Friday, December 9, 2016

The Morning Call--Santa Claus is coming to town

The Morning Call

12/9/16

The Market
         
    Technical

The indices (DJIA 19614, S&P 2246) continued their upward moment on huge volume.  Breadth weakened slightly, but remains solidly in overbought territory.   The VIX (12.4) rallied in the second up day in a row, but remained below its 200 day moving average (now resistance) below its 100 day moving average (now resistance) and within a short term downtrend.  This pin action suggests that investors are as busy buying insurance as they are buying stocks, a sign of waning confidence.


The Dow ended [a] above on its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {18150-20200}, [c] in an intermediate term uptrend {11613-24463} and [d] in a long term uptrend {5541-20148}.

The S&P finished [a] above its 100 day moving average , now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2118-2462}, [d] in an intermediate uptrend {2000-2602} and [e] in a long term uptrend {881-2419}. 

The long Treasury (118.9) fell 1%, closing below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below a key Fibonacci level and in a very short term downtrend.  The question remains, will it challenge the lower boundary of its short term trading range (117.3) and the lower boundary of its intermediate term trading range (115.3) or is it attempting to build a base?   (maybe both?) Too soon to know.

GLD fell, ending below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below the lower boundary of its short term downtrend and back below at a key Fibonacci level---but barely.  That leaves open the question as to whether or not it is stabilizing.

The dollar popped, finishing right on the upper boundary of its short term trading range.  So the challenge of that boundary is back on.  It remains in a strong very short term uptrend and well above its 100 and 200 day moving averages.

Bottom line: the upside momentum continues.  Supported by incredible volume and very strong breadth, the indices seem increasingly likely to challenge the upper boundaries of their long term uptrends---with the caveat that the extraordinary volume could be a sign of a speculative blow off.

Yesterday’s pin action in TLT, GLD and the dollar was a bit of cognitive dissonance in the midst of their attempts to stabilize following big directional moves.  Follow through.

            The incredible shrinking life of Market crashes (short):


    Fundamental

       Headlines

            Yesterday was another slow one for US economic releases.  Just a single datapoint---weekly jobless claims declined less than expected.

            Overseas, things were a bit more lively.  November Chinese exports and imports improved slightly and revised third quarter Japanese GDP was much lower than originally reported.

            ***overnight, November Chinese PPI was much stronger than anticipated while CPI was up slightly.

In addition:

(1)   the British parliament voted to proceed with Brexit by March 31, 2017.  I have opined that I couldn’t imagine a country reclaiming its sovereignty as a negative.  Of course, that is a political judgment, not an economic one.  As to the latter, there are lots of opinions, ranging from dire too optimistic about the Brexit’s impact.  I don’t think that anyone has a clue about what the economic effects will be.  But the point here is that this shouldn’t be dismissed until we do know.

(2)   the ECB surprised everyone by announcing that it will begin tapering its bond buying program.  Of course, it won’t happen for a while; and there were enough ‘on the other hands’ in the narrative of the announcement to give it plenty of excuses to not taper.  Indeed, some analysts called it a ‘dovish (non) taper’.  In other words, an extension of the standard central bank double speak that we have grown to love.
           
(3)   the Chinese imposed additional restrictions on currency transactions.  The struggle is to relieve the downward pressure on the yuan.  The effect on the rest of the globe is a tightening in money supply.

Bottom line: seasonal factors (Santa Claus rally) are adding fuel to the enthusiasm spawned by the Trump election/GOP sweep, which probably means everything will be coming up roses until, at least, the turn of the year.  That is good news for the 50% of my portfolio that is invested.  The other 50% won’t be going up; but it also lets me sleep not having to worry about an extremely overvalued Market.

            To repeat a prior thought: if you are a trader (which I am not), I would play this rally with a Market ETF (VYM, VIG) using a very tight stop.

            The latest on valuations (medium and a must read):

            My thought of the day: many fully invested investors right now are attributing their success to their talent or innate abilities, failing to give enough credit to luck.  This is the same group of folks that when the Market gets hit, blame their losses on bad luck versus their lack of talent or innate abilities.  The truth is that right now, a fully invested investor is most likely extremely lucky.  Why push luck?

       Investing for Survival
   
            The unbusy manifesto.

    News on Stocks in Our Portfolios
 
Ecolab (NYSE:ECL) declares $0.37/share quarterly dividend, 6& increase from prior dividend of $0.35.

C.H. Robinson Worldwide (NASDAQ:CHRW) declares $0.45/share quarterly dividend, 4.7% increase from prior dividend of $0.43.

Economics

   This Week’s Data

   Other

            It is automation not trade that has caused the jobs loss (medium):

            A look at household net worth (short):

            China’s latest move to stem the outflow of yuan (medium):
Politics

  Domestic

  International War Against Radical Islam


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Thursday, December 8, 2016

The Morning Call--The unsinkable Molly Market

The Morning Call

12/8/16

The Market
         
    Technical

The indices (DJIA 19549, S&P 2241) exploded higher yesterday on enormous volume.  Breadth strengthened, extending prices into even more overbought territory.   The VIX (12.2) actually rallied 4%, but remained below its 200 day moving average (now resistance) below its 100 day moving average (now resistance) and within a short term downtrend.  It would seem really contradictory on such a powerful up day to suggest that the VIX was stabilizing above the lower boundary of its intermediate term trading range (10.38).

