Saturday, December 14, 2019

The Closing Bell



12/14/19


Statistical Summary

   Current Economic Forecast
                       
2018 estimates (revised)

Real Growth in Gross Domestic Product                          1.5-2.5%
                        Inflation                                                                          +1.5-2%
                        Corporate Profits                                                                10-15%

            2019

Real Growth in Gross Domestic Product                          1.5-2.5%
                        Inflation                                                                          +1.5-2.5%
                        Corporate Profits                                                                5-6%


   Current Market Forecast
           
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Uptrend                                 24332-34632
Intermediate Term Uptrend                     16032-32301
Long Term Uptrend                                  6849-30311(?)
                                               
2018     Year End Fair Value                                   13800-14000

                        2019     Year End Fair Value                                   14500-14700

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                     2981-3451
                                    Intermediate Term Uptrend                         2676-4166                                                          Long Term Uptrend                                     937-3217 (?)
                                                           
2018 Year End Fair Value                                       1700-1720         
                       
2019 Year End Fair Value                                     1790-1810

Percentage Cash in Our Portfolios

Dividend Growth Portfolio                           56%
            High Yield Portfolio                                     55%
            Aggressive Growth Portfolio                        56%

Economics/Politics
           
The Trump economy is a neutral for equity valuations.   The dataflow this week was negative.   As was the single primary indicator: November retail sales (-). The call is negative.  Score: in the last 218 weeks, seventy were positive, one hundred negative and forty-eight neutral. 

Overseas data returned to its heretofore negative trend, continuing to support the notion that the global economy is a drag on our own.

Developments this week that impact the economy:

(1)   trade:

[a] China: while there appears to be some sort of agreement, we don’t know exactly what the terms are.  Or if we ever will.  It does seem likely that Trump won’t impose those additional tariffs tomorrow and that is a minor plus.  However, given what we know at this point, I don’t think any conclusion can be made beyond that.

The latest.

For skeptics among you.

My bottom line hasn’t changed.  I don’t believe that there [is] will be a deal that incorporates the primary issues of Chinese industrial policy and IP theft before November 2020, if at all.  Any other deal will be not be a long term positive for the US.  That said, any agreement that removes tariffs and increases Chinese purchase of US ag products will be a minor short term economic plus.

[b]  in addition, the Canada, Mexico, US trade treaty appears to be making progress.  That is a positive.  Remember Canada and Mexico are our second and third largest trading partners.

[c] on the other hand, it looks like the Donald now has his sights set on Europe.


(2)   fiscal policy: the Treasury reported the November budget deficit this week, which not surprisingly continued to grow.  Congress then added insult to injury, reaching an agreement on a $1.37 trillion FY2020 budget deal. This at a time of full employment and a record national debt.  I repeat Rogoff and Reinhart’s thesis [with which I agree] that when the national debt is above 90% of GDP [which it is], it acts as a restraint on growth.

(3)   monetary policy: the FOMC met this week.  Nothing really changed from the QEInfinity narrative except that it pledged to make that policy even greater if the dollar funding problem returned.

True to its word, the following day the Fed announced that it would pump $500 billion into the financial system to counter any potential disruption in the repo market.  While I have to give it credit for anticipating this problem, what is troublesome is that these high powered intellects still don’t have a clue of why it is happening.  True, they point to year end liquidity needs; but this factor has never demanded this kind of response in the past. 

Banana republic money debasement.

My concern is that there is a major bank/financial institution with huge counterparty exposure that is teetering on bankruptcy.  To be sure, US banks are much better prepared to deal with a situation like this than they were in 2008, but European and Chinese banks are not.  And turmoil in the EU or Chinese financial system will still have spillover effects on their and the global economies.

(4)   global hotspots. Brexit. Johnson’s landslide victory pretty much assures a Brexit.  However, I don’t believe anyone has a handle on exactly what the economic consequences are for the UK or the EU.  To be sure, they could be positive.  But the point is, no one knows.

(5)    impeachment:  I will continue to avoid political commentary.  Though I believe that the more intense the situation becomes, the more it will negatively affect businesses and consumers willingness to invest/spend.

Bottom line:  on a secular basis, the US economy is growing at an historically below average rate and I see little reason for any improvement.  The principal causes of the restraint being totally irresponsible fiscal (running monstrous deficits at full employment adding to too much debt) and monetary (pushing liquidity into the financial system that has done little to help the economy but has led to the gross mispricing and misallocation of assets) policies.

Cyclically, the US economy continues to limp along.  Indeed, any progress is a miracle given all the fiscal and monetary headwinds.  My forecast remains that the US will avoid recession.
           
