Mike
Lipper’s Monday Morning Musings
Short Term Rally Expected + Long Term Odds
Editors: Frank Harrison 1997-2018,
Hylton Phillips-Page 2018
Short-Term Rally
Focusing exclusively on short-term data suggests that when there
is a strong broad market trend in one direction for an extended time, a countertrend
is likely to surprise proponents of the longer primary trend. That is what I am
expecting in the days and possibly weeks ahead, a somewhat explosive rise in the
general market indices. Below are some indicators of why an explosive rise is likely:
- On Friday, 90.5% of the stocks on the New York Stock Exchange (NYSE) fell in price. Typically, when 90% of a universe goes in one direction, it is close to being exhausted.
- In looking at the daily price charts of both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average, from their historic peaks to Friday’s close they have declined enough from their historic high points to conclude that the last rise has been fully discounted.
- A third set of indicators is the weekly sample survey from the American Association of Individual Investors (AAII). The sample survey divides the views for the market six months from the current date into bullish, bearish, and neutral. In an idealized state one would think approximately one-third of the sample would fall into each category, although that is likely not the case since it is an audience of stock owners. Thus, the “normal” vote favors a bullish view. Recently, the survey showed a contrarian result in favor of the bears and two weeks ago the split was almost 2 to1, 59.2% bearish and 27.4% bullish. This week the ratio was much closer to 3 to1, 21.8% bullish and 61.9% bearish). In theory the AAII survey’s audience is made up of retail investors who have a good long-term record of guessing right, but not at turning points. Perhaps this time the public is in-line with the professionals.
When discussing a possible rally with people, I urged them to
use the opportunity to reposition their portfolio for a new bull market, not
the old one that may already have concluded in 2024.
Putting Tariffs in Perspective
While not perfect as a future model, it may be useful to
compare the current situation with the early 1930s. The US was in the early
stages of a “normal” cyclical recession triggered by the creation of too much
debt.
Coming out of WWI there were constraints on the economy, men
were returning to the workforce, the farm belt was producing food for a
starving world, and Russia was having extreme economic problems. Additionally, the
banking community was pushing out debt to support the expansion of the 1920s,
including margin loans from Wall Street.
As the rest of the world was getting back on its feet it was
better able to feed itself, which reduced the price of food produced by US
farmers. Many started to leave the farm-belt, with young men streaming into factories
as small farms merged into larger ones. They were increasingly replaced by
machines, which were sold to farmers on debt carried by the local small farm
banks. The farmers, their dealers, and their banks, all needed to be
recapitalized. They appealed to their politicians who passed the Smoot-Hawley
Tariff Act, which President Herbert Hoover reluctantly signed. Unfortunately,
numerous other countries followed our lead, which led to a world-wide
recession.
Why is this important to us?
There is an uncomfortable parallel with our situation today.
We have permitted or encouraged prices to rise for eggs, meat, and milk, among
other commodities. In other words, we have inflated our expenses. While not
often aligned, Chairman Powell and Jaime Dimon are both very concerned. Interestingly,
Jaime Dimon is a corporate descendant of J.P. Morgan. In 1907, in an attempt to
head off a major crash, JP Morgan locked the leading bankers in his library and
refused to let them out until they individually agreed to recapitalize the
failing Trust companies.
What is the parallel to what we may be facing today? When
FDR became the President in March of 1933, with his “brain trust” he like Trump
was dealing with a cyclical recession which was not his fault. Somewhat like
FDR, Trump appears to be turning a cyclical recession into a structural
recession, using tariffs as the tool.
What Happens Now?
I don’t know, and I believe President Trump himself does not
know. He knows what he wants to happen, but he doesn’t know whether he has
enough Republican support to make it happen. The following is a possible path to
what will follow:
- The first not fully completed step, the announcement which focused on the rate of the proposed tariffs. President Trump is aware that there are at least two other critical issues that impact world trade; the regulations that deal with the negotiation of the size and shape of trade and payments, and secondly the price level of the currencies involved.
- The next phase is the public or private position of the various countries.
- Is the President really after the negotiation, which he feels is his skill set?
- Implementation of the trade agreement. How will any of the agreements really work and be enforced. (This is the topic I am most concerned about as it takes skilled players to make it work. We have not seen many of these.)
- Cheating is to be expected. How will it be handled?
- The new or refurbished plants will eventually produce excess capacity.
- If the dream becomes the world we live in, will it be a less artificial world than we live in today? Can we handle it?
- The time to complete the process, if it fails, will be short. The Smoot Hawley Tariff ended three years after its passage. If the process succeeds, it is likely to take many years and different administrations.
I would appreciate your thoughts
Did you miss my blog last week? Click here to read.
Mike
Lipper's Blog: Increase in Bearish News is Long-Term Bullish - Weekly Blog #
882
Mike
Lipper's Blog: Odds Favor A Recession Followed Up by the Market - Weekly Blog #
881
Mike
Lipper's Blog: “Hide & Seek” - Weekly Blog # 880
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