Wednesday, March 20, 2019

The Morning Call--The outcome of the trade talks is a mystery, the outcome of the FOMC meeting not so much


The Morning Call

3/20/19

The Market
         
    Technical

The Averages (DJIA 25887, S&P 2832) rested yesterday---not really that surprising   given a solid eight day run to the upside.  S&P closed well above the 2800 as well as the 2811/2815 resistance level, paving the way for a challenge of the indices’ all-time highs (26917/2942)

Volume rose and breadth improved.

The VIX rose 3 ½ %, finishing back above the late February/early March double bottom, negating last Friday’s break.  Barring a follow through to the upside, I view this as not being that significant.

The long bond was off fractionally.  It remains in the upper tier of the trading range defined by a quad top and a double bottom.  The chart remains reasonably strong.

The dollar declined three cents, closing below the upper boundary of the November to present trading range and below the lower boundary of a recently established very short term uptrend for a second day, negating that trend.  Nonetheless, the chart remains strong, ending above both MA’s and within a short term uptrend.

GLD advanced, finishing above both MA’s and in a short term uptrend.

Bottom line: the S&P ended above 2800/2811/2815, leaving little visible resistance between its current price and its all-time high.

TLT and GLD are pointing at a weak economy/easy Fed, the latter likely being the reason equity investors have been jiggy.  However, the price action in the dollar doesn’t exactly fit the weak economy/easy Fed scenario, unless it is being viewed as a safety trade.  So, I remain confused about the messages being sent by our indicators.

                        Tuesday in the charts.

    Fundamental

       Headlines

            Yesterday’s economic data releases were somewhat disappointing: month to date retail chain store sales growth declined, just not as much as in the prior week; January factory orders and orders, ex transportation failed to meet expectations.
           
            Overseas, January EU construction output was very poor while the March economic sentiment index was down but less than anticipated.

            Aside from their normal focus on an FOMC meeting, investors were treated again to the erratic news flow on the US/China trade talks with (1) early reports from China that the talks were not going that well (2) to be answered quickly by reports that Lighthizer was headed for China because negotiations were so positive.   

            The production of money does not create wealth.

            Nouriel Roubini on the Fed.

            Bottom line: anyone who thinks he/she knows what is happening in the trade talks is most likely self-delusional.  I have said repeatedly that I think Trump’s stated goal of changing Chinese industrial policies and IP theft is the right thing to do long term for the US economy.  So, I am cheering the process.  But the Chinese have centuries of negotiating experience and they have the luxury/patience of being able to look decades ahead in accomplishing their goals.  That is why I am OK with (1) no deal or (2) a limited deal that will leave the parties at odds; but fear (3) a deal that looks good on paper, will bring out the champagne and cigars but will be meaningless in correcting Chinese industrial policies and IP theft.

            I believe that the universal consensus is that the narrative coming out of the FOMC will simply parrot the recent ‘patient’ guidance and that it won’t disappoint.  If so, then the Fed ‘put’ will remain in place.  Aside from some major exogenous event, I think that means that equities will maintain their positive bias; and that only ends when either (1) inflation forces the Fed to tighten irrespective of Market sensitivities or (2) the economy weakens further and the Fed eases to no avail.  

            I have long opined that normalization of Fed monetary policy would not damage the economy but would cause severe heartburn in asset pricing.  Here is a decent argument on why I could be wrong---that severe heartburn in asset pricing could damage the economy.  Which would be the ultimate irony: QE didn’t help the economy but helped the Market so while QT wouldn’t hurt the economy, it would hurt the Market which would hurt the economy.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            Month to date retail chain store sales slowed their pace of decline versus the prior week.

            January factory orders rose 0.1% versus expectations of up 0.3%; ex transportation, they fell 0.2% versus estimates of +0.3%.

            Weekly mortgage applications were up 1.6% and purchase applications up 0.3%.

     International

            January Japanese leading economic index came in at 95.9. in line.

            February UK inflation rose 0.5%, in line; PPI advanced 2.2% versus forecasts of up 2.3%; the industrial order index was reported at 1.0 versus consensus of 2.0.

    Other

           
            The latest on Brexit.

            Why the oil price rally has a limit.

            The cost of the dem’s new universal healthcare, green America, guaranteed income and free college proposals.

                        A look at income inequality.

            The rise of the dual economy.

            Global trade is declining.

What I am reading today

            Discovering the Oracle of Delphi.

            DNA research unravels Jack the Ripper mystery.

            The value of mistakes.

            Maximizing your productivity.


