The Closing Bell
5/11/19
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 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 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 positive though it was meager and there were no primary
indicators: above estimates: weekly mortgage and purchase applications, month
to date retail chain store sales, the March JOLTS report, March wholesale inventories/sales,
the March trade deficit, April CPI and PPI; below estimates: weekly jobless
claims, March consumer credit; in line with estimates: none.
I rate the week
a plus. Score: in the last 187 weeks, sixty-two
positive, eighty-four negative and forty-one neutral.
The data from
overseas this week continued weak, even from China. So, no help there for our own economy.
[a] March EU
retail sales were slightly above estimates; the April EU composite and services
PMI’s were lower than anticipated; the EU reduced its 2019 economic growth
forecast; March German factory orders and the April construction PMI were below
forecasts while industrial production was above; March UK GDP and construction output
were below projections while industrial output and Q1 business investment were over,
[b] the April
Caixin composite and services PMI’s were below expectations; the April trade
balance shrunk markedly; CPI was in line: PPI was hotter than anticipated; loan
growth was flat and social spending declined significantly,
[b] March February
Japanese household spending and income were below estimates..
Developments
this week that impact the economy:
(1)
trade: reciting the public negotiations between Trump
and Xi this week would sound like an Abbott and Costello routine. The questions are [a] how much of this public
negotiating is posturing prior to agreeing to a deal? and [b] will the deal include
meaningful reforms in Chinese industrial and IP theft policies? And I have no
clue as to the answer.
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 so.
On
Friday, the talks ended, no deal, the Chinese went home, no new talks are scheduled
but hope springs eternal.
After
the Market close, Trump started process to raise tariffs on remaining $300
billion of Chinese exports to US.
(2)
the increasing tensions with Iran. While I am not even going to speculate about
a shooting war, lots can happen short of that which could still drive oil
prices higher---which, in turn, would be yet another drag on economic growth. I have no idea what the odds are of any such
development, I am simply posing this as a potentially significant risk to the
global economy.
(3)
lost in the shuffle this week was the Fed’s trial
balloon regarding a potential change in the execution of any future QE---which
would basically entail buying US Treasuries only out to a one to two year
maturity with the purpose of pushing down interest rates in that section of the
yield curve in hopes of stimulating additional loan creation.
The good
news is that the change from buying long to short maturities insures the automatic
run off of any build up in the Fed’s balance sheet. The bad news is that the Fed is still trying
implement policies that can be used when the stock Market demands it.
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. However, I don’t see
how that number 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.
In addition, the Goldilocks
composition of the GDP number (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 (25942,
2881) had yet another roller coaster day, but this time ending higher on the
day after a huge early decline. Both
charts remain strong; and importantly, the S&P has closed its April 1st
gap up open---which is a technical plus.
In addition, while both indices are building very short term downtrends,
they closed right the upper boundaries of those trends. If they successfully challenge them, then I would
think another go at their all-time highs is likely.
The VIX plunged
16%, putting it back below both its 100 DMA (which reverted to support on Thursday;
but I am voiding that. It remains resistance.)
and 200 DMA, negating Tuesday’s break (so, it too remains resistance). Though it is still in a solid very short term
uptrend, Friday’s dramatic plummet supports a more optimistic view on equities.
The long bond was
off 1/8 %, but is still above both MA’s, in a very short term uptrend and has
made a higher high bouncing off the lower boundary of that uptrend.
The dollar was down a penny, continuing this
week’s almost stationary price action.
Its chart remains quite positive; though there is still a gap up open
below that needs to be filled.
GLD
was up 1/8 %. Its chart remains broken and,
on a technical basis, gold has not fulfilled the downside objective set up by January
to April head and shoulders formation. On
the other hand, it finished right on the upper the upper boundary of its very
short term downtrend. A break above that
resistance would clearly be a plus.
Bottom line: I
noted Friday morning that (1) the S&P closing the April 1st gap
up open and (2) the VIX declining on a big down day [Thursday] were both
positives and pointed to some upside bias to stock prices. With it ending right on the upper boundary of
its very short term downtrend, we are about to see just how positive that will
turn out to be.
The pin action
in the dollar continues to point at a stronger economy/higher rates; but yesterday
the long bond and gold again said otherwise.
However, all would qualify as safety trades---which would not be surprising
in the current environment.
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. Given the [a] surprisingly upbeat Q1 GDP
report, [b] dataflow of the last month and [c] the markedly better first
quarter earnings season, it seems highly probable that our economy is starting
to perform better. On the other hand, a
prolonged and nasty trade war with China could put a damper on both consumer sales
and business investments. So, not only am I waiting for more current
datapoints to confirm the above factors but also for some clarity on trade
before making any upward revision of my economic growth outlook.
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. So, any upgrade to my forecast will likely be
minor and short in duration.
An initial calculation on the impact of new tariffs on both
the US and Chinese economies.
In short, the economy is a mild 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. 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. And
nothing happened this week to change that.
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, 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.
With the
suspension in trade talks and the ramp up of additional tariffs, analysts have
to start factoring in the impact into their economic and profit growth
estimates of what a longer term continuation of a trade war would mean. They may not change them at this point; but
they have to be prepared for such an eventuality---and it would almost assuredly
be negative.
(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. I believe that Averages are grossly
overvalued [as determined by my Valuation Model].
Remember that
the earnings assumption in the Model is a ten year time weighted moving average. So even if the better than anticipated Q1
data is real, it would have only a fractional effect on the Model’s valuation
equation.
On the other
hand, if it turns out to be the rule for the rest of the year, then Street 2019
earnings forecasts will likely rise and that should increase their valuations. Conversely, fallout from a trade war would,
at the very least, put a damper on any expectations for an acceleration in economic/corporate
profit growth.
All that
said, 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.
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