Thursday, August 17, 2017

The Morning Call--If everything is so awesome why are the Fed and ECB dovish?

The Morning Call

8/17/17

The Market
         
    Technical

The indices (DJIA 22024, S&P 2468) had a volatile day but ended modestly to the upside.  Volume fell; breadth improved.  The upward momentum as defined by the Averages’ 100 and 200 day moving averages and uptrends across all timeframes remains intact.  At the moment, technically speaking, I see little to inhibit their challenge of the upper boundaries of their long term uptrends---now circa 24198/2763. 

The VIX (11.7) declined another 2 ¼ %, closing (1) below its 100 day moving average [now support]; if it remains there through the close on Friday, it will revert back of resistance but (2) above its 200 day moving average [now support].  If the VIX confirms its descent below the 100 day moving average and further pushes below its 200 day moving average, then clearly, the next resistance level is the former low.  However, I leave open the questions as to whether the VIX made or is making some kind of bottom extending back to late July and if I was premature resetting of the intermediate term from trading range to downtrend. 

                And:

The long Treasury rebounded, ending above its 100 and 200 day moving averages (both support), the lower boundaries of its short term trading range and its long term uptrend.  That is a lot of support. 
           
The dollar retreated, closing in a short term downtrend, below its 100 and 200 day moving averages and failed to make a new higher high.  Let’s see what happens when it challenges its recent higher low.
           
 GLD moved up, finishing above the lower boundary of its very short term uptrend and its 100 and 200 day moving averages (both support). 

Bottom line: the indices fought through the hysteria over the Trump gaff and another confusing set of FOMC minutes---which is a pretty heavy load to overcome.  So any thoughts of weakening upside momentum is probably a waste of time.  That said, volume and the pin action in bonds, the dollar and gold continue to point to economic weakness.

    Fundamental

       Headlines

            There were only a couple of datapoints released yesterday:  weekly mortgage and purchase applications as well as July housing starts were disappointing.

            Overseas, second quarter EU GDP grew 0.6%, in line and the IMF raised its estimate for 2017 Chinese GDP growth.

In addition, rumors are that Draghi will not signal a policy change in his upcoming speech in Jackson Hole.   ***which were confirmed overnight by the release of dovish ECB meeting minutes.

            ***overnight, July UK retail sales were stronger than anticipated.

            The Fed released the minutes from its last FOMC meeting.  As usual, there was the obligatory ‘on the one hand, on the other hand’ dialectic---a veritable smorgasbord of gems for both hawks and doves to hang on to.  Indeed, reading and listening to the official media analysis of the minutes, there were both dovish and hawkish conclusions.  However, the most important indicator for me is the futures market; and they were basically unchanged as to the likelihood of future Fed tightening.  In short, nothing new.  My bet is that the Fed will remain more dovish than generally expected---but that is one man’s guess.

            How central banking increases income inequality (medium):

            The level of negative yielding global debt surges……but, but everything is awesome. (short):

            Of course, none of this mattered (not that the Fed minutes should have anyway) to the media which remained focused on Trump’s Wednesday clash with reporters as well as the disbanding of two presidential advisory councils.  I have no idea how long this bull baiting goes on; but I suspect that as long as it does, it will hamper efforts to accomplish healthcare and tax reform and infrastructure spending. 
           
            Bottom line:  yesterday’s poor data, the Fed’s indecision and the Draghi rumor of no forthcoming policy change seemed to keep investors hopeful that QEInfinity will last at least a little bit longer.

            The positive stats out of the EU and Chinese economies apparently left investors unconcerned, which is understandable since so far any improvement in the global economy hasn’t shown up in our numbers. 

Nor was anyone worried about the latest episode of the Trump reality TV series.  After all, the worst thing that could happen, economically speaking, is nothing, i.e. gridlock.  As you know my preferred legislative scenario has long been gridlock.  God only knows how much better off this country would be if we had had it the last sixteen years.  To be sure that lowers the odds of healthcare and tax reform and infrastructure spending.  But in the absence of healthcare reform, my biggest worry has been our political class blowing the budget apart by nonrevenue neutral taxing and spending measures.   So from an economic policy point of view, while this intensified political acrimony could result in less than hoped from fiscal policy revisions but it also means our ruling class won’t be able to do anything stupid.

The one potentially bothersome outcome would be further degeneration in the political dialogue that spawns more violence and further rents the social fabric of this country.
           