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




Tuesday, March 19, 2019

The Morning Call--All eyes on the FOMC


The Morning Call

3/19/19

The Market
         
    Technical

The Averages (DJIA 25914, S&P 2832) had another good day.  S&P closed well above the 2800 (and even the 2811/2815) quad top---marking a breakout in my work (and if it closes above 2815 today, it will also signify a break of the 2811/2815 top crowd).  If it proves to be a break, then next stop is the indices’ all-time highs (26917/2942)

Volume fell (but that is not surprising following Friday’s quad expirations) and breadth improved.

The VIX rose 1 ¾ %, but still finished below the late February/early March double bottom; so, it appears headed for the lower boundary of its short term trading range.

The long bond was off fractionally.  It remains in the upper tier of the trading range defined by a quad top and a double bottom.  The chart remains reasonably strong.

The dollar declined three cents, closing below the upper boundary of the November to present trading range and back below the lower boundary of a recently established very short term uptrend (if it remains there through the close today, that trend will be voided).  Nonetheless, the chart remains strong, ending above both MA’s and within a short term uptrend.

GLD advanced, finishing above both MA’s and in a short term uptrend.

Bottom line: the S&P ended above 2800/2811/2815.   A close there today opens the way for a challenge of their all-time highs and, perhaps, the upper boundaries of the long term uptrends.

TLT and GLD are pointing at a weak economy/easy Fed, the latter likely being the reason equity investors have been jiggy.  However, the price action in the dollar doesn’t exactly fit the weak economy/easy Fed scenario, unless it is being viewed as a safety trade.  So, I am a bit confused about the messages being sent by our indicators.


                       Monday in the charts.

                   


    Fundamental

       Headlines

            One minor stat was reported yesterday: the March housing market index was in line with estimates. 

Overseas, January Japanese industrial production fell but slightly less than anticipated; however, capacity utilization was abysmal.  The January EU trade balance was much better than expected.

            The FOMC meets this week and will likely be the news highlight.  Given the recent Fed ‘patience’ narrative, it would be surprising for the statement following the meeting to be otherwise. 
      
            Bill Dudley comments.

            The Fed needs to buy some recession insurance.

How useful is the Fed’s dot plot?

The Fed can’t fix credit exhaustion.

Bottom line: the bad news is that the uncertainties regarding US/China trade and Brexit escalated Sunday and Monday.  The good news is that the Fed is expected to remain dovish and the S&P hasn’t hesitated after blowing through the 2800 resistance level.  It appears that the good news wins.

    News on Stocks in Our Portfolios
           
Economics

   This Week’s Data

      US

            The March housing market index came in at 62, in line.

     International

            January EU construction output declined 0.7% versus estimates of a 2.1% increase.

            March EU economic sentiment index was reported at -2.5 versus forecasts of -18.7.

    Other

            Is government debt really equity?

            UK Commons Speaker rejects May’s latest Brexit vote.

What I am reading today

            Why are boomers so broke?

            Valuation determines return (must read).

            Seven retirement planning mistakes to avoid.

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




Monday, March 18, 2019

Monday Morning Chartology


The Morning Call

3/18/19

The Market
         
    Technical

            On Friday, the S&P confirmed its challenge of 2800 (and started a challenge of 2811/2815).  If it remains above that level today, it will reestablish a very short term uptrend; and depending on whether you view 2800 or 2811/2815 as the quad top, it will turn its attention to the all time high.  



            The long bond had an up week though with plenty of volatility.  It finished at the upper zone of the recent trading range marked by a double bottom and a quad top.


           
            The dollar languished most of the week.  The good news is that it remained above the lower boundary of its very short term uptrend (and both MA’s and in a short term uptrend).  The bad news it couldn’t sustain itself above the upper boundary of the November to present trading range.



Like TLT, GLD had an up week but with a lot of volatility.  It ended above both MA’s and in a short term uptrend; so, its pin action is reasonably strong despite its voiding of a very short term uptrend.



The VIX got whacked on Friday, pushing through a double bottom support level and heading for the lower boundary of its short term trading range.  If it remains below that double bottom support level today, it will reestablish a very short term downtrend.



    Fundamental

       Headlines
      
            Rumors that the Trump/Xi summit maybe delayed till June.

    News on Stocks in Our Portfolios
 
Accenture (ACN +0.8%) acquires Storm Digital, a digital marketing agency, based in the Netherlands.
Deal terms were not disclosed.
The deal marks Accenture Interactive's second investment in order to strengthen its presence in the Netherlands


Economics

   This Week’s Data

      US

     International

            January Japanese industrial production fell 3.4% versus expectations of -3.7%; capacity utilization declined 4.7% versus estimates of down -.3%.

            The January EU trade balance was +E1.5 billion versus forecast of -E.8 billion.

    Other

            OPEC threatens to kill US shale industry.

