10/19/19
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 23910-34210
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 2623-3523
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 were mixed: above estimates: the
October housing index, weekly jobless claims, August business inventories/sales,
the October NY Fed manufacturing index; below estimates: month to date retail
chain store sales, September retail sales, September industrial production/capacity
utilization, the October Philly Fed manufacturing index, September leading economic
indicators; in line with estimates: weekly mortgage/purchase applications,
September housing starts/building permits.
However, the primary indicators were
negative: September retail sales (-), September industrial production (-), September
leading economic indicators (-), September housing starts/building permits (0).
The call is negative. Score: in the last 209 weeks, sixty-seven
were positive, ninety-four negative and forty-eight neutral.
Overall, the stats have been trending negative
the last couple of weeks. But it will
take a good deal more to persuade me that this isn’t just part of the erratic data
pattern of the last decade.
The IMF has thrown in the towel on global recovery
(must read).
Overseas, the stats were negative, providing
little reason to alter my opinion that the global economy is a drag on our own.
[a] August
EU industrial production, September German PPI, October EU and German economic sentiment
and September UK retail sales, ex fuel were better than expected; July UK employment and average earnings,
the August EU trade balance, September UK CPI and PPI, and August EU
construction output were worse; September UK retail sales were in line,
[b] August
Japanese industrial production was in line; August capacity utilization and
September CPI were below estimates,
[c] the September Chinese trade surplus,
industrial production and loan growth were larger than anticipated; September
vehicle sales and CPI were disappointing; Q3 GDP and September retail sales
were in line.
Developments this week that impact the economy:
(1) trade:
Trump said that the US and China have reached ‘phase one’ of a trade deal. However, the agreement was verbal; nothing on
paper yet. And the Chinese started
walking back the talking points almost immediately. That doesn’t mean that there won’t be a
deal. It just means that nothing is
certain.
(2) fiscal
policy: no news this week.
(3) monetary
policy: the Fed released its latest Beige Book; and the narrative was less optimistic than prior Beige Book releases
or the minutes of the last FOMC meeting.
This sets the Fed up for another rate cut in October---if it wants.
Meanwhile, NotQE is in full operation mode;
but it is still having trouble satisfying the liquidity needs of the overnight
repo market. So far, this has not been a
problem; and it may never be. The
concerning aspect is that, no one, including the Fed, has been able to provide
a valid reason for this liquidity freeze up---which suggests that there could
be a major issue in the global financial market that isn’t obvious yet. ‘Could be’ being the operative words.
Which leaves my bottom line unchanged: 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.
[a] Turkey/Syria/the Kurds. A five day truce has been implemented, giving
the Kurds in the Turkish ‘safety zone’ time to evacuate. That seems fair---Turkey pushes the Kurds who
have been fighting Turkey for decades out of a so called twenty mile ‘safety zone’
and the Kurds get US protection in the process.
What happens next is anyone’s guess.
As you know, Trump’s initial actions which seemingly abandoned the Kurds caused a good
deal of domestic turmoil that only exacerbated the already contentious domestic
political environment. That said, having
our political class gnawing on each others ankle bones keeps them from doing much
damage to the electorate.
[b] Brexit.
Johnson and the EU have a deal.
The question is, can he sell it to Parliament. The vote is today. No news as of this writing.
(5)
impeachment: I will continue to avoid political
commentary. Though I believe that more
intense the situation becomes, the more it will negatively affect businesses
and consumers willingness to invest/spend.
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 (26770,
2986) were off yesterday on lower volume, poor breadth and a rising VIX. Still, they ended solidly above both MA’s and
in uptrends across all timeframes. Two
other somewhat worrisome details are (1) longer term, the indices have now made
their fifth unsuccessful try to mount a challenge of their all-time; plus, they
have made succession of lower highs and
(2) short term, the October 11th gap up opens need to be closed. While my assumption remains that momentum is
to the upside and that the all-time highs (27398, 3027) will be challenged, my
conviction is starting to weaken.
Gold was down fractionally,
but still ended above the lower boundary of its pennant formation, leaving that
technical pattern intact. TLT was unchanged,
remaining close to challenging its 100 DMA but finishing in uptrends across all
time frames.
The dollar’s chart
bears the most comment. UUP was down
another 3/8% on Friday, finishing right on its 100 DMA and the lower boundary
of its short term uptrend---clearly posing a threat to the upside momentum. So, this chart has gone from the strongest of
those I follow to potentially breaking down.
I said yesterday that this doesn’t make any sense to me in the midst of
a dollar funding shortage. Though
traders tell me it is due to strong pound and euro reacting to the increased
odds of a negotiated Brexit. I am not entirely
convinced by that explanation and worry that something more untoward may be
happening.
Friday in the charts.
Stock buybacks expected to decline in 2020.
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. This week’s data was negative; though I think
this has to be viewed in the context of the erratic dataflow of the last ten
years.
Of course, if we get a China deal, any deal,
it will likely prove beneficial to economic growth over the short term. But as I have repeated ad nauseum, an agreement
that doesn’t adequately address the issues of Chinese industrial policy and IP
theft will be Pyrrhic victory.
US policy uncertainty soars.
(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. And, of course,
we now have a ‘deal’ however tenuous it may be at this point. Whether that it proves to be a positive, in
my opinion, remains a question. I tried
this week to present as many views of this deal as I could; and most engendered
skepticism. That doesn’t mean that there
won’t be a deal; it means investors should control their level of jigginess.
(3)
the resumption of QE by the global central banks. This week, the Fed restarted QE [Not QE]. But [a] investors were apparently focused on
other issues and [b] it has not solved the liquidity issue in the overnight
repo market---a problem that few are giving much import. Perhaps they are right; but until this
problem goes away, it is still a problem that could potentially get worse.
The other event this week was the release of
the latest Fed Beige Book which read like the preamble to a rate cut---which I am
assuming we will get at the next FOMC meeting.
All this should have made US investors happy,
but didn’t. Another sign of the unwinding of the Market/Fed codependency?
(4)
impeachment. as I noted above, the more vicious this
battle becomes the more likely it is to have a negative effect on stock prices.
(5)
current valuations. I believe that Averages are grossly
overvalued [as determined by my Valuation Model]. The economy [whether US or global] isn’t
improving. 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 the 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 clearly have been in the minority. Nonetheless, I also believe that when
investors ultimately awake to the damage the monetary regime of the last decade
has done, the unwinding of these effects will not end well for them. And there are signs that this could be
happening.
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.
Defying reversion to the mean.
Draghi warns of overstretched valuations.
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, it should be a plus for stock prices---though
there are signs of late that this interdependency is cracking.
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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