The Closing Bell
2/22/14
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 Trading Range 15330-16601
Intermediate Uptrend 14696-16601
Long Term Uptrend 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 Trading Range 1746-1858
Intermediate
Term Uptrend 1716-2496
Long Term Uptrend 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. It was another
slow week for economic data---which turned ugly again: positives---weekly
retail sales, the February Markit flash PMI and the January leading economic
indicators; negatives---weekly mortgage and purchase applications, January housing
starts and building permits, January existing home sales, the February Housing
index and the February NY and Philadelphia Fed manufacturing indices; neutral---weekly
jobless claims and January PPI and CPI.
Clearly, the
negative housing numbers are a standout and continue the trend of negative data
flow from key segments of the economy.
At the risk of being repetitious, I must include the caveat that these
stats are being impacted by weather. The
problem is we just don’t know how much---and right now, no one seems to care.
What did generate
some heartburn this week were the minutes from the January FOMC meeting in
which the Fed (1) decided that tapering would continue on schedule and (2) concluded
that a change was needed in its forward guidance. Unfortunately with the respect to the latter,
it gave no hint on how that guidance would change which in turn introduced a
bit more uncertainty regarding its policy than investors seemed comfortable
with.
While the
warning light continues to flash, our outlook 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.’
Update
on the big four economic indicators:
The pluses:
(1)
our improving energy picture. The US
The
negatives:
(1) a vulnerable global banking system.
JP Morgan does it again, this time in the derivatives market (medium):
And don’t
forget Madoff (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. Congress managed to get through the week
without proposing or legislating some new piece of shit spending, tax or
regulatory measure.
However, the
bureaucracy was busy as little beavers.
The good news
is that the bank regulators are demanding more capital from foreign banks doing
business here. As I have noted
repeatedly in the ‘sovereign and bank debt crisis in Europe’ section of risks,
these guys are overleveraged on junk and pose a real threat to the rest of the
world as well as themselves. Kudos.
The bad news is
that the FCC announced that it would invade our newsrooms on the premise that
they were studying how the media handles important [by whose definition?]
events. Now goes freedom of the press.
(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.
As noted above,
the minutes of the January FOMC meeting didn’t read as many expected. The Market, in general, seems to have been
assuming after Yellen’s first congressional testimony that the Fed would remain
easy except under the most ideal economic conditions. The minutes appeared to suggest otherwise;
and on top of that remained mute on possible changes in forward guidance.
Frankly, I view
these statements in the minutes as a positive in that (1) they suggest the Fed
is intent of continuing the tapering, even if it is for pussies and (2) the
longer the current overly expansive monetary policy goes on, the more pain we
are doomed to suffer when the punch bowl is removed. Yes, Virginia, there will be pain no matter
when the transition starts. Better to
get over with now than wait until QE has created an even bigger problem.
Of course that
assumes that the Fed handles the transition to normality perfectly. Unfortunately, the Fed has never successfully
moved from easy to tight money without bungling the process; and that is a problem
that only gets worse the longer it is postponed and the larger the Fed balance
sheet at its peak.
That said, as
you know, I am less concerned about a negative impact on any transition process
on the economy [since the ever expanding QE had so little effect] and mostly
worried about the Market reaction [since that is where QE exerted its most
influence].
(4)
a blow up in the Middle East . It remained relatively quiet there though
terrorists alerts have been raised worldwide [Syria is a major center of
terrorist training]; and turmoil continues in Thailand, Venezuela, Argentina and
Ukraine.
(5)
finally, the sovereign and bank debt crisis in Europe
[around the globe?]. The data out of
Europe this week was not that positive---again.
Furthermore, signs of a slowdown in Japan and continuing credit problems
in China will almost certainly be ultimately felt in the EU. Finally, the increased capital requirements
imposed this week by US regulators on foreign banks could be problematic [cost
of the new capital] and bring unwanted attention to the risks associated with the
leveraged state of the EU banking system, the [low] quality of those leveraged
assets and the risk that some exogenous event could push one or more banks into
insolvency.
http://www.zerohedge.com/news/2014-02-21/ukraine-may-or-may-not-have-deal-sp-warns-sovereign-default
And
more wealth confiscation (short):
http://www.zerohedge.com/news/2014-02-21/austria-demands-profitable-bondholders-pay-bad-bank-bailout
Bottom line: the economic data continue to pose a threat to
our growth forecast. I do believe that
some of the shortfall in expectations can be attributed to weather; I am just
not sure how much. For the moment, I
leave our forecast unchanged; though the warning light is flashing.
Fed policy
became a bit more confused this week following the release of the January FOMC
meeting’s minutes. Much of the reason
for the new uncertainty is a function of how investors chose to interpret Yellen’s
recent congressional testimony; that is, she was assumed to be a super dove
(which itself clouded the outlook on Fed policy). Now the Market is worried that she may not be
as dovish as thought.
I still think
that Yellen’s true strips have yet to emerge; so there is likely a bit more investor
schizophrenia ahead of us. Meanwhile, Yellen is stuck with a Herculean
task of unwinding QE without causing economic disruptions. If she is more
dovish than Bernanke and tapers or reverses the taper as a result of the poor economic
stats, then she will just dig a bigger hole for the Fed to climb out of. If not, history is still not on her side,
i.e. the Fed has never successfully transitioned to tight money. And that ignores the possibility that the Markets
will get sick and tired of tapering for pussies and take matters into their own
hands.
