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 14374-15079
Intermediate Uptrend 13894-18894
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 1575-1649
Intermediate
Term Uptrend 1475-2064
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. There was
little economic data this week: positives---weekly mortgage and purchase applications, March wholesale
inventories, April retail sales, weekly jobless claims and the April budget
surplus; negatives---consumer credit, March wholesale sales; neutral---weekly
retail sales. On balance, an up week;
but too few stats on which to make any judgments.
Overseas, the stats out of China
continued to deteriorate. As a result, I
am removing ‘an improving Chinese economy’ as a positive factor in our
outlook. As you know, our Economic Model
assumed that a stronger Chinese economy would offset any further declines in
European economic activity. So this is
not a particularly welcome development.
On the other hand, there were more positive
numbers from Europe .
While I regard this as a hopeful sign, there hasn’t been enough data and
time to assuage my concern that Europe could be slipping
further into recession. I am not
changing our Model but in the absence of a strong performance from China ,
if the stats from Europe began worsening again, I will
likely have to lower the forecast for US
growth especially if there isn’t some improvement in our own data flow.
Net, net, the
amber light on recession is flashing; but 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.’
And:
The
pluses:
(1) our improving energy picture.
The US
The
negatives:
(1)
a vulnerable global banking system. Once again, our fortress bank [JP Morgan]
gets caught ripping off the public. This
time for credit card fraud.
Here is a
follow up to last week’s story that JP Morgan defrauded California
in an energy trading scam (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. Benghazi
was the hot top in the halls of congress this week, so we didn’t get a lot of
movement on the budget. However, as the
numbers roll in, it is clear that between the sequester and the wind down in
the Afghan war, spending is declining.
Plus economic growth and the tax increases in January have revenue
up. That means a smaller budget deficit;
and for that, we all must be thankful.
Here are some of the numbers
behind the decline in the deficit.
Before getting too jiggy, the author failed to mention that this year’s tax receipts are, to
an extent, a function of individuals and businesses moving future income back
into 2012 as a result of the 1/1/13
tax increase. So it would be a mistake
to project the current rate of FY2013 tax receipts into the future.
The flip side
to that is that it may take pressure off congress to do the real work that
needs to be done, i.e. entitlement and tax reform, in order to put the economy
back on its long term secular growth path.
Absent those reforms, the US
economy will likely remain stuck on its current sub par growth path in as much
as the government will continue to suck too many resources out of the economy
and utilize them inefficiently.
I remain
hopeful that our elected representatives will reach a compromise that could
help our economy move back toward its long term secular growth rate. If they do it, fiscal policy would become a
positive. If not, see above.
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. As I am fond of repeating, past bouts of
irresponsible monetary easing have ended in either recession or inflation as
central banks have shown themselves incapable of managing the transition from
easy to tight money; and I see no reason why it would be any different this
time.
Indeed, if
anything, it could be worse in that we have never witnessed a ramp up of money
printing on the current scale; and it is growing daily as more central banks join
the race to print more money and add bank reserves. This week, the Banks of Korea, Australia ,
Poland , Vietnam
and Sri Lanka
joined the mad dash to monetary Armageddon.
I noted last
week that simultaneous weakening in the US ,
EU and Chinese economic data could portend recession and that would likely postpone
the transition period from easy to tight money ---at least for the short term. I also noted that this would probably prompt
the central banks to pour even more money into the global financial system,
ultimately increasing the difficulty of absorbing all those bank reserves
without risking either a third recession or much higher inflation.
Whatever
happens, the fact remains that 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 when it does occur, the Fed along with other
central banks will have the same problem that they have had every time they
transitioned from easy to tight money.
As a reminder, they have never, ever made that transition successfully
and they have never had to do it on the current scale.
Other problems,
aside from the fact that this massive injection of liquidity has not accomplished
the central bankers’ goal, are that:
{i} 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. The popping of any/all
of these bubbles would likely drive the US
economy back into recession,
More on the
developing housing bubble (medium):
{ii} any new infusion of global liquidity (Japan ,
the EU and now Korea et al) will likely only exacerbate this problem.
In addition,
one of the corollaries of too much money printing is the rise in 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.’
So you can see how what might start out as a run of the mill
economic slowdown could be made worse by the popping of various asset bubbles
and/or an intensifying race of competitive devaluations.
[b] a blow up
in the Middle East .
Israel
raised the ante in Syria
this week as it bombed targets that would provide aid to Hezbollah and/or would
hamper Iranian efforts to prop up Assad.
This clearly raises the temperature in the region and the risk of a
misstep that could escalate the odds of a wider conflict. 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.
And:
(4)
finally, the sovereign and bank debt crisis in Europe
remains a major risk to our forecast. This week, the data flow out of the EU was
somewhat upbeat yet again. It is still
too early to tell if this is a sign of real improvement or just some
statistical noise However, we do know
that the European banks remain grossly overleveraged and that their asset
quality leaves much to be desired. We
also know that the eurocrats are too busy slapping each other on the back and
telling themselves how smart they are to take any action to improve conditions---witness
this week’s announcement by the Bank of Cyprus that is will maintain capital
controls until confidence returns.
