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 14100-14798
Intermediate Uptrend 13746-18746
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 1543-1617
Intermediate
Term Uptrend 1456-2050
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 39%
High
Yield Portfolio 42%
Aggressive
Growth Portfolio 40%
Economics/Politics
The
economy is a modest positive for Your Money. The
economic data was mixed this week with a slight tilt to the upside:
positives---weekly mortgage and purchase applications, March housing starts,
March headline and core CPI , March
industrial production, the latest Fed Beige Book; negatives---March building
permits, weekly jobless claims, the April NY and Philly Fed manufacturing
indices, March leading economic indicators; neutral---March retail sales.
Over the last couple of weeks, the economy has
transitioned from a period in which the data were largely positive to one in
which they are much more mixed. I don’t
believe that this is necessarily an ominous sign. After all, how many of these periods have we
been through since 2008? On the other
hand as I noted in our last Closing Bell, the more negative numbers just can’t
be ignored. For the moment, I am holding
to our forecast of continuing sluggish growth; but 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. This week witnessed more
disappointing economic news out of China .
You may recall that I have been depending on the impact of Chinese growth on
our economy to off set the current slowdown in Europe . That still may prove to be the case; however
as I noted in a Morning Call, the amber light is flashing.
The
negatives:
(1)
a vulnerable global banking system. This week’s episode is the report that JP
Morgan [our fortress bank] is now part of an investigation into the Monte dei
Paschi [Italy ’s
oldest and now very troubled bank] acquisition of another bank. We don’t know if there are/will be any
accusations of wrong doing on JPM ’s part;
however, there have already been indictments of other parties.
And this
remarkable installment out of Greece
(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.’
From a Fed official, today’s
absolute must read (medium):
(2)
fiscal policy. I
noted in the last Closing Bell that many of the shorter term problems [fiscal
cliff, sequester, continuing resolution, debt ceiling] had been resolved taking
the risks of a government shutdown off the table. While these steps don’t directly address our
longer term problems [too much spending, too high taxes, too high debt to GDP ],
they do buy time.
Unfortunately,
the budget process has been overshadowed of late by legislative battles on gun
control and immigration along with the Boston
bombings and the ricin flavored letters.
Obama did present
His budget which didn’t really qualify as ‘serious’ although He at least made a
token effort at a ‘grand bargain’ [tax reform/entitlement cuts]. I am sure that there is progress being made
on compromise between the house and senate budget versions---but as I noted,
this seems to have taken a back seat to other issues for now.
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.
A great article by George Will
on the bottomless pit of government spending (medium):
Nevertheless, I
remain concerned 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. This
week, Draghi hinted at the need for the ECB to join in the global race to devalue. To be sure, the decision isn’t in his
hands---Frau Merkel will make that call and I don’t see her cranking up the
printing presses. That said, if the
German economy starts to slow, she may well change her mind.
Let’s hope that
the ECB doesn’t join the current money printing extravaganza because the
Japanese and the Fed are doing a fine job all by themselves of putting the
global financial system at risk. As you
know, I don’t believe that the current massive injection of liquidity is not going
to end well; 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 soaring 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
rising inflation seems out of place in the current environment. But sooner or later, those bank reserves
[excess money supply] have to be withdrawn.
So what if it is one year, two years or five years; at that point in
time, we still have the same problem.
And riddle me
this, Batman? What happens if economy actually is slipping into recession? Will the central banks think that they have
even more leeway to print money? Talk
about uncharted waters.
The problem
here, 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 Obama is encouraging easing
mortgage lending criteria, again {do these morons ever learn?} [b] and any new infusion of global liquidity 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 .
The concern remains that violence could erupt in any of the many flash
points in the region and that would 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. Of particular concern is that Germany
may be slipping toward recession.
The problem 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. with the introduction of uncertainties about the sanctity of
deposit insurance and the imposition of capital controls, no one [read
investors] knows what eurocrats will do next to generate the money to fund the
aforementioned wider deficits.
So God only
knows what the solution to the next crisis will look like; and it leaves open
the possibility that [a] the eurocrats will make another arrogant mistake like
the ‘taxing’ of Cypriot insured deposits but [b] with the accompanying risk
that it can’t be walked back as it was in Cyprus.
In sum, we now
have a situation with [a] the European economy continuing to deteriorate,
making it seemingly only a matter of time before another crisis arises but [b]
no rules to define its resolution save the whims of the eurocrats which time
and again have been proven to include saving the rich and powerful---not a
formula that instills confidence.
IMF warns Spain
debt load unsustainable (medium):
Fitch lowers UK
credit rating (short):
Bottom line: the US
economy remains a positive for Your Money, though it appears that economic
activity is entering another one of those hiccup phases. While this could be the precursor to a
recession, it is far too early to tell.
Fiscal policy
has taken a back seat this week to the fight over gun control and the Boston
bombing. While I am sure house and
senate conferees are working behind the scenes on a budget resolution, we have
nothing to confirm it.
Meanwhile, the
Fed policy continues to streak into uncharted waters, though the issue is being
confused a bit by various Fed chiefs speechifying about the possible end of
QEinfinity. On the other hand, the G20
applauded the Bank of Japan’s recent move that slammed money printing into
overdrive. 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.