The Dow ended [a] above on its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {18150-20200}, [c] in an intermediate term uptrend {11604-24454} and [d] in a long term uptrend {5541-20148}.

The S&P finished [a] above its 100 day moving average , now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2116-2460}, [d] in an intermediate uptrend {2000-2602} and [e] in a long term uptrend {881-2419}. 

The long Treasury (120.4) rose fractionally, closing below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below a key Fibonacci level and in a very short term downtrend.  The question that I raised yesterday is, will it challenge the lower boundary of its short term trading range (117.3) and the lower boundary of its intermediate term trading range (115.3) or is attempting to build a base?  Too soon to know.

GLD also moved up, ending below its 100 day moving average (now resistance), below its 200 day moving average (now resistance) and below the lower boundary of its short term downtrend.  Like TLT, it seems to be trying to stabilize at a key Fibonacci level.

The dollar drifted lower, remaining below the upper boundary of its short term trading range.  It would appear that its recent challenge of that boundary is over for the time being.  However, it is still in a strong very short term uptrend and well above its 100 and 200 day moving averages.

Bottom line: price is truth and the truth is the indices are going higher, likely targeting the upper boundaries of their long term uptrends.  I am less amazed by the pin action than I am about the volume.  It has been stunning.  Short term, it almost certainly suggests further upward momentum; longer term, I have to wonder if it isn’t a sign of a speculative blow off.  I recognize that is talking my book; but it is still a valid question.  

TLT’s (seconded by the entire fixed income complex’s) better performance continue to support the notion that it is trying to find a base.  Even though GLD’s short term chart is just as ugly as TLT’s, it too seems to be attempting to stabilize.
           
    Fundamental

       Headlines

            It was a slow day for economic releases which weren’t all that great anyway: weekly mortgage applications fell while purchase applications rose and October consumer credit grew slower than anticipated.

            Overseas, the European Commission fined three major banks, one of which is JP Morgan (not again), E485 million in a Euribor rate price fixing; UK industrial production declined the most in eight months; China’s foreign exchange reserves fell for the fifth straight month and Russia said that it would abide by the OPEC production cut agreement.

            Update on the Monte Paschi bailout (in) (medium):

            ***overnight, November Chinese exports and imports improved slightly, revised third quarter Japanese GDP was much lower than originally reported, British parliament voted to proceed with Brexit by March 31, 2017, and the ECB surprised everyone by announcing that it will begin tapering its bond buying program.


Bottom line: all in all, there is not much there to explain yesterday’s pin action.  There was some talk that there is going to be some upcoming changes in the S&P index that had the index funds scrambling in anticipation---but that doesn’t do much for me as an explanation.  Probably the best reason was that a majority of investors, like moi, had been were growing increasingly cautious, had too much cash (or were short) and scrambled to participate. 

Which leads to my thought of the day: the great disadvantage of being an institutional investor is that your professional reputation forces you to focus on chasing short term performance irrespective of your best judgment about long term valuation.  That ultimately penalizes the investor because it (1) increases transaction costs and (2) prompts an equal and opposite reaction when short term performance worries force a sale.

I want to reemphasize a point that I have been making of late.  My primary investment objective is to minimize losses in my portfolio not maximize gains.  That means that it would be stupid for me at this point to take the risks associated with buying stocks that are at or near their historical high valuations on the thesis that there might be another 5% upside.  As I have noted before, I would rather be wrong short term and miss some upside than be wrong long term and take a big hit to the principal value of my portfolio. 

            The latest from David Rosenberg (medium):

       Investing for Survival
   
            The key to successful investing,

    News on Stocks in Our Portfolios
 
General Dynamics (NYSE:GD) declares $0.76/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

            October consumer credit advanced $16 billion versus expectations of growth of $19 billion.

            Weekly jobless claims fell by 10,000 versus estimates of a 7,000 decline.

   Other

            The EU financial crisis is more a function of irresponsible lending than irresponsible spending (medium and today’s must read):

            Problems in India (medium):

            Corporate taxes in the Trump world (medium):

Politics

  Domestic

Three new Trump nominees.

And:

And:

  International War Against Radical Islam


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Wednesday, December 7, 2016

The Morning Call--Defining deregulation

The Morning Call

12/7/16

The Market
         
    Technical

The indices (DJIA 19251, S&P 2212) continued their latest move up.  Volume was once again huge; breadth weakened a tad, but remains at overbought levels.  The VIX (11.8) was off another 3%, keeping it below its 200 day moving average (now resistance) below its 100 day moving average (now resistance) and within a short term downtrend.  It moved closer to the lower boundary of its intermediate term trading range (10.38).

