Friday, March 31, 2017

The Morning Call--Trump seems more reasonable on NAFTA

The Morning Call

3/31/17

I will be out of town on family business this weekend.  No Closing Bell.  See you on Monday.

The Market
         
    Technical

The indices (DJIA 20728, S&P 2368) had a decent day.  Volume rose slightly; breadth improved.   The VIX (11.5) was up 1 ½ %, ending back above the lower boundary of its very short term uptrend (voiding the break), below its 100 day moving average (now resistance), below its 200 day moving average (now resistance) and in a short term downtrend.  Its rebound leaves complacency on the table, barely.
               
The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {19202-21498}, [c] in an intermediate term uptrend {11884-24736} and [d] in a long term uptrend {5751-23298}.

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 {2244-2577}, [d] in an intermediate uptrend {2077-2681} and [e] in a long term uptrend {905-2591}.

The long Treasury was down .75%, remaining above its 100 day moving average (now support), below its 200 day moving average (now resistance), below a minor resistance level, in a very short term downtrend and in a short term trading range.
               
GLD fell .75%, but still closed above its 100 day moving average (now support), below its 200 day moving average (now resistance) and within a short term downtrend. 

The dollar increased .5%, ending below its 100 day moving average (now resistance), above but near its 200 day moving averages (now support) and in a short term uptrend.

Oil has turned in three back to back to back strong daily price performances, though it remains in a very short term downtrend.  The driver seems to be comments that OPEC would extend its production cuts---which we already knew.

Bottom line: while the indices were up, they are still within very short term downtrends; so the question remains, was the recent downdraft part of a consolidation move or marked a change of direction.  Bonds, gold, oil and the dollar all supported the recent rebirth of the Trump (reflation) trade. 

    Fundamental

       Headlines

            There were two economic datapoints released yesterday:  weekly jobless claims fell less than expected; by far the more important was the final fourth quarter GDP growth revision which came in slightly better than first stated. 

            ***overnight, the March EU CPI came in lower than anticipated; March Japanese industrial production was better than expected and March Chinese manufacturing and nonmanufacturing PMI were the highest in five years.

            Other developments worth mentioning:

(1)   the politics of fiscal policy don’t seem to be improving, notwithstanding Ryan’s recent encouraging comments.  Trump first expressed the willingness to negotiate with the dem’s---which could be tough given his prior inflammatory comments on that august body.  Ryan responded with ‘no way, Melvin’.  So the Donald has done the next worse thing---piss off the Freedom Caucus. 

                       And the response.

(2)   the CBO warned of the dangers of sustained debt growth.  Thanks.  But Reinhart and Rogoff already told us that several years ago.  Still if the problems with excessive deficits/debt are finally impinging on bureaucratic consciousness, then I guess that qualifies as plus. [medium]

                And the federal government is not the only entity with excessive debt (medium):

(3)   trade policy sneaked back into the headlines as the Donald is reportedly studying ways to penalize ‘currency manipulators’.  If he really follows through with this [another negotiating ploy? see below], it could undo so much of the good generated by deregulation.

On the other hand, the White House has also prepared a draft of a letter that would initiate discussions for changes in NAFTA.  Congress has to accede to the language.  But with that caveat, the major changes [at least as I understand them], that Trump is trying to implement are [a] to stop non NAFTA countries from sending their products through a NAFTA country to avoid tariffs and [b] to level the field on taxes---Mexico and Canada rebate VAT taxes on exports but the US has nothing to rebate, disadvantaging US companies.  Both of those issues seem perfectly reasonable to me (again assuming I have their intent correct); so this first step in amending NAFTA is less negative to trade than I had originally feared.  At least in this case, it appears that all that campaign rhetoric was a negotiating position.

Trump also signed two executive orders ordering a study of similar tax and tariff issues for all countries. (medium):

(4)   finally, as I noted yesterday, four Fed chiefs spoke yesterday.  Reading their comments, I would score two dovish and two hawkish, making this week’s aggregate Fed messages [so far] in perfect symmetry.  The tie could be broken today as two other speakers are scheduled; but it looks to me like business as usual---blow as much smoke as necessary to keep the unwashed masses confused and pray they don’t figure out you are just as confused.  It appears that the monetary policy factor that is driving the Trump reflation trade is more related to the very dovish comments out of the ECB as compared to the Fed’s actions [raising rates, however wimpy they may be].

