The
Closing Bell
6/8//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 14439-30630
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 1368-3178 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 negative: above
estimates: month to date retail chain store sales, May light vehicle sales, the
May ISM nonmanufacturing index; below estimates: weekly jobless claims, May
nonfarm payrolls, May ADP private payroll report, April construction spending,
the May ISM manufacturing and nonmanufacturing
indices, April wholesale inventories/sales, the April trade deficit; in
line with estimates: weekly mortgage/purchase applications, the May composite and services PMI’s, March/April
factory orders, Q1 nonfarm productivity/unit labor costs.
As
were the primary indicators: April construction spending (-), May nonfarm
payrolls (-), March/April factory orders (0) and Q1 nonfarm productivity/unit
labor costs (0). I rate the week a negative. Score: in the last 191 weeks, sixty-three positive,
eighty-six negative and forty-two neutral.
Given the recent
string of disappointing data, it appears that the promising Q1 beginning of the
year has now fizzled to a halt---leaving my forecast intact.
Update on big
four economic indicators.
The data from
overseas this week was a bit mixed though two global measures showed a slowing
of economic growth worldwide. So, a
neutral for our own economy.
[a] the May EU
manufacturing, services and composite PMI’s were above forecasts, unemployment
down ticked slightly while April retail sales were in line; the EU May CPI and
PPI were below consensus; Q1 EU employment and GDP growth were in line; the May
UK manufacturing PMI was well below estimates as was the May construction PMI; the
April German trade balance was less than anticipated while industrial production
was terrible; May German factory orders were stronger than forecast while the construction
PMI was disappointing,
[b] the May
Chinese Caixin manufacturing PMI was better than anticipated while the services
and composite PMI’s were less,
[c] April Japanese
household spending was less than anticipated while income was higher; the April
leading economic indicators were below estimates; the May manufacturing PMI was
better than expected but the services PMI was less,
[d] other global economic
indicators:
{i} ECB downgraded its
EU economic growth forecast,
{ii} JP Morgan’s
May global manufacturing PMI fell.
Developments
this week that impact the economy:
(1)
trade: the main headline was Trump’s Mexican standoff.
[a] short
term, it worked as {overnight} Mexican officials agreed to increase efforts to
block migration to our southern border
[b] even
so, I have to question if
{i} it
is the correct strategy to be fighting trade wars on multiple fronts. The Mexican victory aside, it almost certainly
will put business planning on hold,
{ii} using
trade weapons (tariffs) to address nontrade issues (immigration) isn’t a mistake
that will work against the US in future trade negotiations. I have already ranted over this several times
this week; so, I will end it there,
[c] all
that said, I continue to believe that the Donald’s objectives {controlling immigration;
resetting the post WWII trade/political regime} are worthy. It is some of his tactics that concern me.
Further, China continued
its stream of threats, fining Ford for antitrust violations, warning soybean
farmers that they be totally cut out of the Chinese market, threatening to
embargo rare earth shipments to the US and suggesting the depreciation of the yuan
was a possibility.
(2)
the FTC and DOJ have started investigations of Alphabet,
Amazon, Facebook and Apple for potential antitrust actions. I have no idea of their guilt or innocence. But I do know that these companies are among US’s
crown jewels in the global technology race.
A race which I remind you is one main reasons why the US is duking out
with China. I am mystified.
(3)
the Fed: the highlight of the week was Powell basically
making a Draghi-esque statement, saying that the Fed would do whatever is
necessary to keep the economy [wink, wink, the Market] growing. He also suggested that the Fed continues to believe that
it can ever expand what it considers its ‘tool kit’ to exercise control over
the economy despite the fact that its old ‘tool kit’ [QE] produced only
marginal results.
But don’t forget,
two weeks ago, in the minutes from its latest FOMC , 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
were 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.
What could
account for another quick about face in policy? Drum roll, please---a decline in stock prices,
of course; which we know is the only thing that matters. In other words, anything that Powell/the Fed
says about policy reacting to economic conditions is meaningless drivel.
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.
And (must read).
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. So, I see no need to alter my forecast.
The Market-Disciplined
Investing
Technical
The Averages (25983, 2873) had yet another gangbusters’
day yet on an ever so slight increase in
volume. At least breadth improved,
finally.
