The Closing Bell
8/5/17
We are off in search of cooler temperatures. Back on 8/14.
Statistical
Summary
Current Economic Forecast
2016 actual
Real
Growth in Gross Domestic Product 1.6%
Inflation
(revised) 1.6%
Corporate Profits (revised) 4.2%
2017 estimates
(revised)
Real
Growth in Gross Domestic Product -1.25-+0.5%
Inflation +.0.5-1.5%
Corporate
Profits -15-0%
Current Market Forecast
Dow
Jones Industrial Average
Current Trend (revised):
Short
Term Uptrend 20625-23139
Intermediate Term Uptrend 18586-25837
Long Term Uptrend 5751-24198
2016 Year End Fair Value
12600-12800
2017 Year End Fair Value
13100-13300
Standard
& Poor’s 500
Current
Trend (revised):
Short
Term Uptrend 2413-2715
Intermediate
Term Uptrend 2208-2982
Long Term Uptrend 905-2763
2016 Year End Fair Value
1560-1580
2017
Year End Fair Value 1620-1640
Percentage
Cash in Our Portfolios
Dividend Growth
Portfolio 59%
High
Yield Portfolio 55%
Aggressive
Growth Portfolio 55%
Economics/Politics
The Trump
economy is providing an upward bias to equity valuations. By
volume, the data flow this week was weighed to the positive: above estimates: June pending home sales, month to date retail
chain store sales, the July ADP private payroll report, weekly jobless claims, July
nonfarm payrolls, July factory orders, the July Markit manufacturing and services
PMI, the July ISM manufacturing index, the Dallas Fed manufacturing index and
the June trade deficit; below estimates: weekly mortgage and purchase applications,
June personal income, July light vehicle sales, July retail chain store sales, June
construction spending, the July ISM nonmanufacturing index, the July Chicago
PMI; in line with estimates: June personal spending.
Still, the
primary indicators were slightly negative: June personal income (-), June
construction spending (-), July retail chain store sales (-), June personal
spending (0), July factory orders (+) and July nonfarm payrolls (+). Given this week’s data end up basically
mixed---stronger overall data, but weaker primary indicators---I score this
week a neutral: in the last 95 weeks, twenty-nine were positive, fifty-two
negative and fourteen neutral.
Overseas, the
numbers were upbeat with more good news out of Europe. That has been a good news story of late.
On fiscal policy, little was done. The house is already on summer break, the
senate left yesterday. However, the flow
of promises didn’t abate. We are being
assured of tax reform and infrastructure spending when our ruling class returns
in the fall.
Two other items
worth mentioning:
(1) trade
sanctions have become the most popular weapon of choice in dealing with adversaries:
congress sanctions Russia, Trump sanctions the Venezuelan president and
threatens sanctions against China.
Penalties may be justified and sanctions may work. But I worry about overusing trade sanctions as
a political bludgeon because it could lead to escalating trade wars. History [Smoot Hawley] has shown us that is
not a plus for economic growth.
(2) special
counsel Mueller has empaneled a grand jury.
This all the potential gripping the political and chattering classes
with such force that it could likely not only delay/deter enactment of any of
the Trump/GOP fiscal plan but also could lead to serious domestic turmoil. This is not a forecast; it is a concern.
http://www.zerohedge.com/news/2017-08-04/krauthammer-warns-impeachment-would-be-catastrophic-mistake
Bottom line: this
week’s US economic stats were mixed, confirming the pattern for the last 18
months---the economy struggling to keep its head above water. Even so, most of the securities indices
reacted to Friday’s jobs number as though it were a clarifying datapoint,
pointing to a stronger economy/higher interest rates. I would counter that employment is a lagging
indicator; so its value as a sign of a trend change is more likely to be as an
inverse versus a coincident/leading marker. In other words, strong employment is more
likely the sign that an expansion is nearer its end than its beginning. Supporting that notion is the weekly score I
record every week which has given no sign that the economy is improving
Longer term, I
remain confident in my recent upgrading our long term secular growth rate assumption
by 25 to 50 basis points based on Trump’s deregulation efforts. However, the DC fascination with trade
sanctions is turning an initial positive into a negative. In addition, any further increase in that
long term secular economic growth rate assumption stemming from enactment of the
Trump/GOP fiscal policy is still on hold as they struggle to get anything done.
