The Closing Bell
1/18/14
As you know, a project of mine has been to investigate not only how one
gets assets out of this country but also how one gets oneself out of this
country and where to go. We have already
looked at Panama (no); and this Friday, we are going to Costa Rica and will
gone for a week. As always, I will have
my computer and if any action is required communicate via 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 15790-20790
Intermediate Uptrend 15790-20790
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 1792-1945
Intermediate
Term Uptrend 1685-2366
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 was again fairly upbeat: positives---mortgage and purchase
applications, small business confidence, November business inventories and
sales, the NY and Philadelphia Fed manufacturing indices, capacity utilization
and the December Treasury surplus; negatives---PPI, ex food and energy,
December housing permits and January consumer sentiment; neutral---weekly
retail sales, weekly jobless claims, the December/November revisions of retail
sales, PPI, CPI, housing starts, industrial production and the latest Fed Beige
Book.
The important
numbers this week, in my opinion, were retail sales. December stats looked good but were helped
considerably by big November downward revisions. Combined with the very mixed individual
company reports and guidelines, I found the totality very confusing---though
they were much better received by the Market.
This follows a week in which the employment data was just as
confusing.
If the remainder
of the economic reports in both weeks hadn’t been generally positive, I would
characterized the uncertainty in the numbers of these two key indicators as
disconcerting at best. For the moment, I
leave our forecast in tact but simply point out that the employment and sales
stats raise questions about the strength of the current uptrend:
‘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 big four economic indicators:
The pluses:
(1)
our improving energy picture. The US
The
negatives:
(1) a vulnerable global banking system.
Another week and more examples of malfeasance---this time traders front running
GSE [government sponsored enterprises, e.g. Fannie Mae] orders, you would think
that the banksters would have run out of ideas about how to screw the public by
now. Ah, but for the ingenuity of greed,
In addition, Fed
bank regulators decided to alter the provisions of the Volcker Rule so that
small banks could avoid recognizing losses [$600 million] on their balance
sheets. How much more of this crap is
owned globally? And how much will ultimately have to be written off anyway?
Not to be
outdone, the ECB has lowered the capital requirements for its stress test
(medium):
Finally, as an
illustration that the big banks are liars, thieves, actively circumvent regulators
and are much less solvent than all the wild eyed optimists claims, HSBC just
phonies up its books (medium):
Continuing
trouble in China’s shadow banking industry (medium):
More on gold
price fixing (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. there were three positive developments this
week [a] the senate and house passed a 2014 appropriations bill---the first in
five years, [b] the December government budget was in surplus and [c] the proposal
to extend unemployment benefits for an 11th time was defeated.
I covered each
of these in the Morning Calls this week.
So I will just give the bottom line: these are all positive and, at
least on a short term basis, reduce the risk that a threat to our economy could
come from this direction.
That said, we
can’t forget the recent demise of the sequester, the ongoing problems with
Obamacare and His vows to use His pen to impose rules that can’t make it
through the legislative process. Until
our ruling class comes to grips with the fact that government is the problem
not the solution, fiscal policy will remain a risk and a headwind to economic
growth.
And (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.
Tapering for
pussies is policy but the question is how much impact the recent confusing
retail sales and employment data will have on that policy. Any sign of a slowdown from an already anemic
recovery could give ammunition to the Fed doves to slow the rate of the taper.
In any case,
whatever the Fed does, we stuck with the key issues; [a] 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? [b] from an economic standpoint, since QEInfinity
had little effect on economic activity during its tenure, will it have an impact
being unwound? [c] from a Market
standpoint, since asset prices are where the impact of QE has been felt the
most, isn’t reasonable to assume that it is the Markets that will have to pay
the price for the Fed’s monetary experiment.
(4)
a blow up in the Middle East . This week Iran and the group of five reached
a tentative agreement on the Iranian nuclear program though there is some
disagreement on its provisions. The
cynic in me says that the Iranians, with some help from others in the group of
five, are playing Obama like a Stradivarius.
For all His good intentions, He has no experience playing international
hardball, which He has proven on numerous times in the past, and His advisors
are cut from the same hopey, feely, cumbayah bolt of cloth as He is.
I believe that
increases the risk of [a] a miscalculation on Iran’s part---getting too aggressive
[b] and/or that that Israel and one or more of the Gulf sunni muslim powers will
take the job of restraining Iranian nuclear policy into their own hands.
Temporary
Iranian agreement to begin January 20 (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: the economy continues to click along nicely
despite this week’s confusing retail sales data. However, this is the second week in a row in
which the data of a key economic indicator has caused uncertainty. I am not blowing the whistle yet, but another
such week and the yellow light will be flashing.
There was some
good news on fiscal policy this week.
While it is a positive for the near term, fiscal irresponsibility for
the long term remains a headwind.
The outcome of
tapering for pussies is and will remain an unknown for some time. Whether or not it proves successful depends
on (1) if the Fed really proves effective in unwinding QE without causing
economic disruptions and (2) how 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 is an
upbeat summary of the economy, but the author confuses a healthy economy with a
fairly valued market (medium):
Counterpoint:
This week’s
data:
(1)
housing: weekly mortgage and purchase applications were
strong; December housing starts were down big, but in line; permits, however,
were down big although estimates had been for an advance,
(2)
consumer: weekly
retail sales were mixed; December retail sales were ahead of estimates though
November sales were revised down substantially; weekly jobless claims fell
fractionally; the preliminary January University of Michigan index of consumer
sentiment came in at 80.4 versus estimates of 83.5,
(3)
industry: while still at depressed levels, December
small business confidence rose slightly more than expected; November industrial
production was up, in line, capacity utilization was a touch better than
anticipated, November business inventories were up, sales were up even more;
the New York and Philadelphia Fed manufacturing indices were better than
forecasts,
(4)
macroeconomic: the December US budget was in surplus;
December PPI, CPI and CPI ex food and energy were in line; PPI ex food and
energy was well above consensus; the latest Fed Beige Book reported continued economic
improvement in in all areas of the country.
