Thursday, November 30, 2017

The Morning Call--The tax bill is junk legislation

The Morning Call

11/30/17

The Market
         
    Technical

            The indices (DJIA 23940, S&P 2626) had another mixed day (Dow up, S&P down, though not by much).  Volume was up and breadth improved.  The bottom line remains that both of the Averages continue to trade above their 100 and 200 day moving averages and are in uptrends across all time frames---with the assumption being that stock prices are going higher.
           
The VIX (10.7) was up another 6 ½%, closing above the lower boundary of its long term trading range, above its 200 day moving average (now resistance; if it remains there through the close next Monday, it will revert to support) and below its 100 day moving average (now resistance). 

The long Treasury spiked 1% on heavy volume, ending below the lower boundary of its newly developing very short term uptrend, right on its 100 day moving average (now support), above its 200 day moving average (now support) and above the lower boundaries of its short term trading range and long term uptrend.   This is the first crack since late October in the bond guys’ weak economy, tighter Fed narrative.

The dollar was down one cent, finishing below its 100 and 200 day moving averages (now resistance) and solidly within a short term downtrend and within a developing very short term downtrend---no crack here.

            Gold was off ½ %, though it remained above its 100 day moving average for the third day, above its 200 moving average (now support) and in a short term uptrend.  GLD moved in sync with TLT.

Bottom line: hasn’t changed---long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends. The technical assumption has to be that stocks are going higher.  If you own enough cash to sleep at night, lay back and enjoy it.
           
Trading in UUP, GLD and TLT are back out of sync with themselves (sluggish economy, weak interest rates) and with the VIX and stocks.  I remain confused and uncomfortable with the overall technical picture.
           

            This is not normal (short):

    Fundamental

       Headlines

            Yesterday’s economic data continued its winning way.  Revised third quarter GDP was reported up 3.3% which was in line but an improvement from the prior reading; corporate profits also came in above its previous report, October pending home sales were above estimates and while weekly mortgage applications declined, the more important purchase applications were up.  Overseas, nothing.
           
            ***overnight, the November Chinese manufacturing and non-manufacturing PMI’s were ahead of estimates; November EU inflation was below.

            Yellen testified before congress for the last time, leaving a body of work that will surely be quoted often in the future.  Her tenor during the question and answer session did not change materially from that in her prepared remarks (which I linked to yesterday).

            The Fed released its latest Beige Book.  It was not quite as buoyant in tone as I had expected.  Still it pictured progress (medium):

            The senate continues to work to put together a tax proposal that is better characterized by junk legislation than anything that addresses a simpler, fairer or economically stimulative reform.

            This comment on the senate bill from a lion in our industry---Jack Vogel (short and today’s must read):

            The bottom line: I believe that the unwind of the gross mispricing and misallocation of assets will not end well.  I just don’t know what the trigger event is.  The GOP tax circle jerk is worse than nothing except for its political implications.  In my opinion, it will not lead to economic growth; but it will lead to higher debt and an additional constraint on the economy; it will lead to more stock buybacks and increased dividends none of which will create jobs or raise tax revenues.  When the electorate figures this all out, there will likely be hell by the GOP.

       Investing for Survival
   
            Expert judgment.

    News on Stocks in Our Portfolios
 
           
Donaldson (NYSE:DCI): Q1 EPS of $0.46 beats by $0.04.
Revenue of $644.8M (+16.6% Y/Y) beats by $44.73M.

Microsoft (NASDAQ:MSFT) declares $0.42/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

            October pending home sales rose 3.5% versus expectations of up 1.0%.

            Weekly jobless claims fell 2,000 versus estimates of being flat.

            October personal income rose 0.4% versus forecasts of +0.3%; personal spending was up 0.3%, in line; the PCE price indicator was up 0.2%, also in line.

   Other

            The latest from Jeffery Snider (medium):

            The latest on Brexit (medium):

            US rejects China’s ‘market economy; status (medium):

Politics

  Domestic

  International


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Wednesday, November 29, 2017

The Morning Call--Lay back and enjoy it

The Morning Call

11/29/17

The Market
         
    Technical

The indices (DJIA 23836, S&P 2627) had a spectacular day, keeping the relentless move higher intact.  Volume was up: breadth again improved but again not to the extent that I would have thought given the pin action.  Nonetheless, the bottom line is that both of the Averages remain above their 100 and 200 day moving averages and are in uptrends across all time frames---with the assumption being that stock prices are going higher.

