The Closing Bell
Statistical Summary
Current Economic Forecast
2012
Real
Growth in Gross Domestic Product:
2.2%
Inflation
(revised): 1.8 %
Growth
in Corporate Profits: 16.1%
2013
Real
Growth in Gross Domestic Product +1.0-+2.0
Inflation
(revised) 1.5-2.5
Corporate
Profits 0-7%
Current Market Forecast
Dow
Jones Industrial Average
Current Trend (revised):
Short
Term Uptrend 14702-15435
Intermediate Uptrend 14081-19081
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 1615-1694
Intermediate
Term Uptrend 1494-2082
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 42%
High
Yield Portfolio 44%
Aggressive
Growth Portfolio 43%
Economics/Politics
The
economy is a modest positive for Your Money. This
week’s economic data was mixed though tilted a tad to the negative side:
positives---weekly retail sales, May vehicle sales, weekly jobless claims, May
nonfarm payrolls, May PMI and the April
trade deficit; negatives---weekly mortgage and purchase applications, the ADP
private payroll report, both the ISM manufacturing and nonmanufacturing
indices, April construction spending, April factory orders, first quarter
productivity and unit labor costs; neutral---the latest Fed Beige Book report. So the data continues to roughly reflect our
forecast, thought just barely; hence, I am leaving the amber light flashing.
‘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.’
Update
on the big four economic indicators:
The
pluses:
(1) our improving energy picture.
The US
The
negatives:
(1) a vulnerable global banking system.
‘My
concern here.....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. Obama’s woes
keep on growing. This week, the IRS
scandal slowing worked its way up the
food chain. Thursday, a new brouhaha
broke out with the disclosure of the NSA monitoring US citizens’ phones and
emails. It is unclear at the moment if
the court’s were circumvented. But
regardless, this is going to keep ruling class attention diverted from
responsible fiscal management.
That said, Obama seems
unphased by it all. He butted heads with
Boehner over the budget this week, vowing to veto any legislation that didn’t
conform to His vision [more spending, more taxes]. While this ‘politics as usual’ helps the news
agency fill space, it is becoming increasingly clear that one of the many
reasons that the economy is trapped in a slow growth environment is because it
is getting no help from fiscal policy.
And if we take Obama’s rhetoric at face value, then it will continue to
get no help from fiscal policy. Of course, this is politics, so nothing can be
taken at face value.
All that
aside, US
government debt continues to grow and that means that the risk is also
increasing of 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 .....
I remain open
to the possibility that our political class will address the twin long term
budget problems of entitlement spending and tax reform. Were that to occur, it would turn fiscal
policy into a positive for the economy.
However, its likelihood seems to be slipping away.
(3)
the potential negative impact of central bank money
printing: last week I opined that while
I didn’t doubt that the Fed would fail again in any transition from ease to
tightening, I was beginning to question whether this time it would wait too
long and inflation would be the result---the alternative to that being that it tightens
too quickly and pushes the economy back into recession.
The latter thesis
received some play in the US
press this week as the pundits attempted to explain the downside volatility. Here are two of the best articles; both must
reads:
This author
then added the final nuance: it is not that investors fear an end to QE, it is
that they realize the damage that QE is doing and cease playing the game that
QE has birthed (medium and also a must read):
And here is one
scenario from Citi on how bond markets could drive that process (medium and
also a must read):
As I have noted
previously, part of the problem in forecasting the consequences of the current
massive, irresponsible expansion of global liquidity is that the world has
never experienced anything like this before.
So while the above narratives on how QE will end make sense at the
moment that could change as events unfold.
The point being that I remain quite uncertain as to whether security
volatility, rising bond yields in the face of increasing expansion of central
bank balance sheets, inflation, recession or all of the above will in hind
sight be cited as the natural consequences of this monetary lunacy.
Having
acknowledged that our economy is in uncharted waters and that I don’t know how
the end game will play out, it would be a stretch to conclude that I do know for
sure that it will end badly.
Nevertheless, the mere uncertainty associated with how it will end
suggests caution.
Other potential
problems flowing out of the current massive injection of liquidity are:
[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. The popping of any/all
of these bubbles would likely drive the US
economy back into recession,
The
largest asset on the government’s balance sheet (short):
[b] 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.’
(4) a blow up in the Middle East . ‘The US,
Russia Israel
(5)
finally, the sovereign and bank debt crisis in Europe . This week, the data flow out of the EU
improved somewhat, though not sufficiently to lessen my concerns about
excessive sovereign indebtedness and poor quality, overleveraged EU bank
balance sheets.
To be sure, Europe
has managed to ‘muddle through’ so far---indeed that has been our forecast. But if recession proves to be one of the
consequences as QE is unwound, the EU economy is much more vulnerable as a
result of the magnitude of its collective indebtedness and overleveraged banks.
Bottom line: the US
economy remains a positive for Your Money.
Fiscal policy is uncertain and becoming more so. If a stalemate in Washington
continues, so will the headwinds it is creating for the economy.
Central bank
reserve creation continues, though recent volatility in the securities markets
could be a warning sign. That said, I have
no clue how this experiment ends; but
that in itself poses a risk to all forecasts.
‘Finally, Europe remains a problem. Its economy
is deteriorating. Meanwhile, the
eurocrats have done nothing to lower the level of sovereign debt or improve
highly overleveraged bank balance sheets.
That is a combustible combination.
True, Europe is and may continue to ‘muddle through’;
but not because any attempt has been made to fix the underlying problems.’
