The Closing Bell
Children and grandchildren arrive today. I will be taking this coming week off in
order to have fun with them. I hope
everyone has a Happy Thanksgiving and I will return on 12/2. As always, I will stay tuned to the Market
and if any action is warranted, I will be in touch via a Subscriber Alert.
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 Uptrend 15339-20339
Intermediate Uptrend 15339-20339
Long Term Trading Range 5050-17400
2013 Year End Fair Value
11590-11610
2014 Year End Fair Value
11800-12000
Standard
& Poor’s 500
Current
Trend (revised):
Short
Term Uptrend 1726-1880
Intermediate
Term Uptrend 1635-2215
Long
Term Trading Range 728-1900
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. This
week’s data was generally upbeat: positives---weekly jobless claims; weekly
purchase applications, weekly and October retail sales, September inventories, Markit
PMI , October CPI
and PPI; negatives---mortgage applications, November small business optimism
index, September business sales, the Philly Fed manufacturing index; neutral---October
existing home sales and the November Kansas City Fed manufacturing index.
The only number
that I would highlight is the small business optimism index; and that is
because it plays to my concern that government policies are negatively impacting
business and consumer sentiment that will eventually be reflected in retail
sales and business investment.
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.
Update
on the big four economic indicators (medium):
Two reasons the recovery
is so weak (medium):
The pluses:
(1)
our improving energy picture. The US
Oil [gasoline]
prices continue to fall. This is like a
tax cut for [a] the American consumer and, hence, is a positive for savings or
consumption or both and [b] any business in which energy is a significant
operating cost. It helps margins or
allows for price reductions.
(2)
the sequester. the
economic stats continue to reflect a growing economy despite the sequester, the
tax increase and the recent government shutdown. So far the doomsayers have been proven
wrong.
There remains a
problem; and that is the costs associated with Obamacare. Those
are more of a mystery than the sequester, the tax increase or shutdown because
the numbers associated with the latter were more easily defined. We don’t have a clue at the moment on the
eventual costs of Obamacare; but as I am sure you know, we are getting dire
predictions daily.. That said, if the
doom and gloomers were wrong on the sequester/tax increase/shutdown, there is at
least a chance that they will be wrong on Obamacare.
The
negatives:
(1) a
vulnerable global banking system. As
Rosanna Rosanna Danna once said, ‘if it’s not one thing, it’s another’. Unfortunately, every week seems to bear that
out when it comes to bankster misdeeds. In
this week’s episode:
Moody’s lowers
senior debt rating of major banks
MF Global
settles
JP Morgan
settles and is now in business with the government
Goldman takes a
big loss in its currency trading operations
Corporate
credit levels are back to frothy (short):
‘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. the
budget debate draws closer, though the whole DC focus is now on Obamacare. We are bombarded daily with one f**k up after
another in its administration and estimates of the constantly rising costs of
new healthcare insurance policies; and with each, the total forecast costs both
in human and monetary terms rise further.
The bad news is
that the whole political circus, be it the failed budget discussions, Obamacare
or the partial elimination of the 60 vote cloture rule in the senate, could be
doing sufficient damage to business and consumer confidence to have a material
impact on the economy---this notion supported by the latest small business
optimism report. To be sure, we don’t
have any evidence of an economic impact yet; but there are still lots of November/December stats to be released.
The good news
is that because of this unmitigated disaster, the negotiating axe is now in the
hands of the GOP---which is to say that they have a lot more bargaining
leverage in the upcoming budget and debt ceiling discussions than they had two
months ago. Now if they can just resist
the temptation to allow the dems to snatch victory from the jaws of defeat, we
could be a step closer to real budget reform.
One last
comment on the senate’s recent action doing away with the 60 vote cloture rule
for judicial and executive nominees.
This rule was designed as a curb
on legislative activism and the protection of a large minorities. While it is true that it only applies to
nominations, it is a short step to include all votes in the senate. So for those who think that an improvement in
fiscal/regulatory policy is one of the keys to getting our economic house in
order, this would be bad news because it would eliminate gridlock and ease the
passage of detrimental legislation on spending, taxing and regulating. It is not good for our democracy whoever is
in the majority.
I include this as a counterpoint (medium):
The November small business optimism index declined:
Saturday morning humor (short):
(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.
The major news
this week was the release of the latest FOMC minutes which revealed a Fed that
clearly understands that it has put itself in a very tenuous position viz a viz
its bloated balance sheet but is clueless on how to extract itself.
