The Closing Bell
Statistical Summary
Current Economic Forecast
2012
Real
Growth in Gross Domestic Product (revised):
+1.0- +2.0%
Inflation
(revised): 2.5-3.5 %
Growth
in Corporate Profits (revised): 5-10%
2013
Real
Growth in Gross Domestic Product +1.0-+2.0
Inflation 2.0-2.5
Corporate
Profits 0-7%
Current Market Forecast
Dow
Jones Industrial Average
Current Trend (revised):
Short
Term Uptrend 13265-14035
Intermediate Up Trend
12410-17410
Long Term Trading Range 7148-14180
Very LT Up Trend 4546-15148
2011 Year End Fair Value 10750-10770
2012 Year End Fair Value
11290-11310
Standard
& Poor’s 500
Current
Trend (revised):
Short
Term Up Trend 1407-1485
Intermediate
Term Up Trend 1305-1905
Long
Term Trading Range
766-1575
Very
LT Up Trend 651-2007
2011 Year End Fair Value
1320-1340
2012 Year End Fair Value 1390-1410
Percentage Cash in Our Portfolios
Dividend Growth
Portfolio 26%
High
Yield Portfolio 26%
Aggressive
Growth Portfolio 29%
Economics/Politics
The
economy is a modest positive for Your Money. Not much data this week; what we got was largely
negative: Positives: existing home
sales, the second quarter budget deficit.
Negatives: mortgage and purchase applications, new home sales, weekly
jobless claims and the NY Fed manufacturing index. Neutral: weekly retail sales and the Philly
Fed manufacturing index.
The most
important of the above numbers was the very positive existing home sales
(because housing is the weakest segment in the economy and existing home sales
is a very important measure of housing); but it was outweighed by the magnitude
of remaining negative reports.
Nevertheless,
one week of mostly disappointing data does not a trend make; so for the moment,
nothing in the aggregate numbers persuades me to alter our forecast:
‘a below average secular rate of recovery
resulting from too much government spending, too much government debt to
service, too much government regulation, a financial system with an impaired
balance sheet. and a business
community unwilling to hire and invest because the aforementioned along with
the likelihood a rising and potentially corrosive rate of inflation due to
excessive money creation and the historic inability of the Fed to properly time
the reversal of that monetary policy.’
The pluses:
(1) the ‘big four’ measures of the economy show little
sign of recession.
(2) the seeming move of the electorate towards embracing fiscal
responsibility. I would argue that means
a Romney/Ryan November victory which should be more conducive to fixing the
monetary/fiscal/regulatory problems that plague this economy than an Obama win. Unfortunately, the hope built on this factor
is fading---at least in my mind. The
Romney campaign is proving itself near inept thus far; and as a result, the
polls, including intrade, are predicting a solid Obama triumph.
The negatives:
(1) a vulnerable banking system.
New allegations of misdeeds against JP Morgan surfaced this week,
meaning that this problem is not going away.
The risk here is that: [a] investors lose confidence in our financial
institutions and refuse to invest in America {which clearly hasn’t happened to
date} and [b] the recent scandals are simply signs that our banks are not as
sound and well managed as we have been led to believe and, hence, are highly vulnerable
to future shocks, particularly a collapse of the EU financial system.
(2) a blow up in the Middle East . The Syrian civil war grinds on; and Israel Iran Middle
East . As more facts are
discovered, it is becoming clear that these were not spontaneous eruptions over
an anti-Muslim film, but rather a part of the continuing war between Islam and
the West. Obama’s assurance to the
contrary, this war goes on and is no where near over. Aside from the obvious risk of life in an
armed confrontation, there is an economic side---in this case the risk that
hostilities will bring higher oil prices which could in turn hamper our
economic growth and spur inflation.
That said, the Saudi’s cast
their vote for President this week by upping their oil production and pushing
prices down. However, this is [a] temporary
and [b] if open war breaks out, irrelevant.
(3) the drought persists in the Midwest , though it
has gotten some relief in recent weeks. As a result, grain prices have been
flattish over the last month. However,
year over year, there remains a marked increase in prices. Certainly, a portion of these higher prices
will likely be passed on to consumers; and to the extent that they are, they act
as a tax on income and hence restrain economic growth. Combine this with the fear of the ‘fiscal cliff’
and you have a formula for lower confidence and a threat of a serious slowdown
in consumption and investment.
(4) another up week for the ECRI weekly index [seventh in a row]. That notwithstanding, the developer of this
index insisted last week that the US
(5)
another week, nothing done on the ‘fiscal cliff’ and no
prospects anytime soon.
