4/27/19
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 14329-30520
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 1359-3169 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 slightly negative: above estimates: March new home
sales, month to date retail chain store sales, April consumer sentiment, March
durable goods orders, Q1 GDP; below estimates: weekly jobless claims, March
existing home sales, weekly mortgage and purchase applications, the March
Chicago Fed national activity index, the April Richmond and Kansas City Feds’
manufacturing indices; in line with estimates: none.
However, the primary
indicators were quite positive, including a surprisingly strong GDP report---March
new home sales (+), March durable goods orders (+), Q1 GDP (+) and March
existing home sales (-). I rate the week
a plus. Score: in the last 185 weeks, sixty
positive, eighty-four negative and forty-one neutral.
The data from
overseas this week was lousy, though the absence of more upbeat Chinese stats
could explain that. In the past three
weeks, I have dwelled on the seeming incongruent resurgence in the Chinese
economy while the rest of the world struggles for growth. So, I won’t be repetitious except to say that
if the numbers are real, then it is clearly a plus for the global
economy---‘if’ being the operative word.
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 Q1 GDP number portrayed an economic growth rate much stronger than reflected
in the flow of individual datapoints; although subsequent analysis suggests
that it was not as positive as it appears on the surface (see link below).
To be clear, I am
not saying that the GDP stat wasn’t pleasantly upbeat. And I am still looking at altering some
assumptions in my Economic Model that would result in a higher economic growth
forecast for 2019. However, the number
wasn’t as positive as it appears on the surface. And just to reiterate my bottom line: even if
the economy were to improve cyclically, it will still be unable to return to
its prior secular rate of growth as a result of too much debt to service.
Perhaps more
important for the Markets, I initially thought that the surprisingly upbeat Q1 report
could put pressure on the Fed to resume QT.
However, the adjusted results actually aid the Fed in remaining
accommodative. It can characterize first quarter results in Goldilocks
terms---it was positive but not so much so that it will consider raising
rates. Add in that the inflation measure
in the GDP report was half of expectations and Goldilocks is tiptoeing through
the tulips.
The
negatives:
(1)
a vulnerable global banking [financial] system.
The global liquidity problem.
(2) fiscal/regulatory
policy.
[a] news
reports suggest that the any US/Chinese trade agreement will not likely include
significant changes to Chinese industrial policy and IP theft---which is the
major reason for this whole ‘renegotiation’ process.
On
the other hand, Xi gave a speech on Thursday in which he said the China was
addressing the issues of unfair industrial and IP theft policies. I have noted before that for the Chinese to
just admit that they are cheating is a big first step in solving the
problem. Although in the end, it is
actions that count and those are yet to come.
Absent that,
there will be little impact on the outlook for US long term secular economic
growth. However, if the agreement
results in the lifting of tariffs and the resumption of Chinese purchases of US
oil and soybeans, then there will certainly be a positive impact on cyclical
growth, helping to stabilize and re-accelerate US short term economic growth.
That said, we
don’t know what the final product will look like, so I withhold judgement.
[b] the US and
EU are starting their new round of trade renegotiations which, as you know, was
preceded by the usual ‘art of the deal’ threats. However, there is little news beyond
that. So, we have no idea what will
occur on this front.
Given the uncertain global economic outlook,
the last thing the US/global economies need right now is a two front
confrontation between three of the world’s largest trading blocks.
To be sure, it is, in my opinion,
necessary. {i} The Chinese have been cheating
for years. {ii} The US created an
economic umbrella over Europe following WWII which disadvantaged the US in
trade terms but helped assure a recovery in Europe. That is no longer needed; but the trade
regime remains unfair to the US.
Counterpoint.
So, while I am in favor of both situations being
rectified, the process of correcting them may lead to additional downward
pressure on commerce.
Bottom line:
whatever the impact that might come from a US/China/EU trade quarrels,
irresponsible deficit spending will restrain US secular 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 Bank of
Japan met this week and left its dovish monetary policy unchanged.
The other news
was the relatively tame level of inflation recorded in the GDP report. As I noted above, this gives the Fed
reason/excuse to maintain a relatively easy monetary stance despite the upbeat
GDP number.
However, asset
misallocation and mispricing remain a long term risk to both the economy and
the Markets.
(3)
geopolitical risks:
Europe is a
mess with Brexit [which has apparently been given a stay of execution], riots
in France and fiscal policy discord in Italy; and it continues to be reflected in
a negative way in the economic stats.
Kim Jung Un is
back to his old tricks, threatening his enemies with whatever he imagines that he
has as leverage. I don’t see this as
particularly disturbing. But it is still
something the world must contend with.
Adding to the
potential trouble spots, Trump is suspending waivers to countries buying oil
from Iran. This was met with threats
from Iran to close the Strait of Hormuz.
While most experts that I talk to do not take that seriously, that
doesn’t mean that there aren’t other measures available to Iran to make life uncomfortable
for the US as well as the rest of the world.
You never know
how the situations in Venezuela, Israel and Kashmir will play out.
(4)
economic difficulties around the globe. The stats this week were negative; though
there was none of the surprisingly strong Chinese stats that painted a more
upbeat global economic picture over the preceding three weeks. As you know, I have been somewhat suspicious
that the Chinese economy could be experiencing such a remarkably powerful
turnaround while the rest of the world’s biggest economies struggle. For
the moment, I have to accept the data as credible; but I do so with prejudice.
