The Closing Bell
4/13/19
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 14303-30494
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 mixed: above estimates: month to date retail chain
store sales, weekly jobless claims, the March small business optimism index,
the March budget deficit; below estimates: April consumer sentiment, the
February job openings report, March PPI, March export/import prices; in line
with estimates: February factory orders, weekly mortgage/purchase applications,
March CPI.
There was one primary
indicator---February factory orders (0).
So, I rate the week a neutral. Score:
in the last 183 weeks, fifty-nine positive, eighty-three negative and forty-one
neutral.
The data from
overseas this week was upbeat. That is
the second week in a row of better than expected results, although it is not a
trend yet. China continues to report not
just better but dramatically better numbers. Last week, I discussed this
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.
The surging
Chinese economy notwithstanding, a number of major organizations are shifting
their global growth forecasts downward.
Including
the IMF.
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. However, there are some initial
signs that global economic growth could be bottoming. If they presage improvement, then clearly the
near term outlook for economic and corporate profit growth will be
enhanced. Nonetheless 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.
The economy is
weak because the economy is weak (must read).
The
negatives:
(1)
a vulnerable global banking [financial] system.
(2) fiscal/regulatory
policy.
[a] US and
China negotiators continue to put on a happy face regarding the progress of
trade talks. In this week’s narrative,
it appears that systems are being put in place to monitor compliance with the
terms of any agreement regarding Chinese industrial policy and IP theft.
The good news
is that the Chinese are finally admitting to unfair trade practices.
The bad news is
that we still don’t know how closely their feet will be held to the fire in
correcting those abuses. As I noted on Friday,
the 2025 deadline for Chinese compliance apparently remains part of the deal---and
if that is the case, then there really is no deal.
However, we don’t
know the particulars. So, hope for the
best, prepare for the worst.
Just to keep a
bright shiny face on the trade talks, the US and China have now resolved the
currency manipulation issue.
[b] There was a
ruling by the World Trade Organization that the EU had been unfairly
subsidizing Airbus. That set off a Trump tweet fest
threatening further tariffs on EU products if the situation isn’t rectified
which EU officials countered with their own warning of more tariff increases.
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.
So, while I am
in favor of both situations being rectified, correcting them may lead to
additional downward pressure on commerce. In which case, the outlook for global
growth will diminish.
EU prepares new list of retaliatory tariffs.
[c] On the
other hand, a day later the EU/China announced a trade agreement that sounds good
on the surface and certainly suggests that the Chinese can be flexible. That said, given the globalist, ‘we are the
world’, ‘let’s all hold hands and sing kumbaya’ mindset of the European bureaucracy,
it isn’t farfetched for me to imagine them being easily outmaneuvered by Chinese.
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 Fed
released the minutes of its last FOMC meeting.
The bottom line is that the narrative was just a tad more hawkish than I
had anticipated. However, I think that
Powell has made it crystal clear that he is scared sh*tless of the Market. So, I don’t believe that the Fed will be tightening
anytime soon.
That said, Powell’s
temerity plays second fiddle to the ECB/Draghi’s comments this week.
Finally, as I recorded
in Friday’s Morning Call, China increased credit [‘social lending’] at a record
rate in March.
In short, the
misallocation and mispricing of assets will continue until some straw breaks
the camel’s back.
(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.
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 upbeat with the
positive dataflow out of China again making a big contribution. As I noted both this week and last, the
remarkably powerful turnaround in the Chinese economy seems a bit out of sync
with the rest of the world. For the
moment, I have to accept the data as credible; but I do so with prejudice.
[a] February German
exports/imports were well below consensus, March CPI was in line; February UK
GDP, construction spending and industrial production were better than expected;
February EU industrial production declined less than forecast,
[b] March
Chinese CPI was down more than forecast while PPI was in line, its trade
balance as well as credit expansion soared, auto sales were down big,
[c] March Japanese
consumer confidence was below estimates, as was February machinery orders; on
the other hand, March PPI ran a bit hotter than anticipated.
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 (?).
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 26412, S&P 2907) roared again yesterday. They will almost surely hold their momentum
long enough to challenge their all-time highs.
The S&P’s pin action has been almost perfect. The Dow slightly less so. But, there are two potential negatives that
could affect whether that challenge is successful or not:
(1)
both indices made a second gap up open on Friday. Meaning they now have two gap up opens exerting
restrain on the upside. I know that I have
been talking this point for the last two weeks and nothing has happened. However, remember those gap opens in UUP, TLT
and GLD, which I have also been yakking about have now been closed,
(2)
while the recent drawdown in the VIX would normally be
a plus for stocks, it has now reached a level that puts it near an all-time low. Historically, this has been a signal that stock
prices are getting stretched.
Volume was up
fractionally; and breadth was again mixed.
The long bond was
down another ¾ % and, in doing so, closed that gap open of four Friday’s ago. Meanwhile, it remains in a very short term
uptrend and above MA’s.
The dollar declined
¼ %. It remains in a solid uptrend. The only thing I can see wrong with this
chart is that it needs to trade meaningfully above its prior high.
GLD was off
fractionally. While the longer term
trends remain positive (above both MA’s and in a short term uptrend), the very
short term is looking a bit hairy (in a very short term downtrend and it continues
to develop a head and shoulders pattern).
At the moment, it seems caught in a range marked by the upper boundary of
its very short term downtrend on the upside and its 100 DMA/triple bottom on
the downside.
Bottom line: the
upward momentum in the indices continues which I believe will take them to
their prior all-time highs. Though I am
not sure that they can mount a successful challenge until those gaps are closed
and the optimism reflected in the VIX dissipates some.
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, ex China, suggests is meager. That said, the Street forecast has been for very
slow first quarter economic growth with a pick up through the rest of the year. That may be what happens, though it is clearly
way too soon to know; and the stats out of China, if real, could be the
catalyst that drives the pick up in growth.
To be clear,
my forecast has always been for sluggish growth in 2019 restrained by
irresponsible fiscal and monetary policies, not recession. At the moment, there is little reason to
doubt that scenario.
In
short, the economy is not a negative [yet] but it is not a plus at current
valuation levels.
(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. To that end, there was more happy talk this
week on the US/China trade negotiations and much of it sounded upbeat. 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.
Unfortunately,
this week, Trump opened a second front in his drive to reform the current
global trade regime---this time with the EU.
Both sides swapped threats. Again,
this could turn out to be a big 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.
Goldman
says no more rate hiked until after 2020 elections (thank you, Stephen Mnuchin).
(4)
current valuations. the Averages have recouped almost all
their October to December loss and appear on their way to regaining the rest. Since they were grossly overvalued [as
determined by my Valuation Model] in October, they are now just slightly less
grossly overvalued.
However,
helping valuations: judging by the initial week of earnings reports, it seems
that the Wall Street analyst community went a bit overboard in downgrading
first quarter profit expectations. Many
stocks are beating estimates and beating them by a decent margin. If this turns out to be the rule, the year
end earnings forecasts will likely rise and that should help valuations---or at
least 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 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 4/30/19 14132
1738
Close this week 26412
2907
* 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