            Update on NYSE outstanding margin debt (medium):
            https://www.advisorperspectives.com/dshort/updates/2017/11/28/a-look-at-nyse-margin-debt-and-the-market

The VIX (10.0) was up 1 ½%, closing above the lower boundary of its long term trading range, voiding last week’s challenge.  However, it finished below its 100 day moving average (now resistance) and its 200 day moving average (now resistance). 

The long Treasury rose, ending above its 100 day moving average (now support), above its 200 day moving average (now support) and above the lower boundaries of its very short term uptrend, short term trading range and long term uptrend.   It continues to trade as if the economy is weak and/or the Fed is not raising rates,

The dollar was up ½ %, but still ended below its 100 and 200 day moving averages (now resistance) and solidly within a short term downtrend and within a developing very short term downtrend---not reflective of economic strength or confidence in the US.

            Gold was off two cents, closing for above its 100 day moving average for the third day---so maybe it continues to break the gravitational hold of that MA.  I am still going to wait a couple of days before making that call.  It remained above its 200 moving average (now support) and in a short term uptrend.  Again not indicative of economic strength or higher rates.

            ***overnight,

Bottom line: hasn’t changed---long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends. The technical assumption has to be that stocks are going higher.  If you own enough cash to sleep at night, lay back and enjoy it.
           
Trading in UUP, GLD and TLT are back in sync with themselves (sluggish economy, weak interest rates) but out of kilter with the VIX and stocks.  I remain confused and uncomfortable with the overall technical picture.
           
    Fundamental

       Headlines

            Yesterday’s economic stats were upbeat: month to date retail chain store sales, November consumer confidence and the November Richmond Fed manufacturing index were all strong.  The only spoiler was the September Case Shiller home price index which rose slightly but August was revised down.  Nothing overseas.

            The three news items of the day:

(1)   Powell’s testimony before the senate banking committee, which, in tone, was a bit more dovish than his prepared remarks or anything that Yellen has said lately,

Today, Yellen takes victory lap before congress; we will be quoting this testimony one day as another example of how out of touch with reality the Fed is (medium);

(2)   the Senate budget committee passed its version of tax reform (medium):

                 Related (medium):

                David Stockman’s thoughts on the current version (medium):

(3)   North Korea fired another missile into the Sea of Japan (medium):

            Bottom line: clearly investors were focused on the first two events---which is not unexpected in this ‘everything is awesome market’.  As I noted above, if you have built cash reserves, there is nothing else to do but wait.  How long?  I have already proven I don’t have the answer to that.
           

       Investing for Survival
   
            Five morning habits that make you fat.


    News on Stocks in Our Portfolios
 
Tiffany (NYSE:TIF): Q3 EPS of $0.80 beats by $0.04.
Revenue of $976M (+2.8% Y/Y) beats by $19.05M.


Bank of Nova Scotia (NYSE:BNS) declares CAD 0.79/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

            The September Case Shiller home price index rose 0.5% versus expectations of 0.4%; however, the August number was revised down by an equal amount.

            Month to date retail chain store sales grew faster than in the prior week.

            November consumer confidence came in at 129.5 versus estimates of 124.5.

            November Richmond Fed manufacturing index was reported at 30.0 versus forecasts of 15.0.

                Weekly mortgage applications fell 3.1%; however, purchase applications were up 2.0%
               
                Revised third quarter GDP showed growth of 3.3% in line with expectations; corporate profits rose 10.0% versus the prior reading of 7.4%.
               

   Other

            More economic stats from John Mauldin (medium):


Politics

  Domestic

  International War Against Radical Islam


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Tuesday, November 28, 2017

The Morning Call--A busy month for the ruling class

The Morning Call

11/28/17

The Market
         
    Technical

Yesterday, the indices (DJIA 23580, S&P 2601) turned in a mixed day (Dow up, S&P down).  Volume was up, but off a short and calm trading day on Friday.  Breadth has been improving but not to the extent that I would have thought given the pin action.  Nonetheless, the bottom line is that both of the Averages remain above their 100 and 200 day moving averages and are in uptrends across all time frames---with the assumption being that stock prices are going higher.

The VIX (9.9) was up 2 ½%, managing to close right on the lower boundary of its long term trading range, stopping the clock on its recent break.  However, it finished below its 100 day moving average (now resistance) and its 200 day moving average (now resistance).  It remains on the brink of testing the July low, again.

