9/21/19
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 23689-33939
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 2600-3500
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 upbeat: above estimates: weekly
purchase applications, August housing starts/building permits, August existing
home sales, the September housing index, weekly jobless claims, the September
Philadelphia Fed manufacturing index, August industrial production/capacity
utilization; below estimates: month to date retail chain store sales, the September
NY Fed manufacturing index, August leading economic indicators, Q2 trade
deficit ; in line with estimates: August retail sales/ex autos, July business
inventories/sales.
The primary indicators were also a
plus: August housing starts/building permits (+), August existing home sales
(+), August industrial production/capacity utilization (+), August retail
sales/ex autos (0) and the August leading economic indicators (-). The call is positive. Score: in the last 205 weeks, sixty-seven were
positive, ninety-one negative and forty-seven neutral.
This is the first up week since
August 17th ---and that report ended a string of four upbeat weeks
at which point I was about to remove the yellow flashing light. Then we got the last month of negative
stats. Now this week. We have lived with this data pattern (i.e. short
spurts of positive numbers which suggest my forecast is spot on followed by
short spurts of negative data which suggest I should lower my forecast) for the
last five or six years. It would appear
that to date nothing has changed. I
should be getting used to it. Still is we get another two to three weeks of
favorable numbers, I am going to remove the yellow flashing light.
Overseas, the stats were mixed, again,
providing little reason to alter my opinion that the global economy is a drag
on our own.
[a] July
EU construction output and trade surplus were above forecasts; the August UK
CPI, core CPI and PPI were below estimates while core PPI was in line; The
August German CPI was also below projections; August UK retail sales were lower
than expected; the August EU CPI and core CPI were in line; the September EU
consumer sentiment was lower than anticipated but EU and German economic
sentiment were better,
[b] the
July Japanese all industry activity index was up less than forecast; the Japanese
trade balance was much smaller than expected; August CPI was below consensus,
[c] August Chinese fixed asset investment,
industrial production and retail sales were below forecasts.
In addition, global auto sales are expected
to decline this year and the OECD lowered its 2019 global economic growth
estimate.
Developments this week that impact the
economy:
(1) trade:
Thursday, a Trump official said that Chinese tariffs could go as high as
100%. Then Friday afternoon, Trump
torpedoed the US/China negotiations saying that he wanted a total deal, not a
partial one.
The Chinese exited stage right.
(2) fiscal
policy: no news this week.
(3) monetary
policy: the Fed came through with the expected 25 basis point rate cut but left
investors confused [as usual] because the narrative from the policy statement
following the FOMC meeting [slightly hawkish] was at odds with the tone of Powell’s
post meeting press conference [slightly dovish]. In that presser he also raised the
possibility of renewed QE.
That was pretty much a duplicate of the ECB’s
policy update last week, i.e. lower rates though it is actually restarting QE.
Somewhat surprisingly, the central banks of
Japan, England and Switzerland did not follow the leaders and left rates unchanged---and
England and Japan’s economies are even less robust than our own. The narratives from the post meeting
statements pointed to the fact that they have so few bullets left in their policy
guns that they want to wait until it is absolutely necessary before using
them. And they have a point. Our Fed does have a bit more policy leeway.
Lost in all policy gobbledygook is the fact
that the lion’s share of central bank policy moves over the last ten years has
been a negative [asset mispricing and misallocation] for global growth and will
remain so as long as they pursue their irresponsible QE. The only beneficiaries of this policy have
been the securities market which are now grossly overvalued.
(4) global
hotspots. the main headline this week was the attack on Saudi oil facilities,
again demonstrating just how fragile the Middle East environment is. The good news is that the damage was not as
extensive as originally thought; meaning a shortage of oil does not appear to
be a threat to the global economy.
Also positive is that Trump has responded
with additional sanctions on the Iranian regime rather than military
action. So, for the time being, the situation
seems contained.
***overnight, US to deploy additional troops to Saudi Arabia.
Edging
closer to a Brexit deal.
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.
The
Market-Disciplined Investing
Technical
The Averages (26934,
2992) retreated yesterday. But it
was a quad witching day; and there are so many technical considerations on such
a day, it is very difficult to make any trend judgments. Volume soared but again that was a function of
quad witching. Breadth was negative. The
indices have basically been treading
water over the last week and the September 4th gap up opens need to
be filled. So, some very short term weakness
would not be surprising. However, the Averages
remain above both MA’s and in uptrends across all timeframes. My assumption is that they will continue to
move to the upside---the next major level to be challenged being their all-time
highs (27398, 3027).
