On November 28, Jerome ‘Jay’ Powell gave a highly anticipated speech at the New York Economic Club where he assuaged worries the Fed would go on a reckless campaign of automatic rate hikes even though they had no idea of the consequences of such hikes on the economy, even eighteen months down the road.

Moreover, the Federal Reserve, which is already taking back $50 billion a month in accommodation, says its mandate is to manage inflation, which seems to be under control.   During that speech Powell also outlined the four biggest risks, in order of probability, to the US economy.   He was emphatic that none of these are an immediate threat, however.

Maybe that’s changing.  Maybe the massive capitulation of investors represent a “run” on the banks.

Powell’s Economic Vulnerabilities

• Fire sale
• Run on the backs and general panic
• Boom and bust patterns
• Financial bubbles

A record amount of money was taken out of mutual funds in the week ending Wednesday.  The $46.2 billion from mutual funds and $45.2 billion from ETFs resulted in a record $81.0 billion pouring into money markets.  The good news is the money didn’t end up in empty coffee cans and under pillo

Equity Flows	Mutual Funds	ETFs
Nov 14	+$2.7 billion	-$3.7 billion
Nov 21	-$578 million	-$7.1 billion
Nov 28	-$8.5 billion	-$9.2 billion
Dec 5	-$289 million	-$12.4 billion
Dec 12	-$46.2 billion	-$45.2 billion

Investors Growl

The American Association of Individual Investors sentiment survey turned decidedly bearish.  In fact, combing through the historic data this looks like the largest gap between bullishness and bearishness, 48.9% of investors are now bearish, the highest level of 2018 and highest since August 2011.

Good News?

When individual investor sentiment become demonstrably extreme on one side or the other, the experts often see that as a turning point for the stock market.   While these experts are also emotional and can be contrarian indicators too, there are levels where this axiom seems true.  That number seems to be investor bearishness above 48%.

The last two times investors got this bearish six months later the market was up significantly.

48% Bearish Buy Signal?	Dow Level	Six Months
Aug 4, 2011 49.8% Sep 22, 2011 48.0%	10,733	13,080
Jan 21, 2016 48.7% Feb 11, 2016 48.7%	15,600	18,516

 

China Problem

While the media has focused on tariffs, the biggest risk to the global economy is the dramatic slowing of China’s economy.  More evidence of that came overnight in November economic data:

Industrial Production - Grew at 5.4%, which is the slowest since Feb 2016 and well below consensus of 5.9%.

Retail Sales - Grew at 8.1%, which is the weakest since 2003, well below consensus of 8.8% and a sharp decline from the October reading of 8.6%.

China’s economy is slowing in ways that make tariff talk irrelative.  If there are no buyers or investors then margins are a moot point.  There was also a lot of sloppy economic data across Europe overnight.

King Dollar

The bad news from all of this is the US dollar is powering higher, which means more pressure on multi-nation corporations and emerging market nations.  The DXY is pushing up to its highest level since May 2017.

US Consumer Roar!

Retail sales came in stronger than consensus, but it’s the components of the report and revisions that speak to a confident and robust American consumer.

November Highlights

• Headline +0.2% estimate +0.1%
• Ex –autos +0.2% estimate +0.2%
• Ex gas and autos +0.7% estimate +0.3%
• Control group 0.9% estimate +0.4%

Revisions to October

• Headline 1.1% from 0.8%
• Control Group 0.7% from 0.3%

The control group numbers will help the 4Q2018 GDP number, which I think is a lock to put 2018 above 3.0%.

Trade War Pause

Meanwhile, China has put recent auto tariff increases on ice for three months beginning January through March.

25% tariffs on 144 items (mostly autos)

5% tariffs on 67 items (mostly parts)

Today’s Session

The futures were slammed down more than 300 Dow Points overnight after the Chinese economic data was released.   In addition, negative reactions to earnings from Adobe (ADBE) and Costco (COST) (more details on afternoon note) and the Starbucks (SBUX) analyst day, are also applying pressure.

Let’s not force the issue here.

Portfolio Approach

We are crunching numbers on a few ideas not sure if we are going to close yet but its important everyone have a fair amount of cash on hand.

Communication Services	Consumer Discretionary	Consumer Staples	Energy	Financials	Health Care
2	2	1	1	1	1
Industrials	Materials	Real Estate	Technology	Utilities	Cash
3	4	0	1	0	4

 

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