The long Treasury was down fractionally, but remained above its 100 day moving average (now support), above its 200 day moving average (now support) and above the lower boundaries of its very short term uptrend, short term trading range and long term uptrend.   Other area of the long bond complex continue to perform poorly, suggesting a safety concern.

The dollar was up slightly, but ended below its 100 and 200 day moving averages (now resistance) and solidly within a short term downtrend---not reflective of economic strength or confidence in the US.

            Gold continues to inch higher, closing for above its 100 day moving average for the third day---so maybe it is starting to break the gravitational hold of that MA.  I am still going to wait a couple of days before making that call.  It remained above its 200 moving average (now support) and in a short term uptrend.  Again not indicative of economic strength or higher rates.

Bottom line: hasn’t changed---long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends. The technical assumption has to be that stocks are going higher.

Trading in UUP, GLD and TLT are back in sync with themselves (sluggish economy, weak interest rates) but out of kilter with the VIX and stocks.  I remain confused and uncomfortable with the overall technical picture.
                       
    Fundamental

       Headlines

            Yesterday’s economic data was mixed---October new home sales were gangbusters while the November Dallas Fed manufacturing index was disappointing.  However, new home sales are a primary indicator, so the overall weight is to the positive.

            Overseas, October Chinese industrial profits were below estimates.

            This will be a busy month for fiscal/monetary news.  Congress has 15 legislative days left until year end and a very full agenda.  Here is what it faces besides tax reform (medium):

            As of this morning (medium):

            Deficits matter (medium):

            On schedule today is the testimony of Fed chair nominee Powell before the senate banking committee.  The text of his opening remarks was released last night after the Market close.   Bottom line, nothing new in terms of monetary policy implications.  That said, even if he was planning on blowing the place up, I am not sure his remarks or subsequent comments would be different from what we will get.

            The Yellen put (medium):

Bottom line:  those new home sales numbers were stunning assuming that there is no funny business in their computation.  Another sign that the economy is gaining a little life.  Hope springs eternal that tax reform will be enacted; though given its current form, I can’t fathom why it generates an ounce of enthusiasm.  Nonetheless, the economy has some momentum; the Market clearly has momentum.  So for the moment any cognitive dissonance resulting from the divergent behavior in bonds, the dollar and gold, an exploding national debt, a $4 trillion Fed balance sheet and equity valuations that are at historically elevated levels remains a minimal. 

As long as that continues, in my opinion, investors should be building cash by selling a portion of their winners and all of their losers.  As a reminder, my portfolios are ~50% in cash; and I sleep very well at night.


            The perfect storm (medium):

       Investing for Survival
   
            Building a nest egg without taking too much risk


    News on Stocks in Our Portfolios
 
Bank of Nova Scotia (NYSE:BNS): Q4 EPS of C$1.65 misses by C$0.01.
Revenue of C$6.81B (+0.9% Y/Y) misses by C$240M.


Economics

   This Week’s Data

            October new home sales rose 6.2% versus expectations of down 7.0%.

                And (short):

            The November Dallas Fed manufacturing index was reported at 19.4 versus estimates of 24.5.

                        The October US trade deficit was $68.3 billion versus forecasts of $64.8 billion.

   Other

            I haven’t spent much time on bitcoin.  Here is a good starter (medium):

            An update on Brexit and the capital structure of the UK banks (medium):

            Chinese regulators continue to push the unwind of that country’s credit bubble (medium):


Politics

  Domestic

  International War Against Radical Islam

            A deal between Syria and Israel? (medium):



Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Monday, November 27, 2017

The Morning Call--It's the hap--, happiest time of the year

The Morning Call

11/27/17

The Market
         
    Technical

            It was a happy week in stock land, though the move in the S&P was much tamer than we saw in the long bond, the dollar and the VIX.  Still the Thanksgiving to Christmas period tends to be upbeat for stock prices; so the positive pin action is not surprising.  The assumption remains that stocks are going higher.



          
  The long bond continues to do well---now above its 100 and 200 day moving averages (support), the lower boundaries of its short term trading range and long term uptrend and has again developed a very short term uptrend.  The link below offers an explanation for the strong bid in the long treasury that is not related to a perceived weakening in the economy or a delayed Fed rate hike.  Although after reading the latest Fed minutes (below), one has to wonder.

            And (medium):

            And turmoil continues in the Chinese fixed income market (medium):



            The dollar didn’t have such a good week, breaking below its 100 day moving averages (if it remains there through the close today, it will revert to resistance), remaining below its 200 day moving (now resistance) and within a short term downtrend.  This performance has little to do with large purchases in TLT and more likely reflects the dovish comments of the Fed.  Certainly, it is not suggestive of a strong economy.



