The Closing Bell
4/11/15
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 (revised)
0-+2%
Inflation
(revised) 1.0-2.0
Corporate
Profits (revised) -5-+5%
Current Market Forecast
Dow
Jones Industrial Average
Current Trend (revised):
Short
Term Uptrend 16950-19727
Intermediate Term Uptrend 17043-22179
Long Term Uptrend 5369-18973
2014 Year End Fair Value
11800-12000
2015 Year End Fair Value
12200-12400
Standard
& Poor’s 500
Current
Trend (revised):
Short
Term Uptrend 1982-2963
Intermediate
Term Uptrend 1789-2551
Long Term Uptrend 797-2129
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 neutral for Your Money. There
was almost no economic data this week.
What we got was mixed: positives---weekly mortgage and purchase
applications, month to date retail chain store sales, weekly jobless claims and
the March Markit services PMI; negatives---the March ISM nonmanufacturing
index, February consumer credit, March import and export prices and the
wholesale inventories and sales combo; neutral---latest FOMC minutes.
The only primary
indicator was the ISM nonmanufacturing index, which was slightly negative. That should tilt the score to the negative
side; but given the lack of meaningful stats, it is not worth counting.
We did receive a
bucket load of meaningless blather from the Fed---designed to confuse and
confound investors so they would take their eye off last week’s terrible
nonfarm payrolls number. I believe that this is all in the effort to
keep the Markets sedated in hopes that they won’t realize that the Fed doesn’t
have a f**king clue how to get out of the mess it has created. Of course, it is not alone. Every central bank out there is employing the
same policy, I assume thinking that the Fed knows what it is doing. I guess
they haven’t bothered to study the history of Fed forecasts and policy moves.
One
note: you may wonder why I listed declining import and export prices as a
negative; after all, lower prices are good for you and me, right? Yes, they are. But if declining inflation motivates the Fed
to stay looser longer, that is a negative.
There
was also a dearth of international economic data. What we got was from Europe and for the
fourth week it was generally upbeat. It
is still too soon to state with confidence that the EU is coming out of its
slump; but clearly, I am getting closer.
One of the things that holds me back is the unresolved problems of
Greece and Ukraine. Either one could
turn a nascent recovery on its head.
Speaking of the Greek
bailout, the prime minister went to Russia this week looking for help. He got nothing but some soft mewing from Putin. But my guess is Putin is playing a waiting
game. If he offered a viable alternative
that would likely prompt the EU to bite the bullet and help Greece. On the other hand, doing nothing could keep
the EU playing hard ball; and if that really puts the Greek’s in a corner, he
would likely make a much better deal for Russia’s help.
Our forecast:
‘a below average secular rate of recovery, exacerbated
by a declining cyclical pattern of growth, 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 only gets worse the further oil prices
fall.’
Having said
that, oil prices have been in a trading range for some time now, suggesting
that the ‘unmitigated positive’ of lower prices may be coming to an end. Weighing against that is (1) the continuing
build in inventories, (2) a possible Iran deal that would remove oil sanctions
and (3) this week’s announcement by Saudi Arabia that it is jacking up
production.
Why the Saudi’s
are doing it (medium):
If the past is
any guide, we should hope that oil prices have at least stabilized. I don’t know if the US economy can handle
more ‘unmitigated positives.
Of course, the problem
that I am really worried about is the impact lower oil prices [employment, rig
count, cash flow] have had on the subprime debt from the oil industry on bank
balance sheets and the likelihood of a default.
The financial
sectors exposure to shale oil debt (medium and an absolute must read):
The
negatives:
(1) a
vulnerable global banking system. This
week: all quiet.
But that doesn’t
mean our financial system is healthy (must read)
‘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. Gone fishing. No news.
(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 Bank of Australia left key rates unchanged but stated that it was prepared
to lower them more if necessary, (2) the Bank of Japan gave a two thumbs up to
its own massive QE, even as the evidence mounts of its complete failure, (3)
the Swiss government sold 10 years notes at a negative interest. While clearly not a central bank action, it
is illustrative of the consequences of the EU QE, (4) our own cracker jack Fed,
had several members making more confusing comments on the next rate hike accompanied
by pabulum in the minutes from the latest FOMC meeting and finally, (5) Jamie
Dimon cried ‘bubble’. You know that when
one of the chief beneficiaries of QE starts condemning it, there is trouble in
River City. Or is he just establishing
his defense for the next bank bailout?
