The Closing Bell
Statistical Summary
Current Economic Forecast
2013
Real
Growth in Gross Domestic Product:
+1.0-+2.0
Inflation
(revised): 1.5-2.5
Growth
in Corporate Profits: 0-7%
2014
estimates
Real
Growth in Gross Domestic Product +1.5-+2.5
Inflation
(revised) 1.5-2.5
Corporate
Profits 5-10%
Current Market Forecast
Dow
Jones Industrial Average
Current Trend (revised):
Short
Term Trading Range (?) 14190-15550
Intermediate Uptrend 15152-20152
Long Term Trading Range 4918-17000
2013 Year End Fair Value
11590-11610
014 Year End Fair Value
11800-12000
Standard
& Poor’s 500
Current
Trend (revised):
Short
Term Uptrend 1695-1849
Intermediate
Term Uptrend 1610-2196
Long
Term Trading Range 715-1800
2013 Year End Fair Value 1430-1450
2014 Year End Fair Value
1470-1490
Percentage Cash in Our Portfolios
Dividend Growth
Portfolio 43%
High
Yield Portfolio 46%
Aggressive
Growth Portfolio 43%
Economics/Politics
The
economy is a modest positive for Your Money. We did
a little catch up this week on economic data, though it certainly wasn’t
overwhelming. By and large, it was mixed:
positives---weekly purchase applications, August construction spending, August
wholesale inventories and sales, the Richmond Fed manufacturing index;
negatives---weekly mortgage applications, the October index of consumer
sentiment and the October Markit flash PMI ; neutral---weekly
retail sales, October existing home sales, weekly jobless claims, the September
durable goods orders and orders ex transportation and the September/revised
August nonfarm payrolls report. Nothing
here to warrant rethinking our forecast:
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 historic inability of
the Fed to properly time the reversal of a vastly over expansive monetary policy.
The pluses:
(1)
our improving energy picture. The US
(2)
the sequester.
For all my pissing and moaning about fiscal policy, the sequester is a
stand out positive. Indeed, I should
have listed it as such at the outset; but because it was more of an accident
than intended, I couldn’t bring myself to give the ruling class any
credit. And I am still not sure that
they deserve much given that they weaseled on it in the recent debt ceiling
agreement. But still the net affect of
this policy is to reduce spending; and I will take any help I can get.
The really
great thing about it, is that it remains in effect through 2017; that is unless
the GOP manages to snatch defeat from the jaws of victory and compromise on
this in the next go round of budget/debt ceiling negotiations---we know that
ending it is a top dem objective. To their credit, they didn’t fold two weeks
ago; so there is hope.
Finally before
getting to jiggy, despite the positive impact the sequester has had on
spending, CBO estimates that the budget deficit starts expanding again in the
2015 fiscal year; much of it a result of Obamacare. So this is not a long term solution to
profligate spending.
The
negatives:
(1)
a vulnerable global banking system. Another jolly week for the banksters. This episode features:
[a] JP Morgan nailed
with a $13 billion fine
[b] JP Morgan facing a $5.75 billion
lawsuit from investors
[c] JP Morgan facing investigation over
the Madoff scandal
[d] the FHFA seeking $6 billion from Bank
of America
[e] and gets $5.1 billion from Morgan
[f]
Rabobank facing a $2 billion
fine for its role in libor rate manipulation
[g] Fed allows big banks to participate in
commodities business (medium):
‘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. my
comments above regarding the sequester notwithstanding, fiscal policy remains a
headwind. As I noted, the sequester was
more of an accident than a conscious effort to reduce spending. A fortuitous accident to be sure; but an
accident nonetheless.
Witness the
lack of follow through since its implementation: [a] earmarks and a breach of
the sequester in the supposedly ‘clean budget/ ceiling’ deal and [b] mounting
evidence that Obamacare will be a financial nightmare not only for the US
budget but also the finances of many, many Americans.
