The Closing Bell
2/16/19
Statistical Summary
Current Economic Forecast
2018 estimates
(revised)
Real
Growth in Gross Domestic Product 1.5-2.5%
Inflation +1.5-2%
Corporate
Profits 10-15%
2019
Real
Growth in Gross Domestic Product 1.5-2.5%
Inflation +1.5-2.5%
Corporate
Profits 5-6%
Current Market Forecast
Dow
Jones Industrial Average
Current Trend (revised):
Short
Term Trading Range 21691-26646
Intermediate Term Uptrend 14088-30287
Long Term Uptrend
6585-29947
2018 Year End Fair Value
13800-14000
2019 Year End Fair Value
14500-14700
Standard
& Poor’s 500
Current
Trend (revised):
Short
Term Trading Range 2349-2942
Intermediate
Term Uptrend 1338-3148 Long Term Uptrend 913-3073
2018
Year End Fair Value 1700-1720
2019
Year End Fair Value 1790-1810
Percentage Cash in Our
Portfolios
Dividend Growth
Portfolio 56%
High
Yield Portfolio 55%
Aggressive
Growth Portfolio 56%
Economics/Politics
The Trump
economy is a neutral for equity valuations. The
data flow this week was overwhelmingly negative: above estimates: December job
openings, preliminary February consumer sentiment, the February NY Fed
manufacturing index; below estimates: weekly mortgage and purchase
applications, weekly jobless claims, December retail sales, month to date
retail chain store sales, January industrial production, November
inventories/sales, the January small business optimism index, the December
budget deficit, January import/export prices; in line with estimates: January
CPI/ex food and energy and PPI/ex food and energy.
There were two primary
indicators reported this week: December retail sales (-) and January industrial
production (-). So, this week’s call is easy: negative. Score: in the last 175 weeks, fifty-seven positive,
seventy-eight negative and forty neutral.
One note. Some analysts might argue that lower
import/export prices are a plus in that they would have a positive impact on
prices---and that would be true.
However, I judge them to be negative because they support the notion of
a weakening economy.
The data from
overseas this week was mostly negative (again).
Certainly, some portion of those poor results stem from the effects of
the US/China trade dispute and economic/political turmoil in the UK, France and
Italy. However, at the risk of stating
the obvious, if those problems can’t be resolved, then they are going to keep
impacting the global economy.
My forecast:
Less government
regulation, Trump mandated spending cuts, (hopefully) getting out of the Middle
East quagmire and possible help from a fairer trade regime are pluses for the long-term
US secular economic growth rate.
However, the
explosion in deficit spending, especially at a time when the government should
be running a surplus, is a secular negative.
My thesis on this issue is that at the current high level of national
debt, the cost of servicing the debt more than offsets (1) any stimulative
benefit of tax cuts and (2) the secular positives of less government regulation
and fairer trade [at least on the agreements that have been renegotiated].
On a cyclical
basis, the economic growth rate is slowing as the effects of the tax cut wear
off and the global economy decelerates.
There appears to be an increasing risk that the economy may not be as
strong as even my forecast has portrayed it.
The
negatives:
(1)
a vulnerable global banking [financial] system.
I covered the latest move by Banco Santander screwing
bond holders in favor of stockholders, the continuing problems at Deutschebank
and the defaults by two large Chinese companies.
China’s mountain of debt.
(2) fiscal/regulatory
policy.
Three important
near-term issues are:
[a] the shutdown. Not going to happen. However, with Trump’s next move to declare a
national emergency to obtain additional funds for the wall, the political
rancor isn’t going away. That said, I
have never thought a government shutdown nor the seemingly perpetual political
food fight as negatives for the economy.
Indeed, to the extent that they prevent additional fiscal
irresponsibility, they are a plus,
[b] the
US/China trade talks. It looks like
progress is being made. US trade
officials were in China this week. All
the press releases were rosy in their outlook.
Plus, Xi attended one session on Friday as a sign of goodwill; and Trump
has made it clear that he wants a deal. On
the other hand, comments out of Xi regarding IP theft were anything but
encouraging.
As you know, I
have been supportive of Trump’s effort to negotiate fairer trade deals,
correcting the disparities that grew up in the post WWII world. If he is successful, I believe that it will
be a plus for US secular economic growth.
My concern is that in this latest round, the Chinese beat him at his
‘art of the deal’ game leaving them free to continue their theft of US
intellectual property.
