The Closing Bell
12/6/14
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%
2015
estimates
Real
Growth in Gross Domestic Product +2.0-+3.0
Inflation
(revised) 1.5-2.5
Corporate
Profits 5-10%
Current Market Forecast
Dow
Jones Industrial Average
Current Trend (revised):
Short
Term Uptrend 16164-18910
Intermediate Term Uptrend 16135-21100
Long Term Uptrend 5369-18960
2013 Year End Fair Value
11590-11610
2014 Year End Fair Value
11800-12000
Standard
& Poor’s 500
Current
Trend (revised):
Short
Term Uptrend 1862-2226
Intermediate
Term Uptrend 1704-2420
Long Term Uptrend 783-2071
2013 Year End Fair Value 1430-1450
2014 Year End Fair Value
1470-1490
Percentage Cash in Our Portfolios
Dividend Growth
Portfolio 47%
High
Yield Portfolio 53%
Aggressive
Growth Portfolio 49%
Economics/Politics
The
economy is a modest positive for Your Money. This
week’s economic data was abundant and again weighed to the plus side: positives---weekly
purchase applications, November light vehicle sales, weekly jobless claims, the
ISM manufacturing and nonmanufacturing indices, October construction spending,
unit labor costs, the latest Fed Beige Book and November nonfarm payrolls;
negatives---mortgage applications, Cyber Monday sales, October consumer credit, November ADP private
payrolls, the November Markit services PMI, October factory orders, third
quarter nonfarm productivity and the October trade deficit; neutral---weekly
retail sales.
There were five
primary indicators reported (both ISM numbers, construction spending, factory
orders and nonfarm payrolls); all but one came in positive. This is a further step in minimizing the really
lousy reports we received two weeks ago.
So the preponderance of both the overall positive stats as well as the
primary indicators not only is in line with our forecast but provides another
reason to dismiss the aforementioned disappointing week’s data.
On the other
hand, the numbers from overseas just keep getting worse as do the
prognostications for 2015. So in short, our outlook remains the same, and the
primary risk (the spillover of a global economic slowdown) remains just so.
Our forecast:
‘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, the weakening in the global economic outlook, 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
‘Unfortunately, this positive in our outlook
may be getting to be ‘too much of a good thing’. Whether because of new abundant supplies or
falling demand, the price of oil has been getting hammered of late; and sooner
or later this plus could become a minus.’
‘I have no idea where the crossover point
is, but there is one in which the positive created by lower prices to consumer
and industry is offset by losses in employment and weakening corporate
financial structures resulting from decreased drilling activity (remember the
energy industry has been a major contributor to job growth and cap ex
spending).’
The
negatives:
(1) a
vulnerable global banking system. This week’s menu of bankster activity includes
Citi closing down its ‘dark pool’ fund [this is actually good news]. But JP Morgan made the headlines again---this
time for hiring a man that claimed on his resume that he knew how to scam the
electricity futures market.
Citi shutters
fifth largest ‘dark pool’ fund (medium):
No post is
worth its salt without at least one example of JP Morgan crimes (medium):
And still no
one goes to jail (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. Not much occurred this week; but the
issue of government funding itself is just around the corner. I don’t think that the GOP will use it to bludgeon
Obama; but I also don’t believe that they will agree to finance all of FY2015. How they resolve this dilemma will make
interesting reading.
David Stockman
on the federal debt and budget deficit (medium):
(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.
This week:
(1) the
ECB left interest rates unchanged; but Draghi said that QE is not far
away. I am not convinced that the German’s
will allow him to keep that promise,
Goldman on
Draghi’s [ECB] latest statement (medium):
(2) China
followed its recent rate cut by joining the QE club. That leaves the QE carnival with lots juice,
especially if the Chinese get jiggy with it.
Undoubtedly, the hedge funds, carry traders and yield chasers are ecstatic.
Most economists
are also applauding, though I haven’t a clue as to why. It hasn’t worked in the US or Japan. On the other hand, it has allowed the
politicians to avoid making the tough fiscal decisions that would likely pull
us and the rest of the world out of our malaise [tax and regulatory
reform]. The question is, even if the
central bankers suddenly found religion and turned the pumps off, is it too
late to salvage the overregulated, overtaxed, overleveraged economies without a
recession?