(4) geopolitical
risks: tensions in the Middle East remain.
The Saudis appear to be making no progress wrestling control of Yemen
from the Houthis rebels. Meanwhile,
naval action between the US and Iran has picked up around the mouth of the Red
Sea.
On another US
versus Iran matter, arguing over the ‘recent format for an outline of a deal’
with Iran is in full swing. Making
matters worse, Iran’s stated interpretation of the several critical provisions
of the agreement is dramatically different from Obama’s. How these get resolved is to be
determined. My own bottom line is that
Iran needs a deal more than the US, so there is no reason to give away the
store for the sake of a ‘legacy’ especially
when it could come back and bite You like such things as ‘ISIS is the JV’ and ‘Yemen
is an example of our success’.
Iran gives us
something else to think about (medium):
In Syria, ISIS
has penetrated to within miles of the presidential palace in Damascus with
multiple independent militias switching sides like a Roman orgy. The good news is they are following my
prescription---killing each other without an American in sight. The bad news is that if ISIS actually deposes
Assad, the US will likely get involved.
In addition, …I am…concerned 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 Our Glorious Leader realize how irresponsible, unsound, dangerous and
intellectually vacuous our current ‘local law enforcement’,’ jobs for
jihadists’ strategy [?] is.
The
Ukraine/NATO/Russia standoff hasn’t generated many headlines of late; however a
step up of arms purchases by Germany is worth noting:
(5) economic difficulties, overly indebted
sovereigns and overleveraged banks in Europe and around the globe. That said, Europe continues to turn in upbeat
economic results---this week coming from the UK, Germany and the consolidated
EU data. As I noted above, [a] it is
still too soon to turn positive on the EU economy and [b] the problems of
Greece and Ukraine remain unresolved and if not handled properly could have a
very negative economic impact.
With respect to
the former, I don’t believe we can take comfort in any meaningful progress
toward a bailout agreement in this week’s developments which included {i} the
Greek PM going to Russia in search of aid and {ii} the Greek parliament voting
to investigate a way of renouncing prior ECB loans.
‘Muddling
through’ remains the assumption in our Economic Model. Hopefully, the recent EU data will continue
to improve; which should improve the odds of this scenario. On the other hand, [a] a Grexit remains a
decent probability and no one knows the unintended consequences of such an
event and [b] the Chinese and Japanese economies continue to falter and they
collectively are bigger than the combined EU economies. This remains the
biggest risk to forecast.
The latest data
out of China (short):
Goldman’s
latest look at Japan and its QEInfinity policy (medium):
http://www.zerohedge.com/news/2015-04-10/japan-qe-limit-approaching-goldman-says-boj-risks-losing-crediblity
http://www.zerohedge.com/news/2015-04-10/japan-qe-limit-approaching-goldman-says-boj-risks-losing-crediblity
Bottom line: there was too little US economic news this
week to make judgment about trend.
Earnings week commenced as estimates continued to be lowered.
Overseas, the EU
economy is still showing improvement. Meanwhile, QE remains the principal theme
among the central bankers. My immediate concern is that these actions
add fuel to the currency devaluation race---the history of trade wars generally
suggest that they don’t end well. Further, 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.
The geopolitical
hotspots remain unresolved (1) the Greeks and the Troika appeared to make no
progress this week, as the Greeks continued to look for ways to weasel out of
repaying their debts, (2) the Ukraine/NATO/Russia standoff continues and (3)
the Middle East violence has escalated raising the odds of a Sunni/Shi’a civil
war---which almost certainly won’t leave oil supplies unscathed.
This week’s
data:
(1)
housing: weekly
mortgage and purchase applications were up,
(2)
consumer: weekly
jobless claims rose but less than estimates; month to date retail chain store
sales were up nicely; the headline February consumer credit number was better
than expected but the internals were very disappointing,
(3)
industry: the Markit March services PMI was slightly
better than estimates while the ISM nonmanufacturing index was a little worse;
wholesale inventories grew more than anticipated, but sales declined,
(4)
macroeconomic: the minutes from the latest FOMC meeting;
in March both import and export prices dropped.
The Market-Disciplined Investing
Technical
The indices
(DJIA 18057, S&P 2102) had a good week. They closed above the lower boundaries of their
very short term uptrends (negating that trend) and their 100 day moving
averages. On a short term basis, they
still need to overcome resistance offered by a very short term downtrend and the
late February high before they even start to challenge the upper boundaries of
their long term uptrends. I continue to
believe that those boundaries will prove extremely difficult to surpass in any
meaningful way.
