An Analysis of Daily Events that Impact Your Money
Saturday, August 24, 2019
The Closing Bell
8/24/19
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 Uptrend 23490-33730
Intermediate Term Uptrend 14513-30732
(?)
Long Term Uptrend 6849-30311(?)
2018
Year End Fair Value 13800-14000
2019 Year End Fair Value
14500-14700
Standard & Poor’s 500
Current
Trend (revised):
Short Term Uptrend 2573-3473
Intermediate
Term Uptrend 1383-3193
(?) Long Term Uptrend 937-3217 (?)
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. Not much data this week, but what there was,
was mixed: above estimates: month to date retail chain store sales, weekly jobless
claims, the August Kansas City Fed manufacturing index, July leading economic
indicators; below estimates: weekly mortgage/purchase applications, July new
home sales, the August flash manufacturing, services and composite PMI’s; in
line with estimates: July existing home sales.
The primary indicators were also
mixed: July leading economic indicators (+), July existing home sales (0), July
new home sales (-). I am rating this
week a neutral. Score: in the last 201 weeks,
sixty-six were positive, ninety negative and forty-five neutral.
http://www.capitalspectator.com/will-consumers-and-services-keep-the-us-out-of-recession/#more-12698
While I was elated by the strong
earnings and guidance that major retailers reported this week, that was offset by the
dismal August PMI’s, another inversion in the yield curve and a blow up in the
US/China trade dispute. That leaves the
yellow warning light flashing.
And.
Overseas, the stats were slightly positive, a
welcome respite in an otherwise lengthy negative
trend. But that is not enough to alter
my opinion that the global economy is a drag on our own.
[a] the
July German PPI ran hotter than estimates, the August flash manufacturing, services
and composite PMI’s were above estimates; August UK industrial orders declined
less than consensus; June EU construction output, July CPI and August consumer
confidence were disappointing while the August flash manufacturing, services
and composite PMI’s were above expectations,
German companies brace for recession.
So does German
government.
[b] the
July Japanese trade deficit was larger than anticipated; the August flash manufacturing
PMI and the June All Industry Index was lower than expected while the August
flash services and composite PMI’s were higher; July CPI was, in line.
Developments this week that impact the economy:
(1)
trade: it was a wild week on this front,
[a] first, Trump made another concession
to the Chinese, giving Huawei a 90 day reprieve to conduct business with US
companies,
[b] then not only did the
Chinese do nothing in return but they instituted tariffs on additional US goods
and warned the US not to engage in currency manipulation.
Trump’s delay in imposing tariffs may have
been taken as a sign of weakness by the Chinese
[c] Trump responded by upping the 25% tariffs
scheduled to take effect October 1st to 30% and the 10% tariffs
scheduled to take effect September 1st to 15%.
Three points:
[a] however further this back and forth imposition
of economic penalties go, it doesn’t change the fact that Trump has more to
lose on a short term basis than China, i.e. he has a 2020 election to worry
about and Xi doesn’t. Not only that but
the harsher the confrontation becomes, the more US voters are negatively
impacted and that just ups the pressure on Trump. Which gets to the point that Trump is a lot
more likely to fold than the Chinese---which if he does, would {i} leave the
Chinese free to continue their unfair trade practices for the long term and
{ii} make all the economic agony that the global economy has had to endure
during the US/China trade dispute for naught.
In short, whatever Trump ultimately does, negative
headlines are in our future. If he
folds, the economy will improve short term but the long term economic growth
prospects are negative. If he hangs
tough, the economy will continue to experience a short term drag on growth but
the longer term outlook improves.
[b] this battle has reached the stage that
it may start impacting the general confidence level of even those businesses that
are not affected by China trade. If so,
then their decisions to invest or hire could be delayed; and that is not going
to help our growth prospects,
[c] on Friday, the Chinese/Trump trade headlines
pushed the Powell speech on to the back page.