On the other
hand, it could be that EU businesses are succeeding in lifting their
sovereigns’ economies in spite of the best efforts of the eurocrats to muck up
the works---much the same as is occurring in this country. But we need much more information before reaching
that conclusion and taking our focus off the risks the EU now poses to itself,
the global financial system and the US
economy.
However,
whether or not there is any natural improvement in the EU economies, the recent
move by the ECB to ease monetary policy coupled with the call by the eurocrats
to back off austerity could help mitigate any recessionary pressures short
term. Unfortunately that might also
potentially allow the southern EU governments to halt and even reverse the
steps that they have taken to improve their efficiency and to reduce their
horrendous entitlement and bureaucratic burdens. It would be a travesty to allow short term policies
to undo the progress that the aforementioned austerity measures provided toward
long term economic performance.
A letter to French president Hollande
(medium):
Bottom line: the US
economy remains a positive for Your Money.
Fiscal policy isn’t helping, though the natural sequence of events in a
recovery is occurring, i.e. tax receipts are rising and government spending is
declining. Unfortunately that is no
substitute for entitlement and tax reform.
Fed monetary
policy along with that of the rest of the world has been jammed into overdrive
with the addition of South Korea ,
Australia , Poland
and Vietnam in
the race to monetary Valhalla . ‘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 rose,
(2)
consumer: weekly retail sales were mixed while April
sales were better than forecast; weekly jobless claims declined; consumer
credit growth slowed,
(3)
industry: March wholesale inventories were up in line,
though sales were down substantially,
(4)
macroeconomic: the April US Treasury budget was in
surplus by $112.9 billion versus estimates of +$107.5 billion.
The Market-Disciplined Investing
Technical
The indices (DJIA
15118, S&P 1623) just kept on keepin’ on
this week, closing within all
major uptrends: short term (14274-15079 [the Dow was slightly above this upper
boundary], 1575-1649), intermediate term (13894-18894, 1475-2064) and long term
(4783-17500, 688-1750).
Volume was flat
and anemic again on Friday; breadth was up.
The VIX fell slightly, finishing within its short and intermediate term
downtrends. It is still a positive for
stocks; though as it approaches the lower boundary of its long term trading
range, a trader might want to buy a position as a hedge.
And:
While there has
been an accumulation of factors that are technical negatives, at the moment,
price momentum is trumping everything.
As you know, I am skeptical that it can last; but until that changes, I
want to use that momentum to my advantage---continuing to take profits when
stocks trade into their Sell Half
Ranges
Breakdown in
utilities (short):
GLD was down,
finishing within its intermediate term downtrend. Until we get a test of either the prior low
or the lower boundary of its long term uptrend, I don’t think that there is any
bet here.
The
latest from Marc Faber (short):
Bottom
line:
(1)
the indices are trading within their short term uptrends
[14374-15079, 1575-1649] and intermediate term uptrends [13894-18894, 1475-2064].
(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 (15118)
finished this week about 32.3% above Fair Value (11425) while the S&P (1633)
closed 15.3% overvalued (1416). 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 assumptions
in our Model related to US economic growth and fiscal policy remain
unchanged. I have noted that a ‘grand
bargain’ on entitlement and tax reform would lead to me to raise my long term
growth assumption which would in turn lift Fair Value. But I am under no illusion that this is about
to happen.
The monetary
policy assumption has to change; not so much because of what our Fed is doing
but more because the rest of the world is following suit. Long term, I believe that global money
printing will exacerbate the outcome in the US as all those central banks
transition from ease to tightening---either a worse recession or higher
inflation.
Short term, I am
less clear of the impact because of the economic slow down in China
and the likelihood of further weakness in the EU---though, as I have noted, recent
data suggests that Europe may be on the cusp of some
improvement. More succinctly, a global
slowdown would allow continued aggressive monetary easing and push the
‘transition date’ further into the future.
The point on
monetary policy long term is that if history repeats itself, (1) the transition
from easy to tight [normal] monetary policy will be a bigger negative for our
Models than is currently reflected; I just don’t know when, (2) more
importantly, neither do I know the extent of the damage that will occur in the
tightening process because we are in totally uncharted waters and (3) as a
result, this risk is not properly reflected in our Models.
With respect to
Europe specifically, whether its economy is or is not getting worse, any new monetary easing from
the ECB will likely produce some short term positive effects and would assure
that our ‘muddle through’ scenario remains
alive and well.
My investment conclusion: most of the assumptions in our Models are
unchanged; though that of monetary policy almost assuredly will and to the
negative. I just don’t know when or to
what degree.
Certainly
nothing has occurred that improves equity valuations or persuades me to buy
stocks are current price levels. If
anything, the ever expanding race in global monetary easing has raised my
anxiety level to new heights.
This week, the High Yield Portfolio
Sold one half of its position in Pioneer Southwest Energy (PSE).
Update
on this quarter’s earnings and revenue ‘beat’ rates:
Saturday
morning humor:
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 5/31/13 11425 1416
Close this week 15118 1633
Over Valuation vs. 5/31 Close
5% overvalued 11996 1486
10%
overvalued 12567 1557
15%
overvalued 13138 1628
20%
overvalued 13710 1699
25%
overvalued 14281 1770
30%
overvalued 14852 1840
35%
overvalued 15423 1918
Under Valuation vs.5/31 Close
5%
undervalued 10853 1345
10%undervalued 10282 1274
15%undervalued 9711 1203
* 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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