 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Tuesday's Headlines 1. U.S. Markets Sink on Renewed Recession Fears 2. Get Used to Lower Corporate Profits 3. Bezos Pledges Half of Fortune 4. 10 Year Treasury Yields Tumble Markets Closed
 U.S. Markets Sink as Recession Fears Rise We haven't heard the dreaded "R" word in a while, but it resurfaced today and took over the conversation among institutional investors. Michael Wilson, the Chief U.S. equity strategist for Morgan Stanley, used it in a note to clients this morning and by the time it made its rounds, the DJIA and the S&P500 gave up their early gains and headed for red.
Wilson's note didn't cause the sell-off, per se. It was just a poignant report that identified key risks facing the U.S. economy and the stock market right now.
In brief, here are the main risks Wilson and his team have identified:
Wilson looks at the various economic indicators that make up the U.S. economic cycle, which include orders and inventories, financial market conditions, confidence surveys of business leaders and regional economic data. His team's view is that the U.S. Cycle Indicator has tipped into a downturn, and it's pointing at a severe economic slowdown that could turn into a recession. It looks like this on a chart:  What's Next? Wilson and his team have lowered their 2Q'19 U.S. GDP forecast to 0.6% from 1.0%, and say it could be even lower if trade negotiations don't improve soon. They think the Federal Reserve will be forced to cut interest rates as the economy slows, and the fact that the yield curve inverted last November even though the U.S. and China struck a temporary trade truce is a sign of troubling times ahead. As Wilson put it, "...We think this means the US economic slowdown and rising recession risk is happening regardless of the trade outcome."
Plan accordingly.
About those Corporate Profits... The first quarter earnings reporting season is nearly complete. The main takeaways are that profits were better than we thought they would be, but the trade war is putting pressure on companies that will manifest throughout the rest of 2019. Companies that missed their forecasts were punished by impatient investors. Stock buybacks, which hit another quarterly record, contributed in large part to companies' abilities to beat their earnings forecasts. Remember, buybacks reduce the amount of available shares on the market, which means that earnings per share will rise.
Looking ahead, corporate profits are set to be cut in half as the global economy slows and companies face more difficult comparisons to last year when they had the wind of tax cuts at their back. If you take energy and technology sector earnings out of the mix, the decline will be even greater. James Bianco of Bianco Research plotted the declines on the following chart. It's a steep slide.  Now What? Does this mean that the U.S. stock market will follow those declines? Not necessarily. While the stock market is a big bet on the future profitability of the companies that are in it, remember that it is a market of stocks. Individual stocks like Apple, Boeing, Microsoft and Facebook are heavily weighted in market weighted indexes like the S&P500. They have been known to pull the market up when sentiment was sour, or bring it way down when they are in free-fall.
In addition, if interest rates remain low and potentially get cut again, stocks are often the best alternative for investors seeking yield. We saw this in 2009-10, and we could easily see it again.
Speaking of Returns... 2019 has delivered some very unexpected returns so far, to say the least. Bitcoin's rise from the ashes has been very surprising, but when you think about the recent volatility in the stock market, the uncertainty around the trade war, and companies from JPMorgan to Facebook getting deeper into cryptocurrency, it kind of makes sense. But a 134% increase for Bitcoin still smells like 2017. Here are the top performers across asset classes (except Bitcoin, which is not an asset class), so far this year.  A $3.5 Million Lunch Is having lunch with the world's most famous investor worth $3.5 million? It will cost you at least that much if you want to break bread with Warren Buffett, the Oracle of Omaha. Every year, Buffett auctions off a lunch with him at New York City's Smith & Wollensky Steakhouse. All proceeds go to the Glide Foundation, which addresses issues including hunger, poverty and homelessness. The Glide Foundation is based out of San Francisco, and really does some inspiring work.