As you know, I have recently been questioning the strength of the Fed/Market
co-dependency. The point here is that if
the trade disputes start to impact investor sentiment and Fed can’t rescue the
Market with another rate cut, the Fed/Market connection could be weakened. As you know, my thesis is that once that
linkage breaks, stocks will be on their way to Fair Value---a lot lower as
computed by my Valuation Model.
(2) fiscal
policy: We got another great piece of
news from the congressional budget office this week, predicting that the budget
deficit would exceed $1 trillion annually in 2020 and beyond. All thanks to a tax cut which wasn’t needed
and a deficit expanding budget deal recently agreed to by both parties. Just a reminder that the national debt has reached
the level at which research shows it becomes a drag on economic growth. This is not a plus for long term secular growth.
(3) monetary
policy: there was lots of activity this week; but when all was said and done, there
was little clarity about future policy moves.
[a] the minutes of the last FOMC meeting were
released. It proved a nonevent because
the meeting was before Trump imposed the latest round of tariffs. So, the generally accepted assumption was
that the narrative would have been much different, if the meeting had occurred
after the Donald’s action,
[b] the annual Jackson Hole conference took
place Thursday and Friday. Overall the tone,
in my opinion, was mixed. Several
regional presidents spoke and implied that a rate cut was not in order in September. In Powell’s presentation, he sounded more
dovish. But it is clear from both the
FOMC minutes and the discussions in Jackson Hole that there is disagreement in
the ranks---making the outcome of the September meeting uncertain.
[c] if that isn’t enough for the dedicated
Fed watchers, the Jackson Hole narrative was completely swamped by the news of
the Chinese tariffs and Trump’s counterpunch.
The bottom line being that not only does it
appear that the Fed is losing control of interest rates to the Market, it may
be losing control of the entire economic narrative to trade---at least in investors’
minds. {I continue to argue it never had
control of the economy, otherwise, growth wouldn’t have been subpar after $4
trillion in QE and multiple rate cuts.}
One other item should be included in this
discussion: this week, the ECB released the minutes from its last meeting which
showed that it is ready to lower rates and ramp up bond purchases. Which brings to mind the definition of
insanity. The ECB’s QE put our own to
shame and, as you know, most EU interest rates are negative. And yet, and yet, its economy is in worse
shape than our own AND the ECB want to do more.
(4) global
hotspots. the Middle East hostility remains contained though the Iranians threatened
to close all oil shipping lanes if they are not allowed to export their own
oil.
Unfortunately, the number of global trouble
spots is growing:
[a] the unrest in Hong Kong; while
ostensively a battle over Hong Kong government’s right to deport troublemakers
to the Chinese mainland, it has become intermeshed with the US/China trade skirmish
in that the Chinese are accusing the US of interference,
[b] Italy is again on the verge of
political/economic collapse. By itself,
I don’t consider that a big problem; but to the extent that it would cause
disruptions in the EU banking system, it could precipitate a much larger
problem. And nothing says extra pressure like a hard
‘Brexit’,
[c] Japan and South Korea escalated their dispute,
refusing to share intelligence.
[d] the Brexit deadline is approaching and it
looks a like a no-deal Brexit is the highest probability outcome,
Bottom
line: on a secular basis, the US economy
is growing at an historically below average rate. The principal cause of the restraint being 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 US economy continues to limp
along which is not surprising given the lethargic global economy and the
continuing trade wars. Indeed, this
progress is a miracle given all the aforementioned fiscal and monetary headwinds. That said, the yellow warning light is still flashing.
The
Market-Disciplined Investing
Technical
The Averages (25628,
2847) were hammered yesterday and it occurred on noticeably higher volume and very
poor breadth. The Dow ended below its
100 DMA (now resistance) and below its 200 DMA (now support; if it remains
there through the close next Wednesday, it will revert to resistance). The
S&P finished below its 100 DMA; this is the ninth time it has crossed this
level in the last fifteen trading days. Clearly,
it is acting as a magnet. I continue to withhold a support/resistance call. It closed above its 200 DMA (now support).
The VIX rose 19 %,
ending above 100 DMA (now support) voiding Wednesday’s break and above its 200
DMA (now support).