                Bottom line: I read the above narrative three times and the only positive I can see is that Trump isn’t going to trash NAFTA.  On the other hand, he seems to be undermining his own agenda, the CBO stated the obvious, he is still pushing against China (THE currency manipulator according to Trump) and the Fed continues oblivious to its massive asset mispricing and misallocation policies. 

The Donald’s deregulatory efforts notwithstanding, I believe that the risk is that the economy underperforms expectations and could be made worse by the Fed raising rates as this disappointment become obvious.  And with stocks at historically high valuations, I want to have cash in my portfolio---under any economic scenario. 

            A subdued eighth birthday celebration (short):

            My thought for the day:  however much money you think you'll need for retirement, double it. Now you're closer to reality.
           
       Investing for Survival
   
            Lessons from the older generation.

    News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

            February personal income rose 0.4%, in line; personal spending was up 0.1% versus expectations of up 0.2%

   Other

            Will tax reform boost economic growth? (medium):

            Update on Italy’s banking crisis (medium and a must read):

Politics

  Domestic

Tax reform not that simple (medium):

Update on Wells Fargo fraud case (medium):


  International


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




Thursday, March 30, 2017

The Morning Call--Leave it to the Fed

The Morning Call

3/30/17

The Market
         
    Technical

The indices (DJIA 20659, S&P 2361) turned in a mixed performance yesterday (Dow down, S&P up).  Volume declined noticeably; breadth was mixed.   The VIX (11.4) fell 1 %, ending slightly below the lower boundary of its very short term uptrend (if it closes there today, the trend will be negated), below its 100 day moving average (now resistance), below its 200 day moving average (now resistance) and in a short term downtrend.  If it confirms the break of that very short uptrend, complacency will be back.
               
The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {19181-21498}, [c] in an intermediate term uptrend {11884-24736} and [d] in a long term uptrend {5751-23298}.

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 {2242-2575}, [d] in an intermediate uptrend {2077-2681} and [e] in a long term uptrend {881-2561}.

The long Treasury was up, remaining above its 100 day moving average (now support), below its 200 day moving average (now resistance), in a short term trading range and in a very short term downtrend.

GLD rose, finishing above its 100 day moving average (now support), below but near its 200 day moving average (now resistance) and within a short term downtrend. 

The dollar increased fractionally, ending below its 100 day moving average (now resistance), above but near its 200 day moving averages (now support) and in a short term uptrend.

Bottom line: the indices stalled on relatively low volume.  The Dow actually made a second lower high, while the S&P inched slightly above Tuesday’s close.  In either case, they remained within developing very short term downtrends; so the question remains, was the recent downdraft part of a consolidation move or marked a change of direction.  We wait to see. 

            Update on NYSE margin debt (medium):

    Fundamental

       Headlines

            Two minor economic datapoints were released yesterday: weekly mortgage applications were down while purchase applications were up; and February pending home sales rose sharply.

            Overseas, the UK triggered the Brexit process; and the ECB hinted that it is wary of any tightening of monetary policy.

            Meanwhile back at the ranch, the Fed is out in force this week.  (on the one hand) Following Fischer’s interview yesterday which was widely interpreted as dovish, (on the other hand) two more Fed chiefs spoke sounding a bit more hawkish. And to delight the crowd, four more speak today and two tomorrow.  Confusion remains the best strategy. 

            Bottom line: leave it to the Fed to muddy the water.  After Fischer got investors feeling all warm and fuzzy about a dovish Fed, two of his compatriots disabuse the notion and confuse the lemmings.  That said, the Fed has been, is and forever will be dovish and always behind schedule tightening monetary policy.   The question is, is it so far behind the curve that it will be raising rates just as the economy rolls over?  As you know, I don’t think that such an occurrence would be that damaging to the economy but could prove disastrous to the Markets.

            My thought for the day: If you have credit card debt and are thinking about investing in anything, stop. You will never beat the 18-30% annual interest charge. 

       Investing for Survival
   
            Seven traits of successful investors.

               

    News on Stocks in Our Portfolios
 
Paychex (NASDAQ:PAYX): FQ3 EPS of $0.55 beats by $0.01.
Revenue of $795.8M (+5.7% Y/Y) misses by $3.23M.


