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 15092-20092
Long Term Trading Range 4918-17000
2013 Year End Fair Value
11590-11610
2014 Year End Fair Value
11800-12000
Standard
& Poor’s 500
Current
Trend (revised):
Short
Term Uptrend 1685-1839
Intermediate
Term Uptrend 1606-2192
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. Under
normal circumstances there wouldn’t have been a good deal of economic data this
week; but with the government shutdown, there was even less. Nonetheless what we got was basically mixed: positives---weekly
mortgage applications and the Philly Fed index; negatives---weekly purchase
applications, weekly jobless claims and the October NY Fed manufacturing index;
neutral---weekly retail sales and the Fed Beige Book. As you can see, there is not enough here to
be any kind of tell on our forecast.
Not that the stats
were all that important this week---the dominating event being the negotiations
over the budget resolution/debt ceiling.
As expected, these issues got resolved in the eleventh hour and were
more of the same kick-the-can-down-the-road solutions that leave the government
in business but provide nothing for you and me.
I think that the
key takeaway from this episode will be the impact this three week, three ring
circus has had on business and consumer confidence. After all, had it not been for the ingenuity
and hard work of American businesses and consumers, this economy would be flat
on its face having to deal with irresponsible monetary and fiscal policies. So that confidence may be the most important
factor in moving the economy forward at this moment. In any case, signs of it or lack thereof will
show up soon, particularly as we get into the Holiday
spending season.
I added (above)
our 2014 forecast for the economy and year end Fair Value. These numbers reflect one basic underlying
premise; and that is that nothing has changed.
Our fiscal woes are not going to get solved until the personnel in Washington
changes. Hence, government policies (too
much spending, too much regulation and too high taxes) will continue to act as
a headwind. And largely because of that,
monetary policy is apt to remain overly easy, raising the stakes when, as and
if the Fed begins a transition.
In short, our
forecast remains unaltered and is not likely to change for the foreseeable
future, barring a complete loss of confidence by business and consumers:
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
The
negatives:
(1) a vulnerable global banking system.
At the beginning of every week, I think that surely there will be
nothing write about in this section this time around; but then like clockwork
another bankster fraud plot comes to light.
This week, [guess who?] a JP Morgan trader is being investigate for
currency manipulation. He is rumored to
be part of a group known affectionately as The Bandits.
For the second
act, Goldman persuaded [muscled?] the NY Fed to fire an examiner for ratting
them out.
And:
Knowing too much can be dangerous (medium
and today’s must read):
‘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. What
can you say about a bunch of guys who are elected to do the right thing for the
country, are way over paid for it and yet can’t do something simple like create
a budget for a record five years in a row?
The answer is, nothing good.
Amazingly,
after all the turmoil, fiscal policy is just as f**ked up now as it was three
weeks ago. No, I take that back; it is
worse because these thieves managed to attach several new pork barrel spending earmarks
to the supposedly ‘clean budget/debt ceiling’ bill. Great work.
How can you not want to throw every last one of them out?
So
here we are with too much spending, too high taxes, too much regulation and the
prospect of facing another shutdown/default battle in three months. In short, fiscal policy remains a headwind
and will likely remain that way until at least November 2014. The $64,000 question is, did this latest
circus and the prospect for another in early 2014 do enough damage to business
and consumer confidence to have a material impact on the economy?
I
include in each Closing Bell a lament regarding the potential impact that
higher interest rates [potentially the result of either tapering or the
inability to reach an agreement on the debt ceiling] will have on the budget
deficit. 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)
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.
With Janet
Yellen now scheduled to assume the Fed chief mantle, general consensus is that
the current QEInfinity is apt to go on for some at least another six months;
and if the fallout from the latest battle over the budget/debt ceiling is big
enough, it could continue even longer.