            Gold continues to do well, though at a very plodding pace.  It still seems to be unable to break the pull of its 100 day moving average.  However, it is in a tight solid uptrend, which like TLT and UUP belie the notion of a strong economy/higher interest rates.



            As you might expect, stock euphoria led to VIX hammering last week.  The 100 and 200 day moving averages reversed from support to resistance; and it is now two days away from taking out the lower boundary of its long term trading range.  It even traded intraday below (8.5) its former all-time low of 8.8.   It will be interesting to see just how low the ‘short the VIX’ crowd can push it.



    Fundamental

       Headlines

            The economic data was mixed last week as were the primary indicators; so the call is a neutral.  Score: in the last 111 weeks, thirty-four were positive, fifty-six negative and twenty neutral.  Hence, the trend of upbeat to neutral readings continues.  Probably not on the order of magnitude that is being touted in the media; but still positive and gives little doubt to the recent increase in our 2018 growth outlook.

            Overseas there was little data---one positive stat from Germany, one negative from the UK; so nothing there.  There were a couple of articles on the Chinese recovery/economy that I thought worth review:

China cuts tariffs on consumer goods (medium):

            More China’s debt sell off (medium):

            The big news item of the week was the release of the minutes from the last FOMC meeting.  Well maybe not so big; because they were more of the same, ‘on the one hand’/’on the other hand’ narrative which Fed uses as an excuse to do nothing.  And it was no different this time.  Forget unemployment has passed its third or fourth goalpost shifting.  Forget that asset pricing is not part of the Fed’s mandate.  Forget that the Fed admits that it doesn’t have a clue why inflation is so low.  It continues to wobble on how aggressive to pursue monetary normalization---the primary thing for which it is responsible and which is already long overdue.  This is a train wreck awaiting---just like it was every other time the Fed tried to transition from easy to normalized monetary policy.  Only this time the extremes are of a greater magnitude.  Here is a copy of the minutes.  Read them and weep.


                        Big senate vote (hopefully) coming this week (medium):

            Bottom line:  the economy seems to be gaining a little life, helped along I am sure by hopes of a tax cut which will likely not be simpler, fairer or stimulate growth or investment.  Plus an improving EU economy along with less regulation are making a contribution.  Nonetheless, in my opinion, none of this will lead to corporate profit growth sufficient to justify current valuations.  However, the 900 pound gorilla in the room is the extreme asset mispricing and misallocation that have arisen from the Fed that has grossly overstepped the boundaries of its mandates.  When, as and if the price has to be paid, it will, I believe, be a dear one.

       Investing for Survival
   
            Caution alone is not an investment strategy.



    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

   Other

            Fake data (medium):

Politics

  Domestic

  International War Against Radical Islam

            The latest from Saudi Arabia (medium):

            Time to drain the EU swamp (medium):

Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Saturday, November 18, 2017

The Closing Bell

The Closing Bell

11/18/17

I am taking Thanksgiving week off.  If this Market gets squirrelly, I will be in touch.  Otherwise, enjoy your holiday.

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%

2018 estimates (revised)

Real Growth in Gross Domestic Product                          1.5-2.5%
                        Inflation                                                                          +1.5-2%
                        Corporate Profits                                                                5-10%


   Current Market Forecast
           
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Uptrend                                 21819-24555
Intermediate Term Uptrend                     19280-26611
Long Term Uptrend                                  5751-24198
                                               
                        2016    Year End Fair Value                                   12600-12800

                        2017     Year End Fair Value                                   13100-13300

2018     Year End Fair Value                                   13800-14000

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                     2550-2825
                                    Intermediate Term Uptrend                         2302-3074
                                    Long Term Uptrend                                     905-2763
                                               
                        2016   Year End Fair Value                                      1560-1580
                       
2017 Year End Fair Value                                       1620-1640         

2018 Year End Fair Value                                       1700-1720         


Percentage Cash in Our Portfolios

Dividend Growth Portfolio                          59%
            High Yield Portfolio                                     55%
            Aggressive Growth Portfolio                        55%

Economics/Politics
           
The Trump economy is providing a higher upward bias to equity valuations.   The data flow this week was mixed: above estimates: October housing starts, the November housing index, weekly mortgage and purchase applications, October industrial production/capacity utilization, September business inventories/sales, October import/export prices; below estimates: month to date retail chain store sales, weekly jobless claims, the October small business confidence index, the November NY, Philadelphia and Kansas City Feds’ manufacturing indices, the October budget deficit, October PPI; in line with estimates: October CPI, October retail sales/sales ex autos.
           

