The
Closing Bell
8/10/19
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 2561-3460
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 and what there was, was slightly positive: above estimates:
weekly jobless claims, the June JOLTS report, month to date retail chain store
sales, June consumer credit, the July Markit service and composite PMI’s; below
estimates: light vehicle sales, the July ISM nonmanufacturing index, August wholesale
inventories/sales, July PPI; in line with estimates: weekly mortgage/purchase
applications.
There
were no primary indicators reported. I
am rating this week a positive. Score: in the last 199 weeks, sixty-five positive, ninety
negative and forty-four neutral.
Despite
this week’s positive tilt, it was just barely so. Hardly a reason to question my forecast. The yellow light is still flashing.
Overseas, the
stats were pretty dismal, especially out of the EU---not that helpful for our
own economy.
[a] June German factory orders were above estimates
but its construction PMI, industrial production and its trade balance were
below; the July German services and composite PMI were lower than expected; the
July EU services PMI was also lower while the composite PMI was in line; June UK
construction output, manufacturing output and business investment were below
projections while industrial output was above; July UK services PMI was better,
however, July auto sales were disappointing; Q2 GDP was below consensus,
[b] the July Chinese Caixin services PMI was below
forecasts, the composite PMI above; the July trade balance was larger than
anticipated; July CPI ran hotter than estimates but PPI was down,
[c] June Japanese household spending and cash income
were ahead of estimates while the leading economic indicators were below forecast.
Developments
this week that impact the economy:
(1) trade:
lots of activity this week
[a] Trump threatened to increase tariffs on the
all the Chinese imports not already subject to them. Now they won’t go into effect until the first
of September; so, there is time for enough progress to be made in trade talks to
avoid this happening. But….
[b] the
Chinese allowed the yuan to depreciate {a low yuan = cheaper Chinese goods}
which would, at least partially, offset the impact that higher tariffs have on
imported Chinese goods. While the government
set the yuan value higher the next day, the message was there---increase
tariffs and we will devalue our currency.
Trump
immediately labelled China a ‘currency manipulator’ which implies the potential
for some sort of adverse action against the Chinese; but it really is not that
big a deal.
The bottom
line is that the US and China appear to be locked into a standoff from which
little positive can come. Unfortunately,
I don’t believe the Chinese will even try to resolve this dispute before November
2020 and they may be willing to go to mat longer term to avoid revising their unreasonable,
unfair and one-sided industrial and IP
policies. In short, the odds of a positive
resolution to this standoff anytime soon seem low and as a result, its negative
impact on the global economy will continue and likely get worse.
Counterpoint (must read):
[c]
regrettably, others nations are starting to get into the act with {i} Japan and
South Korea removing each other from their ‘preferred’ trading list (think higher
tariffs) and {ii} the central banks of New Zealand, India and Thailand lowered
the official interest rates---which has the ancillary effect of devaluing their
currency.
All in all, this
week, trade had a negative impact on global economic growth prospects.
(2) monetary
policy: little of substance this week.
Though there appears to be a growing belief that the central banks have
lost their control of interest rates to the Markets. The risk of this becoming generally accepted
is that the notion that the central banks/Fed have the Markets’ back becomes null
and void. While that may have little
impact on economic growth [which I have maintained that they never had in the
first place], it will almost surely affect the current central bank/Fed/Market
co-dependency.
(3) tensions
in the Middle East remain at a slow boil. The hostility remains contained but
the buildup of military hardware in the Persian Gulf is not a plus. 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.
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. I have no idea how this situation plays out;
but it has the potential for negative consequences,
[b]
Italy is again on the verge of political/economic collapse. By itself, I don’t consider that a big problem;
but the extent that it would cause disruption in the EU, especially in the
banking system, it could precipitate a much larger problem. And that says nothing about the extra
pressure a hard ‘Brexit’ could put on the EU financial system,
[c]
North Korea keeps firing off rockets. Like
Hong Kong, this is likely tied into the US/China standoff {China encourages Kim
to make trouble} makes the whole China trade, Hong Kong riots, North Korean missile
testing just a big pot of love stew.
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 US
economy continues to limp along 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 (26287, 2918) drifted lower yesterday
on still lower volume and weak breadth. The
Dow closed right on its 100 DMA (now support) and the S&P ended above its
100 DMA for a second day after reverting to resistance. If it remains there through the close on
Monday, it will return it to support. Both indices remained above their 200 DMA’s.
The VIX rose 6 %, finishing above both MA’s (now
support) and is building a short term uptrend.
That is a bit of negative for stocks.
The long bond was off ¼%, but remained above both
MA’s and in uptrends across all timeframes.
However, it still has that gap up open on Monday which needs to be closed.
The dollar was off fractionally, ending in short and
long term uptrends and above both MA’s. It
still has a gap down open which needs to be filled. However, it did close below the upper
boundary of its former long term trading range for a fifth day---which is a bit
worrisome as it raises the odds that last Friday’s breakout could prove false.
Gold declined 3/8 %, resting in the midst of a very
strong uptrend. It ended within very
short term and short term uptrends and above both MA’s. However, it still has last Friday’s gap up
open which needs to be closed.
Bottom
line: the Averages are in uptrends across all timeframes; but after closing Monday’s
gap down opens, retreated on the day.
That raises the odds that the recent rally was just the necessary
consolidation to close those gap downs, opening the way for another leg down in
the indices. That notion is reinforced by the pin action in
the long bond, the dollar and gold which are all pointing 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 on though
there are few signs of recession, at least domestically. Indeed, second quarter earnings came stronger
than expected which bolsters the hope that the US can skate through the current
global malaise without a downturn.
On the
other hand, if the US/China trade dispute continues to deteriorate [which it is
now doing] that would add a further burden on the US economy. Add in a mounting deficit that has to be
financed and you can see why I have the yellow light flashing.
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, the US/China trade dispute has gotten
worse as both parties increase their penalties on the other. This is not good for the US economy but it is even worse for the rest of
the world---and that suggests little improvement in the economic picture until
the crisis is resolved.
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
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 central banks of New Zealand,
India and Thailand lowered their official bank interest rate---which has the
side effect of lowering the value of their currency, increasing the turmoil in
international trade environment.
I have
maintained for some time that the key to the Market is monetary policy, more
specifically, the total capitulation of the Fed to the whims of the equity market. But this week, investors appeared to begin to
question their faith in the central banks’ ability to navigate the global
economy through what is now a very 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.
The Fed continues to make policy mistakes.
(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, [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 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. 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.
No comments:
Post a Comment