The VIX spiked 9%,
though it still ended below both MA’s
(now resistance) and is in (reverse) sync with the Averages. However, it is close to its 100 DMA and should
it successfully challenge that resistance level, it would point to more downside
in stock prices.
The
long bond rose 1 3/8 % and continued to pull away from the recent sharp downward
trajectory---to the point that it may have made a near term bottom and may resume
its long term upward momentum. It did
all of this while remaining well above both MA’s and in uptrends across all
timeframes. So, the long term trend in
rates remains to the downside. And that September
4th gap down open still needs to be filled.
The
dollar was up ¼ %, remaining the most stable of the indices that I follow. It finished above both MA’s and in short and
long term uptrends. Somewhat
surprisingly, investors seem unphased by the continuing global dollar shortage
problem.
The
Fed is clueless about what is going (must read).
GLD
increased 1 1/8%, trading back near that minor support level that I have been
watching since last Friday. Indeed, it
seems to be following the same pattern as TLT, i.e. building a base, having
never challenged either MA’s or its very short term and short term uptrends. Plus, it still needs to fill the September 4th
gap down open.
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 seem to be
stalling at current levels. I don’t see
that necessarily as a long term negative; though it could indicate that they may
be about to close the September 4th gap up open.
The dollar has definitely regained its
upward momentum. TLT and GLD appear to
have halted their downward momentum and are attempting to rebound.
I remain concerned about gap opens,
increased volatility and low liquidity in other indices and individual
stocks.
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, not the least of which are the weakness in the
international stats and the fallout from the US/China trade dispute. The very recent data has become less bad; but
that just fits the erratic dataflow of the last five years.
Latest Gallup poll shows declining economic
confidence.
At the moment, I am sticking
with my sluggish growth forecast which is a neutral for equities.
(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.
After a frenetic week
of kissing up to each other, the news flow did a 180 this week. The US threatened 100% tariffs, Trump said that
a partial deal was no deal and the Chinese picked up their marbles and went
home.
As you know, I don’t believe
that the Chinese have any incentive to negotiate on their industrial policy and
IP theft, at least until after the 2020 elections and maybe not even then. Clearly,
I could be dead wrong. If I am and Trump
gets the changes he wants, then the outlook for increased trade and a stronger
economy improves markedly. If Trump gets
out maneuvered, then while the short term prospects for growth will rise, the
US will still stuck with the longer term burden on unfair Chinese industrial
policies and IP theft.
(3)
the resumption of QE by the global central banks. That is now occurring worldwide. [a] two weeks ago China lowered bank reserve
requirements, [b] last week ECB lowered
rates and [c] this week the US followed suit.
On the other hand, the Banks of England, Japan and Switzerland declined
to lower rates further. However, the
reason given was that they have been so loose for so long that they had few policy
bullets left and they wanted to hold off using them in case there was an
emergency need. That hardly says tight
or tightening monetary policy. So, the
bottom line is that in aggregate, the global central banks continue to ease.
I have maintained for some time that the key
to our Market is monetary policy, more specifically, its co-dependency with the
Fed. Investors recently seem to be questioning
their faith in the Fed’s ability to navigate the US economy through an
increasingly trying economic climate. Indeed,
I was surprised by the relative lack of enthusiasm regarding the ECB and Fed
rate cuts and promise of renewed QE. So
far, there is not enough to suggest a change in the paradigm of central bank/stock
market co-dependency. However, the risk is
heightening that this could occur.
(4)
current valuations. I believe that Averages are grossly
overvalued [as determined by my Valuation Model]. The economy [whether US or global] isn’t
improving. Gosh only knows what will
happen in the Middle East. True there
could be a trade deal that would brighten the outlook. But there has been so many ups and downs in
the negotiations, I think that a healthy dose of skepticism on a positive outcome
is warranted.
Of course, as usual, I have to conclude that
all of the above are irrelevant as long as investors believe the central banks
have their back. While I still believe
that these monetary policies of the last decade have stymied not aided economic
growth, that they have created valuation bubbles through the mispricing and
misallocation of assets and that they have led to a pronounced inequality in
the distribution of wealth, I am clearly in the minority. Nonetheless, I also believe that investors
will ultimately awake to the damage the monetary regime of the last decade has
done and the unwinding of these effects will not end well for them.
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.
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