The Closing Bell
3/1//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 728-1910
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 was sub-par again: positives---January new
home sales and the November Case Shiller home price index, Chicago PMI, the
Kansas City Fed manufacturing index; negatives---weekly mortgage and purchase
applications, February consumer confidence, weekly jobless claims, the January Chicago National Activity Index,
the January Market flash PMI, the February Dallas and Richmond Fed
manufacturing indices and the revised fourth quarter GDP and price index; neutral---weekly
retail sales, January/December revisions of durable goods orders, February
consumer sentiment and January pending home sales.
The standout
stats this week were:
(1) the
bevy of reports on the manufacturing sector, the majority of which were
negative. As you know, industry is one
of the big four economic sectors; so clearly these number represent at extension
of lousy data flow of late and keep the risk of a slowdown front and center,
(2) the
surprisingly strong January new home sales figure. As I noted Thursday, January is seasonally a
slow month in housing so it is easy to get an unrepresentative stat. Further, new home sales are about one tenth
of existing home sales making them somewhat less important. And finally, this report comes on the heels
of a multitude of terrible housing related numbers from last week.
Still, good
news is good news until proven otherwise.
So I choose to view this as a bright spot in an unsettling, partially
weather related data flow not too different from other temporary slowdowns that
we have experienced in the current recovery.
The question
remains, how much these lousy numbers are being impacted by the weather and how
much by other domestic and international factors? The answer is that we just don’t know. So 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.’
The pluses:
(1)
our improving energy picture. The US
The
negatives:
(1) a
vulnerable global banking system. When I
checked the overnight news on Wednesday morning, these were among the lead
headlines:
BofA estimates
possible legal liability of $6.1 billion.
GE to pay $1.7
billion to Japan’s Shinsei bank to end refund liability.
Credit Suisse
distances top management from tax dodging claims.
Morgan Stanley
and SEC in proposed $275 million settlement of MBS probe.
And yet no individual
has been fined, lost his job or is in jail---oh, I forgot. Four bankers have committed suicide in the last
month.
More price
fixing (medium):
When the
financial sector gets too big (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. Two items this week:
[a] the house
is working on a tax reform package which by and large should be views as a
positive, However, given that this is an
election year {i} one has to suspect that part of this is for show, because
{ii} much of the ruling class and the media deemed it DOA,
[b] Secretary
Hagel is proposing major cuts in military personnel as well as benefits to
those who won’t be cut. Let me stipulate
that the US has proven beyond a shadow of a doubt that it is incapable of
nation building in non-Western cultures.
Therefore, I am happy to dispense with that part of a standing army whose
mission is occupation. However, we live
in a dangerous world made more so by the constant drawing of lines in the sand
and stern warning for which there is no backbone to enforce. So cutting our army to pre-WWII levels seems
a bit dangerous to me.
Furthermore, at
a time when the administration wants to upgrade the life styles of every
minority group in this country, it seems foolishly punitive to me to degrade
the life style of the 1% of the country that is defending the 99%.
(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.
Yellen
testified before the senate this week and didn’t change the script from her
house presentation. She did go off message
just a tad, referring to rough winter and allowing that it could be having an
impact on the economy. However, she also
suggested that it would not temper the Fed’s near term tapering policy. I don’t have to tell you that I consider that
good news.
In addition, she
deferred any specifics on the new forward guidance---which is nothing new; but
market participants can haul it out as an excuse to bang stocks if they
want.
That leaves us
with a Fed attempting to do something that it has never done before---transition
to normality without bungling the process.
That said, as you know, I am less concerned about a negative impact of
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].
And:
(5)
a blow up in the Middle East or someplace else. The world has become much more politically volatile
in the past six months. While the turmoil
in the Middle East captured the early attention, it is now a global
disease. The most recent hotspot in
Ukraine. There I am less worried about
what happens internally or any economic impact outside its borders than I am
about Obama and Kerry shooting the mouths off and Putin deciding to stick up
their ass.
***after the
Market close yesterday and it had become clear that some sort of Russian
appearance was occurring in the Crimean portion of Ukraine, Obama took to the
air and expressed what I thought were very light weight concerns about the
ongoing events in Ukraine. That likely
gives Putin room to do what he wants but keeps the US more or less on the
sidelines and away from a position of losing face in some unwinnable showdown.
(6) finally,
the sovereign and bank debt crisis in Europe and around the globe. It was a generally quiet week for
international economic data. China’s
credit problems remains at the forefront of concerns, although deflation in the
EU is not far behind. So far everyone
has kept their heads above water but the highly leveraged nature of EU, Chinese
and Japanese banking systems along with the low quality of the assets that are
leveraged keeps this risk high on my list of worries.
And:
Bottom line: the economic data improved just slightly this
week, but clearly uncertainty continues to surround our forecast. The biggest question remains the impact of
weather on the numbers; and with the NE suffering another major storm this week,
it will be a while before we have any clarity.
I am staying with our forecast for the moment partially due to this
weather issue and partly due to the fact that American business has overcome
much in the last five years and it has been a mistake to underestimate its ability
to adapt and move forward. Nonetheless,
the warning light is flashing.