Economics

   This Week’s Data

            February pending home sale index rose 5.5% versus expectations of up 2.4%.

                The final revision of fourth quarter GDP showed growth of 2.1% versus estimates of 2.0%; corporate profits were up 22.3% versus the third quarter reading of up 4.3%.

            Weekly jobless claims fell 3,000 versus forecasts of down 11,000.

   Other

            Even more on auto loans (medium):

            Update on oil prices and bank lending (medium):

            Current US infrastructure spending (chart):

            Improving corporate revenues (short):

Politics

  Domestic

The American opioid epidemic (medium):

  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, March 29, 2017

The Morning Call--Was Ryan blowing smoke up our skirts?

The Morning Call

3/29/17

The Market
         
    Technical

The indices (DJIA 20701, S&P 2358) were strong yesterday.  Volume rose; breadth improved.   The VIX (11.5) fell 8 %, ending right on the lower boundary of its very short term uptrend, below its 100 day moving average (reconfirming resistance), below its 200 day moving average (now resistance) and in a short term downtrend.  If it breaks that very short uptrend, complacency will be back.
               
The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {19159-21431}, [c] in an intermediate term uptrend {11884-24736} and [d] in a long term uptrend {5751-23298}.

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 {2242-2575}, [d] in an intermediate uptrend {2077-2681} and [e] in a long term uptrend {881-2561}.

The long Treasury was down, but remained above its 100 day moving average (now support), below its 200 day moving average (now resistance), in a very short term downtrend and retreated off a minor resistance level
               
GLD also fell, finishing above its 100 day moving average (now support), below but near its 200 day moving average (now resistance) and within a short term downtrend. 

The dollar rose, ending below its 100 day moving average (now resistance), above but near its 200 day moving averages (now support) and in a short term uptrend.

Bottom line: the indices followed through Monday’s intraday reversal decisively to the upside.  However, they remain within developing very short term downtrends, so the question remains, was the recent downdraft part of a consolidation move or marked a change of direction.  We wait to see. 

            April is the best stock performance month of the year (short):

    Fundamental

       Headlines

            There was flurry of US economic datapoints released yesterday: weekly retail chain store sales growth fell, home prices rose while the March Richmond Fed manufacturing survey and March consumer confidence were very strong.  Nothing overseas.

            The notable difference in hard and soft data trends (short and a must read):

            The last time investors felt this good about stocks (short):

            ***overnight, UK formally started the Brexit process.

            In Washington, Trump continued his deregulation drive by signing executive orders rolling back Obama’s Clean Power Plan.  Much of the plan is focused on coal as an energy source which is currently being rapidly replaced by cheaper and abundant natural gas.  That trend is not likely to be reversed.  So the overall impact may not be as dramatic as it sounds. However, this is still another small step in getting government regulatory burden off the back of business.

            In addition, Paul Ryan held a news conference and stated that (1) plans to repeal and replace Obamacare are not dead and (2) work is going full steam ahead on tax reform.  That more positive stance seemed to encourage the devotees of the Trump trade.  We can only hope that this not just political bulls**t.

            Finally, Fed Vice Chair Fischer (a Fed hawk) did an interview in which he seemed to be in line with hiking rates twice this year rather than his recent statement that three increases would be appropriate.  He attributed his more dovish stance to the failure to repeal Obamacare.  Investors seemed very pleased.
                       
            Bottom line: given yesterday’s positive flow of events (good numbers, less regulation, upbeat fiscal commentary and dovish Fed), investors seemed to regain some of their optimism.  If I look for a key in yesterday’s developments, I would say (1) the stat that seemed to get investors jiggy was the very positive consumer confidence reading; however, this datapoint has historically been a leading/coincident indicator of market tops/bottoms, (2) Trump’s deregulation efforts are not new news, (3) neither is an easier Fed, so (4) what weighs heaviest for me is how much substance there is in the Ryan statement.  If he is signaling that the house is truly trying to compromise on tax reform and perhaps a re-do of healthcare reform, then the resurgence in the post-election euphoria may very well have some legs.  Otherwise, I think that investors are likely jerking themselves off.

            A review of the trend in corporate earnings (medium):

            The latest from Doug Kass (medium):
            Happy endings (short):
My thought for the day: the book Where Are the Customers' Yachts? was written in 1940, and most investors still haven't figured out that financial advisors don't have their best interest at heart.
       Investing for Survival
   
            For all you buy and hold advocates.