The Market-Disciplined Investing
           
  Technical

The Averages (28135, 3168) were largely unchanged in Friday’s trading.  So, nothing changed with respect to those multiple gap up opens down below or my concern that this is not healthy and could be an indication that the Market is entering or has already entered a blow off top.  On the other hand, the S&P reset a new very short term uptrend (the Dow has not).  Volume was down; breadth mixed.  The VIX fell another 9 ½ % and now is safely back in territory indicative of complacency. 

The long bond rose 1 1/8%, rebounding from Thursday’s beating.  While its short term momentum remains down  (1) as it is still below its 100 DMA,  (2) it continues trade in a trend of lower highs and (3) is now approaching the lower boundary of its very short term uptrend.  However, it is developing a series of higher lows potentially creating a pennant formation which would be more a sign of confusion or uncertainty than negative sentiment.

The dollar was unchanged, ending below its 100 DMA for a third day, reverting to resistance.  It  remains near the lower boundary of its short term trading range.

Gold was up ½%, continuing to bump up against the upper boundary of its very short term uptrend as well as its 100 DMA.  While it remains in that trend of lower highs, it is also developing a trend of higher lows---very similar to the trading pattern of TLT.

The VIX and the S&P are clearly pointing at higher prices, while TLT, UUP and GLD are suggesting uncertainty among its investors.

Friday in the charts.

Fundamental-A Dividend Growth Investment Strategy

The DJIA and the S&P are well above ‘Fair Value’ (as calculated by our Valuation Model).  At the moment, the important factors bearing on Fair Value (corporate profitability and the rate at which it is discounted) are:

(1)   the extent to which the economy is growing.  The economy continues to struggle forward against multiple headwinds, though I still believe that it is not falling into a recession.  As long as this remains the case, US economy will be a neutral  for the Market.

(2)   the [lack of] success of current trade negotiations.  At this moment, all the press notwithstanding, we still don’t know what the terms of the Phase One US/China agreement are. As I have repeated ad nauseum, I don’t believe an agreement will be [has been] reached that adequately addresses the issues of Chinese industrial policy and IP theft---which are why there is trade war in the first place. And that will continue to overhang the Market.

Not helping, with the ink hardly dry on the mystery US/China trade, Trump opened up another dispute.  This time with the EU.  While not as big a factor as China in the economics of US trade, it still keeps the level of Market uncertainty elevated.

Of course, there was developments from which investors can take heart. NAFTA 2.0 is working its way to completion and that should be is a plus for corporate profits and equities.

(3)   the resumption of QE by the global central banks.  Both the Fed and the ECB renewed their dedication to QEInfinity this week.  And the Fed upped the ante by announcing a massive infusion into the US financial system in anticipation of another the repo market freeze up at year end.  Since liquidity is what has fueled the stock market rise the last decade, this injection should initially be a plus for equity prices.  However, if the problems in the repo market reflect some underlying weakness not yet obvious to the gurus in the Fed and this flood of money doesn’t solve the problem, this could be the trigger for the loss of faith in the Fed.

My bottom line remains the same.  Because QE, QEInfinity and NotQE have been and remain Market friendly, stocks should continue to do well until the Fed either reverses its policy or investors figure out just how punitive that policy has been for the economy.

(4)   impeachment. as I noted above, the more vicious this battle,  the more likely it is to have a negative effect on stock prices.

(5)   current valuations. I believe that Averages are grossly overvalued [as determined by my Valuation Model]---which will continue to count for little as long as the global central banks are pumping liquidity into the financial system.

The profit gap.

As prices continue to rise, I will be primarily focused on those stocks that trade into their Sell Half Range and act accordingly. Despite the Averages being near all-time highs, there are certain segments of the economy/Market that have been punished severely (e.g. health care) with the stocks of the companies serving those industries down 30-70%.  I am compiling a list of potential Buy candidates that can be bought on any correction in the Market; even a minor one.  As you know, I recently added AbbVie to the Dividend Growth and High Yield Buy Lists and Kroger to the Dividend Growth Buy List.

Mom and pop investors are not the ones chasing performance.

Bottom line: fiscal policy is negatively impacting the E in P/E.  On the other hand, a new regulatory environment is a plus.  Any improvement in our trade regime with China should have a positive impact on secular growth and, hence, equity valuations---if it occurs.  More important, a global central bank ‘put’ has returned and, if history is any guide, it should be a plus for stock prices. 

            As a reminder, my Portfolio’s cash position didn’t reach its current level as a result of the Valuation Models estimate of Fair Value for the Averages.  Rather I apply it to each stock in my Portfolio and when a stock reaches its Sell Half Range (overvalued), I reduce the size of that holding.  That forces me to recognize a portion of the profit of a successful investment and, just as important, build a reserve to buy stocks cheaply when the inevitable decline occurs.