The $3.5 million current bid for the lunch tops the highest amount ever bid to have a meal with Buffett. It closes in two days, so start bidding
Here's what Buffett had to say about Glide's work: "It makes a difference. It translates into human beings finding that there is hope in life and that something better is there. The rest of the society may have given up on them, but GLIDE is going to give them a chance to find out what their real potential is." —Warren Buffett
Side note, one of the past winners of the charity lunch with Buffett is Ted Weschler, who is now part of Berkshire Hathaway's investment team. I think he made his money back.
Here is the listing on eBay for the auction. 
chart courtesy www.koyfin.com  AMD surged nearly 10% today on analysts predicting the chipmaker is poised to take market share from Intel. Total Systems Services stock has continued to rise on news of the merger. (Global Payments has not, though, and dropped 2.98% today.)  Kraft-Heinz fell almost 7% today, on a bad day for many consumer staples.   Word of the Day Given the news that Mackenzie Bezos, the former wife of Jeff Bezos, has pledged to donate half of her estimated $36 billion fortune to charity via 'The Giving Pledge', we thought it appropriate to make this today's word of the day. Here's what Mackenzie wrote about why she has made that pledge:
"We each come by the gifts we have to offer by an infinite series of influences and lucky breaks we can never fully understand. In addition to whatever assets life has nurtured in me, I have a disproportionate amount of money to share. My approach to philanthropy will continue to be thoughtful. It will take time and effort and care. But I won't wait. And I will keep at it until the safe is empty."  photo courtesy: https://www.volkswagenag.com/en/group/history.html
Today in History May 28, 1937 - Volkswagen is founded in Germany.
This is from Brittanica.com: The company was originally operated by the German Labour Front (Deutsche Arbeitsfront), a Nazi organization. The Austrian automotive engineer Ferdinand Porsche, who was responsible for the original design of the car, was hired by the German Labour Front in 1934, and ground was broken for a new factory in the state of Lower Saxony in 1938. The outbreak of World War II in 1939 occurred before mass production could begin, and the factory was repurposed to produce military equipment and vehicles. Volkswagen's military involvement made its factory a target for Allied bombers, and by the end of the war the factory was in ruins. It was rebuilt under British supervision, and mass production of the Volkswagen began in 1946. Control of the company was transferred in 1949 to the West German government and the state of Lower Saxony. By that time, more than half of the passenger cars produced in the country were Volkswagens.
I'm back - Volkswagen has been upfront about its origins in recent years, and has published a vivid, detailed and honest record of its early days as part of the Nazi Party. If you are interested in learning more, read the company's online chronicle. Chart of the Day: Yields Plunge Further on Economic Worries  Government bond yields plunged further on Tuesday as the prolonged trade conflict between the U.S. and China dragged on and fears intensified that an economic slowdown looms on the horizon. The 10-year yield fell sharply from above 2.31% to around 2.26%, closing Tuesday at a low not seen since September 2017.
As shown on the chart, the 10-year Treasury yield has virtually been in a state of free fall since the major double-top pattern around 3.25% completed forming in November of last year. Most recently, the tables turned and the 10-year yield formed a false double bottom right around the 2.35% level. The first bottom was in late March and the second in mid-May, when the benchmark yield dropped down to test March's trough. Since that second bottom, the yield was on the rebound until last week's dovish Fed minutes were released, after which the yield broke down below the double-bottom.
Strong declines in bond yields have been driven in recent months by fears of slowing global economic growth, dovish-turning central banks (most notably the Fed), and expectations of low interest rates for longer. Most recently, the escalating trade war between the U.S. and China has reignited fears that protectionist policies on both sides could further weigh on global economic growth. As it currently stands, with yields having broken down sharply below the double-bottom, the outlook for yields continues to be bearish in the near-term. However, yields are likely due for a bounce after the long, steep drop since mid-April. If this is indeed the case, such a bounce may occur around the 2.20% support level.
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Tuesday, May 28, 2019
Recession Radar
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