However, the primary indicators were upbeat: October housing starts (+), October industrial production (+), October retail sales/ex autos (0).  The call is positive: Score: in the last 110 weeks, thirty-four were positive, fifty-six negative and nineteen neutral.

Perhaps more important, the trend over the last six weeks has been mostly upbeat, likely confirming that the economy is starting to show a little life.  That notion is supported by the most recent read of the big four economic indicators which have been positive for the last eight week.  Accordingly, I am bumping up my 2018 GDP/corporate profit growth forecast.  In qualitative terms, I would characterize this change as an improvement from sluggish to below average growth driven mostly by cyclical as opposed to secular factors.


Overseas, the pattern remains the same: strength in Europe which is likely contributing to a pick in growth here; not so much in the rest of the globe. Indeed, the Chinese data has shown a marked deterioration since the conclusion of the Chinese Communist Party Congress; and that will likely be aggravated by the recent tightening in standards for the financial industry which are being implemented to halt the excessive use of debt.

In fiscal policy, the house and senate passed their versions of tax reform, though the reconciliation process will be a lot more difficult.  To be fair, I do think that some tax bill will be passed but I doubt it will be ‘reform’, ‘simpler’, ‘fairer’ or ‘pro-growth’.  Our (new and improved) forecast:

A pick up in the long term secular economic growth rate based on less government regulation.  This increase in secular growth could be further augmented by pro-growth fiscal policies including repeal of Obamacare and enactment of (revenue neutral) tax reform and infrastructure spending.  But the odds of that occurring lessen daily.  Further, any expected increase in the secular rate of economic growth would likely be rendered moot if tax reform (assuming its passes) increases the national debt and the deficit.

Finally, cyclical growth appears to be turning up though I am not sure whether it is a function of organic or a pickup in international growth. As a result, I have raised our 2018 growth forecast.
                       
       The negatives:

(1)   a vulnerable global banking system.  Nothing new.

(2)   fiscal/regulatory policy. 

I don’t know why I bother even commenting on fiscal policy because it gives it a status that it doesn’t deserve---passage of the house and senate versions of a tax bill notwithstanding.  The truth is that there is no coherent fiscal policy because the ruling class gives no weight to controlling costs/reducing spending.  They just want to either spend more or cut taxes.  The tax legislation in its current form changes nothing.  I hate to beat this horse to death.  There is little more that can be said.

Side by side comparison of the house and senate bills (medium):

You know my bottom line, too much debt stymies economic growth even if it partly comes from a tax cut.

           
Stockman on the tax reform measures (medium and a must read):


(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 news this week on monetary affairs, though

[a] the Chinese fixed income markets are starting to exhibit signs of heartburn, suggesting something is going within the labyrinth of policy making.  To be sure, nothing may be occurring other than the workings of an inefficient financial system.  Or it could be the results of the aforementioned crack down on speculative lending practices.  Whatever, it bears watching and

[b] Draghi made another of his ‘everything is awesome’ speeches but made no mention of stepping up the unwind of EU QE.
           

You know my bottom line: when QE starts to unwind, so does the mispricing and misallocation of assets.  That thesis is about to be tested.  (also a must read)
           

(4)   geopolitical risks:  little to add.

(5)   economic difficulties around the globe.  The stats this week were in line with recent trends.


[a] German third quarter GDP was strong; third quarter UK inflation was below estimate as was October unemployment,

[b] October Chinese industrial production and fixed asset investment were below consensus while retail sales were above; the Chinese equivalent of the Fed’s Beige Book showed slowing growth throughout the economy,

[c] third quarter Japanese GDP was strong.

The bottom line remains the same: Europe gaining strength, Japan may be improving, China a big question.
                 

            Bottom line:  the US economy growth rate appears to be improving as a result of a combination of the positive impact on its secular growth rate brought on by increasing deregulation and a cyclical component of a late stage recovery helped by a better performance of the EU economy.  Unfortunately, I don’t believe there is much chance of returning to a more normal secular long term rate of growth because of (1) too much debt that will not be assuaged by the recently announced tax bill, in its current form and (2) a failed Fed QE policy that has done little for growth but led to exaggerated moves in asset pricing and allocation.