[c] the
December budget deficit was reported larger than anticipated. This is, of course, illustrative of my major
concern about fiscal policy.
Bottom line:
whatever the positive impact that might to come from a US/China trade deal,
irresponsible deficit spending will restrain US economic growth.
(2)
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 asset bubbles in the stock market as well as
in the auto, student and mortgage loan markets.
The two headlines
this week:
[a] the
statement from a Fed governor that reshaping the QT unwind will be on the
agenda at the next FOMC meeting. If true
and if the Fed does curtail QT, that would, in my opinion, be a major negative. First
of all, it would do little for the economy, just as QEII, QEII and Operation
Twist did little.
Second and more
important, by kowtowing to the Markets [which it has no, zero, nada, nyet
mandate to do], it would prolong the mispricing of risk. To date, that hasn’t been a problem; in fact,
it has been a plus in that it kept economically inefficient companies and
bankrupt sovereigns afloat.
However, in
recent weeks that game seems to be playing itself out as defaults have
increased in the banking and industrial sectors---the result of investor
unwillingness to refinance economically unproductive or marginally unproductive
enterprises.
Of course, a
return to QE may assuage this problem, at least near term. But sooner or later asset misallocation and
mispricing will likely be driven to their logical extreme---financing a project
with no or a negative return. At that
point, a central bank ‘put’ would probably be meaningless and the repricing of
risk would begin.
[b] the figures from the Bank of China show a huge
injection of liquidity into its banking system.
So, it appears to have joined the Fed in ending QT and, perhaps,
initiating some new phase of monetary easing---we may again have not a Powell ‘put’
but a central bank ‘put’.
More.
(3) geopolitical
risks:
Europe is a
mess with Brexit, riots in France and fiscal policy discord in Italy; and it continues
to be reflected in a negative way in the economic stats.
Plus, you never
know how the situation in Venezuela plays out.
(4)
economic difficulties around the globe. The stats this week were again negative,
continuing to point to a global economic slowdown:
[a] December EU industrial production declined more
than expected; its Q4 flash GDP was in line, though Germany’s was a disappointment;
December UK industrial production and Q4 GDP were below estimates,
[b] January Chinese exports were very positive while
imports declined---which is not likely to help their negotiating position in
the current trade talks; January CPI ran hotter than anticipated while PPI saw
a big decline; January Chinese all-system aggregate financings hit a new high.
Bottom
line: on a secular basis, the US economy
is growing at an historically below average rate. Although some recent policy changes are plus
for secular growth, they are being offset by a totally irresponsible fiscal
policy. Until evidence proves otherwise,
my thesis is that cost of servicing the current level of the national debt and
budget deficit is simply too high to allow any meaningful pick up in the US’s long-term
secular economic growth even with improvement from deregulation or the current
trade regime (a caveat being if China does change its industrial policy).
Cyclically, the
US economy is once again slowing as evidenced by the data from both here and
abroad. As a result, my initial US 2019 economic growth rate assumption is at risk
of being too optimistic.
Finally, any move to a more dovish
stance by the Fed is not likely to have an impact, cyclical or secular, on the
economy. QE II, III, and Operation Twist
didn’t, and QE IV probably won’t either.
Meaning that if the Fed thinks backing off QT will help support economic
growth, in my opinion, it will be disappointed.
Wisdom from
Charlie Munger (must read):
The Market-Disciplined
Investing
Technical
The Averages
(DJIA 25883, S&P 2775) staged another Titan III move yesterday. The Dow ended above its 100 DMA (now
support), above its 200 DMA (now support) and back above the lower boundary of
its newly reset very short term uptrend, voiding Thursday’s break. The S&P remained in a very short term
uptrend, above its 100 DMA (now support), above its 200 DMA (now resistance), re-starting
the clock on this challenge (if it remains there through the close on Thursday,
it will revert to support). Both remain
below their previous lower highs (~25977, 2800).
Volume rose
(this is option expiration week; so, an increase in volume and volatility is to
be expected) and breadth improved.
The VIX fell 7 ¾
%, ending below the lower boundary of its short term uptrend (if it remains
there through the close on Wednesday, it will reset to a trading range). And it remains below both MA’s (now
resistance).
The long bond
was up, finishing above both MA’s, in very short term uptrend and within short and
intermediate-term trading ranges.
The dollar was
down pennies again but closed above both MA’s and within a short-term uptrend. However, it finished fractionally below the
upper boundary of its mid-November to present consolidation phase---not enough
to concern me.
