: Oct 26, 2018
4:56 p.m. ET
There is more pain in the pain trade ahead. That is according to Michael Wilson, Morgan Stanley’s chief U.S. equity strategist, who said, during an interview on CNBC midday Thursday, that a then-current market rebound belied a market that is badly damaged and ready to sink further.
Wilson describes current conditions as a “rolling bear market,” which began in February, and predicted that the S&P 500 index SPX, -1.73% could fall to between 2,450 and 2,500. That represents a roughly 8% to 10% drop from the broad-market benchmark’s current levels. “And we think we get there in four to eight weeks,” Wilson said.
Morgan Stanley defines a bear market as a selloff of 20% or more, with no recovery within 12 months.
“Risk-reward remains unattractive for us,” he said. The Morgan Stanley analyst added that the current slump in stocks that wiped out the year-to-date return in the S&P 500 and the Dow Jones Industrial Average DJIA, -1.19% in a powerful move lower on Wednesday, “may last a bit longer.”
Read: Don’t ‘get too cute’ looking for a stock-market bottom just yet, chart watcher warns
----Back in September, Wilson was making ominous calls even as U.S. stocks were recovering from their February corrections, where the S&P 500 and the Dow fell 10% from their late-January peak.
At that time, Wilson pointed to a divergence in credit spreads and equity values as early evidence of a change in the market’s complexion.
“Divergences between equity markets and breadth or credit spreads can also persist for longer than one can stomach before they are resolved. The bottom line is they look to us like clear signals that nice weather may not be the right forecast,” Wilson said in a September note.
More
Amazon was almost worth $1 trillion, now its worth less than Microsoft
By Jeremy
C. Owens Published: Oct 26, 2018
8:48 p.m. ET
Amazon was almost the second U.S. company worth $1 trillion last month. Now,
its worth less than a neighbor and major cloud rival.Amazon AMZN, -7.82% has been No. 2 to Apple Inc. AAPL, -1.59% and briefly flirted with a $1 trillion market cap in early September, but a steep descent after Thursday evening’s earnings on top of an October tech-stock swoon chopped nearly $200 billion off its valuation. Microsoft took a small hit on Friday, losing 1.2%, but finished the week worth $821 billion, $20 billion more than the company on the other side of Lake Washington.
On back-to-back days this week, Microsoft and Amazon promised investors at least 10% revenue growth for the fourth quarter. Microsoft was rewarded after its report, but Amazon’s forecast of 10%-to-20% growth was a much larger decline from the 30% growth it reported for the third quarter.
----Apple
became
the first company to top the $1 trillion barrier in August, beating out
Amazon, and has maintained the milestone through the week’s tech bloodbath,
ending Friday at $1.05 trillion. Several
analysts expect Microsoft to eventually top $1 trillion as it continues to
successfully battle Amazon in cloud-computing while enjoying gains in cloud
software and its legacy personal-computer business, but more believe Amazon
will get there.
More
Mixed U.S. inflation signals leave investors adrift
October
26, 2018 / 12:07 PM
(Reuters) - U.S. quarterly earnings
reports this month were supposed to give investors clarity about the health of
Wall Street’s rally this year.
Instead, profit
reports and forecasts following the most recent three months are giving
investors indigestion as companies send unclear messages about the rising cost
of goods and labor.
“I don’t
understand why people are so hesitant to admit that we’re in an upturn in
inflation,” said Richard Bernstein, chief executive of Richard Bernstein
Advisors LLC.
Companies,
he said, are “scared that they’re not going to get rewarded for pricing
growth.”
The unexplained
absence of inflation during the last decade’s U.S. equity price boom is now
being replaced in investor psychology by fears that inflation is finally
pushing up costs and squeezing margins and may be one of the culprits in this
month’s selloff of U.S. stocks.
U.S.
consumer price inflation was 2.3 percent in the year to September, according to
the Labor Department, and even “core” inflation, which strips out volatile food
and energy prices, is running at 2.2 percent for the year, above the Federal
Reserve’s target.
With
unemployment at 3.7 percent, the lowest in nearly 40 years, annual wage growth
was 2.9 percent in September, a nine-year high.
The question
is whether the cost increases companies say they are now absorbing are fleeting
or here to stay.
At stake is
a market rally built on the premise that stock valuations are justified by
earnings that go on growing.
While
earnings growth is still high at 22 percent so far this quarter, the amount by
which S&P 500 index companies are beating analyst estimates is nearly half
of what it was during the first quarter, according to Refinitiv data.
Unless
companies can raise prices fast enough to keep up with the rising costs of
hiring and materials, stocks may struggle to maintain current valuations.
Borrowing
costs are also rising as the Federal Reserve is expected to keep raising
interest rates into 2019 to ward off the inflationary threat, with U.S. economy
growing at 4.2 percent in the second quarter this year, helped by last year’s
$1.5 trillion worth of tax cuts.
And now U.S. businesses are also
warning of input costs rising as a result of President Trump’s imposition of
import tariffs. Steel and aluminum tariffs have cost Ford Motor Co about $1
billion in profits, its chief executive officer said last month.
More
China's industrial profits growth slows for fifth month as orders wane
October
27, 2018 / 2:55 AM
BEIJING (Reuters) - Profit growth
at China’s industrial firms slowed for the fifth consecutive month in September
as sales of raw materials and manufactured goods further ebbed, pointing to
cooling domestic demand in the world’s second-biggest economy.
The slowdown
was in line with data last week that showed September’s factory output grew at
the weakest pace since February 2016.
Slowing
corporate profits will put pressure on jobs, ultimately tapping the brakes on
household consumption and hurting China’s overall growth.
Industrial
profits rose 4.1 percent in September from a year earlier to 545.5 billion yuan
(£61.23 billion), the National Statistics Bureau (NBS) said on Saturday. That
was less than half of the pace in August, and the slowest since March.
Earnings in
September were mainly pressured by a greater slowdown in production and sales,
declining price growth, as well as a high statistical base a year earlier, He
Ping of the statistics bureau said in a statement accompanying the data.
An
escalating trade war with the United States has also added to the pressure on
overall output, and threatens to chill business investments and earnings growth
in the months ahead.
Data last
week showed the Chinese economy in the third quarter grew at the weakest pace
since the global financial crisis as manufacturing output slowed.
More
“It is hard for us, without being flippant, to even see a scenario
within any kind of realm of reason that would see us losing one dollar in any
of those [CDS] transactions.”
Joseph J. Cassano, a former A.I.G. executive, August 2007, on the Credit
Default Swaps that wiped out A.I.G in 2008.
The monthly Coppock Indicators finished September.
DJIA: 26,458 +199 Down. NASDAQ:
8,046 +261 Down. SP500: 2,914 +166 Dow in August.
All
three slow indicators moved down in March, but the S&P and NASDAQ turned up in August. September will be critical for confirmation
of this change. All 3 slow indicators failed to confirm August’s positive
change making October very vulnerable to a sell off.
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