The
Closing Bell
6/29/19
I am off again to the beach for the July 4th holiday. Back on 7/8.
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 14468-30657
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 1373-3183 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 was overwhelmingly negative this week: above estimates: May pending home
sales, May personal income, June consumer sentiment, finalQ1 corporate profits;
below estimates: the April Case Shiller home price index, May new home sales,
June consumer confidence, month to date retail chain store sales, the June
Chicago Fed national activity index, the June Chicago PMI, the June Dallas,
Richmond and Kansas City Feds’ manufacturing indices, May wholesale
inventories/sales, the May trade deficit, the final Q1 PCE and core PCE prices;
in line with estimates: weekly mortgage/purchase applications, May personal
spending, May durable goods/ex transportation orders, final Q1 GDP growth, May
PCE price index.
On
the other hand, the primary indicators were slightly positive: May new home
sales (-), May durable goods/ex transportation orders (0), final Q1 GDP growth
(0), May personal spending (0) and May personal income (+), final Q1 corporate
profits (+). The overwhelming amount of
negative data outweighs a slightly better showing in the primary indicators. I rate the week a negative. Score: in the last 194 weeks, sixty-three positive,
eighty-eight negative and forty-three neutral.
As you know, the
recent trend in the numbers has been increasingly downbeat. While I am not changing my forecast, I am
starting the yellow light flashing. Another
three to four weeks of poor stats and a recalibration will be likely.
The overseas
data was slightly negative though the numbers out of Japan improved---still, not
that helpful for our own economy.
[a] June EU business confidence, economic
sentiment, industrial sentiment and core CPI were disappointing, while consumer
confidence and CPI were in line; June German consumer confidence was below
consensus; Q1 UK GDP growth was in line while business investment was below
expectations,
[b] YoY Chinese
industrial profits fell less than anticipated,
[c] the April Japanese leading economic indicators,
May CPI, May industrial production and June retail sales were above estimates;
core CPI was in line; and May construction orders and housing starts were below
projections.
Developments
this week that impact the economy:
(1)
trade: the US/China trade narrative this week was
confusing with US sounding somewhat upbeat while the Chinese continued to rail
against tariffs and adding preconditions for resuming trade talks. Of course, nobody has a clue as to what will
happen, including me---but I am sticking with my thesis that the Chinese have
no incentive to negotiate until, at least, after the 2020 elections---which
leaves Trump with two short term options, fold or hang tough. The former would likely be a short term
economic/Market plus; the latter not so much,
***overnight,
Trump/Xi agreed to a ceasefire. That
doesn’t mean things will improve; they just won’t get worse.
(2)
monetary policy: both Bullard and Powell made speeches
this week, both sounding more hawkish
than was Street consensus---citing less concern about the economy [and the US/China truce should help]. To be clear, they say that they are worried,
just not as much.
That
said, the Fed officials economic narrative is more hope than fact anyway. As I document on a continuation basis, the
economy is not as healthy as they allege.
It never has been. But it needs
to appear to be in order to rationalize their misdirected, ineffective monetary
policy of the last ten years which did little to boost the economy.
Of
course, the above is all nonsense because what the Fed is really focused on is
the Market; and since stock prices are up, the need for a decline in rates has
diminished. And as long as that paradigm
exists, the mispricing and misallocation of assets will only get worse as will
the ultimate resolution of this problem.
(3)
tensions in the Middle East remain at a slow boil. The
good news is that this week, the US/Iran standoff was just a war of words. The
bad news is that the threat of violence remains which if it occurs could lead
to severe economic consequences in a worst case scenario. Remember a large
percentage of global oil supplies transits the Straits of Hormuz, which is
bordered on one side by Iran. Any
military action that would choke off those supplies would be a negative for the
global economy.
Trump
appears ready to take on the EU if they violate Iranian sanctions.
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 stronger
than expected Q1 GDP dataflow seems to have faded which is not surprising given
the lethargic global economy and the continuing threat of trade wars. Indeed, the recent dataflow has been negative
enough that I have started the yellow light flashing for a possible downgrade
in my forecast.
The Market-Disciplined
Investing
Technical
The Averages (26599, 2941) rallied yesterday, as
they continued to work off their overbought condition without any kind of major
correction---at least, so far. They
remained below their all-time highs, but, as you know, I have suspended a
directional call on the short term trend.
They are above both moving averages and in intermediate and long term
uptrends.