David Stockman
on Fed policy (medium/long and today’s must read):
More on Fed
policy (medium):
(3)
geopolitical risks. Relative quiet this week although [a] OPEC’s {the
Saudi’s} decision to not cut production could have potentially significant
implications if the cash flow negative members of OPEC get desperate and [b]
the US is sending additional arms to NATO members bordering Russia. Despite this comparative calm, this is the source
of a potential exogenous factor that could produce the loudest bang.
(4)
economic
difficulties, overly indebted sovereigns and overleveraged banks in Europe and around
the globe. The economies of the rest of
the world continued to deteriorate this week: the EU October manufacturing PMI,
the flash services PMI and the composite PMI were all down and the October manufacturing
number was revised lower, the Chinese manufacturing PMI declined to an eight month
low, Russia forecast that its 2015 GDP would be down, Germany lowered its 2015 outlook
for growth and Moody’s downgraded Japan’s credit rating.
I have no idea
when, as and if the rest of the globe’s worsening economic straits will ever
wash on to our shores; but I do know that there is a clear risk of it happening;
so this remains the biggest risk to our forecast.
Bottom line: the US economic news showed a further bounce
back from the week before last’s horrible data.
I view that as a positive for our outlook of a struggling albeit growing
economy. Perhaps more important, the
advance continues strong enough to withstand any negative fallout from a
slowing world economy---which showed more signs of slowing this week.
What is coming
next is going to hurt (medium):
China joined the
QE crowd this week. While I am unsure of
the magnitude of its easing, anything will contribute to more short term
liquidity, more asset mispricing and a greater mean reversion when it finally
occurs. In addition, Draghi promised QE
once again, though I continue to believe that this is all talk and no do.
On the geopolitical
front, there was little news this week.
While the odds of a disastrous exogenous event occurring may be small,
the magnitude of the consequences of such an event could be enormous.
This week’s
data:
(1)
housing: weekly mortgage applications declined but
purchase applications were up,
(2)
consumer: weekly
retail sales were mixed; Cyber Monday sales were about half of forecasts;
November light vehicle sales were encouraging; weekly jobless claims fell, in
line; November nonfarm payrolls were much better than expected; November ADP
private payrolls grew less than consensus, October consumer credit grew less
than estimates,
(3)
industry: the November Markit manufacturing PMI slightly
below forecasts while the November ISM manufacturing and non-manufacturing
indices was better than anticipated; October construction spending rose much
more than expected, October factory orders were disappointing,
(4)
macroeconomic: third quarter nonfarm productivity rose less
than consensus and unit labor costs fell 1.0% much more than estimates; the
latest Fed Beige Book was generally upbeat; the October trade deficit was more
than anticipated.
The Market-Disciplined Investing
Technical
The
Dow (17958) closed the week above its 50 day moving average and within uptrends
across all timeframes: short term (16164-18910), intermediate term (16135-21100)
and long term (5369-18960).
The S&P (2075)
finished slightly above the upper boundary of its long term uptrend (783-2071)
for the third day. If it remains above
that boundary through the close on Wednesday, the break will be confirmed. However, each day of its boundary violation
has been ever so slight. If it continues
to merely surf the upper boundary, the break clearly won’t be decisive. It really requires strong follow through to
cement the notion of a successful challenge.
The S&P finished within its short term (1862-2226) and intermediate
term (1704-2420) uptrends and above its 50 day moving average.
Volume rose on
Friday; breadth improved. The VIX fell, having re-set to a trading range on
Thursday (a plus for stocks). It
continued within its intermediate term downtrend and below its 50 day moving
average.
The long
Treasury was off on Friday but it is still in position to challenge the upper
boundary of its very short term trading range.
It remained within its short term uptrend, its intermediate term trading
range and above its 50 day moving average. Nothing about this pin action suggests a
stronger economy.
