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 15748-20748
Intermediate Uptrend 15748-20748
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 1783-1936
Intermediate
Term Uptrend 1680-2361
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 meager economic data tilted to the plus side: positives---mortgage
applications, weekly jobless claims, the ADP
private payroll report, November factory orders and the November trade deficit;
negatives---weekly purchase applications, December nonfarm payrolls and the
December ISM nonmanufacturing index; neutral---weekly retail sales and the
latest FOMC minutes.
The big numbers this
week were those that were employment related---mostly because they were totally
confusing. Strong private payrolls and
jobless claims, weak nonfarm payrolls. I
do think that weather is a legitimate reason to view the latter as something of
an outlier. Nonetheless, the
unemployment rate was down (6.7% versus 7% prior) with that lousy payrolls
number; this being largely a function of additional dropouts from the labor
force---which is definitely not a positive.
The bigger this datapoint becomes, the more it distorts the overall
employment picture and the greater the potential to lead to inappropriate
monetary and fiscal policy actions---which are already among the biggest risks
to our economic forecast,
And:
Overall the rest
of the data flow was positive and that keeps our forecast on track:
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 just
released upbeat November trade deficit basically reflected the improving energy
picture in the US---declining imports and rising exports. The benefits of this trend are (1) the geopolitical
advantage of being less dependent on foreign oil and (2) an improving trade
balance strengthens the dollar which historically has been good for the economy
as well as stocks.
The
negatives:
(1) a vulnerable global banking system.
A new week, the same old song.
This time around [a] JP Morgan {who else?} settled a dispute over its
role in the Madoff scandal, [b] the SEC
continues to pursue fraud charges in the sale of mortgage backed securities and
[c] China’s credit crisis deepened
The credit crisis
grows in China
(medium and must reads):
And JP Morgan
enters into deferred prosecution agreement over its role in the Madoff debacle. Please note that JPM
strongly suspected Madoff was a fraud and pulled its own money out---any wonder
why I hate bankers? (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. In
the last Closing Bell, the best thing I could say about the Ryan/Murray budget
compromise was that the electorate wouldn’t have to face another threat of a
government shutdown. On the other hand,
it scraped the spending limits set up by the sequester which I believe has much
bigger long term negative consequences.
Just to prove
that they really, really aren’t serious about fiscal responsibility, the senate
this week held a procedural vote that opens the way for debate on extending
unemployment benefits for the eleventh time.
I recognize that [a] there are a lot hurdles this legislation must go
through before it becomes law and [b] there is always a chance that there could
be spending offsets in other area.
But the fact
that it even got to a procedural vote demonstrates the senate’s willingness to
consider more fiscal profligacy. [I
know, I know. This makes me Scrooge
McDuck. But this would be the eleventh
extension, the prior ten having showed no macroeconomic benefit].
Adding insult
to injury, we are getting daily updates on the ongoing disaster that is
Obamacare.
In other words,
after a brief hiatus of fiscal responsibility [the sequester], it is back to
business as usual---spend, spend, spend.
(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.
Tapering for
pussies has begun; and we have a new chairperson of the Fed [irony?]. That was the easy part. The hard part is as it always has been: 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?
The big
question in my mind, at least for the economy, is this: since QEInfinity had
little effect on economic activity during its tenure, why should it have an
impact being unwound? Clearly, ‘it
shouldn’t’ is a reasonably probable answer---and I wouldn’t disagree with that.
However, it is
not the economy that gives me the willies right now; it is the Markets. This is
where QE was been felt the most---in the run up of asset prices
everywhere. So it seems reasonable to
assume that at some point, the Markets will have to pay the price for the Fed’s
monetary experiment.
http://www.zerohedge.com/news/2014-01-09/goodbye-greenspanbernanke-put-welcome-bernankeyellen-collar
The Fed’s logical fallacies (medium):
(4)
a blow up in the Middle East . The latest news is coming out of:
[a] Iraq where al Qaeda now controls a big chunk of the country---a
chunk I might add that a large number of our boys and girls died to ‘pacify’,
[b] Libya where
rebel forces and the government are in a pissing contest over who controls
[benefits economically] from oil exports---the risk being that both sides
employ a scorched earth policy, i.e. destroying the oil production altogether
rather than letting the opposition in on the vig. We know that the most of the
important muslim players are ideological nut jobs, so such an outcome doesn’t
seem all that unreasonable.
That said, I am
less worried about Libya in particular than I am about the general breakdown in
society throughout that Middle East [Syria, Lebanon, Egypt, Libya, Iraq,
Afghanistan] and where that could lead.
My primary
concern being that that Israel and most of the Gulf sunni muslim powers have to
be sitting on pins and needles and have the military capacity to act if their
survival is in question---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.
Counterpoint (medium):
Bottom line: the economy continues to click along nicely
despite this week’s confusing employment data.