    News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

            Weekly retail chain store sales grew considerably less than in the prior week.

            The January Case Shiller home price index rose 0.9% versus estimates of up 0.8%.

            March consumer confidence was reported at 125.6 versus expectations of 113.8.

            The March Richmond Fed manufacturing index came in at 22 versus forecasts of 15.

                        Weekly mortgage applications fell 0.8% while purchase applications rose 1.0%.


   Other

            The other side of household debt (short):

            More on auto loans (short):

            Expectations for US GDP growth in the first quarter (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.




Tuesday, March 28, 2017

The Morning Call--The Trump trade is not dead

The Morning Call

3/28/17
The Market
         
    Technical

The indices (DJIA 20550, S&P 2341) ended slightly lower, following a big intraday selloff.  Volume fell; breadth was weak.   The VIX (12.5) fell 3 ½ %, ending above the lower boundary of its very short term uptrend, back below its 100 day moving average after having reverted to support on Friday (I am putting that call in abeyance until there is follow through one way or the other), below its 200 day moving average (now resistance) and in a short term downtrend.  Yesterday’s pin action suggests that there are still a lot of buyers (complacency) around.
               
The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {19148-21431}, [c] in an intermediate term uptrend {11884-24736} and [d] in a long term uptrend {5751-23298}.

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 {2238-2572}, [d] in an intermediate uptrend {2072-2676} and [e] in a long term uptrend {881-2561}.

The long Treasury was up 0.5%, and remained above its 100 day moving average (now support), below its 200 day moving average (now resistance), in a very short term downtrend and near a minor resistance level.
               
GLD rose 0.5%, finishing above its 100 day moving average (now support), below but near its 200 day moving average (now resistance) and within a short term downtrend. 

The dollar fell 0.5%, ending below its 100 day moving average (now resistance), above but near its 200 day moving averages (now support) and in a short term uptrend.

Bottom line: I thought that the indices did well yesterday, recovering from the big initial down draft. If they can follow through to the upside, it will do a lot to address the issue I posed on Saturday---is the recent sell off noise, reflects consolidation or the start of a directional change. 

            Alarm bells ringing on Trump trade (medium):

    Fundamental

       Headlines

            Only one US economic datapoint was released yesterday: the March Dallas Fed manufacturing index came in below estimates.

            Overseas, March German business sentiment rose to a six year high; OPEC agreed to ‘evaluate’ its production cut plan.

NY Fed says declining oil prices due to drop in demand (medium):

            Investors got a roller coaster ride yesterday as the Market seemingly continued struggled with the implications of the defeat of the healthcare bill; specifically, whether it was only a minor setback and good things still lie ahead for tax reform and infrastructure spending or it signaled the likely demise of the Trump/GOP fiscal reform.  That may remain an open question for a while as a tax bill is likely weeks away. 

That said, we know whatever occurs, the Trump trade has taken a heavy body blow; so it seems probable that some portion of the 300 point post-election rally in the S&P will get taken back.

We also know that (1) the $1 billion in tax savings from the repeal of Obamacare will not be available to offset tax cuts  and (2) the border adjustment tax continues to lose support; it being the source of another $1 billion in tax revenue that was also expected to fund tax cuts.  That, at least, suggests that there could be more disappointment ahead for the dreamweavers.  Certainly, it is too soon to write off Trump/GOP proposals as meaningless but it seems reasonable to assume a scaled back version of the original hype. 

The internal GOP clash on taxes (medium):

In fact, as I have argued repeatedly, given the current magnitude of the budget deficit and the federal debt, any action to reduce tax revenues or increase spending would do more harm to the economy than benefit.   So I believe that the good news scenario is revenue neutral tax reform and a prioritizing of spending versus a big increase.  That is not apt make a lot of investors happy.  So it also seems reasonable that even more of the post-election rally could be recouped.

Bottom line: the economy continues to stumble ahead, perhaps with a bit more consistency than was apparent six months ago.  In addition, its future growth will almost surely aided by the deregulatory efforts of the Donald and may very well be helped more if the GOP can pass a simpler and fairer tax bill.

As far as the valuation question goes, for me at the moment it has a technical component: will the taking back of the Trump trade halt at the lower boundary of the indices short term uptrends or will return to levels of last November?