Longer term, the
indices remained well within their uptrends across all timeframes: short term
(16950-19727, 1980-2961), intermediate term (17026-22162, 1789-2551 and long
term (5369-18873, 797-2129).
Volume rose;
breadth improved. The VIX was down,
finishing within its short term trading range, its intermediate term downtrend,
its long term trading range, below its 100 day moving average and below the
lower boundary of that developing pennant formation. A close there Monday will negate the
formation, suggesting more downside (upside for equities). I continue to think that the VIX remains a
reasonably priced hedge.
And this on the
VIX (short):
The long
Treasury rebounded on Friday, ending a slightly down week. It finished within its short term trading
range, intermediate and long term uptrends and above its 100 day moving
average. TLT has been running in place
for almost three weeks now---a break one way or the other could prompt some
action in our Portfolios.
GLD’s price rose,
closing back above the lower boundary of a very short term uptrend thereby
keeping it in tact. It remains within
its short and intermediate term trading ranges, its long term downtrend and
below its 100 day moving average. GLD
still has a number of tough resistance levels yet to overcome before we can
assume that the worst is over.
Bottom line: short
term, the Averages seem to have developed some momentum to the upside; though
the going has been tough and there remains two resistance points overhead to be
overcome even before they can challenge the upper boundaries of their long term
uptrend. If they get that far I believe
those boundaries will prove impenetrable.
That said, longer
term, the trends are solidly up and will be so until the short term uptrends,
at the very least, are negated.
Fundamental-A Dividend Growth
Investment Strategy
The DJIA (18057)
finished this week about 50.0% above Fair Value (12036) while the S&P (2102)
closed 40.6% overvalued (1495). 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.
Nothing in this
week’s very sparse economic numbers or the world’s central banking community’s
drive for QE global supremacy alters the assumptions in our Valuation
Model. On the other hand, the continuing
improvement in Europe’s data does bring hope that any decline in the world wide
economy might not be as bad as many Street models may have it and hence could
change some assumptions in their valuation models.
Unfortunately,
the continuing enthusiastic global embrace of QE makes the problems that it has
generated worse (misallocation of investment, asset mispricing, encouraging
speculation, beggar thy neighbor currency devaluations, negligible economic
improvement). Regrettably, it will also
likely make the correction process in the securities markets more painful when it
occurs.
Geopolitical
risks have not declined. The Greek bailout talks have progressed very little,
the outcome of the current Ukraine/NATO/Russia standoff is uncertain and the
military developments (Iranian naval movement in the Red Sea and Saudi failures
in Yemen) in the Middle East are increasing the explosive potential there.
‘As I noted last week, I have no clue how to
quantify the aforementioned geopolitical risks’ impact on our Models even if I
could place decent odds of their outcome because: (1) the outcomes are mostly
binary, i.e. Greece either exists the EU or doesn’t and (2) they all most
likely incorporate potential unintended consequences, which by definition are
unknowable. Better to just say these are
potential risks with conceivably significant costs and then wait to see if we
‘muddle through’ or have to deal with those costs. The important investment takeaway, I believe,
is to be sure that your portfolio had at least some protection in the downside.’
Bottom line: the
assumptions in our Economic Model have recently changed. While they will have no effect on our
Valuation Model, if I am correct they will almost assuredly result in changes
in Street models which will have to bring their consensus Fair Value down.
The assumptions
in our Valuation Model have not changed either; though there are scenarios
listed above that could lower Fair Value. That said, our Model’s current calculated Fair
Values are so far below current valuation that any downward revisions by the
Street will only bring their estimates more in line with our own.
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.
Who couldn’t
love this market? (medium):
DJIA S&P
Current 2015 Year End Fair Value*
12300 1525
Fair Value as of 4/30/15 12036 1495
Close this week 18057
2102
Over Valuation vs. 4/30 Close
5% overvalued 12637 1569
10%
overvalued 13239 1644
15%
overvalued 13841 1719
20%
overvalued 14443 1794
25%
overvalued 15045 1868
30%
overvalued 15647 1943
35%
overvalued 16248 2018
40%
overvalued 16850 2093
45%overvalued 17452 2167
50%overvalued 18054 2242
55%
overvalued 18655 2317
Under Valuation vs. 4/30 Close
5%
undervalued 11434 1420
10%undervalued 10832 1345 15%undervalued 10230 1270
* 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.
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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