Fiscal policy, on the other hand, has deteriorated in the sense that
recent senate action is a sign of the continuing inability of our ruling class
to come to grips with budget discipline.
Tapering is a
first step in the transition to a more normal monetary policy. While the fact that this transition has begun
is a plus, it says nothing about how it will end. And the end, of course, is what will
distinguish success from failure. So the
two big questions remain (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 applications were up though
purchase applications were down,
(2)
consumer: weekly
retail sales were mixed; weekly jobless claims fell more than forecast; the ADP private payroll report was strong but December
nonfarm payrolls were well below consensus,
(3)
industry: November factory orders were better than
expected; the December ISM nonmanufacturing index was below consensus,
(4)
macroeconomic: the November US trade deficit was less
than anticipated; the minutes from the last FOMC meeting provided little new
information on Fed policy.
The Market-Disciplined Investing
Technical
The indices (DJIA
16437, S&P 1842) had a trendless week, though they closed within uptrends
along all timeframes: short term (15748-20748, 1783-1936), intermediate term
(15748-20748, 1680-2261) and long term (5050-17400, 728-1900).
Volume on Friday
rose slightly; breadth was mixed. The
VIX was down, ending right on the lower boundary of its short term trading
range. A break of this support level
would be a big positive for stocks. It
is also in an intermediate term downtrend.
The long Treasury
was up strong, so much so that it will invalidate the developing head and
shoulders if it remains at current levels or higher until Market close on
Tuesday.
GLD was also up
big, finishing over the upper boundary of the very short term downtrend. While a positive for GLD, it is still too
soon to get jiggy. It remained within
its short and intermediate term downtrends.
Bottom line: all trends of both indices are up. Trading was a bit confusing on Friday
following the release of nonfarm payrolls number, Initially, it appeared the bad (economic)
news was bad (Market) news---contrary to recent sentiment responses where bad
news was good news because the assumed Fed response. Nevertheless, later in the days, stocks
recovered.
However, the
bond and gold markets were a bit more definitive. Both rallied on what I assume was the
conclusion that the lousy employment data meant that the Fed would ease up on
its tapering strategy.
Whether or not
we are entering another one of those schizophrenic phases in the equity markets
will likely be clarified in next week’s trading---which I am sure will be
influenced by follow through or the absence thereof in bond and gold markets.
Given the lack
of any challenge to any of the major uptrends, I have to assume that the odds are
for an assault on the upper boundaries of the Averages long term uptrends (17400/1900).
However, if one
of our stocks trades into its Sell Half Range, our Portfolios will act
accordingly.
Fundamental-A Dividend Growth Investment Strategy
The DJIA (16437)
finished this week about 41.4% above Fair Value (11625) while the S&P (1842)
closed 27.6% overvalued (1443). 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, though this week’s confusing employment
picture injects some unneeded uncertainty that has the potential of leading
unwarranted fiscal and/or monetary policy actions. We don’t know that will happen; we just need
to be aware that it could occur.
Unfortunately, whether or not this leads to inappropriate fiscal
actions, the economy is already burdened with too much government spending, too
high taxes, too much regulation.
Speaking of
inappropriate fiscal policy, the senate opened the door this week for yet
another extension of unemployment benefits.
While much has to happen before this move would become law, it is still
a sign that at least a part of our political class doesn’t understand.
Many will argue
that the nonfarm payrolls number is a perfect example of why additional
benefits need to be appropriated---and I appreciate their position. So at the risk of sounding heartless, let me
make two arguments (1) unemployment benefits have already been extended tem
times with little result (2) the declining labor participation rate could very
well be a direct function of never ending unemployment benefits. I recognize that that is not a factual
statement; but it is a hypothesis worth testing. In the end, the senate’s
actions illustrate the knee jerk reaction of the political class to throw money
at anything perceived as a problem on the false notion that the government can
fix it---which is the reason our finances are in a shambles in the first place.
Monetary policy
which is already a mess could become more so following Friday’s nonfarm payroll
number. Almost certainly, it will give
the doves ammunition to prolong (reverse?) its current tapering for pussies 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. The nonfarm payrolls number was not good
news, but it is only a single number and there were extraneous reasons for the
shortfall. So it is far too soon to
start worrying about a slowdown.
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 2014 Year End Fair Value* 11900 1480
Fair Value as of 1/31/14 11625 1443
Close this week 16437 1842
Over Valuation vs. 1/31 Close
5% overvalued 12206 1515
10%
overvalued 12787 1587
15%
overvalued 13368 1659
20%
overvalued 13950 1731
25%
overvalued 14531 1803
30%
overvalued 15112 1875
35%
overvalued 15693 1948
40%
overvalued 16275 2020
45%overvalued 16856 2092
Under Valuation vs.1/31 Close
5%
undervalued 11043 1370
10%undervalued 10462 1298
15%undervalued 9881 1226
* 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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