An Analysis of Daily Events that Impact Your Money
Tuesday, April 30, 2013
United Technologies (UTX) 2013 Review
United
Technologies is an industrial conglomerate which manufacturers and services
aircraft engines (Pratt & Whitney), manufacturers heating, ventilating and
air conditioning equipment (Carrier), manufacturers and services elevators
(Otis), builds helicopters (Sikorsky), manufacturers aerospace and industrial
products (Hamilton Sundstrand) and provides security and fire protection
services (UTC Fire and Security). The
company has earned an 18-20% return on equity over the last ten years while
growing profits and dividends at a 13-15% rate.
While UTX ’s businesses are impacted
by the global economic activity, the company has grown fairly consistently returned
because:
(1) its main businesses possess a large parts and
service component which adds stability to earnings,
(2) the
diversity of its product line allows for consistency in revenue and earnings
performance,
(3) its strong
cash flow allows for further acquisitions and product innovation.
Negatives:
(1) a
significant portion of its business is subject to government funding,
(2) its
international operations are subject changes in foreign economies growth rates
as well as currency fluctuations and government regulations,
Statistical Summary
Stock Dividend Payout # Increases
Yield Growth Rate Ratio
Since 2003
Debt/ EPS Down Net Value Line
Equity ROE Since 2003 Margin Rating
*Because the market segments in
which these companies operate are so diverse, comparable data would be
meaningless.
Chart
Note:
UTX stock made good progress off its March
2009 low, quickly surpassing the downtrend off its October 2007 high (red line)
and the November 2008 trading high (green line). Long term, the stock is in an uptrend (straight
blue lines). Intermediate term it is in
a uptrend (purple lines). The wiggly
blue line is on balance volume. The
Dividend Growth Portfolio owns an 85% position in UTX . The upper boundary of its Buy
Value Range Sell
Half Range
4/13
Morning Journal--Update on big four economic indicators
Economics
This Week’s Data
March
personal income rose 0.2% versus expectations of an 0.4% increase; personal
spending advanced 0.2% versus estimates of +0.1%.
The
April Dallas Fed manufacturing index came in at -15.6 versus forecasts of +5.0.
Other
Energy
and healthcare (medium):
Update
on big four economic indicators (medium):
Politics
Domestic
Female DNA
found on Boston bomb (medium):
Education
spending (short):
The Morning Call---Appropriately enough, it is Kentucky Derby week
The Morning Call
The Market
Technical
The
indices (DJIA 14818, S&P 1593) had another great day, finishing within all
major uptrends: short term (14220-14902, 1557-1651), intermediate term
(13804-18804, 1463-2057) and long term (4783-17500, 688-1750). In addition, the S&P confirmed its break
above its former all time high and moved back in sync with the Dow.
Volume
was abysmal (continuing the unhealthy pattern of up prices on down volume);
breadth improved. The VIX rose
fractionally, remaining within its short and intermediate term downtrends.
GLD
was up again, closing within its intermediate term downtrend and its long term
uptrend. However, it is still below the
lower boundary of its short term downtrend.
Bottom line: with yesterday’s close, all signs are ‘go’
with respect to another leg to the upside.
As you know, my best guess (which admittedly hasn’t been worth much
lately) is that the upper boundaries of the Averages long term uptrends are a
solid barrier. Certainly, with the trend
up, that boundary is going to advance over time. But at some point, the downside risk has to
enter into investor’s risk/reward analysis.
Fundamental
Headlines
Yesterday’s
economic news was mixed to negative: March personal income was below
expectations though spending came in better than estimates; the Dallas Fed
April manufacturing index was terrible.
While disappointing viz a viz our forecast, nobody else in stock land
cared.
Investors
were focused on the potential easing by the ECB this week and the formation of
a new government in Italy . Plus the Market’s drive to the hoop is itself
increasing becoming the story driving the Market.
Bottom line: ‘central bank monetary expansion seems to
be the fuel propelling stock prices higher because I sure can’t justify them on
fundamentals. Being a lousy trader, I am
not good at rationalizing prices that are too far divorced from my version of
reality. It is particularly difficult
this time around because of the extremes to which the central banks have taken
monetary policy and the lack of any sound explanation of how they are going to
unwind these measures without causing severe disruptions.