It seems to me
that there are two possible ending scenarios in this tragedy: [a] the Fed
remains paralyzed by the difficulty of their position and the Markets
eventually take matters into their own hands, spiking upward the entire yield
curve and forcing the Fed into a transition to tighter money by raising rates
at the short end, [b] in desperation to be showing that it is doing something,
the Fed acts and bungles the transition on its own.
No one is
expecting the latter except this guy (medium):
And lurking in
the background is Chinese monetary policy which appears to be tightening. I have no idea if this could have a spillover
effect on US Markets/monetary policy; but it is something that has to be
watched.
The central
point of all of this is not when but how the transition process to tighter monetary policy occurs. My bet is that history repeats itself and the
Fed bungles the process, most likely by not tightening fast enough.
(4)
a blow up in the Middle East . The negotiations on curbing Iran ’s
nuclear program have resumed; but there is no news on any agreement. As you know, my concern is that Obama will
agree to almost anything in order to generate a bit of what He at least thinks
is good news. If that occurs, it will
likely put Israel
and most of the sunni muslim powers on red alert and could likely be more
de-stabilizing than no agreement.
Along those
lines, the Iranian embassy in Beirut
was bombed this week, killing a number of people. Undoubtedly, it was meant to provoke Iran
in to an action that would serve to scuttle the aforementioned
negotiations. So far that hasn’t worked,
but the bombing itself is a sign of the continuing tension in that part of the
world
On the other
hand, if the negotiations lead to something more than a face saving way out of
very difficult situation, it would certainly turn the heat down in this part of
the world. I await the details.
(5)
finally, the sovereign and bank debt crisis in Europe . The economic news out of Europe
remained mixed this week, though it was tilted to the negative side. My hope is that Europe
is recovering in the same fashion as the US ---slowly,
fitfully but on a sustained basis. That
would allow our ‘muddle through’ scenario to remain in tact.
That said, we
got some disturbing news this week---allegations that the Spanish government
was just making up all the economic data that signaled a recovery. By itself, that is not good; but if it is
reflective of a more widespread conduct in the economically weak EU countries,
it would clearly suggest a less positive outlook for the EU and its financial
system.
And:
Bottom line: the US
economy continues to improve albeit sluggishly.
I remained concerned about the potential impact on business and consumer
confidence of the last as well as the upcoming budget battle, the mounting confusion
and frustration over Obamacare and the latest gem from the senate. Last week’s small business optimism index
only reinforces that notion. On the
other hand, that lowering in confidence has to get reflected in the real
economic numbers before it has any meaning---and so far that hasn’t
happened.
The economic
data out of Europe continued mixed this week but the
news of a fix in the Spanish stats clearly doesn’t breed a lot of trust. The question is how wide a practice is
fudging the numbers among the weak EU economies? We won’t know short term; but sooner or later
the truth will be known on the ground.
We will just have to wait and see; but in the meantime, our ‘muddle
through’ scenario remains intact..
Monetary policy,
more specifically QEInfinity, remains the major risk to our forecast for
several reasons: (1) it fosters lousy fiscal policy, (2) the longer it goes on,
the greater the risk that the transition from easy to tight money will cause
severe dislocations and (3) the Fed may be in a position where it could lose
control of the transition process [assuming it even has a plan and that the
plan could actually work] to multiple sources---China, Japan, the Markets
themselves to name a few. My guess is
that the Fed will do very little until forced to by an outside force. The only question is how much larger will the
Fed’s balance sheet be when that happens.
This week’s
data:
(1)
housing: weekly mortgage applications fell but the more
important purchase applications were up; October existing home sales declined
though they were in line with estimates,
(2)
consumer: weekly retail sales were positive, while
October retail sales were ahead of forecasts; weekly jobless claims fell more
than anticipated,
(3)
industry: November small business optimism index
declined; the November Market PMI was
stronger than estimated; the Philly Fed index was a big disappointment while
the Kansas City Fed index was roughly in line; September business inventories
were up strong but ominously sales were weak,
(4)
macroeconomic: October CPI
and PPI were quite tame.
The Market-Disciplined Investing
Technical
The indices (DJIA
16064, S&P 1804) had another good week, with the Dow breaching 16000 on
Thursday and the S&P 1800 on Friday.
Both of the Averages are well within uptrends along all timeframes:
short term (15339-20339, 1726-1880), intermediate term (15339-20339, 1635-2217)
and long term (5050-17400, 728-1900).
