What You Need to Know Today

• The curve inverts further and for longer
• Igniting a new call of a coming recession
• UK suspends Parliament – increasing the likelihood of a NO Deal BREXIT
• Mkt needs to test lower shake the branches

 
 Stocks fell, bonds surged….and the curve got more inverted….and in the latest move 30 yr bonds are now yielding less than the S&P 500 dividend yield…. – which means if you just bought the S&P 500 – you would make more money in dividends than you would in coupon payments off the bonds!! (think value over growth)  The last time that happened was in the throes of the financial crisis – March 2009 -  when the S&P bottomed out at 666…..(which also has a whole other meaning….but that’s another story).  And while stocks did end the day lower – there was the usual up and down as they search for stability and attempt to find some support….by the end of the day the Dow lost 120 pts or 0.47%, the S&P gave up 9 pts or 0.32%, the Nasdaq lost 27 pts or 0.34% and the Russell was the biggest loser – shedding 20 pts or 1.35%. 
 
As the day wore on – the selling in stocks gained speed as the ‘flight to safety’ trade lit up…..bonds and gold surged  as investors sought the safety of those assets……and this caused the 2 yr / 10 yr curve to further invert which only caused the recession story to heat up – it almost feels like we are talking ourselves into this recession ……I mean if you say enough, people begin to believe you…..and then it becomes a fait accompli……No matter what the macro data is telling you….and the macro data is NOT screaming recession (yet)…..The story hasn’t changed at all – The US/Sino trade war is alive and well and will most likely go on for a while.  US interest rate policy,  global interest rate policy, slowing European and Asian economies,  an erratic and chaotic narrative driven by the President….via his Twitter account, a strong US economy, a strong US consumer, massive political disruption happening in Brazil, Italy, the UK and the EU, good earnings and good forward guidance and to top it off -  we are now the world’s premier oil producer……so what gives?  Why the sudden concern?  None of these issues are new….(ok, maybe the Brazil issue, but none of the others)
 
What gives is that investors are exhausted for now…..tired of the ongoing trade war, tired of the angst, and tired of trying to invest in what appears to be a chaotic environment – the same way businesses and companies are skittish about making significant investment due to the uncertainty and chaos (see below) …..one day it’s all good with China and we are closer than ever to a trade deal and the next day the President is ‘ordering US companies to stop doing business with China’  oh and btw – tariffs are going up - but not until after the holiday shopping season so as not to disrupt the shortened shopping period this year – FYI -  there are 6 LESS days between Thanksgiving and Christmas and that is just another negative that the media will accentuate as we enter the fall as they try to compare y/y results…… And because inventories have been building  - expect Black Friday to start early – My guess is that they will start the PRE-BLACK FRIDAY  SALES sometime in Mid-November to try and make up for the lost 6 days…..just a guess, but just wait….I’m just sayin’…..
 
And by the way – companies are not committing CAPEX (Capital Expenditures are funds used for the purchase or maintenance of long term assets)  because rates are too HIGH, (rates are at historic lows again)  they are not committing because the environment is chaotic – so batten down the hatches and ride it out – So – safety is the safe and easy way out – bonds are bonds and gold is gold….….and btw – that is also true of international investors – who are searching for some yield, considering yields in Europe and Asia are and have been negative – the US is still paying positive rates and that is attracting capital from around the world, which great for us, but which will naturally cause yields to go lower….remember – as prices rise, yields fall – it just the way it is….so why is money flowing into bonds and gold?  – because of the angst being created.   As my friend Sam Stovall said yesterday –

“A lot of investors are throwing up their hands, saying since I am not privy to any conversations, I don’t know what to believe from a trade perspective”  -

sooooo what do they do?  They manage the risk and that means they sell stocks and buy safety assets…..which in the end will prove to be a naïve decision, I think…..Now – don’t try to catch a falling knife (a weak mkt) but also don’t let that falling knife create the narrative…..look at what has really changed, do your homework, look at the fundamentals and talk to your financial advisor – in the end – stick to the plan.  As prices fall – there is a lot of value being created and if you have the cash and If you have the time horizon – then you can afford to be a bit choosy but don’t abandon the ship….this is not 2007!.
 
Now I have been saying since the initial break back in late July – that any pullback would most likely test the trendlines – which they have – but the one that I keep talking about is the long term trend line…the 200 dma….and while the Dow has done that and found support – the S&P and the Nasdaq have not really tested it yet.  Now remember – the Russell tested it and failed and the Dow Transports tested and failed early on in this latest ‘corrective move’ (both of those events create a technical red flag) …..so it is absolutely necessary for the other indexes to test….and the result of that test will prove to be the deciding factor…..2830 on the S&P represents the lows of the August selloff – we have tested that 3 times and held, but the real trendline is the 200 dma and that is at 2803…..and that is the level that I believe has to be tested……which is 2.3% lower from here…..What happens when that test takes place will be the driver for what happens next……A failure to hold – will ignite a selling spree (initiated by the algo’s that operate on very strict mathematical formulas).  Liquidity will dry up once again and the mkts will re-calibrate lower to test the May lows of 2730…..and this is where I think you begin to make your move…..Patience is a virtue…..the macro data is not collapsing, much of what is happening now is all technical…..not fundamental. 
 
US futures are essentially flat….US macro data today shows a complete weakening in mortgage apps - -6.2% - which just says that applications are down – but remember the time of year…end of summer and if you needed to buy a house to get your kids in school – you’ve already done that…it is a seasonally quiet time – no matter what rates are doing…..so I wouldn’t say that today’s report is anything to get worked up about.  Tomorrow we get the 2nd look at 2Q GDP and it is expected to be 2%, Pers Consumption – exp to be +4.3%, Retail Inv of +0.3%, Wholesale Inv of +0.2%, Init jobless claims of 214k and Cont Claims of 1.68 mil, Pers Inc of +0.3% and Personal Spend of +0.5% (strong numbers) .
 
U.S.-China trade talks were scheduled for this week and so far there has not been any news on the topic and the idea that the Iranians want to talk to the US was put to bed when they made it very clear that THAT is not happening.   Last nights API report on Crude Oil inventories showed a massive drawdown in supplies…..11.1 mil barrels vs the 2 mil expected is causing oil to surge this morning….crude is up 67 cts to $55.58 – attempting to pierce resistance at $56.45….So watch for today’s report from the EIA (Energy Information Admin) too see if it confirms that drawdown….and if it does – we could see oil move up further.   
 
We remain in the 2830/2950 range…..and with futures now lower – that test of 2830 is within sight and then the test of 2803 is in the line of fire…..Stay tuned. 
 
Asian mkts ended mixed…..as they struggle to understand the latest yield curve inversion…and the escalating US/China trade war will only continue to prompt that safe haven trade. And if Xi wants to make it difficult for Trump’s re-election bid – all he has to do is drag this out…and since he is President for life – he has nothing to lose if he makes it difficult for Trump – yeah, will it hurt the economies – yes but in the end – it is what it is..
 
European mkts are also in the red this morning….as they too struggle to understand….while dealing with a disruption in the UK Parliament as Boris Johnson moves to suspend Parliament – effectively increasing the likelihood of the UK leaving the EU with NO-BREXIT DEAL and this has a host of its own implications for the UK and EU economies.  In addition investors have to focus on what is happening in Italy as the Five Star Movement and the Democratic Party join forces to create a new gov’t. 
 
Take good care.