Until someone can ‘splain’ to me a
reasonable end game, I am content to under perform as a price to avoid
disaster.’
As I have noted
endlessly, I am not a trader and do not trade for my own account. However, for those of you who do trade and
want to participate in whatever is left of the up market, I would be looking at
underperforming sectors, commodities being the prime example. After all, if the global economy is going to
the moon, commodities should do better.
Two to look at are the Powershares Commodity ETF (DBC) and Gabelli’s Gamco Natural
Resource Gold and Income Trust (GNT ).
Another
underperforming area is emerging market stocks: Vanguard Emerging Market ETF
(VWO), Wisdom Tree High Yield Emerging Market ETF (DEM), S&P Emerging
Market Dividend ETF (EDIV).
Tight stops are
absolutely essential.
At some point
risk is going to kick in and Ranger Equity Bear ETF (HDGE) might be considered.
The
latest from John Hussman (medium):
The
return of the housing bubble (short but a must read):
The
latest move by the Bundesbank (medium):
Is
a EU QE coming (short/medium)?
The
bank with the largest derivative exposure (medium):
***overnight
EU unemployment rate ticked up again.
Yesterday,
I responded to an article that excused the Fed from a raft of sins. This article entails considerably more
economic expertise than my own. A must
read (medium)
http://www.zerohedge.com/news/2013-04-29/guest-post-why-feds-buy-and-hold-no-sales-exit-not-feasible
Inflation
and the Fed (short):
Investing for Survival
Wall
Street is out of control (short):
http://www.thereformedbroker.com/2013/04/28/absolutely-out-of-control/
Monday, April 29, 2013
A Reply to Fed (Bernanke) Apologists
Markets
worldwide seem intent on ‘not fighting the Fed (all central bank easing)’ to
the exclusion of any concern that valuations may be getting out of whack or
what the consequences may be of unlimited monetary ease.
On the first
point, in an earlier article “Remember, Buy Low, Sell High”, I presented my
arguments for why stocks are in overvalued territory.
As to the second
point, while I am not a trader and, therefore, have a difficult time divorcing
fundamentals (overvalued stocks) from current price levels, I do understand the
liquidity affects that overly easy central bank monetary policy can have on
security prices.
That said, past
periods of excessive Fed supplied liquidity have ended badly; and to date, I
haven’t found anyone that has a clear explanation of what will happen when the
central banks have to start tightening after this unprecedented expansion in
global bank reserves. Nonetheless, I
have a hint. We know what has happened
in the past when the Fed tightened after a period of easy money---100% of the
time, it either tightened too quickly and pushed the economy into recession or it
waited too long and inflation spiked.
Unfortunately,
this time around the Fed’s balance sheet is exponentially more bloated than it has
been in the past. Hence, it seems like
the potential negative consequences in transition to tighter money might also
be larger. I could try to quantify that
potential downside by extrapolating into the present the past experiences when
monetary policy transitioned from easy to tight. But I won’t.
I will simply contend that there are risks and that given the extent of
money expansion, those risks might be higher than experienced in the past.
What has my dandruff up is the
Fed apologists that keep telling me that Bernanke is doing a great job and that
there are no monetary related problems about which to be concerned. I read one such article published on one of
my favorite websites yesterday; and after
bouncing off the ceiling a couple of times, I decided to address what
the authors entitled ‘Everything You Think You Know
About the 'Big Bad Fed' Is Wrong’. :
Here are the
‘misconceptions’ that they attempt to prove wrong. (to be clear, the authors of
the aforementioned article are stating that the bold, italicized statements are
wrong):
(1)
‘printing money increases the money supply’ Well, duh.
Anyone paying attention to the economy and the Fed knows that is not how
monetary policy works; and, hence the authors are correct to say that it is
wrong. What is also correct is that the money
that the Fed is printing goes into bank reserves; and unfortunately, at the
moment those banks are not rushing to lend money (which would create money
supply). So, lots of reserve growth but little
money supply growth. So far, the authors
and I are in agreement.