The Dow ended [a] above on its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {18127-20187}, [c] in an intermediate term uptrend {11597-24447} and [d] in a long term uptrend {5541-20148}.

The S&P finished [a] above its 100 day moving average , now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2113-2455}, [d] in an intermediate uptrend {1998-2600} and [e] in a long term uptrend {881-2419}. 

The long Treasury (119.4) fell fractionally, closing below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below a key Fibonacci level and in a very short term downtrend.  It remains poised to challenge the lower boundary of its short term trading range (117.3) and the lower boundary of its intermediate term trading range (115.3).  However, it does seem to be trying to stabilize.

GLD also declined slightly, ending below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below a key Fibonacci level and below the lower boundary of its short term downtrend.  

The dollar recovered modestly, but remained below the upper boundary of its short term trading range.  It would appear that its recent challenge of that boundary is over for the time being.  However, it is still in a strong very short term uptrend and well above its 100 and 200 day moving averages.

Bottom line: the rally continues; once again on incredible volume.  I remain amazed that prices haven’t reacted even more positively than they have; although some slight weakness could be seen in the breadth numbers.  Historically, modestly higher prices on huge volume and a weakening in breadth is not a positive indicator of even higher prices, especially given the overbought condition in the Market.  That said, the Market strength continues to astound me; so there is no reason for it to stop now.

TLT appears to be trying to find a base; that notion is supported by much improved performance in other sectors of the fixed income market.  That could explain the loss of upward momentum in the dollar---which would be helpful if it continues, given the negative impact of a strong dollar on the foreign earnings of US corporations.
           
    Fundamental

       Headlines

            Yesterday’s economic data was mixed to negative: revised third quarter nonfarm productivity slightly less than anticipated while unit labor costs were well ahead on estimates, the October trade deficit was fractionally higher than expected, month to date retail chain store sales grew less than in the prior week and October factory orders were in line.

            Overseas, the news was also mixed: the IMF and EU finance ministers failed to reach agreement on a Greek bailout; November German industrial orders grew rapidly.

            ***overnight the European Commission fined three major banks, one of which is JP Morgan, E485 million in a Euribor rate price fixing; UK industrial production declined the most in eight months; China’s foreign exchange reserves fell for the fifth straight month..

            Also capturing headlines:

(1)   apropos of next week’s FOMC meeting, several regional Fed presidents made comments suggesting that the rate of monetary normalization will depend on fiscal policy (medium):

(2)   the consequences of the Italian referendum continues to be analyzed.  Here is a really good summation of the issues and likely after-effects (medium):

                  Fitch cuts outlook for Italian banks (medium):

***overnight, Italy announced that it is preparing to make a E2 billion investment in Monti Paschi, hoping this will lure other investors.

(3)   Trump was back at it again; this time going after Boeing on its contract to build the next generation of Air Force One.  As you know, I have opined that many of the fiscal/regulatory promises that he/GOP made during the campaign would be pluses to the US economy.  ‘Promises’ being the operative word.  However, right now, we are witnessing actions, to wit, taking on one company after another [Carrier, now Boeing] in how they run their businesses. 

Yes, keeping jobs in the US is good.  And yes, worrying about how the taxpayers’ money is being spent is good especially in light of the just released Pentagon study [see below].  But saying that you are going to deregulate the business environment and then attacking businesses because you don’t like a specific action is confusing at best.  To be clear, I don’t have a problem with a push to cut government waste.  But I am suggesting that Trump maybe defining deregulation a lot more narrowly than all the broad happy assumptions the Market has made about how great it will be for the economy.

Bottom line: actions have always spoken louder than words (promises); and the actions coming out of the president-elect are not quite what seems to being discounted in the Market.  As I point out above, the Donald said he was for deregulation, but he actions with Boeing means that it may not be for everyone (which just to be clear, I don’t have a problem with).  He said that he wants to cut America’s exposure to regional conflicts; but he just placed three hard ass neocons in national security roles and stuck his finger in China’s eye. 

Not to be repetitious, my point is what the Donald and GOP have said may be much different than what the Market seem to have assumed that they do; but at least for the moment, it remains fixated on what they have said.  Beware of Greeks bearing gifts.

            The latest from Bill Gross (medium):

            Sugar pills (short):

            What is good for workers tends to be bad for investors (medium):

            My thought for the day: one of the harmful biases that investors bring to the process is termed ‘anchoring and adjustment’.  It means initial information unduly influences decisions by shaping the view of subsequent information.  Once the ‘anchor’ or initial information is set, there exists a bias for interpreting other information around the anchor.  Think Trumponomics.  See above.

       Investing for Survival
   
            The probability distribution of the future (excellent read).

    News on Stocks in Our Portfolios
 
Brown-Forman (NYSE:BF.B): FQ2 EPS of $0.50 in-line.
Revenue of $830M (-2.8% Y/Y) misses by $6.65M
MasterCard (NYSE:MA) approved a new share repurchase program of up to $4B worth of stock

MasterCard (NYSE:MA) declares $0.22/share quarterly dividend, 15.8% increase from prior dividend of $0.19.