That in turn leaves [a] the Fed with the necessity of tapering but with
an even more bloated balance sheet and [b]
us stuck with {i} the risks that they will botch up the transition from easy to tight money---as
they have on every prior occasion and {ii} the continuing misallocation of
capital, hardship to savers,
encouragement to speculators that result in distortions to our economy, i.e.
slow growth and high unemployment. http://www.realclearmarkets.com/articles/2013/10/18/our_great_conundrum_an_unbroken_string_of_inflation_100674.html
Charting the
Fed’s failure (short):
Lacy Hunt on Fed
policy (medium and an absolute must read):
(4) a blow up in the Middle East . While
the carnage in Syria
(5)
finally, the sovereign and bank debt crisis
in Europe . Economic conditions continue to improve in Europe . This
progress likely moderates somewhat the risk of a crisis as rising tax revenue
make sovereign debt service more manageable which in turn strengthens bank
balance sheets [since a huge percentage of their assets are in their own
country’s sovereign debt].
The wild card at the moment is that with the
German elections out of the way, how will Merkel respond to the renewed effort
by eurocrats to salvage the economies, governments and banks of southern Europe ?
This doesn’t necessarily have to be a negative. However, it is an unknown which will likely
return to the front pages.
Bottom line: the US
economy continues to grow but at a sub par rate. Fiscal policy remains a headwind and 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
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. This factor is the major risk to our
forecast. The longer QEInfinity goes on,
the greater the risk that the transition from easy to tight money will cause
severe dislocations.
This week’s
data:
(1)
housing: weekly mortgage rose but purchase applications
fell; October homebuilder confidence declined,
(2)
consumer: weekly retail sales were mixed; weekly
jobless claims dropped less than anticipated,
(3)
industry: the October NY Fed manufacturing report was
well below expectations while the Philadelphia Fed index was better than
estimates,
(4)
macroeconomic: the latest Fed Beige Book report was
little changed from its predecessor.
The Market-Disciplined Investing
Technical
The Averages (DJIA
15399, S&P 1744) continue to trend higher, with the S&P leading the
way. It finished within its short term
uptrend (1685-1839). The Dow remained
within its short term trading range (14190-15550).
Both of the
Averages are well within their intermediate term (15092-20092, 1606-2192) and
long term uptrends (4918-17000, 715-1800).
Volume on Friday
was more robust than it has been for some time though breadth continued
mixed. The VIX was off again, closing
near the lower boundary of its short term trading range. A violation of that boundary would be a plus
for stocks.
I repeat the results
of the Thursday night’s check of our internal indicator: in a Universe of 149
stocks, 43 are now at all time highs, 78 are not and 28 are too close to
call. In our limited sample, that is not
great breadth.
The long Treasury
was up slightly on Friday but remains within a short term trading range and an intermediate
term downtrend.
GLD moved lower,
after touching the upper boundary of its very short term downtrend on
Thursday. Its inability to penetrate
this boundary says something about the strength of its bid. It also closed below the upper boundaries of
its short term and intermediate term downtrends. Nothing to do here.
Bottom line: the Averages are out of sync on a short term
basis. I continue to believe that this
is a time to do nothing unless you are skilled trader. The exception being if one of our stocks
trades into its Sell Half
Range
Fundamental-A Dividend Growth Investment Strategy
The DJIA (15399)
finished this week about 33.3% above Fair Value (11550) while the S&P (1744)
closed 21.7% 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: (1) the
economy continues to plod along, (2) the ruling class executed a perfect
kick-the-can-down-the-road maneuver but only for three months and not after
attaching the usual earmarks, i.e. something for them but nothing for you and me, (3) Europe is improving the odds that
it will ‘muddle through’ and (4) the Fed,
after blowing its initial attempt at a transition from easy to tight money,
continues its relentless pursuit of having the most bloated central bank
balance sheet in history, raising the prospect that its next attempt will end
even worse.
Bottom line: the
assumptions in our Economic Model haven’t changed; but I am increasingly
concerned about the monetary policy component.
The longer that QEInfinity goes on, the more difficult task a transition
becomes. Indeed, at some point the fixed
income market could lose enough confidence that it forces the Fed to begin to
adjust policy and thereby removes as an option whatever well laid plans for
transition the Fed has made.
Hence, 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.
Another
great article from Lance Roberts (medium):
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 15399 1744
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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