Saturday, August 24, 2019

I forgot to mention that I am taking next week off. Back 9/3

The Closing Bell


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%


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%

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. 

            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.


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

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


The Market

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.


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.


            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.



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
Home Depot (NYSE:HD) declares $1.36/share quarterly dividend, in line with previous.
Medtronic (NYSE:MDT) declares $0.54/share quarterly dividend, in line with previous.


   This Week’s Data


            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.


            August EU consumer confidence was -7.1 versus forecasts of -7.0.

            July Japanese CPI was reported at +0.5%, in line.


            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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