Economics

   This Week’s Data

            Month to date retail chain store sales rose at a much slower pace than in the prior week.

            October factory orders were up 2.7%, in line.

            Weekly mortgage applications fell 0.7% while purchase applications rose 0.4%.

   Other

            Yesterday, I linked to a release discussing the latest Fed labor market conditions index.  Here is a thorough analysis of what it might mean (medium):
           
Politics

  Domestic

Pentagon buries study showing $125 billion in waste (medium):

  International

            Pat Buchanan on Trump’s call with the Taiwanese president (medium):


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Tuesday, December 6, 2016

The Morning Call--Everything remains awesome

The Morning Call

12/6/16

The Market
         
    Technical

The indices’ (DJIA 19216, S&P 2204) pin actions were back in parallel, advancing nicely.  Volume exploded; breadth strengthened, keeping it at what has become a persistently overbought level.  The VIX (12.2) got whacked 13 ½%, pushing it back below its 200 day moving average and remaining below its 100 day moving average and within a short term downtrend.  It is closing in on the lower boundary of its intermediate term trading range (10.38).

The Dow ended [a] above on its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {18127-20187}, [c] in an intermediate term uptrend {11575-24425} and [d] in a long term uptrend {5541-20148}.

The S&P finished [a] above its 100 day moving average , now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2113-2455}, [d] in an intermediate uptrend {1996-2598} and [e] in a long term uptrend {881-2419}. 

The long Treasury (119.5) fell fractionally, closing below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below a key Fibonacci level and in a very short term downtrend.  It remains poised to challenge the lower boundary of its short term trading range (117.3) and the lower boundary of its intermediate term trading range (115.3).

GLD also declined slightly, taking it back below the Fibonacci level it pushed through last Thursday and remaining below its 100 day moving average (now resistance), below its 200 day moving average (now resistance) and below the lower boundary of its short term downtrend.  

The dollar took a big hit, finishing below the upper boundary of its former short term trading range.  It would appear that its recent challenge of that boundary is over for the time being.  However, it is still in a strong very short term uptrend and well above its 100 and 200 day moving averages.

Bottom line: the Averages had a harmonious up day.  Actually, I was a bit surprised that they weren’t up more given the huge volume and the drubbing administered to the VIX.  Perhaps that is a function of their extreme overbought condition---which didn’t corrected itself very much in last week’s sideways pin action.  Technically speaking, this is going to catch up to the indices at some point; but given this Market’s current propensity to interpret everything positively, when that occurs is anyone’s guess.  But it is a sign of underlying momentum and suggests that a challenge of the upper boundaries of both indices long term uptrends is in our future.  

    Fundamental

       Headlines

            Yesterday’s US data was mixed: the November Markit services PMI was less than expected while the November ISM nonmanufacturing index was better.

            ***overnight, the IMF and EU finance ministers failed to reach an agreement on a Greek bailout; November German industrial orders rose at the fastest pace in two years.

            The big news item was this weekend’s Italian referendum negative vote.  Many, including yours truly, speculated that a ‘no’ vote had adverse implications for that country’s very weak banking system.  But like the Brexit, investors either weren’t disturbed at all or had somehow discounted the vote.  

            Italian bank told to prepare for a bailout this weekend (medium):

Bottom line: we have apparently reached a new age in which it is no longer necessary to worry about events that could have a deleterious on the economy or their impact on valuations.  Everything is and will forever be awesome.  In those circumstances, the most logical investment strategy is to load up on stocks and go the beach. 

The only argument I have to counter that is that I have been here before and that strategy has always ended badly for those who pursued it.   I should add that I had no more clue when it would end then as I do now.  What I will suggest is that any stock bought today will be much lower when this euphoric period is over than it is now---irrespective of how much higher the stock goes in the short term.  If you think that you are smart enough to buy now and get out before mean reversion occurs, go for it.  I am not that smart; so my focus is on selling a portion of the stocks that have been big winners and all my losers.

            I am not the only one confused (medium):

            My thought for the day: there is no free lunch.  When you start thinking that investing is easy, that you can’t lose, that this time is different, grab dates and run because the waitress is coming with the check and it’s bigger than you think.

       Investing for Survival
   
            When I was a boy.

    News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

            The November Markit services PMI was reported at 54.6 versus the October reading of 54.8.

            The November ISM nonmanufacturing index came in at 57.2 versus expectations of 55.5.

                The October US trade deficit was $42.6 billion versus estimates of $42.0 billion.

            Revised third quarter nonfarm productivity rose 3.1% versus consensus of up 3.3%; unit labor costs were up 0.7% versus projections of up 0.3%.

