The Closing Bell
6/20/15
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 17405-20211
Intermediate Term Uptrend 17591-23733
Long Term Uptrend 5369-19175
2014 Year End Fair Value
11800-12000
2015 Year End Fair Value
12200-12400
Standard
& Poor’s 500
Current
Trend (revised):
Short
Term Uptrend 2049-3028
Intermediate
Term Uptrend 1845-2613
Long Term Uptrend 797-2138
2014 Year End Fair Value
1470-1490
2015 Year End Fair Value
1515-1535
Percentage
Cash in Our Portfolios
Dividend Growth
Portfolio 51%
High
Yield Portfolio 52%
Aggressive
Growth Portfolio 53%
Economics/Politics
The
economy is a neutral for Your Money. The
data this week was weighed to the positive by quantity and evenly divided by
quality: positives---May building permits, the June NAHB confidence index, the
June Philly Fed manufacturing index, weekly jobless claims, May CPI, the first
quarter trade deficit and May leading economic indicators; negatives---weekly
mortgage and purchase applications, month to date retail sales, May housing
starts, May industrial production and the June NY Fed manufacturing index;
neutral---none.
The primary
indicators this week were May housing starts (negative), May industrial production
(negative), May building permits (positive) and May leading economic indicators
(positive)---a standoff; but in total the results were on the plus side of
mixed. So this is the third week in a
row in which the indicators have shown a tendency toward stabilization. That is sufficient to recognize that the
trend in the numbers is something other than an outlier. That said, the improvement is hardly robust;
and as such, it fits nicely with our current downwardly revised economic growth
estimates. And hopefully, it signals
that the risk of recession is waning.
Of course, the
main US headline of the week was the statement and Yellen press conference
following the Tuesday/Wednesday FOMC meeting.
Like many prior performances, this combo was a labyrinthine sequence of ‘on
the one hand, on the other hand’ qualifiers for which it would take the Rosetta
Stone to discover the real meaning. But
the bottom line is that the Fed remains as dovish as ever and naturally
investors got jiggy with it.
Our forecast:
‘a much 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
production in this country continues to grow which is a significant
geopolitical plus. However, we have yet
to see the ‘unmitigated’ positive attributed to lower oil prices by the
pundits. Not surprisingly, with oil
prices up, this same crowd is trumpeting the pluses that rising prices will
have on capital spending. If they keep
trying, the law of averages says that they will eventually be right. But who will listen? ‘
The
negatives:
(1)
a vulnerable global banking system. The banksters managed to get through this week
without incurring a fine or any new accusation of misbehavior:
‘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. Nothing this week of
consequence.
(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.
As noted above,
the Fed pulled off a masterful performance this week worthy of the best of
Abbott and Costello. In Thursday’s
Morning Call I speculated that this Roger the Dodger narrative was probably a
function of the Fed having reached the point that it recognizes that QEII
through IV didn’t, isn’t, most likely won’t do anything to improve the economy
but has led to the gross misallocation of capital; that the unwind is apt to be
painful; and hence, it is stalling for time and praying for luck. That may happen; but a bet that Yellen will
find a four leaf clover probably does not have a high probability of success.
In addition,
the rest of the world’s central banks are going their merry way pursuing
QEInfinity. This week, the Bank of Japan left its key interest rate unchanged as
did the Swiss National Bank whose rate is -.75% despite a declining CPI and an
economy on the verge of recession. The central bank of Norway lowered its key
interest rate. The point here is that it
is never good to be a lemming especially when you are following the Pied Piper
off a cliff.
(4) geopolitical
risks: tensions continue in Ukraine and there is no letup in the fighting in
the Middle East. However, this all took
a back seat to the Greek standoff this week.
I will note that the US/Russian rhetoric has reached a point that is a
little concerning---my worry being a misstep by the administration which has proven
time and again its lack of skill in foreign affairs.
(5) economic
difficulties, overly indebted sovereigns and overleveraged banks in Europe and around
the globe. The headline this week, of
course, was the ongoing food fight over the Greek financial crisis. While most of the rhetoric on both sides was a
bit strident, I, nonetheless, thought that I saw a ray of sunshine when the
Troika hinted that there may be some give in its positions on Greek pensions as
well as debt relief.