Earnings update (short):

            My thought for the day: sometimes doing nothing is better than doing something.  But nothing is the enemy of the financial community---it generates no fees or commissions but does generate taxes and trading frictions.  Doing nothing is bad for business. Doing something because your broker says that you should is not a good reason.  I only do something when my discipline, which establishes buy and sell prices well in advance, calls for it.  That is why there are so few times you get a Subscriber Alert announcing any action on my part.

       Investing for Survival

            This is a bit long; but it deals with an important issue in investing---not losing money.

   

    News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

            Weekly mortgage applications rose 0.1% while purchase applications declined 2.0%.

            Weekly jobless claims fell 12,000 versus consensus of down 4,000.

            The August Philadelphia Fed manufacturing index came in at 18.9 versus expectations of 17.0

   Other

            More on auto loans (medium):

Politics

  Domestic

Presented with no comment (short):

  International War Against Radical Islam


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Wednesday, August 16, 2017

The Morning Call--The increasingly poisonous political atmosphere

The Morning Call

8/16/17

The Market
         
    Technical

The indices (DJIA 21998, S&P 2464) were mixed yesterday, failing to follow through with Monday’s pop.  Volume was up slightly; breadth was mixed.  Nonetheless, the upward momentum as defined by the Averages’ 100 and 200 day moving averages and uptrends across all timeframes remains intact.  At the moment, technically speaking, I see little to inhibit their challenge of the upper boundaries of their long term uptrends---now circa 24198/2763. 

The VIX (12.0) fell 2 ½ %, but still closed above (1) its 100 day moving average [now support] and (2) its 200 day moving average for the fourth day, reverting to support.  The absence of follow through was a bit surprising; though clearly it could happen anytime.  Still the key levels to watch for a hint of a change in momentum are the 100/200 day moving averages on the downside and the upper boundary of its short term downtrend on the upside.  I leave open the questions as to whether the VIX made some kind of bottom back in late July and if I was premature resetting of the intermediate term from trading range to downtrend. 

The long Treasury declined a second day, but ended above its 100 and 200 day moving averages (both support), the lower boundaries of its short term trading range and its long term uptrend.  That is a lot of support. 
           
The dollar was up, but still closed in a short term downtrend and below its 100 and 200 day moving averages.  Nonetheless, it has made a lower high after bouncing off the lower boundary of a short term trading range.  That said, it tried to make a higher high yesterday but failed.
           
 GLD declined, but still finished above the lower boundary of its very short term uptrend and its 100 and 200 day moving averages (both support). 

Bottom line: the indices lost most of Monday’s momentum while volume, breadth and the pin action in bonds, the dollar and gold mildly followed through with Monday’s pin action.  But they did so with little conviction.  Follow through.

    Fundamental

       Headlines

            Yesterday’s economic stats were mixed: on the positive side, the August housing market index, the August NY Fed manufacturing index (a blowout number), July import/export prices and most importantly, July retail sales (primary indicator) which were strong; the negatives were month to date retail chain store sales and the June business inventories/sales.

            Update on big four economic indicators (medium):

            ***overnight, the ECB floated a trial balloon that suggested that in his upcoming Jackson Hole speech would not mention in monetary policy changes.

            Politics held the headlines:

(1)   Un seemingly altered the direction of the North Korea/US saber rattling.  Any lessening in tensions is clearly a plus for the economy and the Market.  Let’s hope this nonsense is over; though I wouldn’t bet money on it,

(2)   Trump held, what turned out to be, a bombastic press conference.  Most of the press ignored the announcement of reductions in regulations, in this case, easing the permitting process for infrastructure projects.  I have made a point of praising the Donald’s deregulation emphasis and even raised my long term secular economic growth rate assumption because of it.  This latest move is yet another step.

Unfortunately, this was all drowned out by a heated exchange over who is to blame for the tragic incident in Charlottesville and the timing related to Trump’s response.  I am having flashbacks to Nixon and the press after the Watergate break in.   That was not a pleasant time in this country.  Little got done by way of legislation [think healthcare and tax reform and infrastructure legislation] and the overall mood of the country was as dark as it has been in my lifetime.  If this dog fight continues, there will be no winner.

       ***starting today, representatives of NAFTA nations convene to begin modernizing the trade treaty.

Bottom line: Trump’s move to speed up infrastructure spending by streamlining the regulatory process that was subsumed by the fireworks over what happened at and following events in Charlottesville.   While the latter won’t change the positive economic impact of the former, it only adds to the contentious political dialogue in this country which I fear will have an effect on the Trump/GOP fiscal reform program.  And frankly, I am less worried about that than I am about the increasingly poisonous political atmosphere in this country.  Whoever you want to blame, it is not a plus for the economy or the Market.