Eurocrats
finally admit their incompetence (medium):
This week’s
data:
(1)
housing: weekly mortgage and purchase applications declined,
(2)
consumer: weekly retail sales were up; May vehicle
sales were better than anticipated; the May ADP
private payroll report was weaker than forecast, May nonfarm payrolls were
better and weekly jobless claims fell more than anticipated,
(3)
industry: the May PMI
was slightly better than expected; both of the May ISM manufacturing and nonmanufacturing indices
were below estimates; April construction spending was a disappointment as was April
factory orders,
(4)
macroeconomic: the April US trade deficit was below
forecast; first quarter productivity was less than expected while unit labor
costs were more; the latest Beige Book report was slightly less positive than
its predecessor.
The Market-Disciplined Investing
Technical
The volatility
in the indices (DJIA 15348, S&P 1643) remains. Friday was a big up day, with both of the
Averages finishing within all their major uptrends: short term (14702-15435, 1615-1694),
intermediate term (14081-19081, 1488-2076) and long term (4783-17500, 688-1750).
Volume fell and
breadth was mixed. The VIX challenged
the upper boundary of its short term downtrend and fell back---a positive for
stocks. It remains within its
intermediate term downtrend.
GLD got
pummeled. As you know, our Portfolios
were preparing to Buy GLD on Friday’s open as a result of several weeks an
improving technical picture. However.
GLD was down pre-opening and down big on the open---sufficiently so to make me
step back (lucky is so much better than smart).
A lot of damage was done to GLD’s technicals by the end of the day. As a result, much work will need to be done
before it is again in a position to be Bought
Bottom line: clearly
the ‘buy the dips’ thesis remains in tact as do the short term uptrends;
although I am a bit confused about the ‘bad news is good news’ theory (see
below). Despite my very cautious view of
the Market at these levels, the bullish momentum under the Market is still
quite strong and could easily propel stock prices to new highs The hypothesis that will now be tested is negative
trend forecast by the May 22 ‘outside down day’---S&P 1675-1687 (the upper
zone of the May 22 ‘outside down day) is now the critical resistance
level.
Any move to the
upside that pushes our stocks into their Sell
Half Range
Fundamental-A Dividend Growth Investment Strategy
The DJIA (15248)
finished this week about 33.1% above Fair Value (11450) while the S&P (1643)
closed 15.7% overvalued (1419). 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.
Friday’s nonfarm
payroll number helped give an otherwise lackluster week (economically speaking)
a positive spin---and clearly impacted the Markets as such. Overall the data is supporting our forecast
though admittedly not entirely convincingly.
On the other hand, as I have observed numerous times, this would not be
the first time that the stats have gone through a period of weakness only to
bounce back later.
Judging by the escalation
of the IRS scandal, the new surveillance
revelations and the rhetoric out of the White House this week, further progress
on fiscal policy seems to be slipping away.
As you know, I have been somewhat hopeful that some form of ‘grand
bargain’ (entitlement and tax reform) could be struck. In its absence, that would leave us with
sequestration and the 1/1/13 tax increases as the only budget measures addressing
our government’s fiscal irresponsibility---and
I would qualify that as half assed.
The debate over
monetary policy continued this week.
Early in the week, the fear was that an improving economy would prompt the
Fed to start tapering too quickly, pushing it back into recession, i.e. good
news is bad news. Then Friday a mildly
positive nonfarm payroll number got investors tiptoeing through the tulips on
the thesis that the economy was improving, i.e. good new is good news. It’s all a bit confusing In two weeks
we have gone from ‘good news is bad news’ (economic strength = Fed
tapering) to ‘bad news is bad news’ (poor economic data = Fed may be tapering
too soon) and ‘good news is good news’ (economic strength = economic
strength). It may be that investors are
betting on the best of all worlds, i.e. the Fed may be tapering but it won’t
matter because the economy is strong enough to progress without the added
liquidity (and I might add able to withstand a withdrawal of liquidity).
Good luck with
that. The reality is that (1) the current,
massive global expansion of liquidity is unprecedented; and therefore, the uncertainty
surrounding the unwinding of this process should also be unprecedented and (2) Fed
has never, ever, ever successfully transitioned from easing to tight money
policy.
Bottom line: most of the assumptions in our Models are
unchanged. The key one is that continued
economic growth is dependent on the vitality of US businesses to overcome a
broken political (fiscal) system, a Fed that is making a bad situation worse
(despite its best intentions) and a continent supposedly striving for fiscal
unity that is instead coming unraveled.
I am reasonably confident that
the economy can continue to progress despite the hurdles posed by our ruling
class. I am less sure about the end
result of a monetary policy reaching new
extremes daily or a euro bureaucracy divorced from reality.
Certainly nothing has occurred that
improves equity valuations or persuades me to buy stocks are current price
levels.
In fact, this week, our Portfolios did
nothing.
DJIA S&P
Current 2013 Year End Fair Value*
11600 1440
Fair Value as of 6/30/13 11450 1419
Close this week 15248 1643
Over Valuation vs. 6/30 Close
5% overvalued 12022 1489
10%
overvalued 12595 1560
15%
overvalued 13167 1631
20%
overvalued 13740 1702
25%
overvalued 14312 1773
30%
overvalued 14885 1844
35%
overvalued 15457 1916
Under Valuation vs.6/30 Close
5%
undervalued 10877 1348
10%undervalued 10305 1277
15%undervalued 9732 1206
* 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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