The
Closing Bell
5/25/19
I am off to the beach. Back
6/3. Have a great holiday.
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 14389-30580
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 1365-3175 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 overwhelmingly negative: above estimates: weekly
jobless claims; below estimates: April new home sales, April existing home
sales, month to date retail chain store sales, April durable goods orders, the
April Chicago national activity index, the May flash manufacturing, service and
composite PMI’s, the May Kansas City Fed manufacturing index; in line with
estimates: weekly mortgage/purchase applications.
As were the primary
indicators: April hew home sales (-), April existing home sales (-) and April
durable goods orders (-). I rate the
week a negative. Score: in the last 189 weeks,
sixty-two positive, eighty-five negative and forty-two neutral.
I noted last
week that while the April stats were OK though not inspiring, the early May
datapoints were positive and offered some hope that the better numbers from the
first quarter were continuing. This week’s
terrible April numbers along with the May flash PMI’s as well as the May KC Fed
manufacturing index clearly calls that hope into question; and it provides
little incentive to mark up my economic growth forecast.
The data from
overseas this week was a bit mixed, with somewhat improved stats from Europe
and disappointing numbers from Japan. So,
no help but nothing really negative there for our own economy.
[a] April German
PPI was higher than expected, Q1 GDP was in line; April UK CPI, PPI and budget
deficit were less than forecast while retail sales were above; the May EU flash
consumer confidence index declined less than anticipated while the
manufacturing, services and composite PMI’s were below estimates,
[b] March Japanese
machinery orders were above estimates while its all industry activity index was
below; its April trade balance shrank dramatically and core inflation was in
line; its May flash manufacturing PMI showed contraction.
Developments
this week that impact the economy:
(1)
trade: this week again witnessed the back and forth of
US/Chinese trade threats.
[a] following
Trump’s ban on doing business with Huawei, the Chinese really turned up the volume
calling for a second ‘long march’ and threatening to cut off supplies of rare
earth metals to the US,
[b] the largest
UK cell phone company, Microsoft, Toshiba and several Japanese companies joined
the ban on Huawei products,
[c]
Trump then delayed his blacklisting of Huawei for three months, giving the
Chinese {and the Market} a brief reprieve,
[d] later,
Trump proposed blacklisting other Chinese high tech companies.
***overnight.
Two
observations:
[a] with
numerous other countries joining the blacklisting of Huawei, {i} Trump’s
leadership appears to be giving the rest of the world the cojones to send the
same message---Chinese industrial policy and IP theft is unfair and {ii} it
would seem like the Chinese would be getting the message,
[b] a
reminder that it was the Chinese that trashed the US/China trade deal in the
eleventh hour, not the US. I mentioned
before that it is a negotiating technique for one party to wait until the last
minute and alter the terms of the deal in the belief that the other party wants
the deal so much it will accept any changes.
That may be what occurred in this instance.
I will
repeat my bottom line: [a] we can’t believe a thing that gets said by either
party, [b] no deal is better for long term US secular economic growth than a
crumby deal, but [c] short term, a crumby deal will be better for the economy than no deal, [d] if
the new tariffs are going up, economic and corporate profit expectations will
likely start to be reduced with the concomitant impact on equity valuations and
[e] hoping for a deal, won’t make it so.
More estimates about the
cost of tariffs to the average American.
(2)
the Fed released the minutes from its latest FOMC
meeting. ‘Patience’ remains the watch
word. In this case, the Fed indicated
that it believes that inflation will move higher as a result of improving economic
activity but that it would likely take no policy actions for six to nine months
even if inflation rising. It also said
that at the end of the six to nine month
period, if inflation hasn’t increased, it will consider cutting rates. No
mention of policy moves prompted by Mr. Market---which we know is the only thing
that counts.
We also
know that the Fed has always and forever been wrong which likely means that the
economy is slowing, inflation is dead and it may have to lower rates before the
end of the six to nine month ‘patient’ period.
The dollar funding problem is contributing
to deflation impulse.
(3)
following a [brief] meeting with Pelosi and Schumer,
the Donald said no infrastructure spending unless the investigations
stop---which likely means no infrastructure spending. And that is good news, since the last thing
our economy needs is another $2 trillion in debt to service. You know my bottom line: too much debt inhibits economic growth and the US already
has too much debt even if it is increased through investment on productive
assets.
(4)
the increasing tensions with Iran. The hot air seems to be coming out of this
balloon which is clearly good news.
(5)
I mention the solvency risks in the global financial
system occasionally. This week China had
to bail out the first bank in 30 years.
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 (running monstrous deficits at
full employment adding to too much debt) and monetary (pushing liquidity into
the financial system that has done little to help the economy but has led to
the gross mispricing and misallocation of assets) policies.
Cyclically, the
better than expected Q1 GDP number and first quarter earnings along with the
initial stats from April and May indicated that the US economy might be
starting to re-accelerate which would clearly be good news. However, this week’s really poor April data and change of trend in the May
numbers from upbeat to downbeat suggests that it is too soon to be revising my
economic growth forecast. Even if the data
were to begin improving again, I don’t see how that they could move markedly
higher while the rest of the world languishes, trade wars inhibit commerce and
the US continues to pursue an extremely irresponsible expansive fiscal policy.
