The Closing Bell
2/28/15
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 16675-19447
Intermediate Term Uptrend 16730-21881
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 1941-2922
Intermediate
Term Uptrend 1762-2476
Long Term Uptrend 797-2112
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 again weighed to the negative side: positives---weekly
purchase applications, January durable goods orders and February consumer
sentiment; negatives---weekly mortgage applications, January existing home
sales, January pending home sales; February
consumer confidence, January durable goods orders ex transportation, the
January Chicago national activity index, February Chicago PMI, revised fourth
quarter GDP and the February Richmond and Kansas City Fed manufacturing indices;
neutral: January new home sales.
The key numbers
were January durable goods orders and ex transportation stats, existing home
sales, new home sales, fourth quarter GDP, Chicago PMI and the Chicago national
activity index. Not a lot of joy in this
data; and even where the news sounded good, there were problems: (1) the
durable goods ex transportation is a much more informative measure than the
headline figure and (2) existing home sales [down] are roughly ten times larger
than new home sales [up].
This puts the
recent data flow ever closer to redefining a trend. However, as I continually note, we have been
through so many instances in the current recovery in which a period of lousy
data was suddenly followed by improvement, I am more hesitant to dub the
current situation as the likely beginning of a slowdown than I might otherwise
be. Making this more complicated is that
February stats are bound to reflect the negative impact of the west coast
longshoremen’s strike as well as the terrible weather the eastern portion of
the country has suffered. So
interpreting the economic tea leaves over the next six weeks is going to be
very tricky. This makes me very cautious
about changing our forecast: but the yellow light is flashing brighter.
Real GDP per
capita:
Yellen dazzled
our congress this week and in the process managed to bolster the case for the
doves on monetary policy.
Greece captured
the early headlines this week with its complete capitulation to the demands of
the EU/ECB/IMF. It submitted a bailout
plan that acceded to the guidelines laid out by that group. The plan was approved; and will be voted on
this weekend by several of the constituent sovereign parliaments that require
it (Germany approved it on Friday). That
in turn buys the Greek government a four month extension to implement policies
it swore that it would not do. On the
other hand, it removes the risk of a Greek default for four months. That said, current EU fiscal/monetary
policies make it virtually impossible for Greece, or any of the PIIGS for that
matter, to achieve the objectives of the EU/ECB/IMF bailout dictates. Clearly, economic conditions within the PIIGS
have not reached the point where they realize the futility of trying to meet
those dictates. However, I believe that absent
any change in policy, one or more of the PIIGS will ultimately reach
that point. When that time comes, the EU
economy (and perhaps the rest of the world) may be in for a very rough ride.
The consequences
of Greece (medium):
The second anti-government
protest (short):
And the accompanying
angst (short):
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 hesitant 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 supplies remain abundant and that is a
significant geopolitical plus. Furthermore,
lower prices should be constructive when viewed as either a cost of production
or cost of living. However, none of pricing
positives have yet shown up in the macroeconomic stats. Indeed, as I have been pointing out, that
data has gotten worse over the last month.
So while one’s intuition may be favorably disposed to the ‘unmitigated
positive’ notion, it simply hasn’t shown up in the numbers.
Where Americans
are spending their savings on energy (short):
The one exception
to that statement is the negative impact lower oil prices are having within the
oil patch [employment, rig count]. In
that regard what has me worried is the magnitude of the subprime debt from the
oil industry on bank balance sheets and the likelihood of a default. However, even in this case, there is little
to substantiate a problem; just speculation about the potential danger.
The
negatives:
(1) a
vulnerable global banking system. This
week Morgan Stanley agreed to a $2.8 billion settlement related to fraud in the
mortgage securities market. In addition,
US officials are investigating 10 banks for possible rigging of precious metals
market.
‘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. This week, our ruling class did
little to improve our lot though Obama did veto the Keystone pipeline bill
showing His concern about employment and energy independence. Far more important, He challenged the
Constitution’s separation of powers in an executive order on immigration,
demonstrating His qualifications for His previous job of teaching
Constitutional law. And the entire
worthless ruling class spent the week burning the air waves debating the
nomenclature of ‘terrorists’ while the Middle East burns.