Friday, December 13, 2019

The Morning Call--It ain't over till the fat lady sings


The Morning Call

12/13/19

The Market
         
    Technical
                 
The Averages (28137, 3168) advanced on a host of positive headlines.  As a result, nothing changed with respect to the multiple gap opens or my concern that this is not healthy and could be an indication that the Market is entering or has already entered a blow off top.  On the other hand, the S&P reset a new very short term uptrend.  Volume was up; breadth improved.  The VIX fell another 7 %, continuing its  move back toward a range indicative of complacency. 

The future will not look like the past.

The long bond got hammered (down 1 5/8%) on heavy volume as short term momentum remains down  (1) as it is still well below its 100 DMA which reverted to resistance last Friday,  (2) it continues trade in a trend of lower highs and (3) is now approaching the lower boundary of its very short term uptrend.

The dollar was up 1/8%, (1) ending below its 100 DMA for a second day [now support, if it remains there through the close today, it will revert to resistance] and (2) remains near the lower boundary of its short term trading range.

Gold fell 3/8 %.  Intraday, it traded all the way up to its 100 DMA and the upper boundary of its very short term uptrend before retreating, closing both last Tuesday’s gap up open and Friday’s gap down open.  It remains in the trend of lower highs.

The headlines (China trade deal, more NotQE, a budget deal) pushed everything in the direction of an improving economy scenario.

             Thursday in the charts.

    Fundamental

       Headlines

Yesterday’s stats were not that good. While November PPI was unchanged, core PPI declined; weekly jobless claims were really bad.
      
            Another forecast for 2020.

Overseas, October Japanese machinery orders fell more than forecasts while October EU industrial production and November German CPI were in line.

            Of course, the numbers were small potatoes when it comes to headlines.

(1)   the US/China have apparently reached ‘agreement in principle’ for Phase One trade deal.  We don’t know the terms of the deal yet; but any agreement that reduces tariffs will be a near term positive.  The key to achieving a long term plus would be the addressing unfair Chinese industrial policy and IP theft.

                  ***of course, the overnight countervailing press release---or lack thereof.

                  ***just in, China will hold press conference at 8:30CST.

(2)   the Fed announced that it would head off repo funding problem with a massive injection of liquidity.  The good news is all the new money that will be sloshing around the financial system which has always been good for the Market.  The bad news is that [a] no one has yet been able to determine the exact reasons for the funding problem, [b] while the Fed is clearly responding to this issue, it is doing so without knowing why it is having to respond, [c] meaning that there is the risk that true reason for the problem becomes manifest and it may be bigger than the Fed can manage.

                 Here is a recap of Lagarde’s press conference.

(3)   Congress reached an ‘agreement in principle’ on $1.37 trillion budget deal [the bad news], avoiding possible government shutdown [the good news, sort of].  I don’t need to go through another rant about fiscal irresponsibility.  But this is it in spades and it negatively affects the ability of the economy to grow,

(4)   the conservatives scored a big victory in the British parliamentary elections, seemingly assuring a Brexit, hard or otherwise.  The initial reaction has been quite positive in the UK markets; but I don’t think anyone has a handle on exactly what the economic consequences are for a Brexit for the short term; though I have always been of the opinion that a country reclaiming its sovereignty is a positive.

Bottom line: as I have suggested above there is good news (mostly short term) and bad news (potentially in the long term) in all the above development. 

(1)   a trade deal will certainly be an economic plus short term but if Trump has folded for political reasons and no effort has been made to correct unfair Chinese policies, the long term implications are negative,

(2)   the initial flood of reserves will almost surely have a positive affect on equity prices as it has for the last ten years.  But if there is a severe problem like the potential bankruptcy of a major bank with huge counterparty risks [think Deutschebank] that has been the source of the dollar funding problem and it bursts into the open, it could be a big potential negative for multiple securities markets,

(3)   while investors may think avoiding a government shutdown is good news, servicing an exploding national debt will continue to be a restraint on economic growth,

      The preponderance of these developments appears upbeat near term, especially given the  positive seasonal bias.   So, sit back and enjoy it.  But if you don’t have cash reserves, in my opinion, you should use the current opportunity to build them.

    News on Stocks in Our Portfolios
 
Oracle (NYSE:ORCL): Q2 Non-GAAP EPS of $0.90 beats by $0.01; GAAP EPS of $0.69 beats by $0.01.
Revenue of $9.61B (+0.5% Y/Y) misses by $40M.

Oracle (NYSE:ORCL) declares $0.24/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

            November retail sales were up 0.2% versus consensus of up 0.5%; ex autos, they were up 0.1% versus 0.4%.