But it stops
there. Because the Fed is increasing
reserves with the stated intent of increasing money supply. That is done by the banks lending its
reserves which the Fed believes will speed up economic growth and lower
unemployment. The problem is that to
date its policy has been a bust. However,
if we all woke up tomorrow morning and the banks had lent all those reserves
overnight, money supply would explode and Bernanke et al would be wee weeing in
their whitey tighties and scrambling to withdraw those reserves.
So it seems
to be a bit disingenuous to confuse the result (money printing hasn’t increased
money supply---to date) with the intent (printing money increases bank reserves
which will hopefully increase money supply).
Yes, there has been no surge in money supply, but not for wont of
trying.
(2)
‘QE is pumping cash into the stock market’.
OK, not directly. As you know, most of the QE’s to date have
involved the Fed creating money and buying government bonds and mortgages. The authors argue most of those bonds are
bought from banks and a big chunk of that remains as excess reserves.
(a) true
technically. But in QEIII, virtually all bonds bought by the Fed come almost
dollar for dollar from the Treasury though indirectly (the UST
sells the bonds to primary dealers who then sell them to the Fed and make the
vig) to finance our on going trillion dollar deficits ($1 trillion, i.e US
deficit/12 months = $83,33 billion/month---amazingly close to $85 billion per
month wouldn’t you say?). To be sure,
that is not the stock market; but the effect of these purchases are not
benign--but that is a whole other issue.
See (3) below.
(b) the authors
rightfully point out that much of the positive stock market performance is a
derivative of the ‘don’t fight the Fed’ notion; that is, the Fed’s aggressive
monetary action theoretically provides a downside to the economy and that is a
positive for investor psychology which leads to increased stock investments.
However, I
think psychology is secondary. The main
reason investors are flocking to stocks is that the Fed’s zero interest rate
policy isn’t giving them much of a choice. Investors, even conservative fixed
income types (seniors), have no other place but the stock market to put their
money to earn a return. So while QE may
not be directly pumping money into the stock market, it is forcing money into
the stock market via the perversity of zero interest rates. In the process, it is robbing those conservative
investors, enriching the banks and encouraging the misallocation of capital.
(c) if you
think the big banks are sitting on all those reserves and not doing anything
with them (cough, prop trading, cough), I have a bridge in Brooklyn
that I will sell you cheap.
(3)
‘QE will create runaway inflation’. I agree with the authors that this is not
likely---the runaway part, that is. And they acknowledge that the
inflationistas have been lowering their own dire prognostications. However, that doesn’t mean the economy won’t
suffer from another round of Fed induce inflation. So how about ‘QE may create high inflation’? I am not arguing Weimar Republic/Zimbabwe
level inflation. But I will argue that
based on history, the Fed has never, ever extricated itself from an easy money
policy without either (a) starting to tighten too soon which led to an economic
slowdown if not recession or (b) waiting too long which led to higher than
generally acceptable levels of inflation.
So maybe it should be QE will not create runaway inflation but it
will likely lead to either recession or higher inflation’.
The authors pooh
pooh the notion that inflation could still occur as a result of current Fed
policy. And you know what? They could be right. However, they fail to note that Bernanke has
stated that one of the signs that QE is working is.........drum
roll---inflation. Of course, what
Bernanke means is just a little bit of inflation. But what if he is wrong and ‘a little bit’
turns out to be a whole lot. Assuming the
Fed is smart enough to fine tune its results I believe is a dangerous
assumption. As proof I suggest that you
check on Bernanke’s statement about the health of the housing market mere
months before that bubble blew up.
In other
words, what the authors fail to address is that at some point in time, a day, a
month, a year, a decade from now, the Fed will have to (a) stop buying $85
billion a month in governments and mortgages, then (b) start removing all those
reserves from bank balance sheets. And
what happens then? To be sure, if the US
economy continues to grow at a sub par pace into infinity, the task may be
postponed or rendered moot. But that is not the Fed’s stated intent; and assuming
that it takes all steps necessary to goose the economy (have banks lend those
reserves) and the economy begins to grow, then what happens?