Meanwhile the
FCC has decided that what the Internet needs most is……..drumroll…….more
regulation.
As long as
these morons remain aloof to the problems that too much spending, too high
taxes and too much regulation cause, this economy doesn’t have a snowball’s
chance in hell of returning to its long term secular growth rate.
(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 mewed
her way through her Humphrey Hawkins testimony, leaving us all assured that the
Fed would do nothing to upset the economy by raising interest rates. Which is something of a mystery to me, since [with
the exception of QEI] lower interest rates haven’t done diddily to stimulate
growth [see revised fourth quarter GDP]. Furthermore, nothing juxtaposes the futility
of the other Fed policy objective, i.e. drive up inflation to 2%, and reality
like this week’s January CPI report [-0.7%].
Counterpoint
(medium):
Of course, what
she really means is that the Fed won’t do anything to upset the Markets. Which is also a mystery to me since the
misallocation and mispricing of assets has never been greater. Need I repeat, this story will not end well?
Unfortunately,
our Fed isn’t the only central bank in the game of easing money, doing its fair
share to perpetuate the misallocation and mispricing of assets and aggravating
the current trend in competitive currency devaluation (medium):
Last night, China lowered
interest rates for the second time (medium):
http://www.zerohedge.com/news/2015-02-28/china-cuts-interest-rates-takes-number-central-banks-easing-2015-21
http://www.zerohedge.com/news/2015-02-28/china-cuts-interest-rates-takes-number-central-banks-easing-2015-21
Welcome to
bizarro world, where banks charge to hold your money and pay you to take out a loan (must
read):
This is decent attempt to
explain why Fed policy hasn’t worked (medium):
Absolute must
read interview with Lacy Hunt of the Fed’s bankrupt monetary policy:
(4) geopolitical
risks. Putin appears to have the military
conflict in Ukraine under control. Meanwhile, NATO is threatening to ramp up
the sanctions game. The problem is they
have no more will to win this battle than the shooting one. Indeed, Putin holds the ultimate ace in the
hole---gas. Ukraine and half of western
Europe can be shivering in the dark with the turn of a switch. Given the leadership, the best thing our
side can do at this point is to grab dates and run because pressing Russia will
only end in more pain.
China sides
with Russia on Ukraine (medium):
The Middle East
is nothing but murderous chaos. Although
I am much less worried about who is killing who over there and more worried
about the lack of appreciation by our leadership of radical Islam’s intent to
bring the war to our home. My fear is that it will take a major
catastrophe [like burning people alive and mass beheadings aren’t enough] to
make these morons realize how irresponsible, unsound, dangerous and
intellectually vacuous our current ‘local law enforcement’,’ jobs for
jihadists’ strategy [?] is.
(5) economic difficulties, overly indebted
sovereigns and overleveraged banks in Europe and around the globe. There were again
very few international economic stats this week; and again, what there was, was
mixed. This paucity of data provides no
additional insight as to the overall direction of the global economy. So we are stuck another week with a weak
trend of ‘less bad’ numbers but no real indication that a real improvement is
forthcoming. So for the moment, I am keeping a global slowdown as the biggest
risks to our forecast.
One thing that
did improve was the lessening of the risk of a Greek default---at least in the
short term. With the acceptance of
Greece’s new policy objectives, there is a four month window for the new Greek
government to prove its ‘stuff’ which would in turn put it in a position of
getting additional bailout funds. I am
convinced that a plan to pay off current debt by enacting fiscal policies that
inhibit economic growth in order to receive yet more new debt is not a viable
long term strategy for economic improvement.
Something has to give in the way the eurocrats run the eurozone; and
until new fiscal, monetary policies are authorized, we are going to face the probability
of a default every time the rollover of bailout debt occurs. ‘Muddling through’ will continue until it no
longer can. Then, we got problems.
Bottom line: the US economic news was lousy for a fifth
straight week which means that in the absence of any progress, I am going to
have to alter our forecast at some point.
I have been reluctant to date to make those changes because we have seen
this pattern in the current recovery before only to have it followed by a jump
in activity. In addition, the ever so
slight improvement in the international economic stats raises the hope
(operative word) that the rest of the world is becoming less of a drag on the
US. On the other hand, the
longshoremen’s strike and nasty weather are certain to weaken the numbers that
will be forthcoming in the next month.
