The Closing Bell
3/30/19
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 14233-30424
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 1353-3163 Long Term Uptrend 913-3191
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 negative: above estimates: weekly mortgage/purchase
applications, February new home sales, weekly jobless claims, final March
consumer sentiment, month to date retail chain store sales, the March Dallas and
Kansas City Feds’ manufacturing indices, the January trade deficit, January PCE;
below estimates: February housing starts and building permits, the January Case
Shiller home price index, February pending home sales, January personal income,
January personal spending, March consumer confidence, February Chicago Fed national
activity index, March Chicago PMI, the
March Richmond Fed manufacturing index, Q4 2018 GDP growth, price deflator,
corporate profits and trade deficit; in line with estimates: none.
The primary indicators
were really negative: February housing
starts/building permits (-), Q4 GDP (-), January personal income (-), January personal
spending (-). February new home sales (+).
I rate the week negative. Score:
in the last 181 weeks, fifty-eight positive, eighty-three negative and forty
neutral.
Given the last
month’s data, the earlier hope I had that the US economy could be stabilizing is
fading fast. Plus other developments seem
to be pointing to a world that is either in or on the cusp of a recession: (1) deteriorating
global stats, (2) falling bond yields and an ever flattening yield curve, (3)
the sudden about face of Fed policy while it forecasts a sound economy and (4)
even worse, the new push by the administration for a fifty basis point cut in
the Fed Funds rate.
For the moment, I
am sticking with my assumption that the US can continue to grow albeit at a reduced
rate even if there is a global recession.
However, the yellow light is now flashing.
The data from
overseas this week was negative, though just slightly. That could potentially change if there is a
decent US/China trade deal; however, those prospects appear uncertain, the
happy talk out of administration officials notwithstanding. Net, net, the
global economy remains an impediment to our own economy’s struggle to sustain
growth.
My forecast (for
the moment):
Less government regulation,
(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, exemplified by Trump’s new budget proposal, 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. However,
even if the economy were to improve cyclically, it will still be unable to
overcome the secular negative of too much debt to service.
The
negatives:
(1)
a vulnerable global banking [financial] system.
Problems in Germany.
(2) fiscal/regulatory
policy.
There were positive
headlines on the US/China trade talks, though I don’t think that the happy talk
out of Trump officials can be trusted.
Not that there won’t be a good outcome; I just don’t think that the Trump
narrative has any informational value.
In addition, I
am becoming more convinced that even if we got a great trade deal today, it won’t
prevent the global economy from rolling over.
Certainly, it could have a mitigating effect on the magnitude of any
decline; and of course, long term, it would be a major plus for secular growth. But as I said above, speculating of a
US/China trade deal is a waste of time.
The other item
was the White House campaign to talk the Fed Funds rate down. Earlier in the week, Trump nominated Stephen Moore
to a seat on the Fed. He prompted began
a series media interviews and editorials pushing for a fifty basis point cut in
interest rates. Then on Friday, Larry Kudlow
went on TV espousing a similar action.
First of all,
on its face, it is an absurdity to be advocating such a move while at the same
time telling country how great the economy is.
Second and probably more important, it is a political statement not an
economic one. The universe knows that
incumbents don’t do well in elections when the economy is in the tank: and, in
my opinion, the more Trump pushes for lower rates, the more frightened he [and
others in his administration] is that the economy is rolling over.
Bottom line:
whatever the impact that might 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.
While there was
little news this week, the headlines were still dominated by the debate on the logic
behind the Fed’s dovish turn---the major issues being the strength of the
US/global economy and efficacy of an easier monetary policy. In addition, there was a discussion of how
much weight to give the current rise in bond prices and the flattening of the
yield curve.
But you know
all that because I have been addressing those issues in almost all the Morning
Calls this week. So, I will just repeat
my conclusions.
[a] the 180 degree turn in policy in the
last three months {i} demonstrates the extent to which the Fed has been kidding
itself/you/me about the strength of the economy and {ii} clearly supports my
long term thesis that the Fed has never in its history managed a successful
transition from easy to normal monetary policy,
[b] easy money will do little to improve economic
growth but, if history is any guide, will keep investors buying every asset in
sight.
I believe that the Fed has finally painted itself
into a box from which there is no easy exit: [a] if inflation accelerates, the
Fed will ultimately be compelled to tightening policy irrespective of Market
reaction or [b] if economic growth continues to decelerate, any additional QE
will prove ineffective in halting the slowdown; and Markets don’t like
recessions. (must read):
(3) geopolitical
risks:
Europe is a
mess with Brexit [which now has a very short shelf life], riots in France and
fiscal policy discord in Italy; and it continues to be reflected in a negative
way in the economic stats.
