The Closing Bell
1/31/15
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 16502-19278
Intermediate Term Uptrend 16536-21691
Long Term Uptrend 5369-18960
2014 Year End Fair Value
11800-12000
2015 Year End Fair Value
12200-12400
Standard
& Poor’s 500
Current
Trend (revised):
Short Term Uptrend 1915-2296
Intermediate
Term Uptrend 1742-2456
Long Term Uptrend 783-2083
2014 Year End Fair Value
1470-1490
2015 Year End Fair Value
1515-1535
Percentage Cash in Our Portfolios
Dividend Growth
Portfolio 49%
High
Yield Portfolio 54%
Aggressive
Growth Portfolio 53%
Economics/Politics
The
economy is a modest positive for Your Money. The US
economic data this week was mixed and weighed ever so slightly to the negative
side: positives---December new home sales, the November Case Shiller home price
index, January Chicago PMI, January consumer confidence, weekly jobless claims;
negatives---the advanced estimate of fourth quarter GDP, weekly mortgage and
purchase applications, December pending home sales, December durable goods
orders and the January Dallas Fed manufacturing index; neutral---weekly retail
sales, January consumer sentiment, the January Richmond Fed manufacturing index
and the January flash services PMI.
As you can see,
the stats were very evenly divided.
However, the primary indicators were negative: new home starts being the
positive and December durable goods and fourth quarter GDP estimate, the negatives. The good news is that the disappointing
earnings/guidance announcements mellowed out a bit this week, ending with a
balance of disappointing and encouraging reports/guidance from the largest
players in the major industries.
Nevertheless, 2015 S&P earnings estimates have gone from plus mid-single
digits to flat; and that keeps me worried that this trend could be a warning of
rough macroeconomic data to come.
Another
important item---the FOMC met. In its
subsequent press release, it (1) left the wording of its policy unchanged, (2)
upgraded its assessment of the economy but (3)
included international economic concerns for the first time on its list
of worries. As you know, this has been
on our list of risks for months. Indeed,
it is numero uno. The Fed isn’t quite
there yet; but it makes official that the current global economic weakness
could impact the US.
The other noteworthy
news was the triumph of the Syriza (anti-austerity) party in the Greek
elections. While government
representatives initially did the usual mewing about cooperating with the EU
bankers, (1) the first policy actions were to dismantle austerity measures
imposed during prior debt refinancing and (2) as the week wore on, its rhetoric
became more confrontational. We can’t
know how much of that is posturing for upcoming debt negotiations. But it appears that those talks will be a
good deal rougher than in prior instances and it could mean that the odds of a
Greek default and/or exit from the eurozone have increased.
All that said,
nothing has yet impacted US macroeconomic data.
Hence for the moment, our
outlook remains the same but with a bit less conviction (flashing yellow light)
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. Oil took another leg down this week (though
it bounced hard on Friday). Still we
have little indication that it is impacting our economy save specific problems
one would expect to occur in the oil and oil service industries.
Nevertheless, I
remain concerned about the magnitude of subprime debt from the oil industry on
bank balance sheets and the likelihood of a default. Here too there is nothing substantial; just
speculation about the potential danger. That said until we can definitely say that
lower oil prices are bad for the economy overall, I am leaving this factor as a
positive.
The
negatives:
(1) a
vulnerable global banking system. We
actually made it a whole week without news of bankster allegations, misdeeds
and fines. However, the risks remain of
[a] too much exposure to derivatives and the carry trade, [b] a default in the
oil patch, [c] disruptions in the EU financial system most immediately from the
inability of the new Greek government to come to terms with the ECB/IMF over
the austerity program imposed under existing loans and a rescheduling {read
haircuts} of future debt repayments. To
be sure, the new government has demurred over cooperating with the banking
powers that be; however, they have already began reversing some austerity
measures and made it clear that, if forced, it will withdraw from the Eurozone
and default on {some of} its debts.
‘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. The Senate passed the Keystone Pipeline
Bill Thursday night. It will now go to a
conference committee to iron out the differences with the house version. The point though is that Obama is likely to
veto it and that could raise the entertainment level out of DC. In addition, it is a clear signal that there
will be no real budget, tax and regulatory reform; and hence, the US economy
will likely continue to struggle to regain its past rate of secular growth.
(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.
