Bear market for stocks already underway, recession coming, says Crescat Capital

on Feb27
by | Comments Off on Bear market for stocks already underway, recession coming, says Crescat Capital |

Investors are waking up to a rumble on the geopolitical front, as tensions heat up between two big nuclear powers, India and Pakistan.

See below for more details, and watch for Southern Asia unease to be used as an excuse for selling, something that has already been seen across global equities. Earnings disappointment and ever-present worries about the U.S. economy also get some credit for rattling investors Wednesday.

On that last point, Fed Chairman Jerome Powell heads back to Capitol Hill ahead of more data, as big banks struggle with the debate over whether the U.S. is headed for recession. J.P. Morgan’s CEO James Dimon reportedly told clients Tuesday they are bracing for a recession, just in case.

Doubts about the U.S. and global economy color our call of the day, from Octavio ‘Tavi’ Costa, Crescat Capital global macro analyst, who sees a recession coming, and thinks investors are blind to the fact the bear market for stocks has already started.

“In our view, September of 2018 marked the peak of the U.S. economic cycle. We are now seeing a typical bear market rally, and the next downward leg is likely to be just as abrupt as the first one,” Costa told MarketWatch in an interview. “It’s hard to pinpoint when exactly, but my best guess is between now and April.”

Costa, who says he’s shorting U.S. and global stocks, shared his “deck of charts,” which back up his concerns about the U.S. and global economies. Among them, is this one that shows the widest drop in consumer confidence expectations versus the present situation since the tech bust of the late 1990 early 2000. He notes that notes that every other such drop in the past 50 years has led to a recession.

Crescat Capital

He also highlights this next one, which shows more than a dozen major economies facing negative 30-year yield spreads vs. the fed-funds rate — a global yield-curve inversion. What that means is that short-dated bond yields are trading above long-dated ones — a move that has reliably predicted past recessions.

Costa says bear markets tend to develop in different ways, with a few lags and fairly aggressive moves before markets calm down again. He noted that January saw the third-largest drop in history for the VIX or the Cboe Volatility Index

VIX, +2.18%

which indicates investors are less fearful, but at the same time, a traditional haven in times of trouble, gold, was moving up.

Gold and precious metals are asset he likes right now, and he’s also shorting the yuan and Hong Kong dollar on the view that China is probably sitting on the biggest credit bubble in its history.

Costa’s last whack at the bulls comes through what he says is a metric for valuing stocks that is completely misleading investors right now. That is, the price/earnings ratio — a common metric for valuing share prices of a company relative to earnings per share. In fact, he says the S&P’s has the second-highest p/e ratio at a market peak before a recession going all the way back to 1871.

Opinion: Why gold won’t save your portfolio from inflation’s bite

The market


YMH9, -0.19%

 , S&P 500

ESH9, -0.20%

 and Nasdaq

NQH9, -0.24%

 futures are down. Trading was disrupted for a few hours late Tuesday owing to a technical glitch . Tuesday’s choppy session saw the Dow

DJIA, -0.13%

 , S&P 500

SPX, -0.08%

 and Nasdaq

COMP, -0.07%

log modest losses.

See Market Snapshot for more coverage

The dollar

DXY, -0.01%

is flat, while gold

GCJ9, +0.08%

 and crude

CLJ9, +2.14%

 are higher.

Geopolitical tensions dented Europe stocks

SXXP, -0.34%

while stocks in Asia ended mixed, with the Shanghai Composite

COMP, -0.07%

 and Nikkei

NIK, +0.50%

 both higher.

The quote

Supporters of Jamiat Talaba Islam chant slogans as they celebrate, after Pakistan shot down two Indian military aircrafts, in Lahore, Pakistan February 27, 2019.

“If this (situation) escalates, it will no longer be in my control or in (Prime Minister) Narendra Modi’s.” — That was Pakistan’s president and former cricket star Imran Khan in a televised statement, who added. “We invite you for dialogue… better sense must prevail.”

His comments come after Pakistan says it shot down two Indian jets and seized the pilots, Wednesday, a day after Indian warplanes bombed what they described as a terrorist camp on Pakistani soil. The whole mess started after a suicide attack that killed 40 Indian paramilitary officers nearly two weeks ago. Not helping are some videos circulating, allegedly showing that Indian pilot being roughed up. Trending on Twitter: #saynotowar.

The chart

Our chart of the day shows the very bad day Pakistan’s benchmark KSE 100 had Wednesday. It finished the day down about 2% with investors there clearly stressed out, while India’s BSE Sensex closed with a loss of just 0.3%.

The buzz

Chowing down

The Hanoi summit between POTUS and North Korean leader Kim Jong Un is underway, as the two shook hands and sat down to dinner in Vietnam. Among the highlights were the leader of the free world telling his counterpart that fewer nukes would help out North Korea a whole lot.

A day of indigestion awaits investors in the company formerly known as Weight Watchers. WW International

WTW, +0.61%

 warned on revenue, saying an early push to add members hasn’t gone so well and its key winter season got off to a soft start.


LOW, +0.02%

 post sales miss, says it will take a $1.6 billion charge and shares are down. Best Buy

BBY, -0.40%

 is soaring on blowout results. Results also rolling in from Dean Foods

DF, -1.09%

 , Campbell Soup

CPB, +2.01%

 and Chesapeake Energy

CHK, -0.38%

 . Square

SQ, +1.06%

 , Fitbit

FIT, +0.76%

 , HP

HPQ, -0.04%

 and Box

BOX, +0.54%

 are among the companies reporting after the close.

Ignoring a veto threat by POTUS, House Democrats (plus 13 Republicans), approved a bill blocking his emergency declaration over a border wall.

The economy

Delayed advanced trade in goods and durable goods orders are coming ahead of the open, with pending home sales and factory orders also on tap.

We’ll also get the second day of Fed Chairman Powell’s Capitol Hill testimony, in front of the House Banking Committee, which could be a little more heated than Tuesday’s.

Read: The current bubble could take 2 paths on this chart — one’s nastier than the other

Random reads

Former POTUS lawyer Michael Cohen gets ready to tell Congress that his former boss lied and cheated. Check out his full testimony here.

“Apocalyptic” blaze in West Yorkshire, U.K., amid the country’s record hot winter temps

Mystery school ‘pooper’ outed by police, suing after saying his life is ruined.

R. Kelly fans shut down from trying to raise funds for singer via GoFundMe

“Fortnite” stole our dance moves, say former basketball players

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