So navigating the data and trying to separate the cyclical components
from the strike/weather related effects over the next six weeks is going to be
difficult. The yellow light is flashing
brighter.
When will the
next recession occur (medium)?
The easy money crowd
got a hallelujah this week from Yellen as she demurred about raising interest
rates anytime soon. This keeps the asset
pumping, competitive devaluation forces going full blast. As you know, I believe that the ultimate
price for the largest expansion in global monetary supply in history will be paid
by those assets whose prices have been grossly distorted, not the least of
which are US equity prices.
A Greek default
appears to have been taken off the table for at least four months. That doesn’t mean one won’t occur
eventually. Indeed, I think that without
some dramatic reforms to EU fiscal policy, a default whether by Greece or any
of the other PIIGS in inevitable. The
math simply doesn’t work otherwise. But
that is a problem down the road and how far I haven’t a clue. So for the moment, the risk of financial
turmoil within the EU has been lessened.
On the other
hand, the Ukraine/Russia standoff has shifted from being purely military to
include the chance of economic consequences, including but not limited to
Russia shutting off gas to western Europe---a development that would play merry
hell with the EU economy and by extension those of its major trading partners.
This week’s
data:
(1)
housing: weekly mortgage fell but purchase applications
were up; January existing home sales fell sharply; new home sales were down but
not as much as anticipated; January pending home sales were up less than consensus;
the December Case Shiller home price index rose twice as much as estimates,
(2)
consumer: month
to date retail chain store sales slowed;
weekly jobless claims dropped more than expected; February consumer
confidence was below forecast while consumer sentiment was above,
(3)
industry: January durable goods were up more than
consensus, ex transportation up less than anticipated; the January Chicago
national activity index was weaker than estimates; February Chicago PMI was a
disaster; the Richmond and Kansas City Fed manufacturing indices were well
below expectations,
(4)
macroeconomic: January CPI fell more than forecast;
fourth quarter GDP was revised down from 2.6% to 2.2% but that was slightly
above forecasts of 2.1%.
The Market-Disciplined Investing
Technical
The
indices (DJIA 18132, S&P 2104) surged mid-week on the Yellen Humphrey
Hawkins testimony then gave most of it back by Friday. They remained well within their uptrends across
all timeframes: short term (16675-19447, 1941-2922), intermediate term (16730-21881,
1762-2476 and long term (5369-18860, 797-2112).
Both ended above their 50 day moving averages and their mid-December
all-time highs. The S&P finished back
below the upper boundary of its former long term uptrend. As I noted yesterday, it has pretty much
hugged that upper boundary line since breaking above it. If it can’t pull away from it, then (1) I
will likely reinstate it as such and (2) of course, it will clearly act as
governor on any further price advance. The
Dow is still 700 point away from the upper boundary of its long term uptrend.
Volume was up on
Friday; breadth was mixed. The VIX was down---a bit unusual for a down day in
the Market. It remains below its 50 day
moving average and within its short term trading range and intermediate term
downtrend. I continue to think that, at
these prices, it represents cheap insurance for the trader.
Update on margin
debt:
The long
Treasury seems (hopefully) to have found support this week, ending within
uptrends across all timeframes and above its 50 day moving average. Long bonds continue to represent the largest
commitment in our ETF Portfolio.
Ten things to
know about negative bond yields (medium):
GLD managed to
act less sick this week, holding its short term uptrend and remaining within an
intermediate term trading range and below its 50 day moving average.
Bottom line: despite
the flattish week, momentum still appears to be to the upside. On the other hand, the S&P seems unable
to break the gravitational pull of the upper boundary of its former long term
uptrend. To state the obvious, unless it
can do that, the upside from here is limited.
Supporting that notion is (1) the fact that the Dow is still some
distance from the upper boundary of its own long term uptrend and (2) the
really poor breadth seen in our internal indicator. That said, if stocks do trade higher, our
Portfolios will continue to use that as an opportunity to Sell stocks that no
longer fit our investment criteria or those which trade into their Sell Half
Range.