So,
notwithstanding the authors discounting the argument that nothing has happened ‘yet’,
in truth ‘yet’ hasn’t happened yet. But
more importantly, they offer no useful explanation of how the reduction of this
massive accumulation of reserves is going to be executed without causing
problems when, as and if the economy ever picks up steam except to say that
investors will ultimately come to understand how the transmission mechanism of
monetary policy works.
But I have an
add-on question. How much larger can the
Fed balance sheet get before it is forced to do something? After all, if the
balance sheet keeps growing, at some point in time even a 5 or 10 basis point
move up in rates (down in prices) will destroy the entire Fed highly leveraged equity
position. Now I know that in its
infinite wisdom that the Fed has already dealt with the accounting issue, i.e.
it excused itself from recognizing capital losses. But will investors be that forgiving? I don’t know.
My point is that no one else knows the answers to the above inflation
related questions; and that is a problem for which the Fed is directly
response.
Furthermore as
I noted above, the current QE is basically buying all the new debt issued by
the Treasury to finance our deficit. And
that deficit funds what? Solyndra,
Fisker, federal employee salaries and benefits, war, ethanol and other agricultural
subsidies. What do you suppose the
inflationary impact is of all that extra inexpensive money courtesy of the Fed being
pumped into the economy funding nonessential, inefficient projects, regulations,
useless federal employees and defense materiel?
(4)
‘QE causes high oil prices’. Hmmm. I
haven’t heard this one; but the authors got me on it anyway. Technically, they are correct---from the
initial date of inception of the QE’s, oil prices may be up a little but not
much and nothing about which to complain.
However, check the history of monetary ease, i.e. QE by another name. Oil and food prices almost always start
moving up when the Fed over stimulates or over stays its stimulus
policies.
A big reason
this isn’t happening with oil right now is because of the fracking revolution
in this country which has added significantly to the supply of oil while the
sluggishly growing economy has held back demand. On the
other hand, have you been to the grocery store lately?
And not to be
repetitious, but no one can say definitely what the impact of QE on oil prices will
have been until QE is over.
(5)
‘QE has debased the dollar’. No, the Fed has debased the dollar and has
been doing so since the date of its inception.
Burns, Miller, Greenspan et al, they all did it long before anyone ever
heard of QE or Bernanke---he is just the latest. Sure there have been periods of dollar
appreciation, like when Volcker SHRANK money supply (excuse me, bank reserves). And yes, the dollar is doing fine right now;
but more because the rest of the world is such a mess and the US
just happens to be the cleanest shirt in the dirty laundry---so funds are
flowing into dollar denominated assets.
In the end,
the cold hard facts are that our Fed has a long history of debasing the dollar
primary via an overly accommodative monetary policy; and anyone who argues that
current Fed policy (QE) is not overly accommodative may need to rethink that
position.
The
bottom line here is (a) the Fed’s balance sheet is bloated by any measure, (b)
that hasn’t had negative effects to date, but not because the Ber-nank isn’t
moving heaven and earth in a hopeless attempt to squeeze something positive out
a hugely expansionary monetary policy, (c) nobody, including me, knows how this
chapter in Fed policy is going to end, because we are in totally uncharted
waters, (d) however, a review of monetary history points to numerous examples
of easy money leading to economic difficulties (e) nevertheless, I am not
arguing that it will end badly, (f) rather I am arguing that current Fed policy
has created sufficient potential risks to the economy that it should be held
accountable not only for creating those risks but also the consequences of its
actions and (g) finally, the history of QE has yet to be written. I think it unproductive to assume that
because nothing untoward has occurred to date as a result of current Fed policy
that nothing untoward will ever happen as a result of current Fed policy.
Monday Morning Chartology---4/29/13
The Morning Call
The Market
Technical
Monday Morning ChartologyThe S&P remains in all major uptrends and finished the week above its prior all time high (1576) for the fourth day. A close tonight over 1576 will confirm the break. In addition, that developing head and shoulders pattern has been virtually nullified.
GLD
rallied last week, recovering above the lower boundary of a newly re-set
intermediate term downtrend. It remains
below the lower boundary of its short term downtrend and above the lower
boundary of its long term uptrend,
VIX
continues its directionless wandering.
