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 15472-20472
Intermediate Uptrend 15472-20472
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 1740-1894
Intermediate
Term Uptrend 1648-2229
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. Lots of
economic data this week and most of it was neutral to positive: positives---light
vehicle sales, weekly jobless claims, the ADP
private payroll report as well as November nonfarm payrolls, November Markit PMI ,
the ISM manufacturing index and revised third quarter GDP
and corporate profits, November consumer sentiment; negatives---mortgage and
purchase applications, November personal income and the ISM nonmanufacturing
index; neutral---the combined September/October combos of new home sales and
construction spending, November personal spending, weekly retail sales, October
factory orders and the latest Fed Beige Book.
The numbers that
most experts focused on were the employment figures and they were quite
positive. The reason for this attention,
of course, is the Fed’s supposed employment guidelines viz a viz tapering. Somewhat surprisingly (confusingly) the
Markets had been following a good news is bad news strategy all week; then when
the nonfarm payrolls stat was released stocks rallied hard (good news is good
news). That reaction aside, I continue
to believe that when QE starts to be unwound, equity investors will not be
happy.
The other
datapoint I would point to is the latest University
of Michigan
DC in denial
over deficit (medium):
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.
The pluses:
(1)
our improving energy picture. The US
(2)
the sequester. the
economic stats continue to reflect a growing economy despite the sequester, the
tax increase and the government shutdown.
So far the doomsayers have been proven wrong.
We received
some potentially great news this week---congress appears to be nearing a budget
deal in which the spending reductions mandated by the sequester will be
maintained but they will be applied in a more rationale, selective manner. This is a win, win if it happens.
The
negatives:
(1) a vulnerable global banking system.
The investigations and fines continue a pace. This week, Bank of America paid a $400
million settlement to Freddie Mac and the European Commission imposed E1.7
billion in fines on multiple banks for manipulation of the interest rate
derivatives market.
And there is
more coming (medium):
And the risk
grows (medium and a must read):
American
justice---you wonder why financial fraud keeps occurring (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.’
And (medium):
Saturday morning humor (3 minute video):
(2)
fiscal policy. As
I noted above, the budget debate is in process and it looks like [hope, hope]
while there is no ‘grand bargain’ [lower tax rates, broaden tax base, reduce
spending] in the offing, our elected representatives will at least hold the
line on the spending cuts mandated by the sequester.
I count that as
good news even though [a] the national debt continues to grow and [b] according to the CBO, even if the
sequester remains in place, the deficit will start to grow again in
2016---largely a function of Obamacare.
Speaking of
which, the propaganda machine is telling us that the ‘front end’ of the
enrollment site has been fixed. Even
assuming that to be correct, we continue to be inundated daily with one SNAFU
after another in the overall operation of Obamacare. Plus no one has a clue what this monstrosity
is going to cost both in human and monetary terms---and that is not good news.
(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.
Nothing really
new on this issue this week other than the constant flow of inconsistent policy statements from FOMC
members and the endless speculation as to when, as and if tapering will begin
and how disruptive to the markets it will be.
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.
Related to [a]
above, the US bond markets began to weaken again this week and the Japanese
bond market took it in the snoot---and it is this market that has been the
funding source for much of the carry trade.
If that starts to reverse, global yield assets could be in for some
negative volatility. Finally, lurking in
the background is Chinese monetary policy which appears to be tightening.
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 resumed; and there is talk of some kind of agreement. Although no one seems to agree what the
agreement is. That doesn’t really bother
me; what does, 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.
(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: while this week’s economic data was about as
good as it could get, I still believe that US
economic improvement is and will be sluggish. We did receive a very positive
consumer sentiment number, assuaging at least temporarily my concern about the
potential impact on business and consumer confidence of the ongoing dysfunction
in Washington . Speaking of which, if the budget negotiations
end up as rumored, that would be a short term positive.
There was little
out of Europe this week to alter our outlook which
remains that it will ‘muddle through’.
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 and purchase applications were
terrible; September new home sales were awful but October sales were
gangbusters,
(2)
consumer: weekly
retail sales were mixed; November consumer confidence fell; November light
vehicle sales were above expectations; weekly jobless claims fell, the ADP
private payroll report was above estimates as was November nonfarm payroll; the
unemployment rate fell to 7.0%; October personal income fell while spending was
right on target; November consumer sentiment soared,
(3)
industry: the November Market PMI
was stronger than estimated as was the November ISM manufacturing index;
however, ISM nonmanufacturing index was below forecasts; the September construction spending lagged but
October spending more than made up for it; October factory orders fell less
than anticipated,
(4)
macroeconomic: revised third quarter GDP
was better than expected; third quarter corporate profits were slightly above
consensus; the Fed Beige Book continued to report modest to moderate economic
growth across all geographic areas.
The Market-Disciplined Investing
Technical
The indices (DJIA
16020, S&P 1805) had a volatile week, with the Averages down five days in a
row only to recapture the lion’s share of the decline on Friday and finish back
above the 16000/1800 level. Both are
well within uptrends along all timeframes: short term (15472-20472, 1740-1894),
intermediate term (15472-20472, 1648-2229) and long term (5050-17400, 728-1900).
Volume on Friday
was down after having been up every day of the aforementioned five day Market
decline; breadth improved but not as much as I expected. I am not trying to
talk my book here. Price is truth but
declining volume and uninspiring breadth are not positive signs on a big up
price day. The VIX fell 8%, but remains
well within its short term trading range.
A confirmed breach of this boundary would be a positive for stocks.
The long Treasury
was up fractionally, 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 that doesn’t soften its terrible pin action of late. 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. Every time that there is a hint that a
correction is near (the earlier two ‘outside’ down days and recent five day
decline), prices snap right back. True,
the bounce had a lot to do with the Market being oversold and the number of
divergences continues to grow. But so
far, price is truth and the truth is stock prices are going up.
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 (16020)
finished this week about 38.1% above Fair Value (11600) while the S&P (1805)
closed 25.3% 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. Indeed,
this week’s data was especially positive including the employment numbers. Plus
the terrific University of Michigan
Even better, our
political class seems to be on the verge of doing the right thing for a
change---if the budget negotiations end as rumored. That said, we have no clue what Obamacare
could cost in both human and monetary terms; and until we do, this thing is
like a turd in a punch bowl.
Economic news
out of Europe continue 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.
The Market’s
rather sanguine view of this problem notwithstanding, I continue to believe 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 received positive
news on almost all fronts this week save the only one that counts, i.e.
monetary policy.
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.
What has to be confusing for many
(including moi) is Market reaction to the economic news flow. Prior to Friday, psychology appeared to be
operating on a good news is bad news thesis.
Then on Friday, good news became good news. Of course, we have intermittently experienced
an any news is good news environment this year.
If that continues then clearly we are in store for another leg up---which
seems the most likely scenario given the current positive calendar bias. On the other hand, Friday’s pin action could
have been nothing more than a bounce from an oversold condition. Hence, the confusion.
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.
To that end, this week the Aggressive
Growth Portfolio Sold its holdings in two stocks (ATRI
and ALTR ) that failed their recent
investment review due to deteriorating financials.
DJIA S&P
Current 2013 Year End Fair Value*
11600 1440
Fair Value as of 12/31/13 11600 1440
Close this week 16020 1805
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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