Monthly Archives: October 2018

Good Evening

Just a short note, but in my opinion (everything on this site is all my opinion..) the market action on Thursday Oct-25 was “unimpressive.”  I say this because most of the media was busy high-fiving each other and proclaiming that “the bottom was made” (in one day…) and “things are rebounding.”   What they missed was that the high on the indexes did not exceed the prior day’s high.   Had it done so (which it did not), I would have a different opinion.   See chart:

Until the SP-500 is able to exceed 2745, a nice round number based off the Oct-24 high of 2742.59, my bearish stance will not change.  By definition, a new uptrend must exceed a recent prior high, ideally on healthy volume, and with a “backdrop” of strong/improving fundamentals and positive/improving economic conditions.   The current backdrop includes a cooling housing sector, some fairly big (and arguably well-run) corporations missing earnings (to include Amazon and Google), and some other flames appearing in the windows, indicating that things may turn to ashes soon.

GDP Data will be released on Friday October 26, this is a Catch-22 situation, you can never win with GDP.   A strong GDP is “good news” for the economy, but if anyone has read my posts back in 2014-ish, the recovering economy means the FOMC will raise interest rates, because the economy “can absorb the pain” and higher rates will “tame inflation” (another topic for another day).    A weak GDP is “bad news” because it says things are slowing down, but this may prompt the FOMC to hit the pause button on interest rates.   Long story short, GDP data is coming on Friday October 26 and the market could literally do anything in response.    Most estimate that 3.4 to 3.6% GDP growth will be announced.   President Trump has publicly stated that GDP will be “outstanding.”  The prior GDP was 4.2%.   See graph:

Again, just a quick note to summarize my views of the trading day, the day after the NASDAQ’s worst performance since 2011.   Be cautious when you hear the market is “in a normal correction” (no correction is “normal”, if you catch the Flu every two years it is still not desired…), or that the “jobs reports” are still strong.   Jobs don’t show bad news until companies repeatedly miss earnings, their stocks tank, then layoffs are announced due to “restructuring” and “redefining our business model”.   So jobs are the LAST indicator to use if you are trying to anticipate market downturns.   They indeed are good overall, long-term indicators of the economy.   If full employment exists, then yes, things are good.   Just be careful using unemployment numbers as a bulletproof, error-free, device to forecast the stock market.

Until next posting (when warranted…), thanks for reading and talk to you soon

-Bill Pritchard

Good Evening

As discussed in prior posts, the 2725 level / trendline in the SP 500 index was  important- unfortunately it was breached today October 23.  I have no compelling information or reasons to keep me in stock funds in this time of increased volatility and turbulence, as such,  I will be moving to G-Fund, 100% Contribution Allocations and 100% Interfund Transfer over to G-Fund.    Lets talk a little bit about things as I see them:

Apparent in the chart above is the 2725 level break, this occurred on high volume, a negative sign.  Note that recent “sell off days” were also on high volume, all red flags.   Gold Prices, typically a “safe haven” currency are on the rise:

Numerous things are challenging the markets, I will not regurgitate what I have already said, however the below are the challenges ahead:

• Global trade and tariff concerns
• Rising interest rates
• Poor corporate earnings by Caterpillar and 3M, both large US corporations with global business portfolio.  These companies are among a group of companies believed to act as a barometer for the economy.
• Concerns over Saudi Arabia and death of journalist Khashoggi.  President Trump has threatened economic sanctions and accused Saudi Arabia as participating in a “cover up.”
• 2018 Mid-Term elections:   Any sway of power from one party to another could jeopardize pro-Economy regulation and policy being implemented today.

As reported on this site previously, the housing sector is already cooling off, this has trickle-down impact on the retail sector, construction, commodities, and other areas.  Expect to see “the housing story” to pick up steam in the mainstream financial media in three to six months.   Only a few folks have spoken about this:  much distaste is left over from the 2007-2009 housing-induced, easy mortgage, financial crisis.   As such, this story is not a popular one to talk about.  But all indications are that housing is cooling off.

Also troublesome, is the fact that October is typically one of the best performing months of the year, with a 3+% return for the month:

As we arrive to the last full week of October, the month is negative for the entire month–  it will be almost impossible to obtain a 3% gain between today and Oct-31.   This “behavior” is not reflective of a healthy market.  When a star quarterback suddenly can’t make passes, something is wrong.

In my opinion, things may rally back up in the coming weeks, but the “smart money” will sell into this rally (if it occurs…), capturing some last-minute gains, but then, soon after, the bottom may fall out of the markets.   A technical indicator, the 50-Day and 200-Day moving average, indeed reflects a possible downturn ahead.

In sum, I am changing my personal TSP to 100% G-Fund, both the Contribution Allocation and Interfund Transfer.   If the skies clear up in a month or two, I will re-enter stock funds.   The G-Fund, of many funds, are “shelves” inside a safe, the safe being your TSP Account.   Moving from one fund to another is not “cashing out”.  Until you open the door to the safe, and remove dump the contents on the floor, you are still “investing” albeit in a reduced risk fund.  Do not listen to the “experts” on the internet (more TSP advisory sites and chat groups exist than I can count with both hands…) that claim the G-Fund is not investing or that you should always be in stocks, etc.  I can assure you I have never had trouble sleeping when the markets were shaky and my TSP was G-Fund.  I occasionally get asked about such advice and those sites and quite frankly, most of them are garbage.  Stick to trusted and known information sources, such as Dan Jamison’s FERS Guide or similar reputable sites.  The TSP site itself endorses the use of the G-Fund for account protection:  https://www.tsp.gov/InvestmentFunds/FundOptions/fundPerformance_G.html

With that said, I am enroute to G-Fund.  Will the markets suddenly rally and prove me wrong ?   I hope so.  Until then, I need a little shelter from the storm clouds I think are forming.

