9/7/19
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 23560-33800
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 2578-3478
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. This week’s data was slightly negative: above
estimates: month to date retail chain store sales, the ADP private payroll
report, August light vehicle sales, the August final manufacturing PMI, the
August ISM nonmanufacturing index, the July trade deficit; below estimates: weekly
jobless claims, August nonfarm payrolls, July construction spending, the August
ISM manufacturing index, the August services and composite PMI’s; in line with
estimates: weekly mortgage/purchase applications, Q2 nonfarm productivity/unit
labor costs, July factory orders/ex transportation.
The primary indicators were also negative:
July construction spending (-), August nonfarm payrolls (-), Q2 nonfarm productivity/unit
labor costs (0) and July factory orders/ex transportation (0). The call is negative. Score: in the last 203 weeks, sixty-six were positive,
ninety-one negative and forty-six neutral.
This leaves the yellow warning light
flashing.
The Fed released its latest Beige Book, which didn’t
read that much different from recent surveys: the economy is growing modestly,
labor is tight and manufacturing is struggling in some industries impacted by
trade.
In addition to the Atlanta Fed lowering its
Q3 GDP now forecast this week, Goldman and Merrill also posted their estimates.
This is a
great nine minute interview with a former Fed economist.
Overseas, the stats were mixed, providing no
reason to alter my opinion that the global economy is a drag on our own.
[a] the
July EU PPI and retail sales were in line while July German factory orders and
industrial production were lower than anticipated; the August German and UK manufacturing
PMI’s and the August German construction PMI were below estimates; the August
EU manufacturing PMI and Q2 GDP growth were in line; the August German and EU
services and composite PMI’s plus August UK car sales above forecasts,
[b] the
July Japanese cash earnings was less than consensus; household spending was
also down but less than expected,
[c] the August Chinese Caixin manufacturing,
services and composite PMI’s were better than anticipated.
Developments this week that impact the economy:
(1) trade:
the détente in the US/China trade talks was resurrected with low level negotiations
beginning in September and a formal meeting in October. Clearly, a positive outcome would be an
economic plus. But at the risk of being
too cynical:
[a] the Chinese communist party has its 70th
anniversary in October. This is a major
celebration for them and they undoubtedly want it free of any controversial
headlines. Hence, backing off in Hong
Kong. Hence, the resumption of trade talks. I could be totally wrong; but until the
Chinese show any inclination on compromising on unfair industrial policy and IP
theft, my take is this latest round of talks is all for show,
[b] 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. The point being that Chinese can afford to
string Trump along until, at least the 2020 elections and I continue to believe
that they will do just that.
(2) fiscal
policy: N/A.
(3) monetary
policy: as noted above, the Fed released its latest Beige Book which was a
nothing burger. In addition, in a Q&A in Zurich, Powell stayed with the
party line---a rate cut in September.
Further, the Bank of China lowered reserve requirements
[infusing money into the banking system] this week.
And last but certainly not leased, Draghi has
virtually guaranteed that rates will be lowered at the next [and his last] ECB
meeting. If that isn’t bad enough, his
position will be filled not by an economist but by a politician [Lagarde] whose
latest claim to fame was pouring billions and billions into the Argentine
economy only to watch it disappear.
The bright spot was that several prominent EU
bankers criticized the ECB’s monetary policy as being harmful to the EU economy
which [a] makes me wonder why they are just now figuring that out, but more importantly
[b] it hopefully starts a discussion among those who count of just how detrimental
QE has been to the economies of those countries on which it has been imposed. One can only hope that this will have an
impact. Otherwise we are doomed to the
further destruction of the pricing of risk [misallocation and mispricing of
assets].
(4) global
hotspots. the Middle East hostility continues to simmer, though Trump has put
out feelers for a pow wow with the Iranians.
[a] the turmoil in Hong Kong is subsiding as
a result of concession by the government.
As I noted above, this could be just a ploy to calm the waters until the
Chinese anniversary bash is over.
[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 again this week.
[d] the Brits can’t figure out which way is
up. That leaves Brexit very much in limbo
where developments could go either way.
In any case, the economic turmoil it is causing is negatively impacting
the data out of the EU.
Bottom
line: on a secular basis, the US economy
is growing at an historically below average rate and I see little reason for
any improvement. 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 (26790,
2978) rested yesterday after a big Thursday, closing above their 100 DMA’s for
the third day (reverting to support) and the upper boundaries of their August 5th
trading ranges for a second day, voiding that trading range. They also finished above their 200 DMA’s and
in uptrends across all timeframes. Volume
was down; and breadth improved slightly.
The only negative is that both of
the indices made gap up opens on Thursday---which will have to be closed.
The VIX fell another
8 %, ending below its 200 DMA for a second day (now support; if it remains
there through the close next Tuesday, it will revert to resistance). It also closed below its 100 DMA (now
support; if it stays there through the close next Tuesday, it will revert to
resistance) and below the lower boundary of its August 5th trading
range (inversely related to the August 5th trading range for the
Averages); if it remains there through the close on Monday, that trend will be
voided.
The
long bond was rose ¾ %, but not enough to close Thursday’s gap down
open---which needs to be filled. It finished
above both MA’s and in uptrends across all time frames. So, the chart remains strong and the trend toward
lower rates remains intact.
The
dollar was up fractionally but not enough to fill Wednesday’s gap down open---which
needs to be closed. It ended above both
MA’s and in short and long term uptrends.
Another strong
chart, pointing towards a higher dollar.
GLD
was down another 7/8 %. Nonetheless, it closed
above both MA’s and in very short term and short term uptrends. There is
also Thursday’s gap down open---which needs to be filled.
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 have resolved
their August 5th trading range to the upside, pointing to the return
of upward momentum. The next resistance levels
are their July all-time highs (27398, 3027).
The only negative is that both indices plus TLT, UUP and GLD all
experienced gap opens last week, which, in my opinion, just multiples the odds
of price reversals that will close those gaps.
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. The very
recent data has become less bad---but that it no reason to stop yellow warning
light flashing. Not helping matters is
the recent surge in bond, dollar and gold prices [Thursday’s pin action
notwithstanding]; all of which point to a flight to safety [fear of recession].
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.
The dispute with China
drew a positive headline this week.
However, as I made clear above, I think the Chinese motive for resuming
talks has nothing to do with wanting to compromise. So, I don’t expect any give on their part. They may be hoping that Trump will fold during
the negotiations anyway just to get a deal ahead of the 2020 elections. And if
he does, I consider it a long term negative.
Either way, in my opinion, pain is in our future. The only question is how much.
(3)
the resumption of QE by the global central banks. That is now occurring worldwide. [a] the ECB
made it clear that it is strongly considering another big dose of QE, [b] this week China lowered bank reserve
requirements and [c] the US bond market continues to price in multiple cuts in
the Fed Funds rate this year and this week, Powell all but guaranteed a
September rate cut.
I have maintained for some time that the key
to the Market is monetary policy, more specifically, its co-dependency with the
Fed. Investors recently began to
question their faith in its ability to navigate the US economy through an
increasingly trying economic climate. But so far not enough to suggest a change the
paradigm of central bank/stock market co-dependency. However, the risk is heightening that this
could occur.
Another ear burner
from Jeffrey Snider (must read):
(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 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. Despite the Averages being near all-time highs, 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.
Looking for value.
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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