What I am reading today

            The art of repetition.


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




Saturday, March 16, 2019

The Closing Bell


The Closing Bell

3/16/19

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 Trading Range                      21691-26646
Intermediate Term Uptrend                     14149-30350
Long Term Uptrend                                  6585-29947
                                               
2018     Year End Fair Value                                   13800-14000

                        2019     Year End Fair Value                                   14500-14700

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Trading Range                          2349-2942
                                    Intermediate Term Uptrend                         1353-3163                                                          Long Term Uptrend                                     913-3191
                                                           
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 data flow this week was negative: above estimates: weekly mortgage/purchase applications, January construction spending, the January JOLTS report, January retail sales, preliminary March consumer sentiment, February CPI and PPI; below estimates: January new home sales, weekly jobless claims, month to date retail chain store sales,  February industrial production/capacity utilization, December business inventories/sales, the March NY Fed manufacturing index, January durable goods/ex transportation orders, the February small business optimism index, February export/import prices; in line with estimates: none.

The primary indicators were balanced: January retail sales (+), January construction spending (+), January new home sales (-) and February industrial production (-).  Given the discouraging bias of this week’s overall data, I rate it: negative.  Score: in the last 179 weeks, fifty-seven positive, eighty-two negative and forty neutral.

One note.  The stats of the last two weeks have belied the notion that I introduced a month ago: that the February numbers could be an indication that perhaps the rate of US economic growth has stopped declining.   While I haven’t given up, the odds appear to be fading.

The data from overseas this week was negative, though the Chinese numbers were something of an improvement.   However, in the absence of a trade deal, that may be an aberration.  Certainly, a positive result from the US/China trade talks will help. The global economy remains an impediment to our own economy’s struggle to sustain growth.


My forecast:

Less government regulation, (hopefully) getting out of the Middle East quagmire and possible help from a fairer trade regime are pluses for the long-term US secular economic growth rate.

However, the explosion in deficit spending, exemplified by Trump’s new budget proposal, at a time when the government should be running a surplus, is a secular negative.  My thesis on this issue is that at the current high level of national debt, the cost of servicing the debt more than offsets (1) any stimulative benefit of tax cuts and (2) the secular positives of less government regulation and fairer trade [at least on the agreements that have been renegotiated].

On a cyclical basis, the economic growth rate is slowing as the effects of the tax cut wear off and the global economy decelerates.  Some recent data seemed to be indicating some stabilization in the process, but that trend has reversed itself in the last two weeks.   However, even if the economy were to improve cyclically, it will still be unable to overcome the secular negative of too much debt to service.

       The negatives:

(1)   a vulnerable global banking [financial] system.

(2) fiscal/regulatory policy. 

It was another see saw in the US/China trade talks narrative.  First, Trump said that he wasn’t that concerned with trade talks.  Then we learned why---the Trump/Xi summit had been postponed.  But the Donald just couldn’t stand a negative storyline; so, Friday, the news was that great progress is being made. 

I will leave it to you as to what to believe.  I don’t know how anybody could make heads or tails out of what is really happening.  Certainly, not me. So, I fall back on my original thesis: it would be a long, hard battle to get the Chinese to play fair on industrial policy and IP theft---if they ever do.

The other headline, if you want to call it that, was the issuing of the Donald’s FY2020 budget---at which everyone looked, laughed and threw in the waste basket.  Ignoring its fairyland proposals, my principal problem is that it continues the Obama tradition of trillion dollar deficits.  You know my thoughts.

And.

No one cares anymore.


Bottom line: whatever the impact that might to come from a US/China trade deal, irresponsible deficit spending will restrain US economic growth.

(2)   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  asset bubbles in the stock market as well as in the auto, student and mortgage loan markets.  

Two minor bits of central bank news this week was [a] a Powell interview on 60 Minutes last Sunday---which followed the Fed’s recent narrative, i.e. ‘patience’ meaning a delay/stoppage of rate increases and an end of QT by year end and [b] the BOJ left interest rates unchanged. 

As you know, I could care less about any moves or lack thereof in interest rates.  But I continue to believe that QE did little to help the economy, so QT would do little to hurt.  

However, QE led to the gross mispricing and misallocation of assets.  Absent QT that condition will remain, so, [a] if inflation accelerates, the Fed will ultimately be compelled to tightening policy irrespective of Market reaction or [b] if economic growth continues to decelerate, any additional QE will prove ineffective in halting the slowdown; and Markets don’t like recessions.

(3)   geopolitical risks: 

Europe is a mess with Brexit [which now has a very short shelf life], riots in France and fiscal policy discord in Italy; and it continues to be reflected in a negative way in the economic stats.