Our (new and
improved) forecast:
A positive pick
up in the long term secular economic growth rate based on less government
regulation. This increase in growth
could be further augmented by pro-growth fiscal policies including repeal of
Obamacare, tax reform and infrastructure spending; though the odds of that are
uncertain.
Short term, the economy has seemingly lost its
post-election Trump momentum meaning that our former recession/stagnation
forecast is back as the current expansion seems to be dying of old age.
It is important
to note that this forecast is made with a good deal less confidence than normal;
so it carries the caveat that it will almost surely be revised.
Update on big
four economic indicators.
The
negatives:
(1)
a vulnerable global banking system.
Wells is at it again (medium):
EU banking system dysfunction gets even worse
(medium):
US banks now lobbying to lower capital requirements
(medium):
In spite of the freebee they get from the Fed
(medium):
(2)
fiscal/regulatory policy. This week:
[a] with the house on summer break, little was accomplished
on the legislative front or will likely get done in the next two months with
the senate leaving for its summer break.
That didn’t keep the GOP from running out spokesperson after
spokesperson assuring us that tax reform and infrastructure spending will be
enacted by year end. We can only
hope---as long as they don’t bust the budget wide open in the process
[b] it
also didn’t mean that the Donald was unoccupied.
{i}
first, Trump signed the Russian sanctions bill passed earlier by congress. As you know, I believe that the Russian weren’t
guilty of anything that the US hasn’t done.
I am not suggesting that they get off scot free; but with the global
economy limping along at best, the last thing it or the US needs in a trade war
(see below). Unfortunately, Trump was
trapped into signing this as a result of his Russian connection/Comey firing
problems,
{ii} Trump finally decided to take action against the
Chinese on the issue of theft of American intellectual property---he appointed
a group to study the issue and accompanied it with a threat of trade sanctions. This is one of those issues in trade where I
think that the Chinese pirating is pretty well known, generally agreed upon and
costly to the US---one of our biggest exports is technology/technology related
products. Hence, I think that this move
is justified. The Chinese verbally
reacted quite negatively; though we will have to wait for what they will
do.
All this said, if these actions prompt some sort of
trade war, that is not going to be a plus for global economic growth; and
ultimately could impact our economic outlook.
{iii} further, Trump took action on the immigration
front, introducing a bill that radically changes our law. On the whole, it seems a good place to start
congressional negotiations.
Counterpoint:
[c] meanwhile, below the radar, Trump is making a mark
on our judicial system---which may be just as important as tax reform.
(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.
The Fed was
quiet this week; though in the Treasury Borrowing Advisory Committee’s [an advisory
body to the Fed] latest report, it outlined how disruptive the Fed’s balance
sheet normalization is apt to be. The
Fed really didn’t need to be told that; their actions have shown that they know
the problem that they have created. But
now they are on notice---and with no good alternatives.
The Bank of
England met on Thursday, leaving monetary policy unchanged and lowering its
forecast for 2017 and 2018 GDP growth.
That makes it unanimous. QE for
everyone.
(4) geopolitical
risks: this matter is starting to make me nervous.
[a] first, the
US imposes sanctions on the Russian for alleged interference in our elections
and their aggression against Ukraine. I don’t
understand sticking your finger in the Russian’s eye when {i} the US has not
only interfered in countless elections but instigated the assassination attempts
of political leaders (think Castro, Diem) and {ii} Russia was responding to a
CIA instigated coup of a duly elected pro-Russian president in Ukraine. I am not suggesting that we allow Russia to
do as it pleases. But to antagonize them
then feign outrage at their reaction is not productive or in the long term
interest of peace or trade.
[b] second,
North Korea is run by a punk and his cabal.
Yes, he has nukes; and yes, we need to be sure that he understands that
an attack on the US means certain annihilation of his country. But ramping up public hostility, in my
opinion, makes it more likely that North Korea will make a mistake that puts
the US in greater risk than it otherwise would be.
I am not trying
to fear monger war; but I do think that Trump’s aggressive attitude toward
foreign opposition is overdone and increases the risk of a costly misstep.
(5)
economic difficulties around the globe. This week, the stats continued upbeat out of
Europe and mixed out of China.
[a] the July EU and UK manufacturing PMI’s were above
forecasts; but the Bank of England lowered its 2017/2018 GDP growth estimates,
[b] the July Chinese manufacturing and services PMI’s were
below estimates; but the July Caixin services and manufacturing PMI’s, {another
measure of the Chinese economy} were better than forecast.