            My thought for the day: I haven’t discussed diversification of late.  This is one of the most important investing disciplines because it is a primary avenue to risk reduction.  In short, an investor shouldn’t have his/her net worth overly exposed to a single stock/bond, etc.  It is best accomplished by including stocks, bonds and cash in the portfolio.  Then further, there should be a group of securities within the first two categories; and those securities should be diversified by industries.  I try to keep an initial position size to 3% of the portfolio, though there are studies that show a ten holdings (10% positions) provides most of the diversification one needs.  Finally, if a portfolio is too small to make such diversification economic, there are many, many exchange traded funds that can provide it at a very low cost.

       Investing for Survival
   
            The price of being all in or all out.

    News on Stocks in Our Portfolios
 
3M (NYSE:MMM) declares $1.175/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

            Month to date retail chain store sales advanced slower than the prior week.

            June business inventories rose 0.5% versus expectations of up 0.4%; however, sales only grew 0.3%.

            The August housing market index came in at 68 versus estimates of 65.

            July housing starts fell 4.7% versus forecasts of a 0.8% rise while building permits declined 4.0% versus projections of down 0.6%.

   Other

            Household debt and credit report (medium):

            On the other hand (short):

            More on theft of US intellectual property by the Chinese (medium):

Politics

  Domestic

  International War Against Radical Islam

            The head of Mossad on Iran (medium):


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 The 

Tuesday, August 15, 2017

The Morning Call--Un blinks

The Morning Call

8/15/17

The Market
         
    Technical

The indices (DJIA 21993, S&P 2465) regained some of their lost euphoria yesterday.  However, volume was flat; breadth improved but not as much as the price move in the Averages would suggest.  Nonetheless, the upward momentum as defined by the Averages’ 100 and 200 day moving averages and uptrends across all timeframes remains intact.  At the moment, technically speaking, I see little to inhibit their challenge of the upper boundaries of their long term uptrends---now circa 24198/2763. 

The VIX (12.3) plunged 20%, closing back below the upper boundary of its short term downtrend, negating last Thursday’s break.  However, it remained (1) above its 100 day moving average for the third day, reverting to support and (2) above its 200 day moving average for the third day [if remains above it at today’s close, it will revert to support].  That said, given the magnitude of yesterday’s decline, there is probably better than even odds that there is more downside to come.  I leave open the question as to whether the VIX has made some kind of bottom and the resetting of the intermediate term from trading range to downtrend was premature. 

The long Treasury declined slightly, but ended above its 100 and 200 day moving averages (both support), the lower boundaries of its short term trading range and its long term uptrend.  That is a lot of support. 
           
The dollar inched higher, but still closed in a short term downtrend and below its 100 and 200 day moving averages.
           
 GLD was up fractionally, finishing above the lower boundary of its very short term uptrend and its 100 and 200 day moving averages (both support). 

Bottom line: while the indices bounced hard, volume, breadth and the pin action in bonds, the dollar and gold did not reflect the same degree of enthusiasm.  Maybe they will catch up or…………maybe they won’t.  Follow through.

            If you think last week’s decline was a disaster, you are in the wrong line of work (medium):

            Yesterday in charts (short):

            Broadening internal dispersions (medium):

    Fundamental

       Headlines

            There was no economic datapoints released.  But there will be a number of primary indicators reported this week---retail sales, housing starts and industrial production.  So it will an informative week, economically speaking.

            With respect to fiscal policy, Trump signed a China trade memorandum; the gist of which was to appoint someone to investigate whether or not China is violating trade agreements.  So this was a baby step, but a step nonetheless.  I have already opined that while I am concerned about an overly eager pursuit of adjusting our trade balance, I have been concerned for a long time about the Chinese theft of American intellectual property.  So some good can come of pressing the Chinese on this issue.

            On the monetary front, we got these somewhat hawkish comments from the normally dovish NY Fed head (medium):

            Overseas, the data was mixed:

(1) Japan reported second quarter GDP, business spending and private consumption above expectations,

(2) while China announced retail sales and industrial production below estimates,

(3) in addition, four Arab countries imposed sanctions on Qatar,

(4) the US/North Korean rhetoric cooled a bit which apparently brought some relief to Market participants.  However, I would point out that overvalued equities are still overvalued whether somebody lobs a missile or Un and Trump kiss and make up.  All the Korean/US confrontation represented was a potential spark.  It had nothing to do with the tender---which is a grossly overvalued Market. (medium):

            ***overnight:
           
            Bottom line: Trump continues to use his mouth create obstacles to successfully accomplish his healthcare and tax reforms as well as infrastructure spending.  In other words, the hopes of lifting the long term secular economic growth rate of this country is fading. 