Little new this
week other than Singapore and Russia joining the QE parade. I believe that makes approximately 31
countries that are now firmly pursuing money pumping, currency depreciating
‘beggar thy neighbor’ policies including most of the largest central banks [US,
EU and Japan]. Of course, the Fed currently
looks like a paragon of virtue in this motley crew since has given up the ‘money
pumping’ and is ‘only’ holding interest rates at an artificially low
level. However, that doesn’t alter the
fact that save for QEI, its ‘money for nothing’ policy did little for the US
economy. And that judgment is bolstered by the reality that QE has also done
nothing for any of the other participants either.
And this stunner from Philly Fed chief
Plosser (short):
(4) geopolitical
risks. Violence in Ukraine continued
this week but at a reduced level. The point here being that this situation
contains potentially explosive elements that could suddenly have negative
global geopolitical implications.
(5) economic difficulties, overly indebted
sovereigns and overleveraged banks in Europe and around the globe. This week
S&P lowered Russia’s credit rating to junk stats, Chinese industrial profits declined and the
government dropped their 2015 GDP growth expectations and both Germany and the
EU reported that their respective CPI’s fell [that is deflation, folks]. In short, the global economy continues to
show signs of weakening, massive QE notwithstanding.
Moreover, [a] as
I noted above, oil prices fell further keeping alive worries regarding their
ultimate impact on the global economy and [b] subsequent statements and actions
by the winning party in the Greek elections suggest that these guys mean
business: [a] unwinding austerity measures imposed as conditions on past loans
and [b] making it clear that Greece can’t meet its current debt
obligations. This situation may
ultimately prove a tempest in a teapot; but it is a risk that can’t be ignored.
Who has
the exposure to Greek debt (medium)?
My point in all
this is that the aggregate risks incorporated in a faltering global economy I
believe is the biggest threat to our own economic health.
Bottom line: the US economic news this week was generally
supportive of our forecast; though the lower than anticipated GDP number is a
little concerning (what, what? I thought
declining oil prices were an unmitigated positive for the economy). The string of disappointing corporate
earnings reports plateaued this week; but I still view it as a potential threat
to our outlook. The question remains, is
this the first sign of negative fallout from a slowing world economy? I am not going to say yes; but I am getting
close.
The QE cheerleaders
received more good news this week from Singapore and Russia; though I continue
to see little reason for all the giddiness---economically speaking (I do
understand more booze in the punchbowl).
Indeed, the more QE quest goes on, the more likely it is for disruptions
in global trade and/or the financial system.
Given the
initial anti-austerity moves by the new Greek government, I don’t think that we
can dismiss their rhetoric out of hand as political posturing. That doesn’t mean that that is not. I am just saying the current consensus
thinking that the Europeans will somehow muddle through may not be as pat a
position as might have seemed last week.
This week’s
data:
(1)
housing: December new home sales were quite strong but
December impending home sales were down; the November Case Shiller home price
index was up more than expected; weekly mortgage and purchase applications were
down,
(2)
consumer: weekly
jobless fell more than forecast; weekly retail sales were mixed; January
consumer confidence was much better than estimates while consumer sentiment was
flat,
(3)
industry: the January Dallas Fed manufacturing index
was much worse than anticipated as was December durable goods orders; the
January Richmond Fed manufacturing index was slightly ahead of consensus,
likewise the January flash services PMI, the January Chicago PMI was above forecast,
(4)
macroeconomic: the advance estimate for fourth quarter
GDP was very disappointing.
The Market-Disciplined Investing
Technical
The
indices (DJIA 17164, S&P 1994) had another highly volatile week, finishing
firmly to the downside. Both traded below
their 50 day moving averages. The Dow
took out its mid-December low twice, ending below it. Further both are approaching their 200 day
moving averages (17085, 1974). Nonetheless,
they managed to remain well within their uptrends across all timeframes: short
term (16502-19278, 1915-2296), intermediate term (16536-21691, 1742-2456) and
long term (5369-18860, 783-2083).
Yesterday
carried a bit more significance, technically speaking, than just a lousy day at
the office. It was the last trading day
of January which means the January barometer has now been set; and it was
negative. It joins the Santa Claus rally
as an ill wind blowing for 2015 stock market performance. Here are the stats from Stock Traders’ Almanac
on the effectiveness of the January barometer predicting full year pin action:
Volume jumped on
Friday; breadth was terrible. The VIX advanced 12%, closing above its 50 day
moving average and within its short term trading range and intermediate term
downtrend---although it is quite close to violating the upper boundaries of
both of these trends.
The long
Treasury soared, finishing within the uptrends across all timeframes and well
over its 50 day moving average. This
chart is telling us that either some serious shit lies ahead (recession/geopolitical
event) or TLT is getting way overextended.