It is trading within two downtrends (short and intermediate term); but
it is also near its historic low. If
stocks are going to make a new high, one might think that the VIX will see a
new low.
Update
on ‘the best stock market indicator ever’:
Fundamental
The
Market at a glance (short):
The
short supply of assets (short):
Update
on this quarter’s earnings and revenue ‘beat’ rates (short):
The Fed and economic
growth (medium and today’s must read):
The
latest from Greece
(or what’s left of it):
And
Italy (medium):
News on Stocks in Our Portfolios courtesy of
Seeking Alpha
Economics
This Week’s Data
EU
personal income experiences record drop:
Other
Reinhart
and Rogoff on the Reinhart/Rogoff debate (medium):
More
on the Reinhart/Rogoff debate (medium):
The
latest on the student loan bubble ( a must read):
Politics
Domestic
Eric Holder on
immigration (short):
International War Against Radical Islam
Investigative
points on the Boston Marathon numbers (medium/long):
Saturday, April 27, 2013
The Closing Bell-4/27/13
The Closing Bell
Statistical Summary
Current Economic Forecast
2012
Real
Growth in Gross Domestic Product:
+1.0-
+2.0%
Inflation
(revised): 2.5-3.5 %
Growth
in Corporate Profits: 5-10%
2013
Real
Growth in Gross Domestic Product +1.0-+2.0
Inflation
(revised) 2.5-3.5
Corporate
Profits 0-7%
Current Market Forecast
Dow
Jones Industrial Average
Current Trend (revised):
Short
Term Uptrend 14144-14850
Intermediate Uptrend 13792-18792
Long Term Trading Range 4783-17500
2012 Year End Fair Value
11290-11310
2013 Year End Fair Value
11590-11610
Standard
& Poor’s 500
Current
Trend (revised):
Short
Term Uptrend 1550-1624
Intermediate
Term Uptrend 1459-2053
Long
Term Trading Range 688-1750
2012 Year End Fair Value 1390-1410
2013 Year End Fair Value
1430-1450
Percentage Cash in Our Portfolios
Dividend Growth
Portfolio 41%
High
Yield Portfolio 42%
Aggressive
Growth Portfolio 43%
Economics/Politics
The
economy is a modest positive for Your Money. The
economic data was mixed this week: positives---weekly mortgage and purchase
applications, weekly retail sales, weekly jobless claims, first quarter GDP
and the final April University of Michigan consumer sentiment index;
negatives---the Chicago National Activity Index, the Richmond and Kansas City Fed
April manufacturing indices and March durable goods orders; neutral---March new
and existing home sales.
This continues the transition in economic
measures from a period in which the stats were largely positive to one in which
they are much more mixed. As I noted
last week, we have seen this pattern before so I am not presently alarmed about
a possible recession. However, the amber
light is flashing and if the data becomes more negative and remains that way
for a month or so, then it will likely be a sign that the current economic
upturn may be ending.
For the moment,
our outlook remains unchanged:
‘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) our improving energy picture.
The US
(2) an improving Chinese economy. The data out of China
was once again disappointing this week: lousy PMI
and poor trade numbers. Another two to
three weeks of this news flow and I will remove this as a positive factor.
The
negatives:
(1) a vulnerable global banking system.
This week’s edition [as an aside, isn’t it amazing that virtually every
week we get more evidence of bankster malfeasance?] comes from a report on how
the Italian bank, Monti dei Paschi got into such deep trouble [this is a must
read]:
And this study
from the Royal Bank of Scotland
on central bank purchases of equities. Also
a must read:
Finally, a look
at the health of the Italian banking system (medium):
‘My concern here is that: [a] investors ultimately
lose confidence in our financial institutions and refuse to invest in America 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)
fiscal policy. Over
the last month or so, I have been somewhat upbeat because our elected
representatives managed to negotiate some short term solutions to remove a
government shutdown as a risk. Well,
politicians will be politicians. Being
so, Obama elected to utilize the sequester to shutdown some of the most
economically/politically sensitive government functions in hopes of getting the
GOP to back off the cuts and/or agree to new taxes.