Meanwhile, the Fed doesn’t know whether to s**t or go blind.  All its happy talk about how great the economy is, is belied by its own dovish policy.  The excesses of its QEInfinity policy will sooner or later have to accounted for.  When that occurs, I have no clue. 

Finally, equities are overvalued.  I am very happy with the cash in my Portfolios.

More on valuation (medium):

            Corporate buybacks shrinking (medium):

            The latest from Doug Kass (medium):

            My thought for the day: just because your portfolio is performing well, investing is still a battle---everyday.  Investors have to have a strict investment discipline that remains in place whether the investor is winning or losing---which will happen inevitably.  When he/she does so, the outcomes will take care of themselves.

       Investing for Survival
   
            You don’t have to play.

        
    News on Stocks in Our Portfolios
 
Home Depot (NYSE:HD): Q2 EPS of $2.25 beats by $0.04.
Revenue of $28.1B (+6.2% Y/Y) beats by $300M.


Economics

   This Week’s Data

            July retail sales rose 0.6% versus expectations of up 0.3%.

            The August NY Fed manufacturing index came in at 25.2 versus estimates of 9.8.

            July import prices increased 0.1%, in line; export prices were up 0.4% versus forecasts of up 0.2%.

   Other

            Quote of the day (short):

            Update on auto loans (medium);

Politics

  Domestic

  International War Against Radical Islam


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Monday, August 14, 2017

Monday Morning Chartology

The Morning Call

8/14/17

The Market
         
    Technical

            The selloff in the S&P took it below its former high (the Dow did not).  That is a very minor negative in the scheme of things---it remains above its moving averages and in uptrends across all timeframes.



            The long Treasury continued its upward march, undoubtedly aided by the weak PPI and CPI numbers (lower inflation means lower interest rates, a weaker economy and likely an easier Fed).  Notice it made a higher low and a higher high last week---a good sign of trend momentum.



            The dollar continued its downward track.  As you can see, it made another lower high, keeping the momentum lower.




            Gold’s chart further improved last week---bouncing of its 100 day moving average and resetting its very short term uptrend.  However, it has reached a critical technical level---the upper boundary of its short term trading range.  GLD challenged it once before, unsuccessfully.  If it can make a clear break, that probably means that the S&P and the dollar will continue to fall, while the VIX and TLT will rise.



            Reflecting the drop in the S&P, the VIX soared last week.  It closed above its 100 day moving average (if it remains there through the close today, it will revert to support), its 200 day moving average (if it remains there through the close tomorrow, it will revert to support) and the upper boundary of its short term downtrend (if it remains there through the close tomorrow, it will reset to a trading range).  Notice that I added a minor resistance level (green line), which the VIX penetrated on Friday, but couldn’t hold above.  That is the best short term guidepost that we have, that is, if the VIX busts through it, the next resistance level is considerably higher (circa 23).  If it retreats from here, that likely means that the Market sell off is over.



    Fundamental

       Headlines

Last week’s economic data was tough to interpret: it was slightly weighed to the upside and that included one primary indicator (productivity).  However, the lower PPI and CPI numbers are subject to one’s own bias.  On the one hand, they clearly give the Fed room to stay easier longer (a plus for the Market?) and keeps inflation out of our lives.  On the other hand, they point to a weaker economy, suggesting slower corporate profit growth and an excuse for the Fed to perpetuate QE (a negative for the economy).  Since (1) I am measuring the economy and not the Market in this exercise and (2) the Market did not respond positively to those stats, I am going to rate them as negative which makes the week a wash: in the last 96 weeks, twenty-nine were positive, fifty-two negative and fifteen neutral. 

            The political news was dominated by the school boy, ‘mine is bigger than yours rhetoric’ between North Korea and US, i.e. the Donald.  As you know, I think this a very dangerous strategy for Trump in the sense that it could spawn a ‘Branch Davidian’ type response from Un, i.e. ‘f**k it, we are all going to die sooner or later, I am ready to go down in a blaze of glory’.