GLD rose ½% on
good volume, ending above both MA’s (the 100 DMA is crossing above its 200
DMA---a positive technical signal) and within very short-term and short-term
uptrends.
Bottom line: the Averages are about to
challenge their prior lower highs. If
successful, it would set the stage for a move to their all time highs. If not, it will strengthen that resistance
level.
The dollar, bonds and gold seem to be
attracting ‘safety trade’ investors even though their daily activity is not
always consistent.
Friday
in the charts.
https://www.zerohedge.com/news/2019-02-15/stocks-soar-8th-straight-week-earnings-macro-data-collapse
Fundamental-A Dividend Growth
Investment Strategy
The DJIA and the
S&P are well above ‘Fair Value’ (as calculated by our Valuation Model), the
improved regulatory environment and the potential pluses from trade and
spending cuts notwithstanding. At the
moment, the important factors bearing on Fair Value (corporate profitability
and the rate at which it is discounted) are:
(1)
the extent to which the economy is growing---which the
trend in the dataflow suggests is meager.
Yes, the employment numbers have been good; but employment is a lagging
indicator. As a result, I think that it
is being given too much emphasis in light of other stats.
There is
almost no question that the global economy is slowing; and that is not going to
help our own cause. Still, it is
certainly possible that the US can continue to grow as the rest of the world
slows. But declining global growth is likely
going to inhibit the rate of US growth as well as any improvement in earnings. Speaking of which, the results from the Q4
earnings season as well as the forward guidance provided by companies suggest
that the next couple of quarters could be disappointing.
My
thesis is that, a trade war aside, the financing burden now posed by the
massive [and growing] US deficit and debt is offsetting the positive effects of
deregulation and fairer trade and will continue to constrain economic as well
as profitability growth.
In
short, the economy is not a negative [yet] but it is not a positive at current
valuation levels.
(2)
the success of current trade negotiations. If Trump is able to create a fairer political/trade
regime, it would almost surely be a plus for secular earnings growth. The current trade talks with China clearly
hold promise. However, thus far, all we
have gotten is positive verbiage; though the fact that another round of
negotiations is occurring must be looked at as a plus. Trump almost surely wants a win here. But I think his choice is between no deal [because
it doesn’t include changes in Chinese industrial policy and IP theft] or a deal
[the doesn’t include them]. The latter
might be a positive short term but [a] clearly won’t address the inequities in
the US/Chinese trading regime and [b] will expose ‘the art of the deal’ as so
much fluff.
(3) the
rate at which the global central banks unwind QE---or begin to rewind it. The most significant development this week
was the apparent complete reversal of the Chinese and our Fed’s QT. We will have to wait for the Fed statement
following the next FOMC meeting to be sure that this is the case. However, the new Chinese policy can be seen
in the numbers---so we know that is occurring.
That said, as I
have constantly reminded, neither will likely be a plus of their respective
economies. However, if QEII, QEIII and Operation Twist are any guide, they
should be a big plus for the Markets, at least in the short term.
The
central bank put (must read):
(4) current
valuations. the Averages have recouped much of their October to December loss
and appear on their way to regaining even more.
Since they were grossly overvalued [as determined by my Valuation Model]
in October, they are now just slightly less grossly overvalued. That said, if the latest central bank
liquidity surge continues, valuations will remain irrelevant.
As
prices continue to rise, I will again be focusing on those stocks that trade
into their Sell Half Range and act accordingly.
Bottom line: a
new regulatory regime plus an improvement in our trade policies along with
proposed spending cuts should have a positive impact on secular growth and,
hence, equity valuations. More important,
a global central bank ‘put’ appears to be returning and, if history is any
guide, will almost assuredly be a plus for stock prices. On the other hand, I believe that overall fiscal
policy (growing deficits/debt) will hamper economic and profit growth,
restraining the E in P/E.
As
a reminder, my Portfolio’s cash position didn’t reach its current level as a
result of the Valuation Models estimate of Fair Value for the Averages. Rather I apply it to each stock in my
Portfolio and when a stock reaches its Sell Half Range (overvalued), I reduce
the size of that holding. That forces me
to recognize a portion of the profit of a successful investment and, just as
important, build a reserve to buy stocks cheaply when the inevitable decline
occurs.
DJIA S&P
Current 2019 Year End Fair Value*
14600 1800
Fair Value as of 2/28/19 14016
1724
Close this week 25883
2775
* 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.
No comments:
Post a Comment