[a] 2018 EU
government debt to GDP declined, the April EU flash consumer confidence index
fell more than anticipated; April German business and consumer confidence were
less than consensus,
[b] the
February Japanese all industry index and the leading economic indicators as
well as the March unemployment rate, industrial production, construction orders
and CPI were below estimates; March retail sales and housing starts were above.
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,
given this Q1 GDP number, the US economy may be starting to re-accelerate which
would clearly be good news and result in an upward revision of my economic
growth forecast.
Plus, its Goldilocks composition
(growth but not too hot) and the accompanying very tame inflation number will
likely allow the Fed to remain on the sidelines, i.e. avoid further QT. As you know, I believe QE had little positive
impact on economic growth. So, I am not
really concerned about the economic effect of QT or lack thereof. On the other hand, I believe that QE had a
huge positive impact on asset prices.
So, relieving any pressure to resume QT will be a plus for asset prices.
The Market-Disciplined
Investing
Technical
The Averages
(26543, 2939) had another good day, pulling within a short hair of their
all-tine highs (26656/2942). Both charts
are quite strong. Given their momentum,
it seems likely that they will not just challenge those former highs but push
through them.
On the other
hand, as I continue to point out, there are factors that would suggest some
near term consolidation before that occurs: (1) the VIX voiding its very short
term downtrend notwithstanding, it continues to reflect a very high level of
investor complacency, historically a sign that portends lower stock prices, (2)
the April 1st gap up open still needs to be closed and (3) all-time
highs historically have posed some, if not a lot of, resistance.
Volume was up
slightly but still sub-par and breadth improved.
The VIX declined
4 ½ %. It could certainly go on to challenge
the lower boundary of its short term trading range and perhaps even the lower
boundary of its long term trading range (its all-time low). But those are mere points away. So, I am not sure just how much downside
there is (how much further investor complacency can be stretched).
The long bond was
up 3/8%, continuing its bounce off the lower boundary of its very short term
uptrend. While it experienced a
significant down draft in the first two weeks of April, it has been resilient since
and its chart remains strong.
The dollar was down three cents, but its chart
is quite positive and is within twenty five cents of its twenty year high. However, like the S&P is have has gap up
opens lower down that need to be filled and twenty year highs can provide
considerable resistance.
GLD
was up 5/8 % and is making a valiant attempt at a rally. However, its chart is still broken. Its 100 DMA and the upper boundary of its
very short term downtrend represent overhead resistance.
Bottom line: the
Averages again advanced toward their all-time highs. There is nothing to do but sit back and watch
them battle the resistance.
There was no
informational value in the pin action in UUP, TLT and GLD yesterday.
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. Clearly, Friday’s GDP report points to a
pickup in growth, even if the number isn’t quite as strong as it appears. Plus, there are other signs of an improving
economy: [a] a more upbeat Q1 earnings season than expected and [b] the
remarkable recovery in the Chinese economy.
I have observed that there are caveats to both. But in combination, it seems highly probable
that our economy is starting to perform much better and that I need to be
working on an upward revision of my economic growth outlook.
To be
clear, my forecast has always been for sluggish growth in 2019 restrained by
irresponsible fiscal and monetary policies, not recession. I am going to immediately alter that scenario
based on the positive GDP number and better than expected Q1 earnings season; though
as I noted above they provide sufficient reason to believe that it is too
conservative. However, I would like
further confirmation before upgrading my outlook.
In
short, the economy is not a plus [yet] but it appears to be fading as a
potential negative.
(2)
the success of current trade negotiations. If Trump can create a fairer political/trade
regime, it would almost surely be constructive for secular earnings growth. 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 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.
The same
conclusion applies to the upcoming negotiations with the EU. At this moment, the only thing that has
occurred is the usual ‘art of the deal’ threat preamble. Again, a fairer trade regime could be a plus
for the US economy.
However,
I remind you that the revised NAFTA agreement resulted only in improvements at
the margin, Trump’s characterizations notwithstanding.
(3)
the resumption of QE by the global central banks. If QEII, QEIII and Operation Twist are any
guide, the latest Fed, ECB and Bank of China steps should be a big plus for the
Markets, at least in the short term.
(4)
current valuations. the Averages have recouped their
October to December loss. As you know, I
believed them to be grossly overvalued [as determined by my Valuation Model] in
October.
However,
helping valuations: as noted above, Q1 earnings season appears to be coming in
ahead of forecasts. If this turns out to
be the rule for the rest of the year, then 2019 earnings forecasts will likely
rise and that should increase [my Model’s calculations of] valuations. Nonetheless, given the extremes that equities
have gone to, any upward revisions would only result in less extreme
overvaluation. Although, it could help
investors feel less bad about buying stretched valuations.
That
said, if the latest central bank liquidity surge continues and Trump keeps
pushing a narrative that is Market driven, valuations will remain irrelevant.
As
prices continue to rise, I will 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 the Q1 GDP number
suggests that it may not be as negative as I have been assuming. On the other hand, 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 4/30/19 14132
1738
Close this week 26543
2939
* 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.