TLT and GLD seem
to have found some support. At the
moment, our Portfolios are simply holding their positions. That could change depending on the pin
action.
Fundamental-A Dividend Growth
Investment Strategy
The DJIA (18132)
finished this week about 51.5% above Fair Value (11966) while the S&P (2104)
closed 41.5% overvalued (1487). 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 economic
stats continue to paint a dismal investment picture. We now have five consecutive weeks of subpar
US dataflow. And it is apt to get worse
as a result of the west coast longshoremen’s strike and the disruptive
January/February weather pattern. While any
downgrade in economic activity will have very little impact our Valuation Model
since I use moving averages for many of our inputs, a slippage in profit growth
will almost certainly affect the Market via psychology (i.e. lower P/E’s) and a
decline in forward earnings estimates investors love so much.
The QE crowd
received more good news this week in the form of a dovish performance by Yellen
in her Humphrey Hawkins testimony. I continue to believe that the Fed’s current
policy is not only not working but is compounding the damage it has
wrought. I suggest that the January CPI
(-0.7%) and the latest revised GNP as well as the recent negative dataflow is
evidence enough to illustrates the Fed’s failure to even get close to its goals
(2% inflation and over 3% GDP growth).
Some will argue that it has attained its employment objective but the
validity of that proposition is diminished considerably when one adds back in
those that have completely dropped out of the labor force.
What low
inflation means for stocks (medium):
The point here
is not that the Fed is not trying to do the right thing nor that its lack of
success, in and of itself, is a reason to cease and desist with monetary
easing. The point is the reverse; that
is, the harm it is doing via (1) pricing and allocation irregularities in the
financial system that sooner or later will have to be rectified and (2) the
fact that it is morphing into a global currency war which has never been good
for economies or markets. It is the
mispricing of assets that most impacts our investment outlook.
At this moment, the
Greek/EU/ECB/IMF standoff has been pushed out for at least four months. That clearly removes, for at least that four
month period, the potential for a European financial crisis that could
ultimately impact all markets. For the
moment, that fact along with a slightly better dataflow keeps the ‘Europe
muddle through’ assumption in our Models on track.
The two biggest
geopolitical risks to the Market continue at a slow simmer. The military action in Ukraine seems to be
subsiding but economic saber rattling has taken its place---which can be just
as destructive to the financial markets as the potential spread of a shooting
war.
The Middle East
is slipping into chaos and no one seems to have an answer. Frankly, I think that we ought to wall the
place off and let them go on killing each other. Unfortunately, that is not going to happen
and even more unfortunate, radical Islam seems to want to bring the fighting to
us. And even more unfortunate than that,
our government’s strategy is to treat these guys like a bunch of street punks,
instead of a well-armed, highly motivated fanatics that want to wreak havoc
with our country. The risk here is that
it takes another 9/11 or worse for those in charge to comprehend the error of
their way.
Bottom line: the
assumptions in our Economic Model haven’t changed though the yellow light is
flashing ever brighter as the string of disappointing US stats moves through
its fifth week and the central bankers refuse to acknowledge the damage that
they are inflicting on the global economy.
There are some bright spots: a slight improvement the flow of global
economic indicators and the removal of a Greek default as a catalyst for an EU
financial crisis; but those are hardly sufficient to offset the negatives.
The assumptions
in our Valuation Model have not changed either. I remain confident that the Fair Values calculated
are so far below current valuation that it would take the second coming of
Jesus for stocks to have even a remote chance of not reverting to Fair Value. 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 2/28/15 11966 1487
Close this week 18132
2104
Over Valuation vs. 2/28 Close
5% overvalued 12564 1561
10%
overvalued 13162 1635
15%
overvalued 13760 1710
20%
overvalued 14359 1784
25%
overvalued 14957 1858
30%
overvalued 15555 1933
35%
overvalued 16154 2007
40%
overvalued 16752 2081
45%overvalued 17350 2156
50%overvalued 17949 2230
55%
overvalued 18547 2305
Under Valuation vs. 2/28 Close
5%
undervalued 11367 1412
10%undervalued 10769
1338
15%undervalued 10171 1263
* 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