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 Uptrend 15542-20542
Intermediate Uptrend 15542-20542
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 1750-1904
Intermediate
Term Uptrend 1655-2236
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 46%
Economics/Politics
The
economy is a modest positive for Your Money. Not
much economic data this week but what there was, was neutral to positive: positives---mortgage
and purchase applications, November retail sales, November small business
optimism index; November business inventories and sales; November PPI;
negatives---weekly jobless claims, November inventory/sales; neutral---weekly
retail sales.
The only
datapoint that I would highlight is the small business optimism index. I do so because I have raised concerns that
the recent antics of our political class could diminish business and consumer
confidence and that would in turn negatively influence consumption and
investment decisions. Following a red
hot consumer sentiment number last week, this new reading on small business
optimism seems to put that worry to rest.
Our forecast
remains:
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.
Another
great article from Lance Roberts (medium and today’s must read):
The pluses:
(1)
our improving energy picture. The US
(2) following the busting of the sequester in the latest budget deal,
it is clear that the political class remains on its own self serving, spending
agenda. So I am eliminating this
positive.
The
negatives:
(1) a
vulnerable global banking system. The
only penalty meted out this week was a fine on our ‘fortress bank’, JP
Morgan---tagged for enabling the Madoff fraud.
http://dealbook.nytimes.com/2013/12/11/criminal-action-is-expected-for-jpmorgan-in-madoff-case/?_r=0
There was some
new information on the fired Goldman bank examiner that provides some
entertaining reading:
Finally, the
Volcker Rule was approved this week and confirmed yet again my reasons for
being cynical about the government/Wall Street axis. While there were some provisions in this new
regulation that would hamper some forms of risk taking by the banks, it did
little to curb the most egregious offenses and hence, solve the too big to fail
problem.
‘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
new budget proposal was released this week.
Assuming that it is passed, the good news is that [a] investors/the
electorate won’t have to endure another shutdown threat for two years and [b] the increased spending could act as a
stimulus short term.
The bad news is
the increased spending. The one
discipline in place to restrain our political class’ passion for dispensing
goodies to the masses is no more. To be
sure the initial step toward higher government spending is a small one. However, it is likely only a matter of time
before the temptation to increase the size of the government relative to the
economy will simply prove uncontrollable---and we will be off to the races
again.
All of which
ignores the 900 pound gorilla in the government expenditure
room---Obamacare. Gosh only knows what
the next budget is going to look like with the as yet to be determined costs of
‘affordable healthcare’ and now no spending constraints.
Color me
disappointed. http://www.realclearmarkets.com/articles/2013/12/12/paul_ryan_gave_away_the_sequester_along_with_fiscal_discipline_100793.html
(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.
You know my
position: 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. Clearly if tapering starts next week, this
becomes the operative scenario.
That said, my
conclusion hasn’t changed: [a] the Fed has pushed monetary into uncharted
territory, [b] nobody has a clue as to the economic or Market consequences of
unwinding that policy, [c] the longer it goes on, the worse those consequences
will be, [d] as bad as all that could be, if history repeats itself, the Fed
will make a mess of whatever strategy it follows in the transition process.
How
paper money regimes end (medium and today’s must read):
(4)
a blow up in the
Middle East . The administration
is busy trying to sell an Iran
deal to congress, although there doesn’t seem to be an international consensus
on exactly what that is. My concern as
you know is that Obama will give away the ranch 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.
Meanwhile,
things aren’t going all that swimmingly in Syria
(medium):
(5)
finally, the sovereign and bank debt crisis in Europe . The economic news out of Europe
remained mixed this week. 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.
Bottom line: this week’s stats really didn’t tell us much
about the economy. We did receive an upbeat small business optimism index
reading which combined with last week’s consumer confidence reading appears to
put to rest my concern about declining business and consumer sentiment
negatively impacting growth.
The CNBC
story of tapering I think will prove incorrect; but if it is true, get you
crash helmet on.
The political news
dominated the headlines this week and were hardly positive. Our ruling class crafted a new budget that
does away with the mandatory sequester cuts, so we lost the only fiscal policy
positive in outlook. In addition, the
new Volcker Rule was approved; and despite its 900 page length, it did very
little to deal with our ‘too big to fail’ bank problem.
There was little
out of Europe this week to alter our outlook which
remains that it will ‘muddle through’.
This week’s
data:
(1)
housing: weekly mortgage and purchase applications were
up fractionally,
(2)
consumer: weekly
retail sales were mixed, while November retail sales were better than forecast;
weekly jobless claims soared,
(3)
industry: the November small business optimism index
was slightly better than anticipated; November wholesale sales trailed the rise
in wholesale inventories while business inventories and sales advanced,
(4)
macroeconomic: the November budget deficit was
considerably less than expected; November PPI fell, in line with estimates.