The Market-Disciplined Investing
Technical
The indices (DJIA
16458, S&P 1838) had a trendless week, though they closed within uptrends
along all timeframes: short term (15790-20790, 1782-1945), intermediate term
(15790-20790, 1685-2266) and long term (5050-17400, 728-1900).
Volume was up on
Friday, largely due to options expiration; breadth was mixed. The VIX was down, ending very near 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. I should note that the fact that the VIX is
now trading at a low level suggests a high level of investor confidence.
More on
sentiment (short):
The long Treasury
continues its strong upward movement. It
remains in a short term trading range and an intermediate term downtrend.
GLD was also up
big, trading through its 50 day moving average.
If it holds above this indicator at the close Tuesday, the break will be
validated. That is the third positive
technical development in a row. If it confirms
the challenge to the 50 day moving average, our Portfolios will likely start to
nibble. However, it will be small given
that GLD remains within its short and intermediate term downtrends.
Bottom line: all trends of both indices are up, although
trading was schizophrenic this week, e.g. the Dow up, the S&P down on
Friday. That doesn’t mean stocks are
heading lower. Indeed, as I point out
above, the very low level of the VIX suggests that investors still have a lot
of confidence.
On the other
hand, it is worth recalling that the S&P broke to a new all time high this
week, then immediately reversed itself. That sets up the potential of a double
top. But for that to happen, the S&P
needs to trade below at least the 1815 level and 1792 to be really confident.
Those levels, of
course, are a ways off; so until/unless that happens, the Market direction is
up and the current target is 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.
The gold market has
been quite strong of late, challenging its 50 day moving average on
Friday. A successful break above this
indicator will likely cause our Portfolios to start to nibble.
Fundamental-A Dividend Growth Investment Strategy
The DJIA (16458)
finished this week about 41.5% above Fair Value (11625) while the S&P (1838)
closed 27.3% 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 appears
to be tracking our forecast, though last week’s confusing employment picture and
this week’s retail data inject some unneeded uncertainty. That doesn’t mean that the economy is rolling
over, but if we get any more negative indications, I will be switching on the
yellow warning light.
Fiscal policy
was a bit of a mixed bag this week. The senate
DK’d the extension of unemployment benefits, a budget was passed and December
budget was in surplus. On the other
hand, Obama is threatening to do all in His power to correct ‘income inequality’
and the news on Obamacare hasn’t improved.
In short, the economy remains burdened with too much government spending,
too high taxes, too much regulation and will continue to be until the ruling
class understands that government is the problem not the solution.
Monetary policy is
a mess; and given Bernanke’s defense of it on Thursday, I see little hope of
improvement---leaving us stuck with the same old set on unknowns: (1) can the
Fed manage a successful transition to tighter money? , and whether or not it
does (2) what will be the impact on the economy? (3) what will be the impact on
the Markets? and (4) will the Markets be patient enough to allow the Fed to
execute its plan?
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, though employment and retail
sales data suggest that they might.
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.
Subscriber Alert
Finally, as you know, I have been
doing work on developing an all ETF Portfolio.
Of late, I have felt confident enough that I have started committing
money. It hasn’t shown up on our website
because we are in the process of revamping it.
The investment strategy of this ETF
Portfolio is to invest in a board range of asset classes, providing a maximum
of diversification. There is 10
different asset classes (US REIT, Foreign REIT, US Tips, US Junk Bonds, US
Bonds, Foreign Developed Markets Stocks, Foreign Junk Bonds, Foreign Developed
Markets Government Bonds, Foreign Investment Grade Corporate Bonds, Foreign
Government Inflation-linked Bonds, US Stocks, Emerging Market Stocks, Emerging
Markets Government Bonds and Commodities), each position will be 10% of the
Portfolio.
The Portfolio has started making commitments. First, in US quality municipal bond ETFs (substituting
for US Bonds, US Tips and US Junk Bonds) which will eventually comprise 30% of
the Portfolio. The initial commitments
were 20% of a normal position size. I
have elected to put this money in municipal bonds initially because (1) my tax
status, but more importantly, (2) muni bonds have been crushed due to the
problems in Detroit and Puerto Rico and (3) sectors for which I am substituting
them are not nearly as depressed.
Currently, the ETF’s I have chosen
yield 6.5-7%. Bear in mind that is after
tax return. I believe strongly that
there is no way stocks will provide a 6.5-7% annual return for the next 10
years
from current price levels. Yes, I know everyone hates bonds and
especially muni bonds. But that is the
point, these ETF are selling at the equivalent of a Buy Value Range. Those ETF’s are: Blackstone Quality Municipal
Trust (BKN), Nuveen Dividend Advantage Municipal Trust (NAD) and Nuveen Premium
Income Municipal Trust (NPM).
The Portfolio has also taken positions in
Powershares Emerging Market Sovereign Debt (PCY) and Vanguard US REIT
(VNQ). Both are in asset classes that
have been beaten up and are selling in the equivalent of a Buy Value Range.
I will keep you posted on other
purchases. Hopefully, our new site will
be up and running soon.
DJIA S&P
Current 2014 Year End Fair Value*
11900 1480
Fair Value as of 1/31/14 11625 1443
Close this week 16458 1838
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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