Oil remains a
factor in global economic health and its price continued its roller coaster
ride. This week, {i} the Gulf States
doubled down on the sanctions against Qatar and {ii} chaos escalated in
Venezuela as Trump imposed sanctions (this word is getting far too much use of
late) on the country’s president. The point here is that [a] since energy is a
major component of production, its price usually has a significant impact on
economic growth, [b] I don’t think that the future for oil prices is all that
clear and [c] lower prices have proven not to be an ‘unmitigated
positive’.
In sum, our
outlook remains that the European economy is out of the woods while China is
struggling to do the same. My belief is
that this will eventually positively impact the US economy.
Bottom
line: our near term forecast is that the
US economy is stagnating despite, an improved regulatory outlook and a now
growing EU economy. These two factors should have a positive impact on US
growth though there is scant evidence of it to date. Further, if Trump/GOP were
to pull off a (near) revenue neutral healthcare reform, tax reform and
infrastructure spending on a reasonably timely basis, I would suspect that
sentiment driven increases in business and consumer spending would return. On the other hand, whether justified or not,
the Donald’s recent actions against Russia, China and Venezuela increase the
likelihood of some sort of trade war. I
needn’t remind you that one of the major factors causing the Great Depression
was the institution of the Smoot Hawley trade barriers.
For the long
term, the Donald’s drive for deregulation and improved bureaucratic efficiency
is a decided plus. As you know, I inched
up my estimate of the long term secular growth rate of the economy because of
it.
https://www.project-syndicate.org/commentary/dim-outlook-for-trumponomics-by-nouriel-roubini-2017-08
The
Market-Disciplined Investing
Technical
The indices
(DJIA 22092, S&P 2474) were back in sync yesterday, largely on a better
than expected jobs report (stronger economy, higher rates). Volume was down. Breadth was mixed but remained strong and
within overbought territory. The upward
momentum as defined by the Averages’ 100 and 200 day moving averages and
uptrends across all timeframes remains intact.
At the moment, technically speaking, I see little, except for the VIX,
to inhibit their challenge of the upper boundaries of their long term
uptrends---now circa 24198/2763.
The VIX (10.0)
fell 4 %. It finished above back below
the lower boundary of its former intermediate trading ranges but is still above
the lower boundary of its former long term trading range. As you know, I reset these trends to down but
raised the question as to whether the VIX had made some kind of bottom. I think that it remains a debatable point as
the VIX continues to vacillate above and below those former trading range
boundaries.
The long
Treasury declined, but ended above its 100 and 200 day moving averages (both
support), the lower boundaries of its short term trading range and its long
term uptrend. That is a lot of
support. So unless TLT starts breaking
those support levels, I am assuming that Friday’s soft price performance is not
something about which to be concerned.
The dollar
popped to the upside, but still closed in a short term downtrend and below its
100 and 200 day moving averages.
GLD was down, finishing below the lower
boundary of its very short term uptrend but remained above its 100 and 200 day
moving averages (both support).
Bottom line: all
the indicators responded as would be expected to the strong nonfarm payroll
number and its economic implications (stronger economy, higher interest rates):
(1) all the equity indices were up; of course, the Dow has been reflecting that
scenario all along and (2) TLT and GLD were down and the dollar up.
As I often note,
one day does not a trend make. Plus, the
only sign of any possible trend reversal was GLD’s falling below the lower
boundary of its very short term uptrend.
I await follow through before considering that the ongoing divergences
have been resolved.
Fundamental-A
Dividend Growth Investment Strategy
The DJIA (22092)
finished this week about 69.5% above Fair Value (13032) while the S&P (2476)
closed 53.7% overvalued (1610). ‘Fair
Value’ will likely be changing based on a new set of regulatory policies which has
led to improvement in the historically low long term secular growth rate of the
economy (though its extent could change as the effects become more obvious); but
it still reflects the elements of a botched Fed transition from easy to tight
money and a ‘muddle through’ scenario in Japan and China.
The US economic stats
continue to point to a weak economy. If
I am correct about the economy slowing/stagnating, short term that means Street
economic growth forecasts will begin declining.