   Other

            Fed’s labor market conditions index continues soft (short):

            Trump, congress and trade (medium):

            Trump advisor says that Trump is not going to rip up NAFTA (medium):

            A crisis in need of a taxpayer (medium):

            Speaking of which, Belgium is now enforcing a ‘dance’ tax (short):

            Rise in EU breakup odds (short):

            Evidence of a rebounding global economy (medium):

Politics

  Domestic

The next iteration of snowflake demands (short):

  International War Against Radical Islam


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Monday, December 5, 2016

Monday Morning Chartology

The Morning Call

12/5/16

The Market
         
    Technical

         Monday Morning Chartology

            As you can see, the S&P retreated back below its former high after having remained above it for seven days and advancing 1%.  The big question this pin action raises in my mind is, was this a false flag breakout?  I don’t have the answer, only the Market knows that.  But we will know it soon enough.



            TLT’s chart just keeps getting uglier.  The important thing to note is that it is very near the lower boundary of its short term trading range; and the lower boundary of its intermediate term trading range is just under that.  A successful challenge of those boundaries would mean even lower prices ahead.   The higher rates go, the bigger threat they pose to equity valuations.



            Another ugly chart.  Not much to be hopeful about for the GLD bulls.  Closing back above the 38.2% Fibonacci level is a minor victory; but it sure looks like the lower boundary of its intermediate term trading range (circa 100) is in its future.



            The dollar has challenged the upper boundary of its short term trading range and failed.  That is a hopeful sign that this move (and its corresponding negative effect on trade) could be over---‘could’ being the operative word.



            After getting cut in half in November, resetting its 100 and 200 day moving averages from support to resistance and negating a very short term uptrend, the VIX recovered last week, rising above its 200 day moving average.  This may simply be a normal reaction to an oversold condition.  In which case, there is likely more downside.  On the other hand, it may be signaling that the recent decline is over.  Follow through.



    Fundamental

       Headlines

            ***overnight, Italian referendum fails, PM resigns, nobody cares; in an oddly timed but related item, German finance minister says Greece must implement reforms or leave the eurozone.


            Goldman on what happens next (medium):

            More:
           
            More on valuation (medium):

       Investing for Survival
   
            The growing problem of public employment pension plans.

    News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

   Other

            How China is losing the economic battle with the US (medium):

Politics

  Domestic

  International War Against Radical Islam


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Saturday, December 3, 2016

The Closing Bell

The Closing Bell

12/3/16

Statistical Summary

   Current Economic Forecast
                       
2016 estimates

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

2017 estimates

Real Growth in Gross Domestic Product                      1.0-+2.5%
                        Inflation                                                                         1.0-2.0%
                        Corporate Profits                                                            +5-+10%



   Current Market Forecast
           
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Uptrend                                 18104-20164
Intermediate Term Uptrend                     11575-24425
Long Term Uptrend                                  5541-20148
                                               
                        2016    Year End Fair Value                                   12600-12800

                        2017     Year End Fair Value                                   13100-13300

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                     2111-2455
                                    Intermediate Term Uptrend                         1995-2597
                                    Long Term Uptrend                                     881-2419
                                               
                        2016   Year End Fair Value                                      1560-1580
                       
2017 Year End Fair Value                                       1620-1640         

Percentage Cash in Our Portfolios

Dividend Growth Portfolio                          55%
            High Yield Portfolio                                     54%
            Aggressive Growth Portfolio                        55%

Economics/Politics
           
The Trump economy will likely provide am upward bias to equity valuations.   This week’s data was positive:  above estimates: month to date retail chain store sales, November consumer confidence, the November ADP private payrolls report, October personal income, the November Markit manufacturing PMI, the November ISM manufacturing index, the November Chicago PMI, November Dallas Fed manufacturing index, third quarter revised GDP and corporate profits; below estimates: weekly mortgage and purchase applications, October pending home sales, weekly jobless claims, October personal spending, November light vehicle sales, November retail chain store sales and October construction spending; in line with estimates: the September Case Shiller home price index and October/November nonfarm payrolls.

The primary indicators were also a plus: October personal income (+), third quarter GDP (+), third quarter corporate profits (+), October personal spending (-), October construction spending (-) and October/November nonfarm payrolls (0).

Other indicators included: (1) the latest Fed Beige Book was not quite as upbeat as the prior edition and (2) the Atlanta Fed substantially lowered its projected fourth quarter GDP growth estimate.

            The latter two suggest an overall neutral reading for the week.  But since this accounting has always focused on specific data, I am scoring it an upbeat week.  The score is now: in the last 61 weeks, twenty-one were positive, thirty-six negative and four neutral.
           
We are now rounding the corner into the post Trump election period where the numbers could start to reflect what has been a dramatic rise in sentiment.  So if the stats follow sentiment, we should only see further improvement from here.  I have previously noted, in the absence of the election, the data was already showing some signs of progress; but all things being equal, it would still be too soon to alter our forecast of zero to negative growth rate in the economy.  Of course, all things are not equal.  The aforementioned improvement in psychology is likely to have some positive impact on spending and investment.  More importantly, if the GOP enacts the fiscal program that it has promised, it will almost certainly be a plus for the long term growth prospects for the economy.  Hence, the upcoming revision to our forecast.