The Market-Disciplined Investing
Technical
The indices (DJIA
15755, S&P 1775) had another down week, but remained within uptrends along
all timeframes: short term (15542-20542, 1750-1904), intermediate term (15542-20542,
1655-2236) and long term (5050-17400, 728-1900).
Volume on Friday
fell; breadth improved, though stocks remain oversold. The VIX was up
fractionally, closing within its short term trading range and intermediate term
downtrend. It continues to provide no guidance on
Market direction.
The long Treasury
was up, finishing well within a short term trading range and an intermediate
term downtrend and continuing to build a head and shoulders formation.
GLD was also up
but its pin action remains terrible. It closed
within its short and intermediate term downtrends and lingers near the lower
boundary of its long term trading range---a breach of which would be very bad
news for GLD holders. If there is any
good news in this sorry tale, it is that it is holding above that lower
boundary.
Bottom line: all trends of both indices are up. This week witnessed another shot by the bears
to take this Market down. Someday they
will be successful; but until that happens, you have to assume the uptrend will
continue.
Nevertheless, I
continue to believe that the most likely upside targets are the upper
boundaries of the Averages long term uptrends (17400/1900). If that is the case and the downside is
simply Fair Value (11600/1440), then the risk reward from current levels is not
all the attractive.
If one of our
stocks trades into its Sell Half
Range
Fundamental-A Dividend Growth Investment Strategy
The DJIA (15755)
finished this week about 35.8% above Fair Value (11600) while the S&P (1755)
closed 21.8% overvalued (1440). 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; the stand out number for me being the positive
small business optimism index.
However, our
political class tossed a curve ball (I don’t why I am surprised). It appears the sequester mandates are
dead---so it is back to business as usual, i.e. ‘some sort of half assed
attempt at getting fiscal policy under control’. And as a bonus, the regulators constructed a
Volcker Rule that Bernie Madoff could live with.
Economic news
out of Europe continues to be mixed but there is nothing
to indicate that our ‘muddle through’ scenario isn’t operative.
The wild card in
our economic/Market future is QEInfinity.
The debate continues within the Fed and among market participants on
when to taper, by how much and what the likely consequences will be.
Early in the
week, CNBC posited that the Fed would
announce a start to tapering at next week’s FOMC meeting. As you know, I doubt that it will happen;
though if it does, it would be a long term positive. To qualify that a bit, the sooner the Fed
begins shrinking its balance sheet, the less potential Market pain we will
likely have to endure---but there still will likely be lots of pain.
And to qualify
that even further no one has a clue as to how the process of unwinding QE will
end because we have never been here before.
In the past, when the Fed began shrinking bank reserves, it resulted in
higher long term interest rates (lower bond prices) which spilled over into the
stock market.. My assumption is that
this will occur again, only this time with more vengeance.
The other caveat
is that the Fed may either lose control of the process or, even worse, never
have it in the first place. Market
forces have often overpowered Fed policy in the past; and given the current
extremes the Fed has gone to, investor fear or some exogenous circumstance
could wrest interest rate management from its hands.
So while I can’t
say with certainty that the transition to tighter monetary policy will be an
ugly one, I can say no one knows what it will look like. And that should give anyone pause with
valuations are present levels.
Bottom line: the
assumptions in our Economic Model haven’t changed; and the budget deal and the
new Volcker Rule assures us that things aren’t likely to get dramatically
better. The one thing that could change
our assumptions is if the Fed starts or is forced by the Market to start to
taper and some as yet unforeseen consequence occurs.
The assumptions
in our Valuation Model have not changed either.
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.
That
said, I can’t emphasize strongly enough that I believe that the key investment
strategy today is to take advantage of the current high prices to sell any
stock that has been a disappointment or no longer fits your investment criteria
and to trim the holding of any stock that has doubled or more in price.
The latest 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 12/31/13 11600 1440
Close this week 15755 1775
Over Valuation vs. 12/31 Close
5% overvalued 12180 1512
10%
overvalued 12760 1606
15%
overvalued 13340 1656
20%
overvalued 13920 1728
25%
overvalued 14500 1800
30%
overvalued 15080 1872
35%
overvalued 15660 1944
40%
overvalued 16240 2016
Under Valuation vs.12/31 Close
5%
undervalued 11020 1368
10%undervalued 10440 1296
15%undervalued 9860 1224
* 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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