The Dow ended above its 100 DMA for a second day (now
resistance; if remains there through the close Monday, it will revert to
support) and above its 200 DMA for a third day (now resistance); if it remains
there through the close next Monday, it will revert to support. The S&P closed above its 200 DMA (now
support) and above its 100 DMA for a third day, reverting to support.
So far, so good.
The indices are pushing their way through testing multiple resistance
levels; and if Monday is an up day, all challenges will have been
successful. There remains only one minor
resistance level overhead; and if that falls, then it will be on to the all-time
highs---which if history is any guide, will become former all-time highs.
VIX was
actually up 2 ½ %---unusual on such a big up day in equity prices. That leaves it in a very short term uptrend and
above its 100 DMA (now support).
Importantly, it challenged both of those levels intraday and then bounced. This pin action suggests way too much
complacency. It is still below its 200
DMA for a third day (now support; if it remains there through the close on
Monday, it will revert to resistance).
TLT was up 7/8% on big volume, finishing above both
MA’s (now support) and in a very short term uptrend. It is now 17 cents away from a twenty plus
year high. If it takes out that high,
the long term trend will reset to up.
The dollar declined another ½ %, but remained in a
short term uptrend and above both moving
averages (now support). Notably, it
filled the second lower gap up open intraday, eliminating the magnetic pull of
that gap.
GLD rose another ½ %, closing within a short term
uptrend, above both MA’s (now support) and is now nearing the upper boundary of
its intermediate term trading range.
Bottom line: the indices are almost through successfully challenging
the numerous resistance levels formed during the decline off the May double top. If Monday is an up day all challenges will be
complete; and only one minor resistance level will stand between them and their
all time highs. That is the good
news. The bad news is this has all been
done on very low volume, weak breadth, a VIX that is signalling extreme
complacency and bond, dollar and gold markets that are behaving like safety
trades.
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 upbeat start to the year offered the
promise of some acceleration in sluggish US economic growth rate. Unfortunately, that promise is fading as the
world economy slows, trade wars threaten to make matters worse and the US
economy is burdened with the carrying costs of too large a deficit and national
debt.
My sluggish growth forecast is a slight plus but the odds of
an improvement have declined while those of even weaker growth increased.
(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.
However,
with the Market remaining at elevated levels, the Donald appears to be getting
more aggressive in pursuit of his stated goals---which to be sure are worthy
objectives. But in the case of China, I am
not yet convinced that he will go to the mat if stock prices are falling. I can’t
imagine the Chinese even considering making any compromise before the 2020
elections. If true, then Trump faces
more than a year of potential bad news on Chinese trade. So, the question remains will he fold if the
Market declines in a meaningful way?---which, of course, is a moot point right
now.
Further,
I don’t see anything of near term positive economic significance whatever the
outcome had been of Trump’s Mexican standoff.
If tariffs had been imposed, how would that have been good? Slower growth? Increasing distrust of any trade agreement
made with Trump? Additional uncertainty in corporate suites about making
investment decisions? And where are the
pluses in victory? Trade levels, economic
and corporate profit growth will remain basically the same as before this dust
up. Sure, it is solves a long term problem
the results of which we may be able to measure positively sometime in the
future; but how does anyone quantify that impact today for Market valuation
purposes except to say that it is a psychological plus?
(3)
the resumption of QE by the global central banks---which
soared into the spotlight this week with Powell’s Draghi-esque promise to take
whatever measures necessary to save the economy [the Markets]. The problem, of course, is that the Fed has
been, is and forever will be wrong on the economy; and it has proven that twice
in the last six months.
So, all
it has left is to react to the Markets.
And 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 a flawed
model and 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. (must read)
This is
a good historical review of Market performance following a first rate cut; however,
I would argue with the notion that the economy is in good shape.
(4)
current valuations. I believe that Averages are grossly
overvalued [as determined by my Valuation Model].
What is so
mystifying to me right now is that [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, [c] as I opined
above, the resolution to the Mexico immigration issue will do little to improve
the economy and yet [d] equity prices are rocketing toward their all-time highs.
This
makes no sense, except in the context that as long as the global central banks measure
their success by the performance of the stock Market and act accordingly---in
which case, 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.
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.
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