            Declining sentiment (medium):

            Current fund managers’ asset allocation (medium):


            My thought for the day:  one of the most important thing an investor (or anyone for that matter) to know is what he doesn’t know.  Quoting Charlie Munger:
“If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.”

Monday, March 27, 2017

Monday Morning Chartology

The Morning Call

3/27/17

The Market
         
    Technical

            Notice that each of these charts reflect short term breaks in trends.  Certainly, more is needed, directionally speaking, to alter the long term trends.  The good news scenario is that the index in question is consolidating and preparing for a continuation of the major trend.  The bad news scenario is that ‘times, they are a’changin’.

            The S&P negated its very short term uptrend last week.  The good news is that it failed to follow through to the downside; the bad news is that there is little support before the lower boundary of its short term uptrend.



            The long Treasury rested last week following the prior week’s rally.  It ended above the lower boundary of its short term trading range and above its 100 day moving average (now support).  But it was also below its 200 day moving average and it a very short term downtrend. 



            Gold continued its rally, finishing above its 100 day moving average but below its 200 day moving average and in a short term downtrend.



            The dollar closed below its 100 day moving average but above its 200 day moving average, right on a minor support level and in a short term uptrend.  It needs to hold that support level to keep its upside momentum.



            The VIX rallied hard last week, bouncing decidedly off the lower boundary of its very short term uptrend and closing above its 100 day moving average.  On the other hand, it finished below its 200 day moving average and is in a short term downtrend.  So a mixed performance; but clearly the Market’s complacency has been disturbed.



    Fundamental

       Headlines

       Investing for Survival
   
            Myths in investing #8.


    News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

   Other

            More on the unfunded pension liability problem (medium):

            And:

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.




Saturday, March 25, 2017

The Closing Bell

The Closing Bell

3/25/17


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                                 19148-21431
Intermediate Term Uptrend                     11884-24736
Long Term Uptrend                                  5751-23298
                                               
                        2016    Year End Fair Value                                   12600-12800

                        2017     Year End Fair Value                                   13100-13300

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                     2234-2568
                                    Intermediate Term Uptrend                         2072-2678
                                    Long Term Uptrend                                     881-2561
                                               
                        2016   Year End Fair Value                                      1560-1580
                       
2017 Year End Fair Value                                       1620-1640         

Percentage Cash in Our Portfolios

Dividend Growth Portfolio                          57%
            High Yield Portfolio                                     54%
            Aggressive Growth Portfolio                        55%

Economics/Politics
           
The Trump economy is providing an upward bias to equity valuations.   This week’s data was neutral:  above estimates: February new home sales; the Chicago Fed national activity index, fourth quarter current account deficit; below estimates: February existing home sales, weekly mortgage and purchase applications, month to date retail chain store sales, weekly jobless claims and the March Markit flash composite PMI; in line with estimates: February durable goods orders.

 The primary indicators were also neutral: February new home sales (+), February existing home sales (-) and February durable goods orders (0).  Other factors to consider are the anecdotal evidence we are getting from the used car, student loan, oil and retail sales sectors, all of which are doing poorly.  The question is, are these stats false flags or precursors to lousy data in the macro indicators?  Time will tell us.   As you might expect, I am scoring this week as a neutral: in the last 77 weeks, twenty-five were positive, forty-three negative and nine neutral.


Net, net, the recent trend in the data has been mildly upbeat. It is not as good as much of the narrative on Street would have you believe; but it, at least, seems to be stabilizing if not improving.  So perhaps the thesis that economic growth would start to mend post-election due to a pickup in sentiment is being played out.  While I have bought into that notion, I still feel a bit uncomfortable with it, especially in light of this week’s anecdotal numbers.

On the political side, it was all about passage of the healthcare bill---which didn’t happen. As you know, Trump issued an ultimatum to either pass the bill on Friday or he was moving on.  Then the GOP pulled the bill.  Probably a good move, though one of the benefits of reforming healthcare was that it would reduce costs that could be used to offset tax cuts.  Given the senate’s strong opposition to increasing the budget deficit, that is going to make any tax reform that is not revenue neutral all the more difficult. 

Not that a revenue neutral tax reform wouldn’t be a plus if it simplified and was more fair.  It just wouldn’t have the supposed stimulative effect that a cut is thought to have.  That last sentence was obviously a hedged one because as I have repeatedly opined, an increase in the budget deficit from current levels has been shown to be a negative to economic growth.  So a revenue neutral tax reform is likely the good news scenario; though I suspect that dreamweavers will be disappointed.

