 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Tuesday's Headlines 1. U.S. Markets Mixed Ahead of Fed Testimony 2. GDP Projections Plunge 3. Investors are Buying Stocks Again 4. Virgin's Interstellar Plans 5. R.I.P Ross Perot Markets Closed
 Stocks Mixed as Economic Warnings Flash
U.S. markets were mixed on Tuesday as investors await tomorrow's testimony of Fed Chair Jerome Powell to Congress. The "Humphrey Hawkins" testimony, as it is commonly known, is the Fed's semi-annual presentation of its report on Monetary Policy to the U.S. Senate Banking Committee and the House Committee on Financial Services. On July 5th, the Fed submitted this report on the current state of monetary policy and the future to Congress. Powell will spend the next two days defending that report and answering questions about the probability of a recession, as well as, when and if the Fed will measure interest rates.
One issue that is bound to come up is the Fed's latest GDP predictions for the U.S. According to the Atlanta Fed's GDPNow Estimate for Q2'19, gross domestic product is expected to fall to 1.3% from just a little over 2%, where the Fed projects it is today. While that is not in recession territory, it is trending south, and fast.  What Is the Fed Looking At? Basically, all the ingredients in the economic gumbo that make up GDP, like manufacturing, housing starts, employment, consumer prices, auto sales, trade, import and export prices, and personal income.
As we've been saying, the consumer is holding up well, but businesses, especially manufacturing and industrial enterprises, are fading. This forecast decline in GDP might be the "thing" that moves the Fed to cut rates at the end of July.
Read More: What is GDP and Why is it So Important to Investors?
The TED Spread One big blaring siren is the Fed's own probability of a recession indicator that can be seen through what is called the TED Spread.
The TED spread is the difference between the three-month Treasury bill and the three-month LIBOR based in U.S. dollars. To put it another way, the TED spread is the difference between the interest rate on short-term US government debt and the interest rate on interbank loans.
This probability model delivered a reading of 32.9% for June. It has breached the 30% threshold before every recession since 1960, and it is up from its 28% reading in May.
Critics of the TED spread say that its timing is circumspect and that it is only measuring that one metric—the difference between the three-month U.S. Treasury and the three-month LIBOR. Recessions are caused by a multitude of factors, as I noted earlier. To be sure, the probability is above 30%, which does not make it a certainty, but investors love to dwell on historical precedent, and this is full of that.
chart courtesy NY Fed  Investors Are Buying Despite the mild selloff of the past few days, U.S. markets remain near record highs. Hopes of an interest rate cut have been a big factor in putting them there and new data from Bank of America suggests that investors are rushing back into equities. Their timing is suspect given the economic concerns in the U.S. and abroad, but timing the market is a fool's errand, anyway. Market highs and the prospect of future rate cuts attract investors like bears to honey, and they are swarming in.  What Are They Buying? Per BofA's survey of its clients, they are buying ETFs and equities in real estate, materials, and financials. Financials are a curious buy right now given the prospect of lower interest rates, which is not good for the business of banking, but that's what they are buying.
What Are They Selling? Technology, consumer discretionary, and healthcare stocks. Of these, technology has been out of favor for months given the uncertainty of the trade way. But health care and consumer discretionary have been on fire in 2019 given their immunity from the trade war and the strength of the consumer. Look no further than all-time highs for McDonald's, Coca-Cola, and Starbucks, and you'll get the point.  How Are They Feeling? According to the American Association of Individual Investors' survey—one our favorites—investors are feeling pretty non-committal about the outlook for the stock markets. About a third feel like things are getting worse, another third thinks they are getting better, and the rest are neutral. That doesn't stack up with the fund flows BofA is citing, but BofA surveys both retail and institutional clients. Institutional investors have to put money to work and we know they have been sitting on a lot of money in 2019, despite the stock market rally off of its late December lows. Retail investors are generally more passive, and invest through their 401k's and IRAs. They are usually the last in and the last out.  Branson's Space Dreams Richard Branson is taking his space exploration dreams to the public markets. Virgin Galactic, Branson's space-tourism venture, is preparing to go public in an effort to raise money to keep the company afloat until it can commercially operate and turn a profit. Per the WSJ, a special-purpose acquisition company (SPAC), is planning to invest roughly $800 million in Virgin Galactic for a 49% stake.
As part of the deal with Social Capital Hedosophia, a publicly traded shell, Virgin Galactic later this year would become the first publicly listed human-spaceflight company.
Virgin Galactic has already convinced 600 people to put down $80 million to secure a seat on a future Virgin Galactic space flight, but it will need a lot more reservations to boost this venture. An IPO and the $800 million from Social Capital Hedosophia will help too.
photo courtesy VirginGalactic.com 
chart courtesy www.koyfin.com  AMD rose more than 3% today as Nomura raised its price target for the company, based on analyst optimism around AMD's new desktop processing units.  Davita Healthcare Partners stock dropped more than 5% today after Politico reported that the Trump administration was looking to move kidney treatments into the home, and not into clinics. L Brands fell more than 4% today as the company's CEO's ties to Jeffrey Epstein resurfaced.  Word of the Day Monetary Policy vs. Fiscal Policy: What's the Difference Today's Term of the Day is a Tuesday Twofer. In an article the NYT reports that Central Banks, having kept interest rates low and held onto huge amounts of bonds and securities they once bought to prop up their economies, may not have many effective moves left, in the event of a recession. Central Banks are responsible for monetary policy. That leaves fiscal policy to address a recession. When a recession comes, it will be good to know the difference between the two forms of policy:
"Monetary policy and fiscal policy refer to the two most widely recognized tools used to influence a nation's economic activity. Monetary policy is primarily concerned with the management of interest rates and the total supply of money in circulation and is generally carried out by central banks, such as the U.S. Federal Reserve. Fiscal policy is a collective term for the taxing and spending actions of governments. In the United States, the national fiscal policy is determined by the executive and legislative branches of the government."  Today in History July 9th, 2019:
American businessman Ross Perot died at his home in Dallas of leukemia. He was 89. He was an Eagle Scout, a Navy officer, and a successful businessman, selling two IT companies. He was also one of the most unlikely presidential candidates ever.
He is survived by his wife, Margot; his son Ross Jr.; his four daughters Nancy, Suzanne, Carolyn, and Katherine; 16 grandchildren; three step-grandchildren; and his sister, Bette.
Here are some other former CEOs who ran (or are considering running) for President. Chart of the Day: Follow James As I wrote last week, James Chen, our fearless Chartered Market Technician, is taking over our Chart Advisor newsletter. It's one of our oldest and most loved newsletters for readers who love technical and fundamental analysis. James is a wizard and this newsletters is a must read, so please sign up here to get that every afternoon.
I'll still post interesting charts here from time to time, but if you want to go deep, follow James.
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Tuesday, July 9, 2019
Probability
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