The poster
child for this policy was the furloughing of air traffic controllers which in
the past week was causing considerable pain.
Fortunately congress acted to
bring some sanity to the budgeting process and addressed the air traffic
controller issue in a way that gets them back to work without impacting the
spending cuts in sequestration.
So there is
good news [congress acts fiscally responsible] and bad news [Obama again shows His
ideological spots and seems intent on making a compromise as difficult as
possible].
That leaves me
somewhat ambivalent. I am encouraged by
the congress [especially the senate] move to compromise; but I am
shocked/amazed/concerned [?] by Obama’s willingness to inflict pain on the
electorate [delays in flying] and the economy [lost revenues to airlines,
travel related businesses plus added costs to consumers and businesses] to
achieve a political goal---which suggests that entitlement cuts/tax reforms may
be more difficult to achieve than I had hoped.
My bottom line
remains unchanged: if our ruling class can implement meaningful tax reform and
reduce government spending and the deficit, that could help get our economy
moving back toward its long term secular growth rate. If that happens, fiscal policy would become a
positive. However, if the Administration is willing to sacrifice the economy to
forward its political agenda the odds of achieving meaningful fiscal reform may
have diminished.
I am also
worried about...... the potential rise in
interest rates and its impact on the
fiscal budget. As I have noted
previously, the US
So the risk here is two fold: [a] to the
Fed---its balance sheet is levered to the point that Lehman Bros. looks like it
was an AAA credit. So if interest rates
go up {and prices go down}, the very thin equity piece of the balance sheet
would disappear. The Fed would then be
technically bankrupt. and [b] to the Treasury---it must pay the interest
charges. Hence, if rates go up, the
interest costs to the government go up; and if they go up a lot, then this
budget line item will explode and make all the more difficult any vow to reduce
government spending as a percent of GDP .....
(3)
rising inflation:
[a] the
potential negative impact of central bank money printing. The
ECB meets next week and investors seem hopeful that there will be some sort of
monetary policy easing.
As you know, I
don’t believe that the current massive injection of liquidity is not going to
end well; and the more players that join in and the longer it goes on, the
worse that outcome will be.
Of the twin
evils {recession, inflation} that come with the irresponsible expansion of
monetary policy, my bet is that tightening won’t happen soon enough; so the US
economy will sooner or later face rising inflation [a] Bernanke has already
said {too many times to count} that
when it comes to balancing the twin mandates of inflation versus employment, he
would err on the side of unemployment {that is, he won’t stop pumping until he
is sure unemployment is headed down}.
That can only mean that the fires of inflation will already be well
stoked before the Fed starts tightening and [b] history clearly shows that the
Fed has proven inept at slowing money growth to dampen inflationary
impulses---on every occasion that it tried.
Granted, the prospect of higher
inflation seems out of place in the current environment. But the stated intent of all this central
bank easing is to gun inflation. I have
no idea if they will be successful if ever.
But I can add; and I know that bank reserves [money supply in waiting]
are growing daily at an historically rapid pace.
Sooner or
later, those bank reserves have to be withdrawn. It may be in a day, a month, a year, two
years or five years. But whenever that
happens, the Fed will have the same problem that it has had every time it has
transitioned from easy to tight money; only this time the magnitude of the
transition will be exponentially higher than at any time in the past.
The more
immediate problem, aside from the fact that this massive injection of liquidity
has not accomplished the central bankers’ goal, is that [a] our banks have used
this largess for speculative purposes, increasing trading activities and
funding the growth of auto and student loan bubbles---and now perhaps a new
mortgage bubble and [b] any new infusion
of global liquidity {Japan and perhaps the EU} will likely only exacerbate this
problem.
A corollary concern is that all
this money printing increases the potential for a currency war. ‘ an
overly easy monetary policy generally results in the depreciation of the
currency of that bank’s country which in turn improves that country’s trade
balance and strengthens its economy.
That is great unless its trading partners get pissed and commence their
own ‘easy money/currency depreciation’ effort. At that point, you got yourself a currency
war; and that seems to be the direction that the major economic powers are
headed in.’
[b] a blow up
in the Middle East .