            Bottom line, nothing in the numbers to alter our ‘struggling economy’ forecast.  Trump needs to shut up.  I am pleased with our Portfolios’ cash position.

            More fodder for the bulls (short):

       Investing for Survival
   
            The math problem with buy and hold.
           
    News on Stocks in Our Portfolios
 
VF Corporation (NYSE:VFC) acquires global workwear company Williamson-Dickie Mfg. for ~$820M.

Economics

   This Week’s Data

   Other

Politics

  Domestic

  International

            China imposes sanctions on North Korea (short):

            Afghanistan = Vietnam?

           



Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Saturday, August 5, 2017

The Closing Bell

The Closing Bell

8/5/17

We are off in search of cooler temperatures.  Back on 8/14.

Statistical Summary

   Current Economic Forecast
                       
2016 actual

Real Growth in Gross Domestic Product                          1.6%
Inflation (revised)                                                              1.6%                     Corporate Profits (revised)                                                     4.2%

2017 estimates (revised)

Real Growth in Gross Domestic Product                      -1.25-+0.5%
                        Inflation                                                                         +.0.5-1.5%
                        Corporate Profits                                                            -15-0%



   Current Market Forecast
           
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Uptrend                                 20625-23139
Intermediate Term Uptrend                     18586-25837
Long Term Uptrend                                  5751-24198
                                               
                        2016    Year End Fair Value                                   12600-12800

                        2017     Year End Fair Value                                   13100-13300

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                     2413-2715
                                    Intermediate Term Uptrend                         2208-2982
                                    Long Term Uptrend                                     905-2763
                                               
                        2016   Year End Fair Value                                      1560-1580
                       
2017 Year End Fair Value                                       1620-1640         

Percentage Cash in Our Portfolios

Dividend Growth Portfolio                          59%
            High Yield Portfolio                                     55%
            Aggressive Growth Portfolio                        55%

Economics/Politics
           
The Trump economy is providing an upward bias to equity valuations.   By volume, the data flow this week was weighed to the positive: above estimates:  June pending home sales, month to date retail chain store sales, the July ADP private payroll report, weekly jobless claims, July nonfarm payrolls, July factory orders, the July Markit manufacturing and services PMI, the July ISM manufacturing index, the Dallas Fed manufacturing index and the June trade deficit; below estimates: weekly mortgage and purchase applications, June personal income, July light vehicle sales, July retail chain store sales, June construction spending, the July ISM nonmanufacturing index, the July Chicago PMI; in line with estimates: June personal spending.

Still, the primary indicators were slightly negative: June personal income (-), June construction spending (-), July retail chain store sales (-), June personal spending (0), July factory orders (+) and July nonfarm payrolls (+).    Given this week’s data end up basically mixed---stronger overall data, but weaker primary indicators---I score this week a neutral: in the last 95 weeks, twenty-nine were positive, fifty-two negative and fourteen neutral. 

Overseas, the numbers were upbeat with more good news out of Europe.  That has been a good news story of late. 

On fiscal policy, little was done.  The house is already on summer break, the senate left yesterday.  However, the flow of promises didn’t abate.  We are being assured of tax reform and infrastructure spending when our ruling class returns in the fall.

Two other items worth mentioning:

(1)   trade sanctions have become the most popular weapon of choice in dealing with adversaries: congress sanctions Russia, Trump sanctions the Venezuelan president and threatens sanctions against China.  Penalties may be justified and sanctions may work.  But I worry about overusing trade sanctions as a political bludgeon because it could lead to escalating trade wars.  History [Smoot Hawley] has shown us that is not a plus for economic growth.

(2)   special counsel Mueller has empaneled a grand jury.  This all the potential gripping the political and chattering classes with such force that it could likely not only delay/deter enactment of any of the Trump/GOP fiscal plan but also could lead to serious domestic turmoil.  This is not a forecast; it is a concern.

Bottom line: this week’s US economic stats were mixed, confirming the pattern for the last 18 months---the economy struggling to keep its head above water.  Even so, most of the securities indices reacted to Friday’s jobs number as though it were a clarifying datapoint, pointing to a stronger economy/higher interest rates.  I would counter that employment is a lagging indicator; so its value as a sign of a trend change is more likely to be as an inverse versus a coincident/leading marker.  In other words, strong employment is more likely the sign that an expansion is nearer its end than its beginning.  Supporting that notion is the weekly score I record every week which has given no sign that the economy is improving 

Longer term, I remain confident in my recent upgrading our long term secular growth rate assumption by 25 to 50 basis points based on Trump’s deregulation efforts.  However, the DC fascination with trade sanctions is turning an initial positive into a negative.  In addition, any further increase in that long term secular economic growth rate assumption stemming from enactment of the Trump/GOP fiscal policy is still on hold as they struggle to get anything done.