Overseas, the data was mixed; and for better or worse, sentiment there is less upbeat than here.  The Italian referendum doesn’t help nor does a rocketing dollar nor does the potential for increased global economic turmoil due to a change in US trade policy.  So our global ‘muddle through’ forecast remains intact.

Other factors figuring into the global outlook:

(1)    the wish for an OPEC production cut was granted this week.  But there was a lot of funny business in the math of the quotas.  Plus US frackers are said to be gearing up to increase production.  And that says nothing about the rampant cheating that historically occurred within the group. 

Yeah, the price of oil may lift near term but I wouldn’t count on it holding, barring a dramatic increase in growth in the world economy.

Or will OPEC get lucky and US/Iran deal fall apart?

(2)    according to Draghi, the Italian banks hold a third of all EU nonperforming loans.  If that is not bad enough, a negative vote in this weekend’s referendum could impact the government’s ability to arrange their recapitalization which they are in desperate need of---an unhappy consequence for not just the Italian banks but potentially for other weak links in the EU financial system [Spanish, Portuguese, English and German banks]. 

(3)    China’s currency [along with a lot of others] continued to decline helped along by a soaring dollar.  This turmoil in the currency markets can potentially exacerbate trade relations [a] not only with the US, if we believe the Donald [b] but also amongst themselves.  If it continues, it will not be good for anybody and will almost assuredly negatively impact US corporate profitability.

In summary, this week’s US economic stats were upbeat, though I think that the data flow has less relevance at the moment than it will be when it starts to reflect the likely coming changes in fiscal/regulatory policies.  For the moment, I am revising our short term forecast but will wait until we see any concrete changes in the Trump/GOP fiscal agenda before altering the long term secular economic growth rate in our Models. 

Our (new and improved) forecast:

a possible pick up in the long term secular economic growth rate based on lower taxes, less government regulation and an increase in capital investment resulting from a more confident business community.  However, there are still a number of potential negative unknowns including a more restrictive trade policy, a possible dramatic increase in the federal budget deficit, a Fed with a proven record of failure and even whether or not the aforementioned tax and regulatory reforms can be enacted.   

It is important to note that this change in our forecast is all ‘on the come’ and hence made with a good deal less confidence than normal.  Nonetheless, I have made an initial attempt to quantify this amended outlook with the caveat that it will almost surely be revised.

Bottom line: the stats over the last month or so have reflected more of a mixed picture than purely a negative one. I am not saying that it reflects an improving economy but it is a possibility.  That said, the more important factors are (1) an upturn in sentiment which itself could be a spur to growth and (2) the likely net positive impact of the Trump fiscal/regulatory policies.  Unfortunately, I have no idea how much until we see exactly what is enacted.  The problems of an irresponsible monetary policy and global economic weakness remain.
                       
       The negatives:

(1)   a vulnerable global banking system.  This week:

[a] Italians vote this weekend on a constitutional referendum that among other things has implications for their distressed banking system---a ‘no’ vote would raise concerns about a financial meltdown {the Italian banks need recapitalizing; political turmoil could slow down or even exacerbate this problem}.  To give you an idea of the size of this problem, the ECB reported this week that one third of all EU nonperforming loans were held by Italian banks.  I am not predicting a horror scenario, just its possibility---there are a lot of ‘ifs’ in the bad news scenario.  But were it to occur, it could infect the entire EU banking system.


Here is a more detailed explanation (medium):

[b] as an illustration, the Bank of England reported this week that three major banks had failed their most recent ‘stress test’,

[c] not to mention the continuing trials and tribulations at Deutschebank.  The latest:

[d] in addition, there is yet a potentially undetermined effect of the growing anti-establishment sentiment among voters, as reflected in the Trump/Brexit votes.  Any further challenge to the current EU economic structure would almost surely negatively impact its overleveraged banking system,

[e] finally, Chinese rates have been soaring of late based apparently on a shortage of dollars.  This is a liquidity issue that could have adverse effect not just on that country’s banking system but globally (medium and a must read).

(2)   fiscal/regulatory policy.  This is slowly becoming much less of a negative.  Of course, it all depends on the Donald’s follow through on the tax and regulatory policies that he has promised.  But clearly, his nominees for Treasury and Commerce forward his agenda.  If he/the GOP deliver, this factor could turn to a positive.  But we need to await the delivery to do that.  Further, there is still the issue of trade and its possible negative impact if the Donald gets as aggressive as he sounded in the campaign.

Trump and the new economic order (medium):


Closing the Obama growth gap (medium):

(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.  

Again, I don’t want to be repetitious; but the bottom line is that an aggressive fiscal program will relieve the Fed of assuming that it has to carry the load of economic stimulation; in other words, it can began to normalize monetary policy.  As I have previously noted, the Fed will likely signal at least a start of the process in its December FOMC meeting [i.e. rate hike].  While I doubt a normalization of monetary policy will have much impact on the economy, I believe that it will dramatically effect asset repricing and reallocation---which are already beginning to occur in bonds ahead of any Fed change in policy.  The best thing the Fed can do is get out of the way of the Markets (i.e. don’t fight the rise in rates) and don’t f**k up a return to normalcy---a task unfortunately at which it has an abysmal record of success.