As you know, my
position on the ‘fiscal cliff’ as it currently exists is that in the end, the
scheduled tax increases and spending cuts will not occur; or if they do, they
will be quickly reversed. Whoever wins
in November will do something in January to alter this outcome---we just don’t
what that will be.
That said, the
risk here is that the above assessment is dead wrong; that is, we once again
end up with a split government, both parties decide to play chicken and push
the US
The other
problem which I introduced several weeks ago is the potential rise in interest
rates and their impact on the fiscal budget.
As I noted, the US GDP .
In the
meantime, the inability of our political class to focus on anything but its own
re-election contributes to the fear and uncertainty among businesses and
consumers and by extension their willingness to spend, invest and hire.
(6)
related to the above is the potential negative impact
of central bank money printing. Draghi
and Bernanke have made it clear that they are ‘all in’ when it comes to throwing
whatever quantity of money it takes to solve their respective problems. This week it appeared as though the Bank of
Japan has joined this orgy.
This explosive global
monetary easing impacts the US
(7)
finally, the sovereign and bank debt crisis in Europe
remains the biggest risk to our forecast.
It is amazing that since the presentation of the Draghi plan and German
high court ruling approving [to some extent] the bail out, nothing has
happened. This is largely because the
two aforementioned events pushed eurorates down and encouraged Eurobond buyers---and
as a result Spain Italy
This moment of
stability, however, is not likely to last as these countries slip further into
recession and their budgets move even further into the red, requiring even more
financing to bridge that gap. When that
time comes, only then will the Draghi plan meet its first real test; and hence,
making this moment much too soon to assume that the eurocrats have the stomach to
follow through with the fiscally tough portion of the plan.
That said, as
long as investors continue to give the eurocrats the benefit of the doubt, our
‘muddle through’ scenario continues to be operative; and since time is being bought,
there remains the chance that the EU can figure out a way to extricate itself
from its current fiscal morass.
Nevertheless,
until we know whether there is any policy follow through that will began
correcting the current flawed model, the European ‘tail risk’ remains: investor
patience wears thin and they trash the eurobond/eurocurrency markets, creating
a crisis that is beyond the eurocrats’ capability to resolve---a likely outcome
of which will be a freezing up of the entire financial system which infects our
own [via counterparty risk in credit default swaps].
The latest
from Spain
Bottom line: the US
Of course, little
can be expected from our elected representatives, at least until after
November; and even then uncertainty will remain until we know the true agenda
of the next regime. With respect to
monetary policy, it seems the Fed and ECB will continue to do what they do
best---print money; and that keeps our inflation concerns alive.
Finally, the EU
is in a strange quiet period that is not likely to last. But I am not smart enough to know what
happens next.
For the moment
then, this is all reflected in our Models.
This week’s
data:
(1)
housing: both the weekly mortgage and purchase applications
declined, the latter in particular; August new home sales were below estimates
while the much larger existing home sales number was quite robust,
(2)
consumer: weekly retail sales were mixed; the weekly
jobless claims were flat versus forecasts of a decline,
(3)
industry: the
September New York Fed manufacturing index came in well below expectations
while the comparable Philadelphia Fed’s index was down but less than estimates,
(4)
macroeconomic: second
quarter Treasury deficit was less than anticipated.
The Market-Disciplined Investing
Technical
This week, the indices
(DJIA 13579, S&P 1460) closed within two primary trends (1) their short
term uptrends [13265-14035, 1407-1485] and (2) their intermediate term uptrends
[12410-17410, 1305-1905]. Resistance
exists at the old 2007 highs of 14190/1576.
Volume on Friday
soared but that was largely a function of the quadruple expiration and the
rebalancing of the S&P; breadth was mixed.
The VIX traded back below the lower boundary of its intermediate term
trading range, re-starting the clock on the violation of this boundary on our
time and distance discipline.
Other measures
of technical strength are giving off conflicting signals (for example, the
divergence of the Dow and the transports---see below), keeping the overall
picture mixed. A check of our internal
indicator on close Friday produced the following results: in a 160 stock
Universe, 70 stocks were above their April 2012 level (13302, 1422), 59 were
not and 31 were too close to call. This
is an improvement from my last check. However,
given over one half the stocks are not above their April prices and the slim
margin between those stocks that were clearly above that level and those that
weren’t, this not exactly a clarion call for a significant advance. Of course, the ‘too close to call’ group is
large enough that any swing within this subset in either direction would likely
act as a signal of Market direction.
A look at the
DJIA and the Transports (short):
GLD was up, finishing
above the upper boundaries of its (1) very short term uptrend, (2) short term
uptrend and (3) intermediate term trading range.