Our (new and improved) forecast:

A positive pick up in the long term secular economic growth rate based on less government regulation.  This increase in growth could be further augmented by pro-growth fiscal policies including repeal of Obamacare, tax reform and infrastructure spending; though the odds of that are uncertain. 

 Short term, the economy has seemingly lost its post-election Trump momentum meaning that our former recession/stagnation forecast is back as the current expansion seems to be dying of old age.

It is important to note that this forecast is made with a good deal less confidence than normal; so it carries the caveat that it will almost surely be revised.
                                               

                        Update on big four economic indicators.

       The negatives:

(1)   a vulnerable global banking system.  

Wells is at it again (medium):


EU banking system dysfunction gets even worse (medium):

US banks now lobbying to lower capital requirements (medium):

In spite of the freebee they get from the Fed (medium):

(2)   fiscal/regulatory policy.  This week: 

[a] with the house on summer break, little was accomplished on the legislative front or will likely get done in the next two months with the senate leaving for its summer break.  That didn’t keep the GOP from running out spokesperson after spokesperson assuring us that tax reform and infrastructure spending will be enacted by year end.  We can only hope---as long as they don’t bust the budget wide open in the process

[b] it also didn’t mean that the Donald was unoccupied.

{i} first, Trump signed the Russian sanctions bill passed earlier by congress.  As you know, I believe that the Russian weren’t guilty of anything that the US hasn’t done.  I am not suggesting that they get off scot free; but with the global economy limping along at best, the last thing it or the US needs in a trade war (see below).  Unfortunately, Trump was trapped into signing this as a result of his Russian connection/Comey firing problems,

{ii} Trump finally decided to take action against the Chinese on the issue of theft of American intellectual property---he appointed a group to study the issue and accompanied it with a threat of trade sanctions.  This is one of those issues in trade where I think that the Chinese pirating is pretty well known, generally agreed upon and costly to the US---one of our biggest exports is technology/technology related products.  Hence, I think that this move is justified.  The Chinese verbally reacted quite negatively; though we will have to wait for what they will do. 

All this said, if these actions prompt some sort of trade war, that is not going to be a plus for global economic growth; and ultimately could impact our economic outlook.

{iii} further, Trump took action on the immigration front, introducing a bill that radically changes our law.  On the whole, it seems a good place to start congressional negotiations.

        Counterpoint:

[c] meanwhile, below the radar, Trump is making a mark on our judicial system---which may be just as important as tax reform.


(3)   the potential negative impact of central bank money printing:  The key point here is that [a] the Fed has inflated bank reserves far beyond any comparable level in history and [b] while this hasn’t been an economic problem to date, {i} it still has to withdraw all those reserves from the system without creating any disruptions---a task that I regularly point out it has proven inept at in the past and {ii} it has created or is creating asset bubbles in the stock market as well as in the auto, student and mortgage loan markets.  

The Fed was quiet this week; though in the Treasury Borrowing Advisory Committee’s [an advisory body to the Fed] latest report, it outlined how disruptive the Fed’s balance sheet normalization is apt to be.  The Fed really didn’t need to be told that; their actions have shown that they know the problem that they have created.  But now they are on notice---and with no good alternatives.

The Bank of England met on Thursday, leaving monetary policy unchanged and lowering its forecast for 2017 and 2018 GDP growth.  That makes it unanimous.  QE for everyone.

(4)   geopolitical risks: this matter is starting to make me nervous. 

[a] first, the US imposes sanctions on the Russian for alleged interference in our elections and their aggression against Ukraine.  I don’t understand sticking your finger in the Russian’s eye when {i} the US has not only interfered in countless elections but instigated the assassination attempts of political leaders (think Castro, Diem) and {ii} Russia was responding to a CIA instigated coup of a duly elected pro-Russian president in Ukraine.  I am not suggesting that we allow Russia to do as it pleases.  But to antagonize them then feign outrage at their reaction is not productive or in the long term interest of peace or trade.

[b] second, North Korea is run by a punk and his cabal.  Yes, he has nukes; and yes, we need to be sure that he understands that an attack on the US means certain annihilation of his country.  But ramping up public hostility, in my opinion, makes it more likely that North Korea will make a mistake that puts the US in greater risk than it otherwise would be.