Not that there
is going to be concessions or that the Greeks will accept them even if there
are. But the eurocrats have made an art
form out of snatching victory from the jaws of defeat at the last mille
second---and we are nearing the last mille second [June 30].
End this torture test, just get out (medium):
My bottom line here hasn’t changed: I don’t know how this ends, I don’t
know what that means for the markets but I do believe that there will be
unintended consequences; and since those are by definition unknowable, this
situation demands some caution.
Doug Kass on
Greece (medium):
‘Muddling
through’ remains the assumption for the global economy in our Economic Model
with the proviso that if a Greek default/exit occurs, all bets are off. This
remains the biggest risk to forecast.
Is
the Chinese economy on the road to recovery? (medium):
Bottom line: the US economic news continues to indicate improvement
from its first quarter swoon. That is
positive in that it, hopefully, is taking the recession scenario off the table.
The
international data contributed little this week to the information flow. However, the central banks were out in force keeping
QE alive and well. Our Fed gave its best
impression of a confused Casper Milquetoast.
It was joined in its embrace of QE by the Swiss, Norwegian and Japanese national
banks. No one seems to be ready yet to
acknowledge the misallocation of assets and the consequences thereof. Sooner or later.
Finally, the
Greek/Troika negotiations included both good news and bad news. That is a step ahead of where we were last
week; unfortunately we are seven days closer to a default. They may yet pull a rabbit out of their hat. But I wouldn’t be betting heavily of such an
outcome.
This week’s
data:
(1)
housing: May housing starts fell but building permits
rose; the June NAHB confidence index was very upbeat; mortgage and purchase
applications declined,
(2)
consumer: month to date retail chain store sales slowed;
weekly jobless fell more than anticipated,
(3)
industry: the May industrial production was down versus
expectations of an increase while capacity utilization was down; the June NY
Fed manufacturing index was extremely disappointing while the Philly Fed index
was much better than consensus,
(4)
macroeconomic: the headline and core May CPI numbers
were lower than estimates; the first quarter US trade deficit was lower than
forecast; the May leading economic indicators were well ahead of anticipated
results.
The
Market-Disciplined Investing
Technical
The indices
(DJIA 18014, S&P 2109) were up on the week. Both closed above their 100 day moving averages
but below their former all-time highs---having been unable to generate any
follow through to Thursday’s moonshot. I
wondered aloud in Friday’s Morning Call if the bulls had the juice to push the
Averages up to their former highs or the upper boundaries of their long term
uptrends. At least for one day, they
clearly didn’t.
That said longer
term, the indices remained well within their uptrends across all timeframes:
short term (17405-20211, 2049-3028), intermediate term (17591-23733, 1845-2613)
and long term (5369-19175, 797-2138).
Volume rose
markedly on Friday; but that was primarily due to option expiration. Breadth was poor. The VIX was up 6%, but still finished below
its 100 day moving average and the upper boundary of a very short term
downtrend. While that should be a plus
for equities short term, it is nearing a level that makes it attractive as
portfolio insurance.
The long
Treasury rose on Friday, but still closed below its 100 day moving average and below
the upper boundaries of its very short term and short term downtrends.
GLD continues to
do nothing. Oil remains at the upper end
of a short term trading range while the dollar closed below its 100 day moving
average and the lower boundary of a very short term downtrend.
Bottom line: the
indices just didn’t have the momentum for any follow through from Thursday’s
big up day. On the other hand, earlier
in the week, the bears were unable to bust the support that has been provided
by the 100 day moving average for the last two years. That leaves the Averages
in a trading range that is bound by the 100 day moving averages and their prior
highs.
My technical bias
remains to the downside primarily because I believe that the upside is limited
by the resistance I expect to be offered by the upper boundaries of the indices
long term uptrends while there is a much larger downside represented by the
lower boundaries of their short term uptrends.
However, that spread is not enough to warrant getting beared up.
Nevertheless, I
do think that with equities near their historical highs both in price and
valuation, the opportunities offered by buying stocks at current levels just
aren’t there---period. Sure there may be
some companies that look cheap. Indeed,
we have eight or nine stocks on our Buy Lists.