The Market-Disciplined Investing
         
  Technical

The indices (DJIA 23358, S&P 2578) seem to have entered into some kind of consolidation phase, failing to follow through on Thursday’s strong pin action which in turn had reversed a week of drifting lower.  Volume fell and breadth weakened.  But the bottom line remains that both of the Averages remain above their 100 and 200 day moving averages and are in uptrends across all time frames.  The assumption is that stock prices are going higher.

The VIX (11.4) was down another 3%, but still finished above the upper boundary of its former short term downtrend (now a trading range), above its 100 day moving average (now support), above its 200 day moving average (now support) and above the lower boundary of its long term trading range.  Following its recent pattern of not trading inversely to stock prices, it was down on a down day.  More clarity is needed to get a sense of what is going on.
           
The long Treasury was up ¾ %, ending above its 100 day moving average (now support), above its 200 day moving average (now support) and above the lower boundaries of its short term trading range and long term uptrend.   The only negative is that TLT has not re-established a very short term uptrend.  (economic weakness or a safety trade?)
           
The dollar fell, finishing below its 200 day moving average (now resistance), below the upper boundary of its short term downtrend, but above (though closing in on) its 100 day moving average (now support).  It appears that UUP is confirming its downtrend---which suggests economic weakness or flight from the dollar.

GLD was up 1 ¼%, closing well above its 100 day moving average (remember that it has violated this moving average five times in the last week; if remains there through the close on Tuesday, it will set as support), above its 200 day moving average (support) and the lower boundary of a short term uptrend. 

Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends. The technical assumption has to be that stocks are going higher.
           
Strength in TLT and GLD along with weakness in UUP suggest a slowing economy---certainly not the narrative from stock land.  That said, the TLT, GLD, UUP trends are all very short term, so it is too soon to be drawing any conclusions.

I remain uncomfortable with the overall technical picture.
           

Fundamental-A Dividend Growth Investment Strategy

The DJIA and the S&P are well above ‘Fair Value’ (as calculated by our Valuation Model).  However, ‘Fair Value’ could be rising based on a new set of regulatory policies which would lead to improvement in the historically low long term secular growth rate of the economy (depending on the validity of Reinhart/Rogoff; also note an improvement in the cyclical growth rate resulting from better growth overseas doesn’t affect the secular growth as calculated in our Model); 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 economy appears to have picked up a little steam as it reaches the late stage of its anemic recovery.  I have raised my 2018 GDP and corporate growth estimates; but even on that forecast, stocks in general are generously valued.  So this upgraded outlook will do little to alter values in our Model.

The GOP made progress on its tax reform with both the house and senate passing its own separate version.  I am going to give them the benefit of the doubt and assume passage of some sort of tax bill.  However, while I believe it may score political points with the electorate and price points with investors, I also believe that it will do little to promote secular economic growth.  As a result, if stocks fly on tax cuts, they will discount even more future growth that is either not there or so far in the future as to not be really relevant to today’s valuations. 

In short, even if passage is achieved, I believe that Street estimates for economic and corporate profit growth based on the improving economy, fiscal reform narrative are too optimistic.  And when it wakes up from this fairy tale that could, in turn, lead to declining valuations. 

That said, fiscal policy is a distant second where it comes to Market impact.  The 800 pound gorilla for equity valuations is central bank monetary policy based on the thesis that (1) QE did little to help the economy but led to extreme distortions in asset pricing and allocation and (2) hence, its unwinding will do little to hurt the economy but much to equities as the severe perversion of security valuations is undone.  That thesis is about to get tested, albeit at an agonizingly slow pace, as the Fed and other central banks inch their way toward monetary normalization.

Bottom line: the assumptions on long term secular growth in our Economic Model may be beginning to improve as we learn about the new regulatory policies and their magnitude.  Plus, there is a ray of hope (though fading) that fiscal policy could further increase that growth assumption though its timing and magnitude are unknown.  On the other hand, if it raises the deficit/debt, I believe that it would negate any potential positive. In any case, I continue to believe that the current Street narrative is overly optimistic---which means Street models will ultimately will have to lower their consensus of Fair Value for equities. 

Our Valuation Model assumptions may be changing depending on the aforementioned economic tradeoffs impacting our Economic Model.  However, even if tax reform proves to be a positive, 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 11/30/17                                13158            1625
Close this week                                               23358            2578

Over Valuation vs. 11/30
             
55%overvalued                                   20394              2518
            60%overvalued                                   21052              2600
            65%overvalued                                   21710              2681
            70%overvalued                                   22368              2762


* 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.