This week, the ECB suggested that its bond buying program had a terminal date, which is to say, it too intends to begin normalizing its monetary policy.  Of course, nothing is happening near term.  But I still thought it odd to make such a statement in front of the Italian referendum which could cause disruptions in the financial market and to which the ECB will almost certainly come to the rescue.  Nevertheless, long term, it says its intent is to begin tapering its bond buying program.

On the other side of the globe, the Bank of China has its hands full with a declining yuan exchange rate and a dollar funding problem allegedly the result of the strong dollar---necessitating a number of restrictions [among them tightening monetary policy] to stem the outflow of dollars.  That makes three.

Now the question becomes, can all this get done without severely disrupting the Markets?  See above for my answer.

Who benefited from the decade of negative real interest rates? (medium):


(4)   geopolitical risks: Syria is getting worse.  This week Turkey threatened to invade Syria which would clearly turn up the heat in that conflict.  On the other hand, I think that a Trump presidency lessens the odds of any kind of US/Russian conflict.  He has criticized the international adventurism of the Bush/Obama administrations; so we should have less of that---which in my opinion is good for the economy and good for the youth of this country who have had to bear the weight of the last 16 years of neocon driven foreign policy.

(5)   economic difficulties in Europe and around the globe.  This week:

[a] France’s third quarter GDP was in line while October consumer income and spending were ahead of estimates; November EU economic and industrial confidence were below consensus while consumer confidence and the manufacturing PMI were in line, November EU inflation rose but at a rate still  below the 2% goal, the UK manufacturing PMI was below estimates,

[b] November Chinese manufacturing and services PMI’s were better than anticipated

Another week of mixed stats; that is the third week in a row of not-so-negative data.  Hardly a sign that a bottom has been reached but it does continue to support to our global ‘muddle through’ scenario.  Unfortunately, this set of numbers are not apt to be helped by a continually rising dollar, a more restrictive Chinese monetary policy or the potential further weakening of the Eurozone’s economic/political system that could result from a negative vote in the Italian referendum.
           
            Bottom line:  the US economic stats were upbeat this week, while the global economic numbers were once again in no man’s land.   That said, both the US and global economies may be about to change, perhaps dramatically---which would make the current dataflow less relevant.  If the stars align, the US will be getting an injection of fiscal stimulus in early 2017, which offers promise of not only better data but a normalization of Fed monetary policy (and a December rate hike). Not just that, there has been a huge increase in sentiment as a result of the foregoing which itself could propel a pickup in economic activity.   Hence, my new (tentative) forecast.

A counterproductive central bank monetary policy is the biggest economic risk to our forecast; although, it is still unclear how much fiscal stimulus will be forthcoming. 


This week’s data:

(1)                                  housing: weekly mortgage and purchase applications fell; the September Case Shiller home price index was in line; October pending home sales were well short of estimates,

(2)                                  consumer: October personal income was above projections while personal spending was below; month to date retail chain store sales improved from the prior week while November sales grew less than in October; November light vehicle sales were below forecast; November consumer confidence jumped markedly; November nonfarm payrolls increased more than estimates, but the October number was revised down substantially; the November ADP private payroll report was much better than anticipated; weekly jobless claims were disappointing,

(3)                                  industry: the November Markit manufacturing PMI and the November ISM manufacturing index were better than expected; October construction spending was less than projected; the November Dallas Fed manufacturing index was well ahead of estimates; the November Chicago PMI was outstanding,


(4)                                  macroeconomic: the revised estimate for third quarter GDP growth was ahead of forecasts while corporate profits improved from the prior reading.

The Market-Disciplined Investing
         
  Technical

The indices’ (DJIA 19170, S&P 2191) pin action continued to diverge (Dow down, S&P flat).  Volume declined; breadth strengthened keeping it at very overbought levels.  The VIX fell fractionally.  While it remained below its 100 day moving average and in a short term downtrend, it closed above its 200 day moving average for the second day (if it remains there through the close on Tuesday, it will revert to support).
           
The Dow ended [a] above on its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {18104-20163}, [c] in an intermediate term uptrend {11568-24418} and [d] in a long term uptrend {5541-20148}.

The S&P finished [a] above its 100 day moving average , now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2111-2453}, [d] in an intermediate uptrend {1995-2597} and [e] in a long term uptrend {881-2419}. 

The long Treasury bounced after a couple of very poor days, but still closed below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below a key Fibonacci level and in a very short term downtrend.  It remains poised to challenge its short term trading range, with the lower boundary of its intermediate term trading range not that much further down.

GLD rose slightly, but enough to end back above the Fibonacci level it pushed through Thursday (small comfort).  Still it finished below its 100 day moving average (now resistance), below its 200 day moving average (now resistance) and below the lower boundary of its short term downtrend.  