Thank you for reading…

-Bill Pritchard

Good Morning

Indeed this month has been a roller-coaster.  October, historically a top performer, will likely under-perform this year; that fact alone is a red-flag itself regarding what lies ahead (if you believe that kind of stuff- I do…).

Lets talk about some of my opinions regarding what is challenging the markets.  Back in July 15, I said this about inflation:

“…However some economic data has started to trickle in which may negatively impact the bull market.  Inflation data, as measured by the Consumer Price Index (CPI), minus Food and Energy, reflects that inflation has risen to all time highs, at a 2.3% 12-month change rate….”

Fast forward to today, and the mainstream financial media is talking about “the inflation story” (reported by me in July).   Inflation is on the rise, but if you look at the below charts, inflation’s rise is much subdued, while interest rates have risen rapidly since December 2015.   Both PCE Inflation (the Federal Reserve’s preferred benchmark) and Core CPI (more widely followed in financial press circles) inflation is shown.  This prompts me to ask “Are rate hikes the proper thing to do ?”

Apparent is that inflation has ticked up, however also observe that shortly after it goes up, the data reflects that it goes back down.  Since 2012, it has been contained in a relatively narrow trading range.   However, in December 2015, the interest rate hikes began, reportedly “in response to rising inflation”.

If we take a look at the most recent Federal Open Market Committee (FOMC) Minutes (LINK: https://www.federalreserve.gov/monetarypolicy/fomcminutes20180926.htm ) we will see this comment:

Allow me to make the observation that per the Federal government’s own Department of Labor data, unemployment is at the lowest it has been in history.  I did not invent this or otherwise make it up.  It is what it is.   So I must ask:   Why is the FOMC insistent on continued rate hikes ?   I do not have the answer.   My opinion is they should throttle back on rate hikes and put the rate-hike pistol back into the holster for now.

Lets talk about the SP 500 Index, my benchmark barometer for the health of the markets.   The index was doing “fine” until October 4, when all heck broke loose.   In recent weeks, the International Monetary Fund (IMF) cut global growth forecasts (citing trade tensions), a Saudi journalist was reportedly hacked to death in the confines of a diplomatic consulate building (prompting threats of economic sanctions on Saudi Arabia) and the minutes from the September FOMC meeting were released.   See graphic:

One reason I did not pull the ejection handles over to G-Fund (panic response) was I wanted to assess the scene first.  In aviation, the first thing a Pilot is trained to do when an emergency arises is “wind your watch” – in other words, breathe, assess, then act.  The action in October resembles a panic response (by others) to numerous news events, but as I have said before, the “economic foundation” is very strong.   Jobs, innovation, productivity, etc is still very strong in our country.  The markets will indeed be impacted by continued interest rate hikes.   I feel this is the #1 threat against the market, with the #2 threat being inflation.  Tariffs also have the potential to hurt the markets, even though “I get it” as to why President Trump wants them.  However my personal opinion is the stock markets are not going to like tariffs.  The housing/real estate sector is already cooling off, as reported by Bloomberg on October 15:  https://www.bloomberg.com/view/articles/2018-10-15/housing-prices-may-have-entered-a-cyclical-downturn

Housing impacts other industries, banks, retail (Home Depot, Lowes), manufacturing, textiles (roofing products, lumber), and other industries.   When housing slows down, it contaminates other areas and is not something the already weakened stock market needs.

The 2725 level in the SP 500 what I am watching next:

A downward penetration of this level reflects a high probability the market will go lower.   This will trigger the oft-asked question:  “Why get out now?   We are already down, it is too late.”   Allow me to remind the audience that the G-Fund is considered an investment vehicle, albeit a reduced rate of return.   The TSP website itself says this:  Consider investing in the G Fund if you would like to have all or a portion of your TSP account completely protected from loss.

Note that it takes months for large institutions to “unwind” positions, so any additional problems we see this month or next will likely result in much more severe downward action three to six months ahead, something I don’t want my TSP exposed to.

In sum:  My TSP allocation has not changed, but a downward break below 2725 on the SP 500 will likely trigger a change to the G-Fund in my personal TSP, unless clear and convincing evidence exists against it.

Again:  I have made no changes to my TSP, however a move to G-Fund may be in my near future.

Thanks for reading…

-Bill Pritchard

Good Morning

Hope everyone is having a good weekend.   Some news to share, according to reporting by Federal News Network, (former) OPM Director Jeff Pon has resigned abruptly, and a replacement has been named.   Links discussing this are here:

Trump names OMB deputy to replace Pon as OPM director

https://www.whitehouse.gov/presidential-actions/president-donald-j-trump-announces-intent-designate-individual-key-administration-post/

Readers will recall that OPM Director Pon was a key proponent of numerous changes to federal employee benefits, which I discussed on my May 20, 2018 post 

Amongst Pon’s proposals, were:

• Eliminating Federal Employees’ Retirement System Annuity Supplements
• Modifying Annuity Supplements From a High 3 Average to High 5 Average Salary
• Increasing Contributions to Federal Employees Retirement System
• Reducing or Eliminating Retirement Cost-of-Living Adjustments

Readers will recall reporting both here and via Dan Jamison’s FERS Guide, that these initiatives seemed to have stalled out in recent months.   My post (before Pon’s departure) on May 20, 2018 outlines six reasons why I believed it will be hard to accomplish those proposals.

In sum, after spending seven months at OPM, Mr. Pon is no longer at the agency.

-Bill Pritchard