Volume on Friday
was up slightly; breadth was mixed. The VIX fell 3% and closed within a short
hair of the lower boundary of its short term trading range. A confirmed breach of this boundary would be
a positive for stocks.
The long Treasury
was up fractionally, following a very volatile week. The pin action suggests that it will go lower
(yields higher). However, it remains
well within a short term trading range and an intermediate term downtrend.
GLD was down,
continuing to act like a very sick puppy.
It finished right on the lower boundary of an intermediate term
downtrend, remains within a short term downtrend and is drawing nearer to the
lower boundary of its long term trading range---a breach of which would be very
bad news for GLD holders.
Bottom line: all trends of both indices are up. Nothing in the price action suggests an end
anytime soon. Indeed this week, the
Averages experienced a second ‘outside’ down day (a negative technical
indicator) in as many weeks and completely shrugged it off. Nevertheless, divergences exist and grow more
numerous each week.
It seems
reasonable to assume that there is at least an even chance of another leg up,
and the most likely targets, in my opinion, are the upper boundaries of the
Averages long term uptrends (17400/1900).
If that is the case and the downside is simply Fair Value (11575/1436),
then the risk reward from current levels
is not all the attractive.
As a longer term
investor, I think that the aforementioned risk/reward ratio is an invitation to
lose money. I would, however, take
advantage of the current high prices to sell any stock that has been a
disappointment and to trim the holding of any stock that has doubled or more in
price.
In the meantime,
if one of our stocks trades into its Sell
Half Range
Trading Thanksgiving week
(short):
Fundamental-A Dividend Growth Investment Strategy
The DJIA (16064)
finished this week about 38.8% above Fair Value (11575) while the S&P (1804)
closed 25.6% overvalued (1436). 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.
The economy
continues to track our forecast and, indeed, to overcome the numerous fiscal
barriers (sequester, tax increases, Obamacare) being thrown up by our elected
officials. The one thing I worry about
is the lousy business and consumer sentiment numbers which I fear will
translate into weaker spending and capital expenditures. The good news is that to date it hasn’t shown
up in the stats; but I have the yellow light flashing until January.
So for the
moment, we are caught in a situation where we have to question the data we are
getting. Spain
may be the only fraudster and the economic momentum from the rest of Europe
could overwhelm its shortcomings. On the
other hand, it may not be and the EU could be closer to a third recession than
we now think. In addition, if this problem spills over into the EU bank
solvency difficulties; that is, if the EU economies are weaker than the data
reflect, then their ability to service all that sovereign debt on bank balance
sheets has been diminished
The wild card in
our economic/Market future is QEInfinity.
In the latest FOMC minutes, the Fed all but admitted that its easy
monetary policy could be a huge potential negative and that it was uncertain
exactly how to extricate itself from the mess it has created. The Market’s reaction seems to suggest that a
majority of investors have concluded that the Fed’s only course is to keep
pumping as fast as it can.
As you know, I
think that a prescription for disaster; and I think that the growing technical
divergences in the Market are a sign that the ranks of eternally optimistic may
be thinning out a bit.
My point on
monetary policy is and has been that (1) QE has to end, (2) what prompts the
end is not necessarily in the hands of the Fed, (3) but when it does end, the
Market impact is likely to be ugly and (4) the longer it goes on, the uglier
the impact.
Bottom line: the
assumptions in our Economic Model haven’t changed; though we got bad news on
virtually every front this week (poor business sentiment, Spanish lies, higher
Chinese interest rates, an uncertain Fed and the bombing of the Iranian embassy
in Beirut ).
Nor have they
changed in our Valuation Model. I remain
confident in the Fair Values calculated---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.
Margin
expectations (short):
Everybody’s
portfolio gets whacked sometime (short):
Another
bear bites the dust (medium):
Cognitive
dissonance (short):
This week, our Portfolios did nothing.
DJIA S&P
Current 2013 Year End Fair Value*
11600 1440
Fair Value as of 11/30/13 11575 1436
Close this
week 16064 1804
Over Valuation vs. 10/31 Close
5% overvalued 12153 1507
10%
overvalued 12732 1579
15%
overvalued 13311 1651
20%
overvalued 13890 1723
25%
overvalued 14468 1795
30%
overvalued 15047 1866
35%
overvalued 15626 1938
40%
overvalued 16205 2010
Under Valuation vs.10/31 Close
5%
undervalued 10996 1364
10%undervalued 10417 1292
15%undervalued 9838 1220
* 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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