In addition, the State Department approved the Keystone pipeline.   This adds emphasis to the point I made last week that Trump’s effort downsizing and rationalization of the bureaucracy will likely have a bigger impact on the economy than I originally forecast.   Indeed, I am adding 25 to 50 basis points to our long term economic secular growth rate assumption.  That, of course, sounds a good deal more precise than I want to be; but you have to start somewhere.  So just be aware that this number could easily go higher or lower.

Oil prices continued their decline this week.  As you know, I am not surprised by this given my skepticism about OPEC’s ability to follow through with proposed production cuts.  Of course, it is doing all it can to salvage the production cut agreement.  In fact, it is meeting this weekend to ‘assess the effectiveness of the production cuts’.  I could save them the time and expense by pointing to the obvious.  Nonetheless, I would expect another bulls**t statement from this group aimed at papering over its lack of success.  My point in including this discussion is that the last round of oil price declines was not good for the economy.  I don’t expect this time will be any different.

While trade policy has played second fiddle to the healthcare bill of late, it is still an ‘….area that Trump has spent a lot of time and capital on; and while he has unquestionably shaken up the establishment by criticizing NAFTA/Mexico, Germany and the euro, nothing really concrete has been done---and that is the good news. I am not going to repeat the endless number of reasons why actually following through with his threats would be a negative for both our trading partners and ourselves.  My hope is that they are just negotiating bluster and the final results will be much more free trade friendly.  But if he is serious, this will be a major economic negative.

Overseas, the data this week was again almost nonexistent; but what we got was positive.  That leaves our ‘muddle through’ scenario in place but also leaves open the possibility that our forecast could be upgraded.  That said, there are still problems out there that could stop a recovery in its tracks: the Monte Paschi bailout, the Brexit, currency turmoil in China, Mexico and Turkey, the potential impact of a Trump anti- free trade agenda and Greece’s bailout difficulties. 

Bottom line: this week’s US economic stats was neutral, neither helping or hindering the thesis that either the economy is improving or is about to improve based on increasing investor sentiment.  More is needed before I will feel confident with my revised tentative short term forecast.  On the other hand, based on the likely positive impact of Trump’s deregulation efforts, I am upgrading our long term secular growth rate by 25 to 50 basis points.   

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 spending 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.’
                       
       The negatives:

(1)   a vulnerable global banking system. Nothing new this week.

(2)   fiscal/regulatory policy.  I continue to hope that the Donald’s new policies will prove beneficial to the economy and I can eliminate this factor as a negative. 

Holding center stage this week was the healthcare drama---which in the end played out as a tragedy.  From the standpoint of the healthcare plan itself, I am not sure it is all the bad because [a] given the opposition in the senate, it wasn’t clear at all that it would ultimately pass anyway and [b] as I understand the issues that were preventing agreement among the GOP, the plan as presented had enough liabilities that it could very well have ended up ultimately as a negative.  So I am not that upset that a bad bill wasn’t replaced by a somewhat less bad bill.  Further, from a political point of view, Obamacare is still owned by the dems. 

To be sure, a lack of reform of Obamacare is a negative.  The fact that the republicans couldn’t manage the repeal and replace process hurts (1) the Market’s image of Trump the dealmaker, (2) lays bare the popular assumption that healthcare and tax reform along with increased infrastructure spending were somehow a slam dunk---the everything is awesome scenario.  But I never believed that line anyway and (3) it impacts tax reform because the large tax savings from Obamacare was planned to be used for tax cuts.

As I noted above the Keystone pipeline received State Department approval this week.  This is another positive in the Donald’s deregulation effort which I believe will have a positive impact on the US economy; so much so, that as I also noted above, I am raising our assumption on the long term secular growth rate of the economy.  It is not going to put back in the historical range; but it is a move in the right direction.

The bottom line here is that (1) deregulation is lifting our economy’s long term growth prospects, (2) the Trump/GOP election victory was not the magic elixir that many seemed to believe, (3) however, I believe that they will still achieve some form of tax reform and infrastructure spending legislation which will also prove beneficial to the economy’s long term growth but (4) the restraint on accomplishing aggressive tax and spending programs is not GOP harmony but math.  In my opinion, they simply won’t get done and if they do, it will be more harmful than beneficial.

