The Closing Bell
3/16/19
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 14149-30350
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, January construction spending, the January JOLTS report, January
retail sales, preliminary March consumer sentiment, February CPI and PPI; below
estimates: January new home sales, weekly jobless claims, month to date retail
chain store sales, February industrial
production/capacity utilization, December business inventories/sales, the March
NY Fed manufacturing index, January durable goods/ex transportation orders, the
February small business optimism index, February export/import prices; in line
with estimates: none.
The primary indicators
were balanced: January retail sales (+), January construction spending (+),
January new home sales (-) and February industrial production (-). Given the discouraging bias of this week’s
overall data, I rate it: negative. Score:
in the last 179 weeks, fifty-seven positive, eighty-two negative and forty
neutral.
One note. The stats of the last two weeks have belied
the notion that I introduced a month ago: that the February numbers could be an
indication that perhaps the rate of US economic growth has stopped declining. While I
haven’t given up, the odds appear to be fading.
The data from
overseas this week was negative, though the Chinese numbers were something of
an improvement. However, in the absence of a trade deal, that
may be an aberration. Certainly, a
positive result from the US/China trade talks will help. The global economy
remains an impediment to our own economy’s struggle to sustain growth.
My forecast:
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. Some
recent data seemed to be indicating some stabilization in the process, but that
trend has reversed itself in the last two weeks. 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.
(2) fiscal/regulatory
policy.
It was another
see saw in the US/China trade talks narrative.
First, Trump said that he wasn’t that concerned with trade talks. Then we learned why---the Trump/Xi summit had
been postponed. But the Donald just
couldn’t stand a negative storyline; so, Friday, the news was that great
progress is being made.
I will leave
it to you as to what to believe. I don’t
know how anybody could make heads or tails out of what is really
happening. Certainly, not me. So, I fall
back on my original thesis: it would be a long, hard battle to get the Chinese
to play fair on industrial policy and IP theft---if they ever do.
The other headline,
if you want to call it that, was the issuing of the Donald’s FY2020 budget---at
which everyone looked, laughed and threw in the waste basket. Ignoring its fairyland proposals, my
principal problem is that it continues the Obama tradition of trillion dollar
deficits. You know my thoughts.
And.
No one cares
anymore.
Bottom line:
whatever the 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.
Two minor bits
of central bank news this week was [a] a Powell interview on 60 Minutes last
Sunday---which followed the Fed’s recent narrative, i.e. ‘patience’ meaning a
delay/stoppage of rate increases and an end of QT by year end and [b] the BOJ
left interest rates unchanged.
As you know, I
could care less about any moves or lack thereof in interest rates. But I continue to believe that QE did little
to help the economy, so QT would do little to hurt.
However, QE led
to the gross mispricing and misallocation of assets. Absent QT that condition will remain, so, [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.
(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 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] January EU industrial production was below
estimates; February EU core inflation was in line, the German government
lowered its 2019 economic growth forecast,
The EU faces huge problems
[b] January/February Chinese industrial production was
below projections while retail sales and fixed asset investments were above,
More.
[c] January Japanese machinery orders were below
forecasts, February PPI was higher than anticipated and the BOJ warned about that
country’s declining volume of trade.
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 a totally irresponsible fiscal policy.
Cyclically, the
US economy is slowing as evidenced by the data from both here and abroad.
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.
The Market-Disciplined
Investing
Technical
The Averages
(DJIA 25848, S&P 2822) ended the week on a high note---as many had expected
on this quad witching day. S&P closed
well above the 2800 (and even the 2811/2815) quad top---marking a breakout in
my work (but clearly not so with the 2811/2815 crowd). Next week’s pin action should clarify the discrepancy. If it proves to be a break that all can agree
on, then next stop is the indices’ all-time highs (26917/2942)
Volume was big
as expected and breadth improved.
The VIX fell 4%,
finishing below the late February/early March double bottom and appears headed
for the lower boundary of its short term trading range.
The long bond rose
5/8 %, capping a volatile but up week.
It ended in the upper tier of the trading range defined by a quad top
and a double bottom. The chart remains reasonably
strong.
The dollar declined
four cents, closing below the upper boundary of the November to present trading
range but above the lower boundary of a recently established very short term
uptrend. The chart remains strong.
GLD advanced,
finishing the week ahead of last week’s close.
But, like TLT, it endured a lot of volatility to get there. Despite
having voided a very short term uptrend, it still closed above both MA’s and in
a short term uptrend.
Bottom line: the
S&P ended above 2800/2811/2815, whatever your choice. The pin action next week will likely resolve
any disagreement about what level marks resistance. At the moment, it looks to me like the
Averages are headed for a challenge of their all-time highs.
And.
TLT and GLD are
pointing at a weak economy/easy Fed, the latter likely being the reason equity investors
have been jiggy. However, the price
action in the dollar doesn’t exactly fit the weak economy scenario, unless it
is being viewed as a safety trade. So, I
am a bit confused about the messages being sent by our indicators.
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.
Until proven otherwise, my thesis will remain that the long term
economic impact on secular growth of 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 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. Unfortunately, I can’t tell from the inconsistent
narrative the true state of the current trade talks with China. Although the one fact that we do know is that
the Trump/Xi trade summit has been postponed.
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. So, this delay is not surprising.
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, it 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’ appears to be returning 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 25848
2822
* 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.
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