My main concern
with fiscal policy right now remains whether or not the recent budget/debt
ceiling circus and the prospect for another in early 2014 have done enough
damage to business and consumer confidence to have a material impact on the
economy.
Thoughts from Ron Paul on the
budget/debt ceiling deal (medium):
The Washington
protections racket (medium):
(3)
the potential negative impact of central bank money
printing: The key point here is that [a] the Fed has inflated bank reserves
far beyond any comparable level in history and [b] while this hasn’t been an
economic problem to date, {i} it still has to withdraw all those reserves from
the system without creating any disruptions---a task that I regularly point out
it has proven inept at in the past and {ii} it has created or is creating asset
bubbles in the stock market as well as in the auto, student and mortgage loan
markets.
And:
With the
weakness this week in the employment numbers, consensus seemed to be that QEInfinity
is apt to go on for some time. However,
another wrinkle occurred later in the week and that was a few steps towards tightening
by the Chinese central bank. We don’t
know yet whether this was just a technical move or the start of a transition
process from easy to tight money.
My concern
being that if it is the latter, the Markets are apt to react as they did when
Ben suggested that the Fed might start to taper. As I noted in our Morning Call, I hadn’t considered
that the end of global QE would be marked by the tightening of a central bank
other than the Fed. .
The point here
is that [a] it doesn’t matter which {major} central bank begins the process,
once interest rates start jumping in one sector of the global economy, it will
likely spread very rapidly and [b] it doesn’t change the risks of a botched transition from easy to tight money. Indeed, they are likely increased since
whatever the Fed’s exit strategy is, they will lose control of its execution.
(4) a blow up in the Middle East . Obama and our state department just can’t
seem to get things right. This week the
Saudi’s who have been our ally in the Middle East
basically told us to go s**t in our hat.
The source of their ire was our new improved policy toward Iran whom the
Saudi’s view as the greatest threat to stability in the region---echoing the
concern expressed here that Obama will allow the Iranians to lure Him into to
some deal that enhances His world leadership role but only in His own mind
while they drive for the hoop [nuclear bomb].
With the Saudi’s now joining the Israeli’s in their feeling of
abandonment and betrayal, the risks have escalated that one or the other will
take matters into their own hands.
(5)
finally, the sovereign and bank debt crisis
in Europe . For
the first time in several months, we received a little cognitive dissonance
this week as some of the economic reports were less than encouraging. I have said many times before that one week
does not make a trend; so at the moment, it is too soon to be concerned. But it is reason to be alert.
And:
And:
And:
Bottom line: the US
economy continues to do just fine, though there were some worrisome
developments overseas (China
potentially tightening money supply, Draghi’s stress test, soft EU economic
data). Despite the sequester, fiscal
policy remains a drag on economic activity. My biggest concern is that the
latest battle over the budget/debt ceiling could have damaged business and
consumer confidence sufficiently to impact an already below average economic
growth rate.
Monetary policy is
the major risk to our forecast. An
overly expansive policy is a huge negative and is apt to get worse in as much
as a lousy fiscal policy gives the Fed doves carte blanche to continue a lousy
monetary policy. The longer QEInfinity
goes on, the greater the risk that the transition from easy to tight money will
cause severe dislocations. This week, another
potential wrinkle presented itself---the Chinese carried out some monetary
tightening maneuvers. This may have been
just a technical move; but until we know, I will be watching developments
closely.
This week’s
data:
(1)
housing: weekly mortgage fell but purchase applications
rose; September existing home sales declined though less than expected,
(2)
consumer: weekly retail sales were mixed; weekly
jobless claims dropped less than anticipated; September nonfarm payrolls rose
less than forecast though August was revised up substantially; the October
consumer sentiment index was below consensus,
(3)
industry: August construction spending increased more
than estimates; September durable goods orders were greater than expected
though ex transportation they were a disappointment; the October Richmond Fed
manufacturing index came in above forecasts; the October Markit flash PMI
was less than consensus; August wholesale inventories rose more than anticipated, wholesale sales also
increased,
(4)
macroeconomic: the August trade deficit was less than
expected.