GLD made a big
comeback. While it could not regain the
lower boundary of its former very short term uptrend, it did remain above the
upper boundary of its short term uptrend, within its intermediate term trading
range and well above its 50 day moving average.
GLD’s volatility is driving me nuts; but our Portfolios will add to their
position on the open Monday.
Bottom line: there
are times the Market makes it easy to follow its actions and times when it gets
too complex. That is where we are
now. Whether it presages a major move
one way or the other---or not---this is a time for only the most nimble and
talented trader. I am neither. So I am
sticking with watching the major trends and staying on the sidelines.
On the other
hand, the message from bonds and GLD is a lot clearer. Bonds are yelling that something is
amiss. I can guess what it might be; but
you never know from which direction you are going to get hit. In any case, our ETF Portfolio owns a full
position in bonds so I am loving the pin action. GLD’s chart is not quite as well defined as
TLT; but it has overcome a number of technical hurdles and it could very well
be sending the same message as the bond Market.
At the moment, our Portfolios have a small position in gold and it will
get bigger on Monday. However, I want to
emphasize that GLD’s volatility scares me so further steps will be done with caution.
Fundamental-A Dividend Growth
Investment Strategy
The DJIA (17164)
finished this week about 43.8% above Fair Value (11933) while the S&P (1994)
closed 34.4% overvalued (1483). 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.
This week’s
data/events have not improved the overall investment picture. While the reported economic data overall was
mixed, the big shortfall in fourth quarter GDP does not inspire
confidence. On the other hand, it
perfectly fits our description of the US economy: sluggish improvement.
The lousy
earnings reports among major companies in key industries continued though
admittedly this week witnessed more balance between disappointing and upbeat
announcements. Nevertheless, despite this less negative flow of profit reports
and a positive tilt to the number of earnings ‘beats’, the Market’s consensus
2015 S&P earnings forecast has gone from up mid-single digits to zero---illustrating
I believe that it is the big boys that are getting hurt. The question is, are these earnings misses
due principally to a strong dollar---companies and investors alike are clinging
to this as the proximate cause---or do they also include lower revenues due to
a poor global economic environment. The
answer is likely to weigh heavily on investor psychology.
Overseas, it was
business as usual, which is to say, more dismal economic stats. On the economic/political front, the new
Greek government made its first policy moves which was to reverse austerity
measures imposed on the prior government by the EU bankers---a good indication
that any solution to that country’s debt problem will not be under the old
formula of new loans to pay off old loans and more austerity. In addition, the new Greek PM penned an open
letter to the Germans. (I linked to it
in Friday’s Morning Call; and if you didn’t read it, you should). In it, he basically said ‘no mas’ to
austerity. All this suggests a turbulent
negotiations process to deal with upcoming Greek debt payments---which is not
to say, a mutually agreeable outcome can’t be worked out. But the process may cause some investor
heartburn.
QE received
another boost this week. This time from
Singapore and Russia which joined the others on the yellow brick road. However, the most significant item was the
mention of concern about international developments in the latest FOMC
statement. I suggest that the Fed making
official its worries about global growth a week after numerous central banks
dogpiled onto QE is not an endorsement of QE success. My guess is that these guys are scared
shitless that (1) competitive devaluations do what they have always done and
that is disrupt international commerce and (2) that recession hits the US
before it ever has the chance to raise interest rates, leaving it with almost
no policy levers to soften its blow.
Bill Gross on
lousy fed policy and likelihood of low market returns (medium) new
Does QE breed
stability or instability? (medium):
Bottom line: the
assumptions in our Economic Model haven’t changed though the yellow light is
flashing. In addition, the risk to our
global ‘muddle through’ scenario is greater than ever as a result of the continuing
decline in oil prices, disruptions in the global monetary system and a
potential Greek default/exit from the EU.
The assumptions
in our Valuation Model have not changed either. I remain confident in the Fair Values calculated---meaning
that stocks are overvalued. As a result,
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.
DJIA S&P
Current 2015 Year End Fair Value*
12300 1525
Fair Value as of 1/31/15 11933 1483
Close this week 17164
1994
Over Valuation vs. 1/31 Close
5% overvalued 12529 1557
10%
overvalued 13126 1631
15%
overvalued 13722 1705
20%
overvalued 14319 1779
25%
overvalued 14916 1853
30%
overvalued 15512 1927
35%
overvalued 16109 2002
40%
overvalued 16706 2076
45%overvalued 17302 2150
50%overvalued 17899 2224
Under Valuation vs. 1/31 Close
5%
undervalued 11336 1408
10%undervalued 10739
1334
15%undervalued 10143 1260
* 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.