I am not trying to fear monger war; but I do think that Trump’s aggressive attitude toward foreign opposition is overdone and increases the risk of a costly misstep.

(5)   economic difficulties around the globe.  This week, the stats continued upbeat out of Europe and mixed out of China.

[a] the July EU and UK manufacturing PMI’s were above forecasts; but the Bank of England lowered its 2017/2018 GDP growth estimates,

[b] the July Chinese manufacturing and services PMI’s were below estimates; but the July Caixin services and manufacturing PMI’s, {another measure of the Chinese economy} were better than forecast.
               
Oil remains a factor in global economic health and its price continued its roller coaster ride.  This week, {i} the Gulf States doubled down on the sanctions against Qatar and {ii} chaos escalated in Venezuela as Trump imposed sanctions (this word is getting far too much use of late) on the country’s president. The point here is that [a] since energy is a major component of production, its price usually has a significant impact on economic growth, [b] I don’t think that the future for oil prices is all that clear and [c] lower prices have proven not to be an ‘unmitigated positive’. 

In sum, our outlook remains that the European economy is out of the woods while China is struggling to do the same.  My belief is that this will eventually positively impact the US economy.

            Bottom line:  our near term forecast is that the US economy is stagnating despite, an improved regulatory outlook and a now growing EU economy. These two factors should have a positive impact on US growth though there is scant evidence of it to date. Further, if Trump/GOP were to pull off a (near) revenue neutral healthcare reform, tax reform and infrastructure spending on a reasonably timely basis, I would suspect that sentiment driven increases in business and consumer spending would return.  On the other hand, whether justified or not, the Donald’s recent actions against Russia, China and Venezuela increase the likelihood of some sort of trade war.  I needn’t remind you that one of the major factors causing the Great Depression was the institution of the Smoot Hawley trade barriers. 

For the long term, the Donald’s drive for deregulation and improved bureaucratic efficiency is a decided plus.  As you know, I inched up my estimate of the long term secular growth rate of the economy because of it. 

The Market-Disciplined Investing
         
  Technical

The indices (DJIA 22092, S&P 2474) were back in sync yesterday, largely on a better than expected jobs report (stronger economy, higher rates).  Volume was down.  Breadth was mixed but remained strong and within overbought territory.  The upward momentum as defined by the Averages’ 100 and 200 day moving averages and uptrends across all timeframes remains intact.  At the moment, technically speaking, I see little, except for the VIX, to inhibit their challenge of the upper boundaries of their long term uptrends---now circa 24198/2763. 

The VIX (10.0) fell 4 %.  It finished above back below the lower boundary of its former intermediate trading ranges but is still above the lower boundary of its former long term trading range.  As you know, I reset these trends to down but raised the question as to whether the VIX had made some kind of bottom.  I think that it remains a debatable point as the VIX continues to vacillate above and below those former trading range boundaries.

The long Treasury declined, but ended above its 100 and 200 day moving averages (both support), the lower boundaries of its short term trading range and its long term uptrend.  That is a lot of support.  So unless TLT starts breaking those support levels, I am assuming that Friday’s soft price performance is not something about which to be concerned.
           
The dollar popped to the upside, but still closed in a short term downtrend and below its 100 and 200 day moving averages.

 GLD was down, finishing below the lower boundary of its very short term uptrend but remained above its 100 and 200 day moving averages (both support). 

Bottom line: all the indicators responded as would be expected to the strong nonfarm payroll number and its economic implications (stronger economy, higher interest rates): (1) all the equity indices were up; of course, the Dow has been reflecting that scenario all along and (2) TLT and GLD were down and the dollar up.

As I often note, one day does not a trend make.  Plus, the only sign of any possible trend reversal was GLD’s falling below the lower boundary of its very short term uptrend.  I await follow through before considering that the ongoing divergences have been resolved.

Fundamental-A Dividend Growth Investment Strategy

The DJIA (22092) finished this week about 69.5% above Fair Value (13032) while the S&P (2476) closed 53.7% overvalued (1610).  ‘Fair Value’ will likely be changing based on a new set of regulatory policies which has led to improvement in the historically low long term secular growth rate of the economy (though its extent could change as the effects become more obvious); but it still reflects the elements of a botched Fed transition from easy to tight money and a ‘muddle through’ scenario in Japan and China.