Finally, the eurocrats are no closer to
resolving the multiple European sovereign/bank insolvencies than they were a
year ago. Indeed, with the Cyprus
Unfortunately, an EU wide loss of
investor/voter confidence stemming from this could exacerbate the risks of (1)
a deeper recession in the EU with spill over effects in our own economy and (2)
a bankruptcy in the financial system that would result in a Lehman Bros/AIG -like explosion of derivative
counterparty failures. As I have noted
in the past, I have no idea how to model such an occurrence.
This week’s
data:
(1)
housing: weekly mortgage and purchase applications were
up; March housing starts were very strong though building permits disappointed,
(2)
consumer: weekly retail sales were mixed; weekly
jobless claims rose more than forecast; both the March headline and core CPI
were lower than anticipated,
(3)
industry: March industrial production was double
estimates; the April NY and Philadelphia Fed manufacturing indices were below
expectations,
(4)
macroeconomic: March
leading economic indicators fell versus forecasts of an increase; the latest
Fed Beige Book reported that economic activity was advancing moderately, singling
out real estate as improving markedly.
The Market-Disciplined Investing
Technical
The indices (DJIA-14547,
S&P 1555) ended the week on an up note, closing within all major uptrends: short term (14100-14748,
1543-1627), intermediate term (13746-18746, 1456-2050) and long term (4783-17500, 688-1750). However, they remain
out of sync on surmounting their all time highs---the Dow having done so
(14190), the S&P not (1576).
The S&P posed
the first challenge to any of those uptrends when it closed on the lower
boundary of its short term uptrend on Thursday.
However, it recovered on Friday. Clearly,
the bulls are alive and well. That said,
stocks were very oversold on Thursday’s close, so a bounce was to be
expected. Furthermore, given the duration
of this uptrend, it would be a surprise if it didn’t take a couple of assaults
to successfully break the trend---assuming that even happens.
In sum, the
trend is stock prices remains up though the technical evidence continues to
mount that the Market (1) at the very least is in for some rough sledding even
assuming the uptrends hold and (2) at the most, that the Market is rolling
over.
I think that the
best strategy remains to stay passive and let the bulls and bears duke it out
for control of direction---though if one of our stocks hits its Sell Half
Range, I will likely act.
Volume on Friday
rose; breadth improved. The VIX fell,
finishing within its short and intermediate term downtrends---a positive for
stocks.
GLD was up but
that didn’t change an otherwise horrendous week. It is now trading well below the lower
boundaries of its short term downtrend and intermediate term trading
range. It sniffed at the lower boundary
of its long term uptrend during the week but made no real challenge. I think that, at the least, GLD will re-test the
Monday lows. If the long term trend can
hold, then our Portfolios will likely begin re-building a position.
And:
http://www.zerohedge.com/news/2013-04-19/chinese-gold-exchange-sold-out-begins-importing-switzerland
Bottom
line:
(1)
the indices are trading within their short term uptrends
[14100-14748, 1543-1617]and intermediate term uptrends [1746-18746, 1456-2050].
However, the S&P is not confirming 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 (14547)
finished this week about 27.6% above Fair Value (11400) while the S&P (1555)
closed 9.2% 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 is
tracking with our forecast; though as I noted above, it seems to be entering a
more disjointed phase. We have seen
brief patches of weakness in this recovery before; so for the moment, this
won’t impact the assumptions our Valuation Model. I have, however, initiated the warning light.
No news on
fiscal policy. But I remain open to the
notion that some sort of fiscally responsible budget compromise could be
reached that would in turn change this from a negative to a positive in both
our Economic and Valuation Model. That
said, the proof of the pudding is in the eating; and we are not there yet. So hope is the operative word.
On the other
hand, global monetary policy gets scarier and more confusing by the day. Fed officials are making sounds about
somehow, someway starting to slow money growth.
Meanwhile, the G20 just gave a free pass to Japan to keep on pumping and
Draghi’s is mewing about a more aggressive ECB monetary policy. This all leaves me a bit perplexes but very
alarmed. 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 and the eurocrats continue to undermine
investor/electorate confidence. I don’t
know how a ‘muddle through’ strategy holds up in that environment and yet it
does. No matter how dire the
circumstances and no matter how unsavory the eurocrats’ temporary fixes, the
electorates and investors continue to take it all in stride.
In an investment
sense, I suppose I should be pleased because my ‘muddling through’ assumption
has worked out better than I could have ever hoped. Indeed, if investors and electorates remain
passive despite inequities imposed by the eurocrats, then ‘muddle through’ will
remain the default scenario.
My investment
conclusion: the economic assumptions in
our Valuation Model are unchanged, though we must remain cognizant of recent
deterioration in the data flow. The
fiscal policy assumptions are also unchanged but there is some hope of an
improvement---it is simply too soon to tell.
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 Europeans don’t seem to care---and you can’t have
crisis if no one thinks that there is one and everyone is willing to accept the
consequences of their misguided leaders’ actions. While this situation remains an enigma to me,
I am not changing my ‘muddle through’ assumption until or unless the European
citizens/investors demonstrate that they are no longer willing to accept inept
eurocratic governance .
This week, our Portfolios did nothing. I remain concerned enough about monetary
policy and the goings on in Europe that I am not
bothered by our Portfolios’ above average cash positions.
First
quarter earnings results to date (short):
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 14547 1555
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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