Fed tapering policy
received another affirmation this week with Yellen’s senate testimony---though
as near as I can tell the Market either doesn’t believe her or thinks that
tapering won’t impact stock prices. On
the other hand, she did nothing to lift the veil on the coming changes in forward
guidance---but again no one seemed to care.
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 only economic
news out of Europe was French unemployment hitting a new high and speculation
the Rome will go toes up---so the concerns over the EU economy remain. The rest of the world wasn’t any better. Ukraine is a hot spot though more for
political than economic reasons. China holds
center stage right now as it appears that the central bank is intent on curbing
excess speculation (Janet are you watching?).
Whether this marks the beginning a global unwind of the carry trade remains
to be seen. However, at the moment we
know that the Bank of China has managed to prevent a crisis. So 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--again; January new home sales were extraordinarily positive while pending
home sales were flat; the November Case Shiller Home Price Index rose,
(2)
consumer: weekly
retail sales were mixed; February consumer confidence declined while consumer
sentiment rose; weekly jobless claims were worse than consensus,
(3)
industry: the January Chicago National Activity Index
fell and December reading was revised down; February Chicago PMI was better
than estimates; the February Market flash PMI was well below expectations; the
February Dallas and Richmond Feds’ manufacturing indices were disappointing
while the Kansas City Fed’s index was above consensus; January durable goods
orders were better than anticipated though the December revision was worse,
(4)
macroeconomic: revised fourth quarter GDP was below
estimates while the price index was above.
The Market-Disciplined Investing
Technical
` The
indices (DJIA 16321, S&P 1859) had a good week, especially for the S&P
which busted through the upper boundary of its short term trading range (also
its all-time high) and now is in the midst of our time and distance discipline affirming
that break. Confirmation will be depend
on the S&P remaining above 1848 through the close on next Wednesday (time)
or trading above 1885 whichever comes first.
Even if the short term trend is re-set to an uptrend, the S&P will
still be out of sync with the Dow; so the Market as a whole will remain trendless.
It continues to trade within intermediate
term (1723-2503) and long term uptrends (739-1910).
The Dow closed
the week within short (15330-16601) and intermediate term (14696-16601) trading
ranges and a long term uptrend (5050-17400).
Volume picked up
slightly on Friday; breadth was mixed. The
VIX was down, ending within its short term trading range and intermediate term
downtrend and slightly below its 50 day moving average.
The long Treasury
was up fractionally. Having negated the
head and shoulders pattern on Thursday’s close, it remained within a short term
trading range and an intermediate term downtrend.
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, Yellen reiterating that tapering was still on, a sinking
yuan and stampede out of yuan carry trade and escalating tensions in Ukraine,
investors not only bid prices up but pushed the S&P through its all-time
high. True, volume was unimpressive,
breadth middling and our internal indicator unsupportive. Plus a successful break by the S&P is not being
confirmed by the Dow which leaves the Market trendless.
But as I said time and again, price is truth
and right now, the truth is smokin’. So
an assault on the upper boundaries of the Averages long term uptrends is
becoming ever more likely.
Meanwhile, we
have a Market that will either remain in a trading range or become trendless;
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):
And:
Fundamental-A Dividend Growth Investment Strategy
The DJIA (16321)
finished this week about 39.7% above Fair Value (11675) while the S&P (1859)
closed 28.2% overvalued (1449). 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 sub-par---this week the
industrial sector was in the spot light.
I accept that weather is at least partly to blame; but there could be
much more at work. So the lousy numbers
can’t be summarily dismissed. I believe
that any real hint that the US is entering a recession would not be well
received by the Market. So the warning
light is flashing yellow.
Yellen
reiterated that tapering for pussies would remain on go. As you know, I have my doubts that there will
be much economic impact. Rather I believe
that it will largely show up in asset prices. Given this week’s pin action, clearly
either no one believes Yellen or no one agrees with my take. Only time will tell.
The ruling class
was relatively quiet this week. Tax
reform was put on the table and if enacted would be a huge plus for the economy
and the Market. But this is an election
year and transformational legislation doesn’t usually occur in those
years. Indeed most of the pundits opine
that its odds of passage this year are zilch.
It appears that defense spending will take a big hit in the upcoming
budget. If it is not offset by more
entitlement spending that is a positive near term. Longer term, I worry about the wisdom of this
action in an increasingly turbulent world.
Finally, it is
not from the EU or the Middle East that the Market could potentially get
heartburn. Rather it is (1) China if its
attempt to curb speculation [raising interest rates and weakening the yuan]
spills over into the global markets and (2) Ukraine, if investors get the
willies over potential armed confrontation.
The former being by far the greater risk, in my opinion.
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.
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.
DJIA S&P
Current 2014 Year End Fair Value*
11900 1480
Fair Value as of 3/31/14 11675 1449
Close this week 16321 1859
Over Valuation vs. 3/31 Close
5% overvalued 12258 1521
10%
overvalued 12842 1593
15%
overvalued 13426 1666
20%
overvalued 14010 1738
25%
overvalued 14593 1811
30%
overvalued 15177 1883
35%
overvalued 15761 1956
40%
overvalued 16345 2028
45%overvalued 16928 2101
Under Valuation vs. 3/31 Close
5%
undervalued 11091 1376
10%undervalued 10507
1304
15%undervalued 9923
1231
* 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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