The economic
news out of Europe, and the rest of the world for that matter, is not
inspiring. All this will have its impact
on eurobanks balance sheets which are not that sound in the first place. For the moment, I am leaving the ‘muddle
through’ scenario in place though, like the US, the yellow light is flashing.
This week’s
data:
(1)
housing: weekly mortgage applications and purchase applications
fell; January housing starts and building permits were terrible; January
existing home sales were down more than anticipated; the February Housing Index
was down substantially,
(2)
consumer: weekly
retail sales were positive for the first time in several weeks; weekly jobless
claims fell slightly,
(3)
industry: the February NY Fed manufacturing index was
one half of expected, while the Philly Fed index was negative; the February
Market flash PMI was better than estimates,
(4)
macroeconomic: the January CPI and PPI were in line; the
January leading economic indicators were slightly better than forecast; the
January FOMC minutes created some cognitive dissonance.
The Market-Disciplined Investing
Technical
` The
indices (DJIA 16103, S&P 1836) see sawed for most of the week, eyeing their
all-time highs but not mounting much of an effort to challenge them. They remained within their short term trading
ranges (15330-16601, 1746-1858). The Dow
closed within its intermediate term trading range (14696-16601) and closed
right on its 50 day moving average, while the S&P is in an intermediate
term uptrend (1716-2491) and above its 50 day moving average. Both are in long term uptrends (5050-17400, 736-1910).
Volume picked up
on Friday as a result of option expiration but it was still pretty anemic;
breadth declined. The VIX was down, ending
within its short term trading range and intermediate term downtrend and slightly
above its 50 day moving average.
The long Treasury
was up, finishing within a short term trading range and an intermediate term
downtrend. The head and shoulders
formation is still in play.
GLD traded down,
but remains above the lower boundary of that very short term uptrend and its 50
day moving average. It finished within
both a short and intermediate term downtrend.
I continue to wait for a serious (and unsuccessful) challenge to the
lower boundary of its very short term uptrend before getting jiggy about GLD.
Bottom line: the bulls are still control. Despite a week full of lousy economic numbers
both here and abroad and a much less dovish set of minutes from the last FOMC meeting,
stocks were flat---fighting off every attempt to sell off. However, volume has remained low, breadth
mixed and our internal indicator is not supportive of a further price advance.
That said, it
has been a fool’s game to bet against higher stock prices. So it seems likely that we will still see an assault
on 1858, 16601 at a minimum. How prices
behave at that juncture will provide some new insight on the strength of the
bulls.
Meanwhile, we
have a Market in a trading range; so there is really not much to do save using
any price strength that pushes one of our stocks into its Sell Half Range and to
act accordingly.
For the bulls (medium):
Technical
thoughts from Citi (medium):
Fundamental-A Dividend Growth Investment Strategy
The DJIA (16103)
finished this week about 38.2% above Fair Value (11650) while the S&P (1836)
closed 26.9% overvalued (1446). 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 dataflow, especially
in the primary sectors of the economy, continues to be weak. Weather is being argued as a major mitigating
factor; and I tend to agree with this analysis.
However, the lousy numbers can’t be summarily dismissed.
Given the
minutes of the January FOMC meeting which were released this week, we also can’t
assume that the Fed will make everything alright if the economy does
deteriorate. And even if it tries, the
history of QE suggests that suspending or even reversing tapering will do
little to stimulate economic activity. Indeed as I have posited many times, the most
likely result of the prolonging of QE would be to push stocks further into
nosebleed territory---unless, of course, Markets get sick and tired to
absorbing more US paper.
The ruling class
was relatively quiet this week save one whopper from the FCC which is now
proposing ‘a study’ of our nation’s news providers. God only knows that nothing would make me
happier than a shutdown of MSNBC and ridding the world forever of Chris ‘a got
a thrill up my leg’ Matthews. Unfortunately,
the only thing worse than keeping him around would be for the government to do
the dirty work. Yet another reason why
this is not the country that I grew up in.
Overriding all of these considerations is
the cold hard fact that stocks are considerably overvalued not just in our
Model but with numerous other historical measures which I have documented at
length. This overvaluation is of such a
magnitude that it almost doesn’t matter what occurs fundamentally, because
there is virtually no improvement in the current scenario (improved economic
growth, responsible fiscal policy, successful monetary policy transition) that
gets valuations to Friday’s closing price levels. Indeed, the problem is that any revision in
the economic outlook from here is more likely to be negative than positive.
Bottom line: the
assumptions in our Economic Model haven’t changed, though the risks are rising
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.
Well said (short):
DJIA S&P
Current 2014 Year End Fair Value*
11900 1480
Fair Value as of 2/28/14 11650 1446
Close this week 16103 1836
Over Valuation vs. 2/28 Close
5% overvalued 12232 1518
10%
overvalued 12815 1590
15%
overvalued 13397 1662
20%
overvalued 13980 1734
25%
overvalued 14562 1806
30%
overvalued 15145 1878
35%
overvalued 15727 1951
40%
overvalued 16310 2023
45%overvalued 16892 2095
Under Valuation vs. 2/28 Close
5%
undervalued 11067 1373
10%undervalued 10485
1301
15%undervalued 9902
1229
* 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