Quick Takes and Shadowstats’ Thoughts on the U.S. Stock Market

by the Curmudgeon

Introduction:

First and foremost, I hope all readers followed our advice NOT to trade this stock market due to volatility and computer-generated trading (front page of Dec 26, 2018 WSJ).

Victor will be interviewed on January 3^rd by Real Vision TV website (subscription required). He will be asked questions based on content in the two previous Curmudgeon posts (Sunday and Monday of this week). We hope to share the highlights of that interview, to be broadcast January 13^th, with our readers.

Financial data points:

· According to Greg Ip of the WSJ, the Fed Funds rate has historically averaged 2 % above the trailing 12 - month inflation rate (i.e. 2% real yield). Well, that hasn’t happened in well over a decade! As of Dec 26, 2018, it was 2.4% with a range specified to be 2.25% to 2.5%. You can monitor the actual Fed Funds rate daily here. Inflation as measured by the YoY CPI-U rate of change was 2.1% in 2017 and 2.2% in 2018 to date. You can check CPI-U for all years from 1913 at this Fed Minneapolis Bank website. Only now is the real Fed funds rate positive as it’s slightly above the trailing CPI-U inflation rate. Clearly, the Fed has not been too tight up till now!

· Leuthold’s Major Trend Index (MTI) improved slightly last week (ended December 21^st) to a ratio of 0.75, with a jump in the Intrinsic Value category offsetting losses everywhere else. Leuthold’s Doug Ramsey wrote: “The lack of more meaningful MTI improvement in response to this month’s collapse suggests the bear has yet to fully express himself. But the swipes he’s taken so far have hit hard….”

· Ramsey further states: “Interestingly, the same bulls who reminded us for years that valuations are a very poor timing tool are now calling for an imminent market bottom based on… yes, valuations! We distinctly recall those arguments having been trotted out during the first couple months of the last two bear markets. We don’t mean to minimize the extent of the valuation markdowns-to-date. Last week, for example, the median trailing P/E on the Leuthold 3000 fell into its undervalued zone (i.e., below the 30th percentile) for the first time since late 2012. But few of our cap-weighted valuation measures have returned to their fair valuation zones (30th-70th percentiles), with ratios based on sales, cash flow, and Normalized EPS all showing considerable risk.”

· Leuthold’s MTI Economic category has actually improved in the last three months even though we expect a considerably weaker economy in coming months. Essentially all of the improvement has come from the leading inflation components—and with the stock market having delivered a major deflationary blow in the last few months, more “improvement” here is expected.

· Note that we pointed out in Monday’s Curmudgeon post that inflation has been slowing in the last few months and is likely to decrease further in the year ahead. Here’s what I wrote: “Inflation is moderating as per November's Personal Consumption Expenditure (PCE) price index report, published December 21st by the BEA. The PCE is the Fed's favorite inflation metric. It was up 0.06% month-over-month (MoM - from October to November 2018) and is up 1.84% year-over-year (YoY). The latest Core PCE index (less Food and Energy) came in at 0.15% MoM and 1.88% YoY Core PCE are now both below the Fed's 2% target rate.”

· The late Richard Russell’s PTI (now maintained by the Aden Forecast) is now bearish and below both the 1 year and 5-year MAs. Here are the PTI charts:

Source: Aden Forecast

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Shadowstats John Williams Thoughts on the Stock Market:

· Weakening Economy, driven by Fed Tightening, and FOMC Promises for Even

· More in 2019, Likely Were Proximal Triggers for the Recent Stock Market Rout

· Market Turmoil Likely Has Only Just Begun

· Attempts by Fed to Mollify Impact of Recent Tightening Could Trigger

· Flight from the U.S. Dollar and Gold Buying Portend Greater Crises (edited by Curmudgeon)

Excerpt of John’s latest subscribers only commentary:

The proximal stock-selling trigger here most likely included investor reaction to a full year of quarterly rate hikes by the Federal Reserve’s Federal Open Market Committee (FOMC). Those rate hikes have impaired consumer liquidity, triggering the onset of what appears to be a new recession. After the FOMC hinted that early signs of a weakening economy could trigger a meaningful pullback in next year’s planned rate hikes, the Fed went on to schedule the bulk of those rate hikes anyway.

Those two sets of actions by the Fed were traditional, proximal stock selling triggers. Raise interest rates, and stock prices usually decline.

President Trump expressed understandable frustration with the Fed hiking interest rates recently, so as to slow the economy, particularly where the economy already had been turning down.

The Federal Reserve system was set up as separate entity from the political government, so that that Fed could take politically unpopular actions, such as raising interest rates, without facing political repercussions. Unlike the U.S. President, the Board of Governors of the Federal Reserve likely could remove the Fed Chairman, if they chose, but they currently are in agreement with the Fed Chair. Yet, the problems and instabilities here for the system appear to be with the Federal Reserve per se, not with a particular Fed Chairman.

The current big issues facing the economy and financial-system have their roots in the banking-system collapse of 2007/2008, particularly as to (1) why the banking system failed, and as to (2) how the banking system was saved.

The ultimate righting of the system might have to come from an Act of Congress.

Watch the U.S. Dollar and Precious Metal Prices. The weakness seen in stock prices in recent days increasingly was accompanied by U.S. dollar selling and gold buying. The flight from the dollar and to safety continues as major issues for U.S. and global financial stability.

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In closing, Victor and I again wish all readers a wonderful last weekend of 2018 and a great new year in 2019. Let us know what you liked and didn’t care for by emailing the Curmudgeon at ajwdct@gmail.com OR reply to my tweets @ajwdct247.

Good luck and till next time.

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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