Syria
returned this week as the regional flashpoint as Obama began rattling His
sword. My worry is that if violence erupts,
it may in turn lead to a disruption in either the production or transportation of
Middle East oil, pushing energy prices higher.
(4)
finally, the sovereign and bank debt crisis in Europe
remains a major risk to our forecast. This week, the evidence continued to come in
pointing to a further weakening in the EU economy: record unemployment, reports
of wide spread hunger in Greece ,
losses at Italian banks.
The problem with
a weakening EU economy is that lower economic activity means lower tax receipts
which means wider deficits which means
[a] more bail out money is required and [b] the riskier all that sovereign debt
on bank balance sheets becomes.
Additionally, lurking in the background is the fallout from the Cyprus
crisis, i.e. the introduction of uncertainties about the sanctity of deposit
insurance and the imposition of capital controls and along with them the fear
that the eurocrats could make another hubris inspired policy mistake but find
themselves unable to reverse it as they did in Cyprus.
The ECB
offered a ray of sunshine [?] this week when multiple officials suggested that
the EU ditch austerity and join the US
and Japan in
trying to print their way to prosperity.
To be sure, if that happens, it would likely cement our ‘muddle through’
scenario at least for another year or two.
But as I noted a couple of weeks ago, the EU sovereign economies have survived
what seems like the worst of austerity and are healing. By that I mean their economies are adjusting
to smaller governments, reduced cradle to grave social welfare programs, deeply
entrenched unions that stifle productivity and less overall government spending.
So while the
ECB switching to an easy money policy has the entire ‘don’t fight the Fed’
world absolutely giddy, I am not sure it is the best policy for the long
economic health of the EU.
I include this
article less for its market forecast and more for the discussion of what
could be going on in Europe (medium):
And
new poll shows declining support for the EU (medium):
Bottom line: the US
economy remains a positive for Your Money, though it appears to be entering a
slower growth environment---hopefully only temporarily. While this could be the precursor to a
recession, it is far too early to tell.
Fiscal policy remains
uncertain as Obama appears to have not given up on an ideologically driven
political agenda in which He seems prepared to forgo economic growth to achieve
it.
Irresponsible Fed
policy is being made worse by the triple down, all in, balls to wall Japanese
monetary expansion. Plus this duo may be
joined by yet another major central bank---the ECB. Regrettably,
I am not smart enough to know when Markets will cease to tolerate this
irresponsible behavior by the central banks or what the magnitude of the fall
out will be when they do. My guess is
that it won’t be pretty and I will likely have to alter our Model.
This week’s
data:
(1)
housing: weekly mortgage and purchase applications were
up; March existing and new home sales advanced but less so than anticipated,
(2)
consumer: weekly retail sales were up; weekly jobless
claims were quite positive, the final reading of the April University of
Michigan index of consumer sentiment was up more than forecast,
(3)
industry: March durable goods orders were well below
estimates as were the March Chicago Fed National Activity Index and the April
Richmond and Kansas City Fed manufacturing indices,
(4)
macroeconomic: the initial first quarter GDP
reading was solid though not as strong as expected..
The Market-Disciplined Investing
Technical
The indices (DJIA
14700, S&P 1585) ended the week on an up note, closing within all major uptrends: short term (14142-14850,
1550-1624), intermediate term (13792-18792, 1459-2053) and long term (4783-17500, 688-1750). However, they remain
out of sync on surmounting their all time highs---at least for one more trading
day.
In the past
week, the S&P has gone from challenging the lower boundary of its short
term uptrend to being on the verge breaking to a new all time high. Clearly, the bulls are in control and the
question as to whether the recent sideways move is a sign that the Market is
rolling over or building a base for another leg up is about to be answered.
As I noted in
Friday’s Morning Call, assuming the S&P breaks out to the upside, I think
that the next most likely resistance occurs at the upper boundaries of the
Averages long term uptrends. Further, I
think that these levels will be show stoppers.
That leaves us with an upside of circa 10% following an over 100% run to
date. Playing for that last 10% is
something some traders can do with great skill.
I am not one of those guys/gals.