As a final note, some of the above is political speculation on my part---something that is above my pay grade.  So take it for what it is worth; which is very little.

(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.  

Not much to discuss this week.  The news on monetary policy came from overseas as [a] the Bank of Japan said that there was little reason to tighten and [b] the ECB’s latest round of bond purchases was more aggressive than had been expected.  So it looks like these guys are at odds with Yellen & Co---they having raised rates last week. 

But I don’t think the spread is that great.  As I opined last week, I believe the only reason the Fed raised rates was because the bond market forced it.  I think that the Fed would be perfectly happy to not hike rates again; and given that the bond market continued its turnaround [rally] this week, I think that takes the pressure off the Fed for further rate hikes.  As you know my thesis has always been that what the Fed really fears is that rising rates will derail the Markets because its QE/ZIRP policies were one of the main drivers of this grossly overvalued Market.  So any excuse to delay lifting rates is a God send. 

Of course, the other part of my thesis is that I believe that the Fed is way behind schedule in raising rates.  But I don’t believe that a tightening Fed will side track the economy because its easy money policy [except QE1] did little to help it. 

My bottom line remains that when the unwinding of the global QE/ZIRP/NIRP begins in earnest, I believe that it will have only a modest effect on the economy but a noticeable one on the Markets.


(4)   geopolitical risks: I continue to worry about Trump’s seeming willingness to throw diplomacy aside and treat the rest of the world like they are the press.  To be clear, I don’t have an issue with most of the principles behind his offensive comments. And I understand that he may just be trying to set up a negotiating position.

My point here is that, in my opinion, duking it out with foreign leaders in public increases the odds of a misstep that could be costly in far more ways than just economically.


(1)   economic difficulties in Europe and around the globe.  Another slow week for the release of global economic numbers: February UK inflation was higher than expected; and the March EU flash composite PMI rose, hitting a six year high.
    

In other news, the UK triggered the Brexit process; Greece said it would likely fail to achieve results necessary to receive the next round of bailout money; and most concerning the G20 failed to renew a pledge to resist all forms of protectionism.

In sum, this week’s data was parse but what there was, was upbeat.  Still not enough to add to or detract from any judgement about the trend.  So there is little incentive to alter our ‘muddle through’ forecast.

            Bottom line:  the US economic stats appear to be stabilizing.  More importantly, the Donald’s drive for deregulation and improved bureaucratic efficiency is a decided plus.  On the other hand, the turmoil over the healthcare bill is a good illustration that the Donald’s fiscal program has a rocky road ahead of it however great it may sound on paper.  I continue to believe that something positive will come from changes in fiscal policy; and they will likely be enough to alter our long term secular economic growth rate assumption in our Models.  However, I also believe that they will take longer and have less impact than seems to be Street consensus at this time.

This week’s data:

(1)                                  housing: February existing home sales were disappointing while new home sales were off the charts; weekly mortgage and purchase applications were down,

(2)                                  consumer: month to date retail chain store sales growth slowed from the prior week; weekly jobless claims rose considerably more than estimates,

(3)                                  industry: February durable goods orders were above forecast but ex transportation they were below; the February Chicago Fed national activity index was much better than consensus; the Kansas City Fed manufacturing index was above projections; the March Markit flash composite PMI was below expectations,

(4)                                  macroeconomic: the fourth quarter current account deficit was less than anticipated.

The Market-Disciplined Investing
         
  Technical

The indices (DJIA 20596, S&P 2343) ended slightly lower following the pulling of house Trumpcare bill.  Volume rose; breadth was weak.   The VIX (13.1) was up, ending above the lower boundary of its very short term uptrend, above its 100 day moving average for the third day (it now reverts to support), below its 200 day moving average (now resistance) and in a short term downtrend.  It appears that the thesis that the period of complacency could be ending remains in place.
               
The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {19148-21431}, [c] in an intermediate term uptrend {11884-24736} and [d] in a long term uptrend {5751-23298}.

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 {2236-2570}, [d] in an intermediate uptrend {2072-2676} and [e] in a long term uptrend {881-2561}.

The long Treasury was up fractionally, but remained above its 100 day moving average for the third day (it now reverts to support), below its 200 day moving average (now resistance) and in a very short term downtrend.
               