The question is when; and more important from a Market standpoint, given
investor proclivity for interpreting bad news as good news, whether they will even
care. I can’t answer that latter issue
except to say that someday, bad news will be bad news; and mean reversion will
likely occur.
With the house already
on summer break and senate leaving this weekend, not much is going to get done
legislatively. But Washington remains a
busy place. First, both Trump and GOP
senators are out promising that tax reform and infrastructure spending are
being hammered out among congressional leadership and that they will be much
easier to pass than healthcare reform.
OK. I hope that is right.
But the general
atmosphere in DC is one of extreme acrimony.
And it is going to get worse, if all the investigations into Trump’s
Russian connection and Hillary’s emails gain momentum. I am not saying tax reform and infrastructure
spending won’t occur. I am just pointing
out that the normally ugly legislative process may be a bit more ugly if the
aforementioned investigations lead to charges. That would not be a plus for
investor sentiment.
In addition,
sanctions were flying right and left---Congress enacting Russian sanctions and Trump
imposing sanctions on the Venezuelan president and threatening more to come as
well as instituting actions that could lead to sanctions against the Chinese
over the theft of US intellectual property.
To be clear, there is a decent rationale for all of these actions; and
it could be that they will have the desired effect on each one’s behavior. But if they don’t, what then?
What bothers me
is that combined, they suggest a pattern by our political class that sanctions
are a great tool to use to impose pain against any country that doesn’t act in
what they believe is an acceptable manner.
Singularly, that is probably right.
I am worried about the collective impact; that is, if a single party
retaliates, it is not apt to affect us all that much. However, getting at odds with both the
Russians and the Chinese could have a cumulative impact. Further, the Europeans are upset about our
actions against the Russians. So add
them to the list. The point is that we
can’t keep upsetting trade relations with multiple parties because cumulatively
it could prove economically painful for us.
Don’t forget that one of the causes of the Great Depression was the
passage of the Smoot Hawley tariff bill.
And don’t forget the subsequent Market’s pin action.
Finally, the
central banks continue to confuse, obfuscate and pursue a policy that has
destroyed price discovery---and it is being done not to have some potential
positive effect on the economy, but to avoid a Market hissy fit. Not something that I believe is in the best
long term interests of the economy or the Markets. As
you know, I have long time believed that the loss of faith in or the dismantling
of QE will result in correcting the mispricing and misallocation of assets; and
that most assuredly will not be a plus for equity prices.
Net, net, my
biggest concern for the Market is the unwinding of the gross mispricing and
misallocation of assets caused by the Fed’s (and the rest of the world’s
central banks) wildly unsuccessful, experimental QE policy. While
I am encouraged about the changes already made in regulatory policy, fiscal
policy remains a mess. Whatever happens,
stocks are at or near historical extremes in valuation, even if the full Trump
agenda is enacted; and there is no reason to assume that mean reversion no
longer occurs.
Bottom line: the
assumptions on long term secular growth in our Economic Model are beginning to
improve as we learn about the new regulatory policies and their magnitude. Plus, there is a tiny ray of hope that fiscal
policy could make progress though its timing and magnitude are unknown. I continue to believe that the end results
will be less than the current Street narrative suggests---which means Street
models will ultimately will have to lower their consensus of the Fair Value for
equities.
Our Valuation
Model assumptions are also changing as I raise our long term secular growth
rate estimate. This will, in turn, lift
the potential ‘E’ component of Valuations; but there is a decent probability
that short term this could be at least partially offset by the reversal of
seven years of asset mispricing and misallocation. In any case, even with the improvement in our
growth assumption, the math in our Valuation Model still shows that equities
are way overpriced.
As a long term investor, with
equity valuations at historical highs, I would want to own cash in my Portfolio
and would use the current price strength to sell a portion of your winners and
all of your losers.
DJIA S&P
Current 2017 Year End Fair Value*
13200 1630
Fair Value as of 8/31/17 13032 1610
Close this week 22092 2476
Over Valuation vs. 8/31
55%overvalued 20199 2495
60%overvalued 20851 2576
65%overvalued 21502
2656
70%overvalued 22154 2737
* 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.
This comment has been removed by the author.
ReplyDeleteMajor index of stock market like nifty, sensex and bank nifty closed on a negative note today. Traders can follow such posts to stay updated with market fluctuations. Commodity market traders can earn better returns by following mcx tips of precise nature.
ReplyDelete