The Closing Bell
The Christmas Holidays are upon us.
We have family coming in for Christmas; then we leave to visit others
afterward. I am taking off though New
Year’s week and will return January 6.
As always I stay close to the Markets; so if something happens that
requires action, I will be in touch via Subscriber Alerts.
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 15584-20584
Intermediate Uptrend 15584-20584
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 1758-1912
Intermediate
Term Uptrend 1662-2243
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. This
week’s economic data tilted to the plus side: positives---November housing
starts, weekly retail sales, November industrial production, third quarter
nonfarm productivity, third quarter GDP ,
November leading economic indicators and the October federal budget deficit;
negatives---weekly mortgage and purchase applications, existing homes sales, weekly
jobless claims, the December NY and Philly Fed manufacturing indices and third
quarter corporate profits; neutral---the December Markit flash PMI
and CPI /CPI
ex food and energy.
The big numbers
to highlight this week were (1) November industrial production---points to good
progress in a key economic sector, (2) the upward revised third quarter GDP ---indicating
continued growth in the overall economy, (3) the conflicting new and existing
home sales---not a disaster but something to watch and (3) third quarter
corporate profits---profits play a big role in stock valuation. If they are starting to slip, that will
likely be a problem for equities.
Overall there
was a generally positive data flow; so it keeps our forecast on track. That said, there is nothing in these figures
to suggest a stronger economy than reflected in our outlook:
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.
It’s Christmas, so I am going to include some goods news in this section---don’t
think that it is going to last.
EU bank balance
sheets are improving (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. The
new budget proposal has been passed by both the house and the senate. All that is left is Obama’s signature. 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 loss of what fiscal discipline our ruling class had for what amounted to an
all too short period of time. I know; I
have heard all the political commentary on how Ryan saved the GOP, how the
focus will now be on Obamacare in 2014, how that will result in a republican
majority in the senate and how that will lead back to fiscal discipline. It may turn out that way; but I will believe
it when it happens and not a nanosecond before.
All of which
ignores the 900 pound gorilla in the government expenditure room---Obamacare. This thing is perhaps the greatest
governmental administrative clusterf**k in history; and unfortunately, it is
the electorate that will pay in both human and dollar terms. I suspect that this law will eventually implode
based on its unworkability. What it
costs you and I before that occurs is the question.
http://www.zerohedge.com/news/2013-12-20/obamacare-confusion-sends-hospital-admissions-lowest-record
(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.
Well, the
Ber-nank did it. Give him credit. Sure it was tapering for pussies; and yes,
the Fed appears intent on keeping interest rates abnormally low for your and my
lifetimes. But it is a start.
On the economic
side, the issue which I have held front and center throughout QE Infinity now becomes
paramount: can the Fed successfully transition from easy to tight money without
bungling the process---which it has done at every other such juncture in its
history?
Despite my
congenital cynicism, I am open to the Fed being successful. Indeed, I hope that is the case for all of
our economic sakes. And frankly, increasing
the odds of that happening is the fact that QEInfinity [except for QEI] had little
impact on economic activity. It is not
unreasonable to argue that if it didn’t distort economic activity on the way
up, why should it have an impact being unwound?
In the end, though, history says that there will be problems.
As far as the
Markets go, it is a different story.
This is where QE was been felt the most---in the run up of asset prices
everywhere. So I feel much more
comfortable assuming that at some point, the Markets will have to pay the price
for the Fed’s monetary experiment.
I recognize
that the initial reaction was upbeat. On
the other hand, a good start does not mean a good finish---just ask Tony
Romo. So the opportunity remains that
the Fed will muck this transition up just as it has all of its predecessors.
My
task is to watch with an open mind.
(4) a blow up in the Middle
East . The latest news is
that Iran may
be coming back to the negotiating table---though there is no clue why. If it is the tough stance by John ‘the
hammer’ Kerry, then this is likely good news.
If it because we gave away the ranch in behind the scenes negotiations,
then this will be just another feel good exercise by our political class that
gives Obama some good news to offset the disaster that is Obamacare; and in the
process will raise the paranoia level of Israel and most of the sunni muslim
powers injecting more not less instability into the region.