GLD fell on
Friday, closing right on the lower boundary of its former long term trading
range (having been above that boundary 11 out of the last 14 trading days). I think it remains to be determined whether the
initial break was real or a false flag and whether that boundary will end up
marking the effective bottom for GLD.
That said, the fact that it is in downtrends across all timeframes and
below its 50 day moving average suggests the former alternative.
Bottom line: the
S&P is challenging the upper boundary of its long term uptrend but not very
forcefully. Indeed as long as remains
within a couple of points (as it has done the last three trading days), it is
going to be hard to convince me that this is a break at all. I will make the call but I won’t believe it
until there is follow through to the upside.
TLT continues to
toy with the upper boundary of its very short term trading range and to
demonstrate upside momentum. GLD
likewise is struggling with a boundary---the former lower boundary of its long
term trading range but has all the technicals working against it. Neither of these charts suggest a stronger
economy. On the other hand, the break
down in the VIX is consistent with an improving stock market.
Fundamental-A Dividend Growth
Investment Strategy
The DJIA (17958)
finished this week about 50.9% above Fair Value (11900) while the S&P (2075)
closed 40.2% overvalued (1480). 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, Japan and China.
Following a
rough set of numbers two weeks ago, the US economic data appears to be back on
track. The Market was particularly ebullient
over Friday’s nonfarm payroll number---which is, as you know, good economic news
but which, as you also know, should be bad news for Fed policy.
Of course for
the last year, we have, for the most part, been in an environment where good
news (a better economy) is good Market news and bad news (a weakening economy)
is good Market news (continuing Fed ease).
At some point in time, investors’ infinite jigginess is going to give
way to the notion that bad news is indeed bad news. Could be tomorrow or next
year or the next year. But it is going
to occur. At that point, then the risk
of declining growth/recession/deflation occurring overseas becomes of even more
importance.
Speaking of the
global economy, it continues to go from bad to worse. The latest stats, noted above, were virtually
all negative. We have to give credit to
the US economy for continuing to advance when the rest of the world is
suffering. The $64,000 question is, how long
can it continue to do so?
QE got a boost
this week from additional easing measures by the Chinese central bank. As I noted above, I am not sure of its
magnitude; but in investors’ minds something is clearly better than nothing. Further, Draghi made more promises on QE (but
did nothing). Nonetheless, QEInfinity is alive and well and investors are
loving it---witness the steady climb in equity prices. The only issues are what happens when it
stops or what happens if it doesn’t stop?
In other words, in my opinion, this is a lose/lose equation.
Oil (prices) was
the main headline this week with a majority of the pundits predicting that they
will go lower and that this trend is a big positive to the US economy. I always get nervous when the experts agree
on the direction and consequences of a developing trend especially one that is
so impactful on our economy---like oil.
I am not deliberating trying to invent negatives here; but my point is
that the US economy is far too complex for such an overwhelming consensus; plus
there are invariably unknown unknowns involved when a major sector of the
economy is disrupted. So I caution not
to get too jiggy.
And:
And:
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.
Bottom line: the
assumptions in our Economic Model haven’t changed (though our global ‘muddle
through’ scenario is at risk). 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.
Bear
in mind, this is not a recommendation to run for the hills. Our Portfolios are still 55-60% invested and
their cash position is a function of individual stocks either hitting their
Sell Half Prices or their underlying company failing to meet the requisite
minimum financial criteria needed for inclusion in our Universe.
The latest from Lance Roberts
(medium):
DJIA S&P
Current 2014 Year End Fair Value*
11900 1480
Fair Value as of 12/31/14 11900 1480
Close this week 17912
2074
Over Valuation vs. 12/31 Close
5% overvalued 12495 1554
10%
overvalued 13090 1628
15%
overvalued 13685 1702
20%
overvalued 14280 1776
25%
overvalued 14875 1850
30%
overvalued 15470 1924
35%
overvalued 16065 1998
40%
overvalued 16660 2072
45%overvalued 17255 2146
50%overvalued 17850 2220
Under Valuation vs. 12/31 Close
5%
undervalued 11305 1406
10%undervalued 10710
1332
15%undervalued 10115 1258
* 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