The US economic stats continue to point to a weak economy.  If I am correct about the economy slowing/stagnating, short term that means Street economic growth forecasts will begin declining.  The question is when; and more important from a Market standpoint, given investor proclivity for interpreting bad news as good news, whether they will even care.  I can’t answer that latter issue except to say that someday, bad news will be bad news; and mean reversion will likely occur.

With the house already on summer break and senate leaving this weekend, not much is going to get done legislatively.  But Washington remains a busy place.  First, both Trump and GOP senators are out promising that tax reform and infrastructure spending are being hammered out among congressional leadership and that they will be much easier to pass than healthcare reform.  OK.  I hope that is right. 

But the general atmosphere in DC is one of extreme acrimony.  And it is going to get worse, if all the investigations into Trump’s Russian connection and Hillary’s emails gain momentum.  I am not saying tax reform and infrastructure spending won’t occur.  I am just pointing out that the normally ugly legislative process may be a bit more ugly if the aforementioned investigations lead to charges. That would not be a plus for investor sentiment.

In addition, sanctions were flying right and left---Congress enacting Russian sanctions and Trump imposing sanctions on the Venezuelan president and threatening more to come as well as instituting actions that could lead to sanctions against the Chinese over the theft of US intellectual property.  To be clear, there is a decent rationale for all of these actions; and it could be that they will have the desired effect on each one’s behavior.  But if they don’t, what then? 

What bothers me is that combined, they suggest a pattern by our political class that sanctions are a great tool to use to impose pain against any country that doesn’t act in what they believe is an acceptable manner.  Singularly, that is probably right.  I am worried about the collective impact; that is, if a single party retaliates, it is not apt to affect us all that much.  However, getting at odds with both the Russians and the Chinese could have a cumulative impact.  Further, the Europeans are upset about our actions against the Russians.  So add them to the list.  The point is that we can’t keep upsetting trade relations with multiple parties because cumulatively it could prove economically painful for us.  Don’t forget that one of the causes of the Great Depression was the passage of the Smoot Hawley tariff bill.   And don’t forget the subsequent Market’s pin action.

Finally, the central banks continue to confuse, obfuscate and pursue a policy that has destroyed price discovery---and it is being done not to have some potential positive effect on the economy, but to avoid a Market hissy fit.  Not something that I believe is in the best long term interests of the economy or the Markets.    As you know, I have long time believed that the loss of faith in or the dismantling of QE will result in correcting the mispricing and misallocation of assets; and that most assuredly will not be a plus for equity prices.

Net, net, my biggest concern for the Market is the unwinding of the gross mispricing and misallocation of assets caused by the Fed’s (and the rest of the world’s central banks) wildly unsuccessful, experimental QE policy.   While I am encouraged about the changes already made in regulatory policy, fiscal policy remains a mess.  Whatever happens, stocks are at or near historical extremes in valuation, even if the full Trump agenda is enacted; and there is no reason to assume that mean reversion no longer occurs.

Bottom line: the assumptions on long term secular growth in our Economic Model are beginning to improve as we learn about the new regulatory policies and their magnitude.  Plus, there is a tiny ray of hope that fiscal policy could make progress though its timing and magnitude are unknown.  I continue to believe that the end results will be less than the current Street narrative suggests---which means Street models will ultimately will have to lower their consensus of the Fair Value for equities. 

Our Valuation Model assumptions are also changing as I raise our long term secular growth rate estimate.  This will, in turn, lift the potential ‘E’ component of Valuations; but there is a decent probability that short term this could be at least partially offset by the reversal of seven years of asset mispricing and misallocation.  In any case, even with the improvement in our growth assumption, the math in our Valuation Model still shows that equities are way overpriced.

                As a long term investor, with equity valuations at historical highs, I would want to own cash in my Portfolio and would use the current price strength to sell a portion of your winners and all of your losers.
               

DJIA             S&P

Current 2017 Year End Fair Value*              13200             1630
Fair Value as of 8/31/17                                  13032            1610
Close this week                                               22092            2476
Over Valuation vs. 8/31
             
55%overvalued                                   20199              2495
            60%overvalued                                   20851              2576
            65%overvalued                                   21502              2656
            70%overvalued                                   22154              2737


* Just a reminder that the Year End Fair Value number is based on the long term secular growth of the earning power of productive capacity of the US economy not the near term   cyclical influences.  The model is now accounting for somewhat below average secular growth for the next 3 to 5 years. 

The Portfolios and Buy Lists are up to date.


Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973.  His 47 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies.  Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.