You never know how the situation in Venezuela plays out.

(4)   economic difficulties around the globe.  The stats this week were again negative, continuing to point to a global economic slowdown:  

[a] January EU industrial production was below estimates; February EU core inflation was in line, the German government lowered its 2019 economic growth forecast,
    
The EU faces huge problems

[b] January/February Chinese industrial production was below projections while retail sales and fixed asset investments were above,

More.

[c] January Japanese machinery orders were below forecasts, February PPI was higher than anticipated and the BOJ warned about that country’s declining volume of trade.

            Bottom line:  on a secular basis, the US economy is growing at an historically below average rate.  Although some recent policy changes are a plus for secular growth, they are being offset by a totally irresponsible fiscal policy. 
          
Cyclically, the US economy is slowing as evidenced by the data from both here and abroad.  

          Finally, any move to a more dovish stance by the Fed is not likely to have an impact, cyclical or secular, on the economy.  QE II, III, and Operation Twist didn’t, and QE IV probably won’t either.   Meaning that if the Fed thinks backing off QT will help support economic growth, in my opinion, it will be disappointed.

The Market-Disciplined Investing
           
  Technical

The Averages (DJIA 25848, S&P 2822) ended the week on a high note---as many had expected on this quad witching day.  S&P closed well above the 2800 (and even the 2811/2815) quad top---marking a breakout in my work (but clearly not so with the 2811/2815 crowd).  Next week’s pin action should clarify the discrepancy.  If it proves to be a break that all can agree on, then next stop is the indices’ all-time highs (26917/2942)

Volume was big as expected and breadth improved.

The VIX fell 4%, finishing below the late February/early March double bottom and appears headed for the lower boundary of its short term trading range.

The long bond rose 5/8 %, capping a volatile but up week.  It ended in the upper tier of the trading range defined by a quad top and a double bottom.  The chart remains reasonably strong.

The dollar declined four cents, closing below the upper boundary of the November to present trading range but above the lower boundary of a recently established very short term uptrend.  The chart remains strong.

GLD advanced, finishing the week ahead of last week’s close.  But, like TLT, it endured a lot of volatility to get there. Despite having voided a very short term uptrend, it still closed above both MA’s and in a short term uptrend.

Bottom line: the S&P ended above 2800/2811/2815, whatever your choice.  The pin action next week will likely resolve any disagreement about what level marks resistance.  At the moment, it looks to me like the Averages are headed for a challenge of their all-time highs.

                And.

TLT and GLD are pointing at a weak economy/easy Fed, the latter likely being the reason equity investors have been jiggy.  However, the price action in the dollar doesn’t exactly fit the weak economy scenario, unless it is being viewed as a safety trade.  So, I am a bit confused about the messages being sent by our indicators.

                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), the improved regulatory environment and the potential pluses from trade notwithstanding.  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---which the trend in the dataflow suggests is meager.  Until proven otherwise, my thesis will remain that the long term economic impact on secular growth of the financing burden now posed by the massive [and growing] US deficit and debt is offsetting the positive effects of deregulation and fairer trade and will continue to constrain economic as well as profitability growth.

In short, the economy is not a negative but it is not a positive at current valuation levels.
           
(2)   the success of current trade negotiations.  If Trump is able to create a fairer political/trade regime, it would almost surely be a plus for secular earnings growth.  Unfortunately, I can’t tell from the inconsistent narrative the true state of the current trade talks with China.  Although the one fact that we do know is that the Trump/Xi trade summit has been postponed.  As you know, I have been somewhat skeptical that a comprehensive agreement on Chinese industrial policy and IP theft could be reached in the short term.  So, this delay is not surprising.

My concern is not that we get no deal or a small deal but that the Chinese out maneuver Trump and he gives away the need for progress on industrial policy and IP theft just to get a deal.
(3)   the resumption of QE by the global central banks.  If QEII, QEIII and Operation Twist are any guide, it should be a big plus for the Markets, at least in the short term.

(4)   current valuations. the Averages have recouped much of their October to December loss and appear on their way to regaining even more.  Since they were grossly overvalued [as determined by my Valuation Model] in October, they are now just slightly less grossly overvalued.  That said, if the latest central bank liquidity surge continues, valuations will remain irrelevant.

As prices continue to rise, I will again be focusing on those stocks that trade into their Sell Half Range and act accordingly.

Bottom line: fiscal policy is negatively impacting the E in P/E, although 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’ appears to be returning and, if history is any guide, will almost assuredly 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.

DJIA             S&P

Current 2019 Year End Fair Value*              14600             1800
Fair Value as of 3/31/19                                 14074            1731
Close this week                                               25848            2822

* 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.