Bottom
line:
(1) the DJIA and S&P are in uptrends, both in the short term
[13265-14035] and the intermediate term [12410-17410, 1305-1905],
(1)
long term, the Averages are in a very long term [78
years] up trend defined by the 4546-15148, 651-2007 and a shorter but still
long term [13 years] trading range defined by 7148-14198, 766-1575.
The historical
performance of September (short):
The
latest from Trader Mike:
Fundamental-A Dividend Growth Investment Strategy
The DJIA (13579)
finished this week about 21.6% above Fair Value (11165) while the S&P (1460)
closed 5.6% overvalued (1382). Incorporated
in that ‘Fair Value’ judgment is a ‘muddle through’ scenario in Europe
and a sluggish recovery at home that isn’t likely to improve until we change
the personnel in Washington
The economy
continues its slow. plodding progress---although this week was a bit of a
hiccup. Nevertheless, taken in its
entirety, the recent data suggests that the risk of recession is declining. But to be clear, it in no way points to anything
better than a ‘sluggish’ recovery.
I have alluded
somewhat optimistically of late to the chance that we could get ‘a change in
personnel in Washington’ which in turn could potentially mean some reform of
those factors that have been restraining US economic growth. That explicitly means that the GOP regains
the reigns of power in Washington
All that said, the probability of
severe economic dislocations in Europe remains the biggest
risk in our forecast. However, as I
noted above, the last two weeks have been strangely quiet as investors,
apparently confident that Draghi means what he says, continue to buy the PIIGS
bonds at interest rates low enough to allow those countries to finance their
deficits without asking the ECB for a bailout.
That keeps our ‘muddle through’ scenario alive though only by
default---since the bond markets have yet to test a PIIG and hence, the Draghi
plan.
This has the stock jockeys all jiggy
but does nothing for my confidence. Of course, to date, those guys are
right and I am wrong. For better or
worse, I resist following this crowd because there is nothing that I can see by
way of an improved outlook for corporate profits (indeed our economic scenario
is positive relative to many others) or higher valuations (how can interest
rates or inflation go down from here?).
So my assumption is that this rising Market is a function of enhanced
liquidity thanks to the world’s central bankers.
And therein lies the rub. I have no problem admitting either a mistake
in our forecast which could alter the profits assumption in our Model or one on
interest rates or some other fundamental factor that could play on
multiples. If that were the case, our
Portfolios would be spending cash as this is written. But if this Market is being driven largely as
a function of liquidity, then investing becomes simply a game of the greater
fool with no way of telling when the end is near.
Certainly, it can be argued that the
end of the rising Market would be marked when the printing presses go silent
and I agree with that. The problem is
that when it happens, there is no barn door big enough to let all those buyers
of liquidity exit without severe price dislocations to the entire market. I have lived through several of those
occurrences; and in my opinion, it is not worth the short term pleasure of
being loaded with equities as liquidity lifts prices to have to face the pain
when it comes time to grab dates and run.
My investment conclusion: stocks (as defined by the S&P) are
overvalued (as defined by our Model) and become more so with each passing
week. I have no clue how long this will
go on; but as long as it is driven by easy monetary policy, it is a Market that
is too risky for me to play.
To be clear, the economy is performing
as I expected; as are corporate profits.
So in the absence of any of the risks enumerated in the Economics
section manifesting themselves, I am not worried about the fundamentals. My decision to not chase stocks is based
strictly on price. So all things remain
equal, if stocks drop 10-12% in price, our Portfolios will be Buyers.
This week our Portfolios did nothing.
Bottom line:
(1)
our Portfolios
will carry a high cash balance,
(2)
we continue to include gold and foreign ETF’s in our
asset mix because we continue to believe that inflation is a major long term
risk. An investment in gold is an
inflation hedge and holdings in other countries provide exposure to better
growth opportunities. However, the
likelihood of a continued strengthening in the dollar argues for less emphasis
on these investment alternatives over the intermediate term.
(3)
defense is still important.
DJIA S&P
Current 2012 Year End Fair Value*
11300 1400
Fair Value as of 9/30/12 11165 1382
Close this week 13579 1460
Over Valuation vs. 9/30 Close
5% overvalued 11723 1451
10%
overvalued 12281 1520
15%
overvalued 12839 1589
20%overvalued 13398 1658
25%
overvalued 13956 1727
Under Valuation vs. 9/30 Close
5%
undervalued 10606 1312
10%undervalued 10048 1243 15%undervalued 9490 1174
* 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
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 40 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.
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