You never know
how the situations in Venezuela and Israel play out.
(4)
economic difficulties around the globe. The stats this week were just slightly negative,
but continued to point to a global economic slowdown or worse:
[a] February
German retail sales were in line and the March German business climate index
was better than expected; Q4 UK business investment fell less than expected
while GDP was in line; the Q4 EU business confidence index, the industrial
sentiment index and the economic sentiment indicator were below consensus while
the consumer confidence index was in line,
Permanent
recession in Italy (must read):
[b] January/February
Chinese industrial profits declined.
[c] the January
Japanese all activity index was below estimates; the February unemployment rate,
industrial production, construction orders and housing starts were better than
anticipated while retail sales disappointed.
Bottom
line: on a secular basis, the US economy
is growing at an historically below average rate. Although some recent policy changes are a plus
for secular growth, they are being offset by totally irresponsible fiscal and
monetary policies.
Cyclically, the
US economy is slowing as evidenced by the data from both here and abroad. Further, the reversal of Fed policy and
plunge in interest rates put an exclamation point of that notion.
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 or lowering the Fed Funds
rate will help support economic growth, in my opinion, it will be disappointed.
The Market-Disciplined
Investing
Technical
The Averages
(DJIA 25928, S&P 2834) had another great day, with the S&P closing above
2800/2811/2815 level. Clearly, it is making
another attempt to break free of this level’s the gravitational pull. However, given (1) all the back and forth around
2800/2811/2815 since last October (2) plus the fact that Friday was the last trading
day of the quarter and institutions were marking up their portfolios for
performance purposes, I am not totally convinced that this latest move has a
clear path to the S&P’s all-time high.
Also holding me back is that the Dow remains in a very short term downtrend
and the pin action in the dollar and the long bond are negatives. Follow through.
Volume rose and breadth
improved.
The VIX declined
10 3/8 %, finishing in the lower zone of the trading range marked by the 200
DMA on the upside and the double bottom on the downside---whose violation would
be a plus for stocks.
The long bond was
down slightly on volume. The good news
is that it is maintaining its upward momentum and move toward its all-time
high. The bad news is that last Friday’s
gap up open still needs to be closed.
The dollar rose.
The good news is that it remains above the upper boundary of the November to present
trading range (a move above its prior high would put this trading range in the
dust bin), above both MA’s and in a short term uptrend. The bad news is that it gapped up on Wednesday’s
open.
GLD recovered a
little of its big Thursday selloff---which was the first really negative
development in some time. The good news
is that it is in a solid uptrend and yesterday was a gap down open. The bad news is that it is nearing a former minor
double bottom and is developing a head and shoulders pattern.
Bottom line: certainly
on a price basis, Friday’s pin action enhances the probability of the S&P moving
higher versus the odds of a failure to sustain the 2800/2811/2815 level. However, many other indicators suggest otherwise.
So, I await follow through.
TLT and UUP continue
to point to lower interest rates/a weaker economy. GLD is taking a hit from the strong dollar.
Friday in the charts.
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 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.
Plus the stampede by the central banks to ease along with the pin action
in the global bond markets, the dollar and gold are confirming further economic
weakness, perhaps, even recession. That
is not my call, at the moment; but it is subject to change.
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. While there was more happy talk this week on
the US/China trade negotiations, unfortunately, the entire narrative on this
issue has been so muddied by the obvious political/Market oriented nature of
the administration’s comments that I, for one, have no idea about the true
state of the current trade talks with China.
As you
know, I have been somewhat skeptical that a comprehensive agreement on Chinese
industrial policy and IP theft could be reached in the short term.
My
concern is not that we get no deal or a small deal but that the Chinese out maneuver
Trump and he gives away the need for progress on industrial policy and IP theft
just to get a deal.
(3)
the resumption of QE by the global central banks. If QEII, QEIII and Operation Twist are any
guide, the latest Fed move should be a big plus for the Markets, at least in
the short term.
(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: fiscal
policy is negatively impacting the E in P/E, although a new regulatory environment
is a plus. Any improvement in our trade regime
with China should have a positive impact on secular growth and, hence, equity
valuations---if it occurs. More
important, a global central bank ‘put’ has returned and, if history is any
guide, will almost assuredly be a plus for stock prices.
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 3/31/19 14074
1731
Close this week 25928
2834
* 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.