(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.
And:
S&P lowers EU credit rating (medium):
Bottom line: the economy continues to click along
nicely. It will likely be helped at the
margin by the new budget agreement; though as you know, I think the deal is a
negative for the long term as it represents the continuing inability of our
ruling class to come to grips with fiscal discipline.
The fact that
the Fed did anything with respect to terminating its abdominal monetary policy
also is a positive. However, I really
don’t view it as much of an effort to transition to a more sound policy. While I was clearly wrong on the timing of
tapering, there remains much more important issues like (1) will the Fed really
prove effective in unwinding QE without causing economic disruptions? and (2) how
will the Markets handle tapering for pussies under conditions of extreme
valuation?
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
down; November housing starts soared though existing home sales were a
disappointment,
(2)
consumer: weekly
retail sales were up; weekly jobless claims rose more than expected,
(3)
industry: November industrial production was stronger
than expected; the December Markit flash PMI
was roughly in line; the December NY and Philly Fed manufacturing indices were
well below estimates,
(4)
macroeconomic: third quarter nonfarm productivity was
up more than anticipated while unit labor costs were negative; November leading
economic indicators were better than expected; third quarter GDP
grew more than thought, though corporate profits came up short; November CPI
was flat, ex food and energy, it was higher than consensus; the October federal
budget was lowered than forecasts.
The Market-Disciplined Investing
Technical
The indices (DJIA
16221, S&P 1818) finished the week on a strong note, closing within
uptrends along all timeframes: short term (15842-20584, 1758-1912),
intermediate term (15584-20584, 1662-2243) and long term (5050-17400, 728-1900).
Volume on Friday
was huge as a result of option expiration; breadth improved considerably---though
overall it remains negative. This notion
is supported by the latest dismal reading of our internal indicator. The VIX was down, ending 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 bounced off
the lower boundary of its long term trading range, though it remained within
its short and intermediate term downtrends.
Despite a sick looking chart, that fact that GLD couldn’t successfully
challenge its long term trading range is a positive. I am once again seriously considering
starting to re-build this holding.
Bottom line: all trends of both indices are up. True, trading has been a bit more erratic
lately but I continue to believe that the seasonal bias will drive equity
prices towards 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 (16221)
finished this week about 39.8% above Fair Value (11600) while the S&P (1818)
closed 26.2% 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. It will
get a little short term help from slightly more government spending. That said the problem of too much spending,
too high taxes, too much regulation that has plagued investors for over a
decade is not going away.
The GOP can
argue all it wants that its budget compromise sets the stage for the recapture
of the senate and white house which will lead to a new fiscal nirvana. I suspect that is bulls**t even assuming they
can accomplish those election goals. Of
course, at the moment, it is irrelevant because they control neither. So until they (1) succeed in their electoral
goals and (2) prove that as a party, they have found fiscal religion [2017], we
are stuck with the current bunch of irresponsible liars, thieves and whores of
the moneyed interests and with them, the prospect of an ever growing federal
debt and burdensome regulatory environment.
Tapering for
pussies not withstanding, I believe that the wild card in the Market future remains
QEInfinity. To be sure, the fact that
the Fed has started a transition to tighter money is a positive in the sense
that it marks the beginning of the end.
Unfortunately, given its tentativeness and the expectation that the Fed
could still be tapering when my six year grandchild goes to college, I am not
looking at this a solid attempt at normalizing monetary policy.
Hence, all the
old issues associated with an unwinding of QE remain: what happens when, as and
if the transition gets serious, what happens if the Fed never gets serious, how
long will the Markets accept ever more government paper without demanding a
higher risk premium.
I don’t know the
answer to those questions although history gives us a hint---and the consequences
are not positive.
Bottom line: the
assumptions in our Economic Model haven’t changed; and like the budget deal and
the new Volcker Rule last week, tapering for pussies assures us that things
aren’t likely to get dramatically better.
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.
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 16221 1818
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.
No comments:
Post a Comment