The Market-Disciplined Investing
Technical
The Averages (DJIA
15570, S&P 1759) continue to trend higher, with the S&P leading the
way. It finished within its short term
uptrend (1695-1849). The Dow broke above
the upper boundary of its short term trading range (14190-15550) on
Friday. Our time and distance discipline
now comes into effect; if the Dow remains above 15550 through the close next
Tuesday, the break will be confirmed.
However, I point out that on the prior two occasions (early August and
mid September) when it broke above this boundary, it failed.
Both of the
Averages are well within their intermediate term (15152-20152, 1610-2192) and
long term uptrends (4918-17000, 715-1800).
Volume on Friday
was up slightly; breadth improved but not as much as I would have thought given
the pin action. The VIX fell, closing
within its short term trading range and intermediate term downtrend.
The long Treasury
was up slightly on Friday, finishing in a short term trading range and an intermediate
term downtrend. It continues to build a
reverse head and shoulders pattern---which if completed would be a plus for
bond prices.
GLD rose, ending
within a very short term uptrend but a short term and intermediate term
downtrend. It also closed above its 50
day moving average.
Bottom line: the DJIA is challenging the upper boundary of
its short term trading range. If
successful, that could portend another major leg up; if not, the Dow will have
made a quadruple top. I await the
outcome. In the meantime, if one of our
stocks trades into its Sell Half
Range
Great summary of
the Market’s health (medium):
Margin debt
keeps rising (medium):
Counterpoint:
Another
indication of how overextended this Market is (short):
Fundamental-A Dividend Growth Investment Strategy
The DJIA (15570)
finished this week about 34.8% above Fair Value (11550) while the S&P (1759)
closed 22.8% overvalued (1432). Incorporated
in that ‘Fair Value’ judgment is some sort of half assed attempt at getting fiscal
policy under control, a botched Fed transition from easy to tight money, a
historically low long term secular growth rate of the economy and a ‘muddle
through’ scenario in Europe.
Most of the
assumptions in the above forecast are tracking our expectations though we did
receive negative datapoints this week. The
economy continues to plod along.
However, as I noted previously, I am concerned about the impact that the
budget/debt ceiling circus has had on business and consumer sentiment. Apropos of that, consumer sentiment in
October was below expectations. Clearly
that is only one datapoint; so I am not suggesting that it proves my concern. It is a piece of evidence.
General euphoria
prevails among investors regarding the likely continuation of QEInfinity. I am not going to rant and rave about the
absurdity of this policy; I have done enough of that. I will reiterate that if the recent monetary
tightening maneuvers by the Chinese central bank are more than just technical
moves---and to be clear, I have no proof of intent one way or the other---that
has the potential shaking global fixed income markets which in turn would take
control of interest rates out of the Fed’s hands. Then we would see just how ugly the
transition to tighter money will be.
Bottom line: the
assumptions in our Economic Model haven’t changed; but there were some
disconcerting developments along multiple fronts this week, If any of these prove to be anything other
than noise, they could have an impact on our forecast.
In the meantime,
I remain confident in the Fair Values generated by our Valuation
Model---meaning that stocks are overvalued.
So our Portfolios maintain their above average cash position. Any move to higher levels would encourage
more trimming of their equity positions.
This week, our Portfolios did nothing.
DJIA S&P
Current 2013 Year End Fair Value*
11600 1440
Fair Value as of 10/31/13 11550 1432
Close this
week 15570 1759
Over Valuation vs. 10/31 Close
5% overvalued 12127 1503
10%
overvalued 12705 1575
15%
overvalued 13282 1646
20%
overvalued 13860 1718
25%
overvalued 14437 1790
30%
overvalued 15015 1861
35%
overvalued 15592 1933
Under Valuation vs.10/31 Close
5%
undervalued 10972 1360
10%undervalued 10395 1288
15%undervalued 9817 1217
* 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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