The Market-Disciplined
Investing
Technical
The Averages (25585, 2826) rallied yesterday on
very light (pre-holiday) volume and improving breadth. The Dow finished above both MA’s, negating
Thursday break of its 200 DMA. The
S&P finished above both its DMA’s.
Both have now made higher lows to go along with the lower highs marked
earlier in the week. Both have gap down
opens which now need to be filled. In short,
a slight improvement in the technical picture.
But the indices are now in a range bordered by lower highs and higher
lows. How they break out of that range
should provide some directional information.
The VIX fell 6 ¼ %, but remained above its 100
DMA for a second day (now resistance; it if remains there through the close next
Tuesday, it will revert to support) and its 200 DMA (now resistance).
The long bond was up again, finishing above
both MA’s, in a very short term uptrend and at another two year high. The next resistance level is its all-time
high.
The dollar declined 3/8 %, continuing to fall
away from its ten year high. Technically speaking, it is understandable
given (1) the strong resistance posed by a ten year high and (2) the magnetic
draw of those two unfilled gap up opens below current price levels. That said, the chart remains quite strong.
GLD was up. Its chart remains broken---its 100 DMA remains
resistance; plus, it still hasn’t fulfilled the downside objective set by that
recent head and shoulders formation.
Bottom line: investors appear undecided on
direction, illustrated by the recently set lower highs and higher lows. If they ultimately make a higher high, then the
odds increase of a challenge of their all-time highs. If a lower low is made, the probability of a double
top will go up.
Thursday and Friday’s pin action in UUP, TLT
and GLD points to a weaker economy.
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. The [a] surprisingly upbeat Q1 GDP report and
[b] the markedly better first quarter earnings season point to an improving
economy. However, the April data has
gone from neutral to negative and the new stats from May have gone from
positive to neutral at best. In
addition, a prolonged and nasty trade war with China could put a damper on both
consumer sales and business investments.
So, I am hesitant to make any upward revision in my economic growth
outlook until there is a bit more clarity.
It is
important to remember that my current outlook is for sluggish growth, not
recession. And that is predicated on the
restrictive impact of too large a deficit and national debt. That is only getting worse; though, clearly,
if the $2 trillion infrastructure gets deep sixed, that would make this factor
less negative.
In short, the economy is a slight plus but subject to change.
(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.
The
Donald’s established pattern in any of his ‘art of the deal’ negotiations has
been to bloviate on the unfairness of a current state of affairs, make all
kinds of threats then settle for a slight improvement. So far the US/Chinese talks have mostly fit
the prior model. However, to date, he
has shown little inclination to settle for slight improvement and every intent
of going to the mat in order to achieve a fairer trade regime with China. In this case, going to the mat could be a
long, drawn out affair given the past intransigence of the Chinese.
Of
course, Trump has been able to keep the rhetoric hot because the Market has
been giving him the leeway to do so. But the question that I ask almost every
day, is given Trump’s preoccupation with the level of stock prices, if the
Market starts to plunge, how large a decline will he tolerate before folding
[the Trump ‘put’]?
And it
seems like the Market has begun to struggle with just that question, that is,
[a] it is questioning whether the US/Chinese trade war will be a brief affair
and [b] hence, it starting to assess the
economic impact of a prolonged trade war which would force a marked lowering in
economic growth and corporate profit estimates.
If so,
then the answer to the question {is the Trump ‘put’ still in place?} clearly has
Market implications. However, I have added a second question, if it is, will
it still work? The answers to those two
question could have a short term impact on equity prices.
(3)
the resumption of QE by the global central banks. Of
course, there is more than one ‘put’ out there.
The other is from the Fed; and it is much more potent. As we know, the Fed claims that its policy is
determined by economic developments; but it has proven time and again that what
really matters is the Market. So, even
if the Trump ‘put’ fails, my assumption is that the Fed will have the Market’s back.
If QEII,
QEIII and Operation Twist are any guide, this should be a plus for the equity
prices. The question here, is when will
investors realize that a Fed run by academics with an inflated view of their
ability to control the economy has been a disaster? I have no clue for the answer; but until it
occurs, the assumption has to be that the Market has limited downside. That said, history says that nothing goes on forever.
(4)
current valuations. I believe that Averages are grossly
overvalued [as determined by my Valuation Model].
As long
as the global central banks and our president continue to measure their success
by the performance of the stock Market and act accordingly, valuations will likely
remain irrelevant.
As
prices continue to rise, I will be primarily focused on those stocks that trade
into their Sell Half Range and act accordingly. However, there are certain
segments of the economy/Market that have been punished severely (e.g. health
care) with the stocks of the companies serving those industries down
30-70%. I am compiling a list of
potential Buy candidates that can be bought on any correction in the Market;
even a minor one.
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.