GLD rose slightly, but finished above its 100 day moving average (now support), below its 200 day moving average (now resistance) and within a short term downtrend. 

The dollar inched higher, but ended below its 100 day moving average (now resistance), above its 200 day moving averages (now support) and in a short term uptrend.

Bottom line: all of our indices have broken short term support/resistance levels.  Whether that is just noise, reflects consolidation or the start of a directional change, I don’t know.  But we need to be alert in case it is the latter.

Fundamental-A Dividend Growth Investment Strategy

The DJIA (20596) finished this week about 60.6% above Fair Value (12823) while the S&P (2343) closed 47.7% overvalued (1585).  ‘Fair Value’ will likely be changing based on a new set of fiscal/regulatory policies which may lead to an as yet undetermined improvement in the historically low long term secular growth rate of the economy; but it still reflects 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 mixed though the anecdotal reports were something a good deal less.  Still the recent trend in the numbers suggest that the economy has less downside than I had feared, though I am not sure of the magnitude of any upside.  Yes, I am raising the long term secular economic growth rate in our Models based on Trump’s good work at deregulation.  And yes, I will likely raise it even more once we know the magnitude and timing of any new fiscal policies.  But (1) increasing the secular long term growth rate potential of the economy does nothing for the forecast for the next 12 months and (2) as I have continually pointed out, the math of substantial tax cuts and/or major infrastructure spending just doesn’t work.  As a result, I think that if our improved short term and long term growth assumptions for the economy are anywhere near correct, they will likely still be a disappointment to many on the Street.

Further, while talk of trade and currency has been out of the headlines of late, I remain concerned about Trump’s push towards tariffs and manipulating the dollar lower.  Free trade is and always has been an agent of economic progress and global political stability.  His proposals would inhibit those objectives.  Although I have acknowledged that his moves may be nothing more than initial negotiating positions from which positives can be derived.    However, the initial responses to his efforts by both Mexico and the G20 belie that notion, leaving me concerned that this factor could prove to be a negative.

All that being said, you know that my negative outlook for stocks has little to do with the progress or lack thereof for the economy/corporate profits and is directly related to the irresponsibly aggressive global central bank monetary policy which has led to the gross misallocation and mispricing of assets. 

As you know, my thesis all along has been that since the economy was little helped by QE/ZIRP, then it could do just fine in the face of a reversal of those policies.  On the other hand, since the Markets were the primary beneficiaries of Fed largesse, it would be they who suffered when the Fed began to tighten.

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 encouraged about the changes already made in regulatory policy and the potential improvements coming in fiscal policy, I caution investors not to get too jiggy about the rate of any accompanying acceleration in economic growth and corporate profitability.  Finally, whatever happens, stocks are at or near historical extremes in valuation and there is no reason to assume that mean reversion no longer occurs.

Bottom line: the assumptions in our Economic Model are beginning to improve as we learn about the new fiscal/regulatory policies and their magnitude.  However, I think the timing and magnitude of the end results will 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 are also changing as I raise our long term secular growth rate assumption.  This will, in turn, lift the ‘E’ component of Valuations; but there is a decent probability that this could be at least partially 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.  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 use the current price strength to sell a portion of your winners and all of your losers.  If I were a trader, I would consider buying a Market ETF (VIG, VYM), using a very tight stop.
               
                If only I knew when (medium):


DJIA             S&P

Current 2017 Year End Fair Value*              13200             1630
Fair Value as of 3/31/17                                  12823            1585
Close this week                                               20596            2343

Over Valuation vs. 3/31 Close
              5% overvalued                                13464                1664
            10% overvalued                                14105               1743 
            15% overvalued                                14746               1822
            20% overvalued                                15387                1902   
            25% overvalued                                  16028              1981
            30% overvalued                                  16669              2060
            35% overvalued                                  17311              2139
            40% overvalued                                  17952              2219
            45% overvalued                                  18593              2298
            50% overvalued                                  19234              2377
            55%overvalued                                   19875              2456
            60%overvalued                                   20516              2536
            65%overvalued                                   21157              2615
            70%overvalued                                   21799              2694

Under Valuation vs. 3/31 Close
            5% undervalued                             12181                    1505
10%undervalued                            11540                   1426   
15%undervalued                            10899                   1347



* 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.