I am quite happy to forego what is left of the upside in order to have
my principal protected against any sudden move to the downside. As always, if one of our stocks hits its Sell
Half Range
Volume on Friday
was down---again sustaining the pattern of higher prices on lower volume; breadth
was not good. The VIX fell slightly,
finishing within its short and intermediate term downtrends---still a positive
for stocks.
GLD was down
though it had a pretty good week. It
managed to bounce above the lower boundary of a newly re-set intermediate term
downtrend but remained below the lower boundary of its short term downtrend. I will be watching any new move to the downside
to see if the prior low or the lower boundary of its long term uptrend can be
held. If so, our Portfolios will likely
start re-building their positions.
Bottom
line:
(1)
the indices are trading within their short term uptrends
[14144-14850, 1550-1624] and intermediate term uptrends [13792-18792, 1459-2053].
The S&P appears poised to confirm the DJIA’s breakout above its all time
high.
(2) long term, the Averages are in a very long term [80 years] uptrend
defined by the 4873-17500, 688-1750.
Fundamental-A Dividend Growth Investment Strategy
The DJIA (14700)
finished this week about 28.9% above Fair Value (11400) while the S&P (1585)
closed 12.2% overvalued (1412). Incorporated
in that ‘Fair Value’ judgment is some sort of half assed attempt at getting fiscal
policy under control, continued money printing, a historically low long term
secular growth rate of the economy and a ‘muddle through’ scenario in Europe.
The economy along
with first quarter earnings season is tracking with our forecast; although as I
noted above, it has been a bit more sluggish in the last three weeks. We have seen brief patches of weakness in
this recovery before; so for the moment, this won’t impact the assumptions our
Valuation Model. Nevertheless, the amber
light is flashing.
Fiscal policy
developments this week focused on the politics of sequestration; and it did
nothing to encourage me that a responsible budget compromise could be
reached. Nonetheless, I remain open to
the notion that some sort of negotiated budget settlement could be reached that
would in turn change this factor from a negative to a positive in both our
Economic and Valuation Models. That
said, the proof of the pudding is in the eating; and we are not there yet.
Global monetary
policy just gets scarier and more confusing by the day. It now looks like the ECB could join the
money printing extravaganza next week. We
are in the midst of a grand, though I fear very dangerous, experiment. It is very difficult to make assumptions in
our Models when we are going where we have never gone before.
Moving on to
Europe, its economy is worsening but a new easy money policy could produce some
short term positive effects and would likely assure that our ‘muddle through’
scenario will be given new life.
My investment
conclusion: the economic assumptions in
our Valuation Model are unchanged, though we must remain cognizant of the recent
deterioration in the data flow. The
fiscal policy assumptions are also unchanged and Obama is doing nothing to help
improve this factor. The monetary policy
assumptions are also unaltered. However,
that is a function of not knowing how to model the current, unprecedented
explosive growth in global money supply and not because I have confidence in my
assumptions.
The EU recession/financial debt problems
keep getting worse; but the ECB is floating a trial balloon that it believes
will fix this problem---easy money. This
would increase our ‘muddle through’ forecast’s half life, though I fear it will
simply prolong the agony.
There
isn’t anything that makes me want to chase stock prices further into overvalued
territory. I remain unconcerned by our
Portfolios’ above average cash positions.
This week, our Portfolios Sold two
holdings (SCHW, CME ) that failed to meet their
periodic quality check for inclusion in our Universe.
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 [which is now under review]. An
investment in gold is an inflation hedge and holdings in other countries
provide exposure to better growth opportunities.
(3)
defense is still important.
DJIA S&P
Current 2013 Year End Fair Value*
11600 1440
Fair Value as of 4/30/13 11400 1412
Close this week 14700 1585
Over Valuation vs. 4/30 Close
5% overvalued 11970 1482
10%
overvalued 12540 1553
15%
overvalued 13110 1623
20%
overvalued 13680 1694
25%
overvalued 14250 1765
30%
overvalued 14820 1835
Under Valuation vs.4/30 Close
5%
undervalued 10830 1341
10%undervalued 10260 1271
15%undervalued 9690 1200
* 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 with
somewhat higher inflation.
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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