But when the bear reigns supreme, he takes the good girls with the
bad. At that point, relative performance
is a bulls**t concept. In short, I wouldn’t
be running for the hills but I definitely would not be buying stocks at these
levels for any reason.
Longer term, the
trends are solidly up and will be so until the short term uptrends, at the very
least, are negated.
This
from a positive technician. The only
argument I have with this presentation is him characterizing the media as
bears. I watch CNBC and Fox all day and
read dozens of blogsites. The
overwhelming majority of what I see and hear is bullish (medium):
Fundamental-A
Dividend Growth Investment Strategy
The DJIA (18014)
finished this week about 48.8% above Fair Value (12105) while the S&P (2109)
closed 40.4% overvalued (1502). 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 US stats
add further evidence that the economy may be stabilizing, albeit at a
diminished rate of expansion. Still that
is better than a sharp stick in the eye (recession). Hence, it supports our recently revised
economic forecast.
Likewise, this
week’s Fed’s actions reflect ‘a botched transition from easy to tight money’. Indeed, the transition should have already
taken place; so it is already botched.
Now the Fed is in the unenviable position of not being able to tighten
because the economy is already slowing and events in Greece could produce a
shock that would necessitate a further infusion of liquidity to maintain
stability within our financial institutions.
Making matters
worse, the long end of the yield curve has been rising. That would be normal in an environment of
improving economic activity. Unfortunately
the reverse is occurring; or more correctly said, the economy is showing signs
of stabilization after a rough first quarter but is not likely to get back to
its growth rate of a year ago. My
conclusion is that the bond guys have lost faith in the Fed; and if that spills
over into the equity market, well, times could get tough.
News out of the
EU is now pointing to this coming Monday as a critical day for the Greeks. The Troika is meeting and are apparently
intent on coming up with a final ‘take it or leave it’ offer---which in
fairness would be the umpteenth ‘take it or leave it’ proposal. So I am not sure of its true significance. In addition, rumors are swirling that the
Greek banks may not be able to open on Monday.
Now that could be a problem especially for the Greeks and could hasten a
resolution to this circus. I remain
unclear as to the ultimate consequences of a default or Grexit; but I suspect
that they will impact the Markets.
Greeks prepare for
potential bank holiday (medium):
The other item
worth mentioning is what is going on in the Chinese stock market, which is to
say, rampant speculation. I have recently
linked to several articles discussing the growth in margin debt, the absurd
valuations being placed on some stocks (very reminiscent of the dot com bubble)
and the new trend among smaller Chinese corporations to shut down operations
and use their assets to speculate in the equity markets. Well, this week it looked like the start of
payback time as the Chinese markets were hammered.
All that said,
there has not been a very close correlation between the US and Chinese equity
markets in the past, so I am not suggesting that it will this time either,
assuming the Chinese markets continue to suffer whackage. However, a combination of an EU sell off due
to a Grexit coupled with a continuing decline in the Chinese markets could
produce a degree of heartburn where the whole is greater than the sum of the
parts.
Shanghai
composite breaks down (short):
Bottom line: the
assumptions in our Economic Model are unchanged. If they are anywhere near correct, they will
almost assuredly result in changes in Street models that will have to take their
consensus Fair Value down.
The assumptions
in our Valuation Model have not changed either; though there are scenarios (Grexit)
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.
Icahn echoes
Trump’s warning on the Market (short):
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
perils of low liquidity and high leverage (medium):
DJIA S&P
Current 2015 Year End Fair Value*
12300 1525
Fair Value as of 6/30/15 12105
1502
Close this week 18014
2109
Over Valuation vs. 6/30 Close
5% overvalued 12710 1577
10%
overvalued 13315 1652
15%
overvalued 13920 1727
20%
overvalued 14526 1802
25%
overvalued 15131 1877
30%
overvalued 15736 1952
35%
overvalued 16341 2027
40%
overvalued 16947 2102
45%overvalued 17552 2177
50%overvalued 18157 2253
55%
overvalued 18762 2328
Under Valuation vs. 6/30 Close
5%
undervalued 11499
1426
10%undervalued 10894 1351
15%undervalued 10289 1276
* 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 47 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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