     International

            October Japanese industrial production fell 4.5% versus estimates of -4.2% while capacity utilization declined 4.5% versus +0.3%; the Q4 large manufacturers index came in at 0 versus +2, the small manufactures index was -9 versus -8, all industry capex rose 6.8% versus 6.6%.

            November German wholesale prices dropped 0.1% versus expectations of +0.2%.
           
    Other

            The growing gap between mean and median household income.

            The mounting China debt default problem.
           
            Two million homes with negative equity in Q3 2019.

            The Fed’s wishful thinking.

What I am reading today

           

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Thursday, December 12, 2019

The Morning Call--The art of the deal. Another day, another headline


The Morning Call

12/12/19

The Market
         
    Technical

The Averages (27911, 3141) returned to their winning ways yesterday.  But nothing changed with respect to the multiple gap opens or my concern that this is not healthy and could be an indication that the Market is entering or has already entered a blow off top.  Volume declined; breadth improved.  The VIX fell 4 ½ %, finishing below both DMA’s (now resistance) voiding Monday’s break and heading back toward a range indicative of complacency. 

            Fed day performance.

The long bond jumped ¾%, but short term momentum remains down  (1) as it is still well below its 100 DMA which reverted to resistance last Friday and  (2) it continues trade in a trend of lower highs.

The dollar dropped 3/8%, (1) filling Friday’s gap up open, (2) ending below its 100 DMA [now support, if it remains there through the close on Friday, it will revert to resistance] and (3) nearing the lower boundary of its short term trading range.

Gold was up ¾ %, closing both last Tuesday’s gap up open and Friday’s gap down open.  It remains below its 100 DMA (now resistance) and in the trend of lower highs.

All the gap opens in TLT, UUP and GLD have now been filled and are pointing at lower interest rates.

            Wednesday in the charts.

    Fundamental

       Headlines

            Yesterday’s data was somewhat mixed.  Weekly mortgage applications were up but purchase applications were down and November CPI was slightly above expectations but core CPI was in line.  There was one disappointing stat---the November budget deficit was larger than anticipated.
            Overseas, one stat: November Japanese PPI came in above estimates.        

            The lead headline of the day was the wrap of the FOMC meeting. In its formal statement, it basically indicated that Fed policy is on hold.  It (1) by a unanimous vote, left rates unchanged, (2) said that there would be no rate hikes in 2020, (3) said that the unemployment rate could go even lower without provoking a Fed response and (4) left its discussion about the economy almost completely unchanged from the prior statement.

            In Powell’s subsequent press conference, he acknowledged that the Fed may take NotQE to Defcom 2, i.e. buying longer dated maturities, if the repo funding problem returns.
                 
            More on the repo funding problem.

            Still more.

           ***overnight, in her first meeting as head of the ECB, Lagarde leaves interest rates unchanged and continues the bank’s bond buying program.

            I reported in yesterday’s Morning Call that Trump’s trade advisor had indicated that no decision had been made regarding the scheduled imposition of Chinese tariffs on December 15th.  Here is the source of that report.

            ***it is a new day, so there has to be a new trade headline.  Reuters reports that Trump will proceed with the December 15th imposition of tariffs on Chinese goods.  China vows to retaliate.

The benefits of NAFTA 2.0 versus a China deal.

            Bottom line: what did we learn yesterday?

(1)   the national debt continues to expand at an unconscionable rate at a time of full employment.  I believe that at the current vaulted level of national debt, it will act as a restraint on economic growth. 

(2)   nobody has a clue about whether or not there will a trade deal with China.  However, even if there is, I believe that it will not address the original reason for starting the conflict in the first place.  On the other hand, Trump is making progress with other trading partners and that will be a plus for the economy going forward.  Though clearly any disruptions in trade volume while revisions are being made will impact the economy in the short term.

(3)   the Fed is entrenched in its QE policy and is, indeed, willing to double down if the repo funding problem resurfaces.  So apparently it is willing to go down with the ship when the mispricing and misallocation of assets exact their toll on the Market.  I am not smart enough to know when that might occur; and until it does, the Market’s bias will remain to the upside.
           
            Rising dividend expectations for 2020.

    News on Stocks in Our Portfolios
 
            Altria (NYSE:MO) declares $0.84/share quarterly dividend, in line with previous

Economics

   This Week’s Data

      US

            The November budget deficit was $209 billion versus estimates of $196.5 billion.

            November PPI was unchanged versus expectations of +0.2%; core PPI was -0.2% versus +0.2%.

            Weekly jobless claims rose 49,000 versus projections of up 10,000.


     International

            October Japanese machinery orders fell 6.1% versus forecasts of -1.8%.

            October EU industrial production came in at -0.5%, in line.

            November German CPI fell 0.8%, in line.

    Other

What I am reading today

            The Mayflower and Plymouth Rock.
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