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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