At the moment, I am waiting for the indices to fill
last Tuesday’s gap up opens and then, see how they trade following that. My current assumption is that the momentum is
to the upside, that those gaps will be filled and the upward trajectory will be
resumed. However, I am bothered by the lack of volume (though it was up big on
Friday, spawned by the end of quarter institutional window dressing), uninspiring
breadth and the failure of other major indices to make new highs.
VIX fell 4
3/8%, ending right on between its 100 DMA (now support), the lower bound of the
narrowing gap between it on the downside and the upper boundary of its very
short term downtrend on the upside. A
break of one of these levels should provide directional information.
TLT was down nine cents, but still closed above
both MA’s (now support), in a very short term uptrend and very close to its
twenty year high. As I noted previously,
that high represents major resistance; so, I expect more backing and filling
before another attempt is made to break above it---if indeed there is such an
attempt.
The dollar declined two cents, finishing below its
100 DMA (now resistance) but in a short term uptrend, above its 200 DMA (now
support) and still needs to close last Thursday’s gap down open.
GLD rose ¼%, finishing in short and intermediate term uptrends and above
both MA’s (now support). However, there
is a major gap up open lower down---which needs to be filled.
Bottom
line: the Averages continued to
consolidate after the big run that started in early June. In the process, they got very overbought, so the
current pin action isn’t surprising. In
fact, it is a plus that the recent backing and filling has been so tame. Still more is needed to close those gap up
opens lower down. Nonetheless, I
continue to believe that momentum remains to the upside; though clearly, that
call is less certain now.
It is remains
disconcerting that volume is low (versus high volume in bonds, the dollar and
gold which are pointing to recession/or the need for a safety trade), breadth
is weakening, other indices have failed to confirm Monday’s breakout of the
Dow/S&P and the VIX has been acting
unconventionally for the last couple of weeks.
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. After an upbeat start to the year, the economy has
settled back into the doldrums and it isn’t being helped by a slowing global
economy, the fallout from the US/China trade skirmish and the burden of the
carrying costs of too large a deficit and national debt.
The big
question is how the slowing economy will impact second quarter earnings which
will begin being reported soon.
My sluggish growth forecast is a neutral but that could
change if the stats continue to deteriorate and/or the upcoming earnings season
proves disappointing.
(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.
At the
moment, the elephant in the room is China.
While investors have been cautiously optimistic [and they were correct
for having done so], I believe that the Chinese are just buying time and that ultimately,
they will not even consider making any compromise before the 2020 elections, if
ever. If true, then Trump faces more
than a year of potential bad news on Chinese trade. And given that he measures his success by the
level of the Market, the question is, will he fold if the Market declines in a
meaningful way?
That may
be a moot point right now, but it is a long way to November 2020 and much can
happen.
If the
Donald were to fold, the best scenario would be for US/China trade to return to
prior levels for the short term and the continued cheating by the Chinese for
the long term. In other words, nothing that
would happen to improve corporate profitability or lift the valuation of
equities from their already lofty levels.
(3)
the resumption of QE by the global central banks. Fed officials suggested this week that because
the economy appeared a bit stronger than they had previously thought, they were
further from easing than they had indicated earlier. That, of course, is bulls**t. Economics have nothing to do with it. They
are as close to easing as the Market will tell them to be. At the moment, I don’t see anything that is
going to change this paradigm of central market/stock market co-dependency.
That makes
no sense to me but that is what we are stuck with. Unfortunately, I have no clue when this model
changes; but Herb Stein once said, something that can’t go on forever, won’t.
The Fed ‘put’ paradox.
(4)
current valuations. I believe that Averages are grossly
overvalued [as determined by my Valuation Model].
At the moment,
[a] the US economic numbers are not that great, the global stats are worse and,
absent a US/China trade deal, are not apt to get better---all of which augurs
poorly for corporate profits, [b] long term interest rates are plunging and the
yield curve is flattening, both suggesting that a weaker economy, and perhaps
even recession, is in our future, and yet [c] equity prices are at their
all-time highs. The only explanation
that I have for this is in the context that the global central banks measure
their success by the performance of the stock Market and act accordingly. As long as that is the paradigm, fundamental
economics and 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. This week, I added AbbVie to the Dividend
Growth and High Yield Buy Lists.
Bottom line: fiscal
policy is negatively impacting the E in P/E.
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.