The long bond popped
1 5/8 %, finishing above both MA’s and in uptrends across all timeframes. It continues to be overextended.
The dollar declined
½ %, but still closed in short and long term uptrends and above both MA’s. It has that minor resistance level at its
July 31st high.
Yuan crashing
So is the dollar
Gold soared 2 %, making
a five year high and is now within very short term and short term uptrends and
above both MA’s. However, it still has the
gap up open from two weeks ago which needs to be closed.
Bottom line: long term, the
Averages are in uptrends across all timeframes; so, the assumption is that they
will continue to advance. Short term, they
voided very short term downtrends but are
stuck in the trading range dating back to August 5th---though the Dow
ended right on the low.
The long bond, the dollar and gold continue
to point at the need for a safety trade.
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 economy continues to struggle forward against
multiple headwinds. As you know, the
dataflow over the last couple of months has raised my concerns that it may
ultimately succumb to these forces---to such an extent that I started the
yellow warning light flashing. Not helping
matters is the recent surge in bond, dollar and gold prices; all of which point
to a flight to safety.
My sluggish growth
forecast is a neutral but that could change if the stats deteriorate further.
(2)
the [lack of] 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, that ain’t
happenin’, Indeed, conditions only got
worse this week with the Chinese raising tariffs on US additional goods and
Trump responding by upping the tariff rates on those already or about to be
imposed. Not helping this is [a] the Chinese
accusing the US of complicity in the Hong Kong riots, [b] the US sailing a warship
through the Straits of Taiwan, [c] the US defending Vietnam’s mineral rights in
the South China Sea and [d] Japan requesting additional US air support over
fear of Chinese aggression.
As you know, I
believe that the Chinese will not even consider making any compromise before
the 2020 elections, if ever. So, the
magnitude of this quarrel will likely continue to be determined by Trump’s
actions. If he wants to get more
contentious, it will and vice versa. To
be clear, I still believe that what he is doing is the right course for the
economic long term. But short term, pain
is the word. The only question is how
much.
(3)
the resumption of QE by the global central banks. That is now occurring worldwide. This week, the ECB made it clear it was contemplating another big dose
of QE; and the US bond market continues to price in multiple cuts in the Fed
Funds rate this year.
I have maintained for some time that the key
to the Market is monetary policy, more specifically, its co-dependency with the
Fed. But this week, investors again
appeared to begin to question their faith in its ability to navigate the US
economy through an increasingly trying economic climate. While I am not suggesting a change the
paradigm of central bank/stock market co-dependency, the risk is heightening
that this could occur.
(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; though to be fair, Q2 earnings season was better than expected---including
the retail sector, [b] long term interest rates are falling, suggesting that a weaker
economy, and perhaps even recession, may be in our future, and yet [c] equity
prices are still showing little sign of challenging their long term upward
momentum.
The only explanation that I have for this is in
the context that the global central banks are all in on their support of equity
markets. For the last decade, they have measured their success by the
performance of the stock Market, acted accordingly and been victorious. As long as that is the paradigm, fundamental
economics and valuations will likely remain irrelevant. But as I noted over the last two weeks, that
may be changing.
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.
As you know, I recently 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.
Friday, August 23, 2019
The Morning Call---Overnight, the Chinese up the ante
The Morning Call
8/23/19
The
Market
Technical
The Averages (26252,
2922) closed mixed yesterday (Dow up, S&P down). Volume was up fractionally; breadth improved. The
Dow ended below its 100 DMA (now resistance) and above its 200 DMA (now support).
The S&P ended above its 100 DMA for a second day. But given its see saw action above and below
this resistance point, I continue to withhold a support/resistance call. It finished above its 200 DMA (now support).
The VIX rose 5 ½ %,
but still finished below its 100 DMA for a second day (now support; if it
remains there through the close today, it will revert to resistance) but above its
200 DMA (now support).
The long bond was
down 5/8 %, but ended above both MA’s and in uptrends across all timeframes. It continues to be overextended but is
working off that condition.