The dollar sold off for a second day, finishing below the upper boundary of its former short term trading range (it had reset on Monday, then fell back below it Tuesday, then pushed over it on Wednesday and is now back below it), leaving the challenge of the short term trading range in question.

Bottom line: the Averages continue to their sideways consolidation from the recent post-election run up.  To date, it has been a bull’s dream (sideways action versus a sharp decline).  The only points of concern are a rallying in the VIX and the S&P has retreated below its former high, raising the question, was this recent breakout a false flag?  My current assumption is no and that a challenge of the upper boundaries of both indices long term uptrends is in our future.  

The sharp retreat in bond prices is a growing concern in that, the higher rates go, the bigger challenge they pose to stock valuations.  If TLT successfully challenges the lower boundaries of its short and intermediate term trading ranges, I think that equities will pick up a headwind.
           
Fundamental-A Dividend Growth Investment Strategy

The DJIA (19170) finished this week about 50.9% above Fair Value (12700) while the S&P (2191) closed 39.5% overvalued (1570).  ‘Fair Value’ will likely be changing based on a new set of fiscal/regulatory policies which will lead to an as yet undetermined improvement in the historically low long term secular growth rate of the economy but will still reflect the elements of a botched Fed transition from easy to tight money and a ‘muddle through’ scenario in Europe, Japan and China.

This week’s US economic data was positive while the global stats were again mixed.  But they are both secondary considerations as we try to figure out what a Trump presidency/GOP sweep means for the economy and the Markets.

As I have repeatedly noted, with fiscal and regulatory polices likely to change, the current data means less than it otherwise would in the absence of those changes.  My problem is I just don’t know by how much change is in the cards---and that clearly is a determinant of Fair Value.  To be sure many of these shifts in policy will have a positive impact.  However, I am less sure about the outcome of altered trade relations and a big increase in deficit spending.  Nonetheless, from a qualitative point of view, I believe that the net effect will be positive. 

Not Bill Gross (medium):

That said, aside from the aforementioned uncertain economic effects, valuation continues to be a major problem because:

(1)   at this point, the Market is seemingly only  focused on the positive results,

(2)    while I think it reasonable to assume that the rate of corporate profit growth could pick up, that is not a forgone conclusion because earnings expansion will likely be hampered by the negative elements, among which are rising interest rates, rising labor costs, adverse currency translation costs, rising trade barriers and a slowdown in corporate buybacks,

(3)   the P/E at which those earnings are valued will be adversely impacted by higher interest rates---which is now happening in spades,

(4)   the current assumptions in our Valuation Model are for a better secular economic and corporate profit growth rate than has actually occurred. So any pickup in the ‘E’ of P/E is at least partially reflected already in our Year End Fair Values,

(5)   finally, the Market’s problem right now is the absence of real price discovery, i.e. asset mispricing and misallocation, brought on by a totally irresponsible monetary policy. One of the major things a stronger fiscal policy will do is allow the Fed to normalize monetary policy, i.e. raise rates and sell the trillions of dollars of bonds on its balance sheet. In other words, start unwinding asset mispricing and misallocation.  Plus the unwinding of QE appears to be happening in China and Europe which could likely speed up the whole process.  Once real price discovery returns, I believe it will not be favorable to stock 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.  In addition, while I am positive about the potential changes coming in fiscal/regulatory policy, I caution investors not to get too jiggy with any accompanying acceleration in economic growth and corporate profitability until we have a better idea of what, when and how new policies will be implemented.

Bottom line: the assumptions in our Economic Model are likely changing.  They may very well improve as we learn about the new fiscal policies and their magnitude.  However, unless they lead to explosive growth, then Street models will undoubtedly remain well ahead of our own which means that ultimately they will have to take their consensus Fair Value down for equities. 

Our Valuation Model will also change if I raise our long term secular growth rate assumption.  This would, in turn, lift the ‘E’ component of Valuations; but there is an equally good probability that this could be offset by a lower discount factor brought on by higher interest rates/inflation and/or the reversal of seven years of asset mispricing and misallocation.

                I would use the current price strength to sell a portion of your winners and all of your losers.
               
DJIA             S&P

Current 2016 Year End Fair Value*              12700             1570
Fair Value as of 12/31/16                                12700            1570
Close this week                                               19170            2191

Over Valuation vs. 12/31 Close
              5% overvalued                                13335                1648
            10% overvalued                                13970               1727 
            15% overvalued                                14604               1805
            20% overvalued                                15240                1884   
            25% overvalued                                  15875              1962
            30% overvalued                                  16510              2041
            35% overvalued                                  17145              2119
            40% overvalued                                  17780              2198
            45% overvalued                                  18415              2276
            50% overvalued                                  19050              2355

Under Valuation vs. 12/31 Close
            5% undervalued                             12065                    1491
10%undervalued                            11430                   1413   
15%undervalued                            10795                   1334



* 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 74hard way.