And.
The dollar declined
two cents, closing in short and long term uptrends and above both MA’s. It still has that minor resistance level at its
July 31st high.
Gold was off ¼ %, but finished within very short term and
short term uptrends and above both MA’s.
However, it still has the gap up open from two weeks ago which needs to
be closed. And like TLT, it remains overbought
but becoming less so.
And
Bottom line: long term, the
Averages are in uptrends across all timeframes; so, the assumption is that they
will continue to advance. Short term, they
voided very short term downtrends but are
having problems confirming a move above their 100 DMA. So, they remain in the congestion range dating
back to August 5th.
The mixed pin action of the last couple
of days notwithstanding, the long bond, the dollar and gold continues to point
at the need for a safety trade.
Thursday in the charts.
Fundamental
Headlines
Lots of data released
yesterday. In the US, they were mixed: July
leading economic indicators, the August Kansas City Fed manufacturing index and
weekly jobless claims were better than expected while the August flash
manufacturing, services and composite PMI’s were disappointing.
Adjusting the
recession indicators.
Morgan
Stanley increases the odds of recession.
Overseas,
August EU consumer confidence, the June Japanese All Industry Index and the
August Japanese flash manufacturing PMI were below estimates; however, the August
Japanese flash services and composite, the August EU and German flash
manufacturing, services and composite PMI’s were ahead of forecasts.
The Bundesbank
poured cold water on hopes of German fiscal stimulus.
***overnight,
China announces tariffs on additional US goods.
And threatens US
over currency intervention.
There
were several headlines out of the central banks:
(1)
in CNBC interviews
at the Jackson Hole conference, two regional Fed presidents [Harker, George] delivered hawkish messages on monetary policy.
(2)
on the other hand, the ECB released the minutes from
its last meeting which showed that it is ready to lower rates and ramp up bond
purchases.
Larry Summers says
central bankers are impotent.
Bottom line: the dataflow
has been erratic this week. In the US,
we got upbeat retail numbers on Wednesday, then some really disappointing PMI
stats yesterday---which in combination keeps flashing yellow warning light on.
Overseas, the data
has been poor for the last couple of months; but yesterday, there were solid
PMI numbers from both Japan and Europe. While
the latter could be the first sign that the global economy is recovering, I need
a lot more of the same before I will stop thinking that it will cease being a
drag on our economy.
The central
bankers continue to demonstrate that they are clueless. The ECB is doing what it does best which is
throwing everything including the kitchen sink at a sick European economy that hasn’t
gotten any better in the past and will likely not get any better in the future
whatever it does. On the other hand, it
has been a master at driving interest rates to negative yields which is the
essence of asset mispricing.
The Fed doesn’t
know whether to sh*t or go blind. The constant
uncertainty captured in its narrative and actions reveals either its ineptitude
or its knowledge that QE was a monstrous mistake and that it has no idea how to
get out of its self-inflicted choiceless corner. Its only game now is trying to keep alive the
Fed/Market co-dependency, praying that no one notices the emperor’s new clothes. When, as and if that game ends, equities will
likely return to Fair Value which, according to my Model, is considerably
lower.
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
July
leading economic indicators rose 0.5% versus consensus of 0.2%.
The
August flash manufacturing PMI came in at 49.9 versus estimates of 50.5; the
services PMI was 50.9 versus 52.8; and the composite PMI was 50.9 versus 51.7.
The
August Kansas City Fed manufacturing index came in at -2 versus expectations of
-10.
International
August
EU consumer confidence was -7.1 versus forecasts of -7.0.
July
Japanese CPI was reported at +0.5%, in line.
Other
Lower
mortgage rates are not necessarily a plus for the economy.
Latest
on Brexit.
What
I am reading today
The
illusion of explanatory depth.
Friday
morning humor---if only.
The
last flip of the earth’s magnetic core took 22,000 years.
The savior of China.
The
importance of Hong Kong to mainland China.
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for Survival’s website (http://investingforsurvival.com/home)
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