10/26/19
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 23990-34290
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 2634-3534
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 a lot of data this week; but what there was,
was negative: above estimates: the October flash manufacturing PMI, the October
Richmond and Kansas City Feds manufacturing indices; below estimates: weekly
mortgage/purchase applications, September existing home sales, weekly jobless
claims, month to date retail chain store sales, October consumer sentiment, September
durable goods orders, the October flash composite PMI, 2019 budget deficit; in
line with estimates: September new home sales, the October flash services PMI.
In addition, the primary indicators were
also negative: September existing home sales (-), September durable goods orders (-) and
September new home sales (0). The call is negative. Score: in
the last 211 weeks, sixty-seven were positive, ninety-six negative and forty-eight
neutral.
The stats continued their negative trend of
the last month. Still it will take a couple
more weeks of poor numbers to persuade me that this isn’t just part of the
erratic data pattern of the last decade.
Overseas, the stats were negative, providing
little reason to alter my opinion that the global economy is a drag on our own.
[a] September
German PPI and the October business conditions index were higher than expected;
October UK industrial orders and Q4 business optimism, October consumer confidence
and both the German and EU October flash manufacturing, services and composite
PMI’s, October German consumer confidence were less,
[b] August
Japanese all industry index and leading economic indicators were better than
estimates; the September trade balance and the October flash manufacturing, services
and composite PMI’s were worse,
Developments this week that impact the economy:
(1)
trade: aside from the usual happy talk, the one
event this week that bears mentioning is an announcement by the Chinese that
its soybean purchase won’t start until the second year after Phase One of the
new, improved trade deal goes into effect.
In other words, any positive economic impact of a trade deal is fading
into the sunset---unless Trump folds.
(2) fiscal
policy: the highlight of the week was the news that the FY2019 budget deficit
was $984 billion, the largest since 2012.
And it is forecast to only get bigger, at a time when the economy is [or
has already passed] peak growth and unemployment is at a historic low. You know my thesis: the US debt/GNP has
already passed the level at which added deficit spending hampers growth.
I thought this article on the impact of EU spending
was enlightening.
(3) monetary
policy: NotQE is developing into a bigger injection of monetary stimulus than
QE; primarily because the liquidity needs of the global financial system appear
insatiable at the moment. How long this
goes on and whether or not the Fed can ultimately satisfy Market demands are
major questions right now---and the answers will be critical to the health of
the global economy.
That said, I could be making a mountain out
of a molehill because there are very few other observers that seem concerned. Still I don’t think it can be ignored.
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,
https://www.realclearmarkets.com/articles/2019/10/25/the_feds_not_pegging_bond_yields_the_yield_have_the_fed_pegged_103955.html
(4) global
hotspots.
[a] Turkey/Syria/the Kurds. This situation
remains quite fluid. We are not likely
to know the real consequences of the change in US policy for some time;
although the neocons are howling like scalded dogs.
[b] Brexit.
the British Parliament passed the Brexit deal but voted to delay
implementation. At this moment, we are
waiting to see if the EU will extend the deadline for a deal.
Here is a blow by blow description of where the process is 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. My forecast remains that the
US will avoid recession.
The
Market-Disciplined Investing
Technical
The Averages (26988,
3022) had a good Friday. The S&P
reset its very short term uptrend (the Dow didn’t) and pushed through its prior
lower high (the Dow didn’t) on improved volume and better breadth. The VIX fell 7 ¾ %, breaking below the lower boundary
of its recent trading range and is approaching its 7/25 low (the S&P
high).
The indices ended
solidly above both MA’s and in uptrends across all timeframes. Plus, as I noted, the S&P reversed two of
its short term negatives (resetting its very short term uptrend and ending
above its last lower high)---which clearly improves the short term technical
picture. The negatives that remain are
(1) the Dow is now out of sync with the S&P and (2) the October 11th
gap up opens need to be closed. My assumption
remains that momentum is to the upside and that the all-time highs (27398,
3027) will be challenged; and my conviction is improving
TLT declined ½%
and is now re-approaching its 100 DMA.
While it finished above both MA’s and in uptrends across all time frames, it is
again threatening the loss of momentum.
The dollar rose 1/8%,
continuing its bounce off its 100 DMA and the lower boundary of its short term
uptrend and appears to be regaining its upside push.
Gold was up ¼ %, confirming the break above the upper boundary its pennant
formation. My assumption is now that it
has made a short term bottom and its price is headed higher---although it still
has several minor resistance levels that it must be overcome.
What is a bit
mystifying about the GLD, TLT, UUP pin action is that GLD is usually negatively
impacted by higher interest rates and a strong dollar; and we go both on a day
that GLD moved higher.
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).
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 again. But I want to see additional data before I
think this is other than the erratic dataflow pattern of the last ten
years.
Of course, if we get a China deal, any deal,
it will likely prove beneficial to economic growth and the Market 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.
(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’---supposedly. However,
the Chinese keep walking back the terms---something we should be used to by
now. The latest change being that any
agricultural purchases will start only after the Phase One deal has been in
effect for two years. 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. The Fed is pushing QE [Not QE] with a vengeance,
the scope of which is apparently tied to the growing liquidity problems in the
global financial system. So far, I am in
the minority of those who think this a problem.
Perhaps the others are right; but until this problem goes away, it is still
a predicament that could potentially get worse.
China is having its own liquidity problems.
That said, until Friday, the Market has not been
acting like the Fed is easing mightily. Perhaps
Friday’s trading was just a delayed reaction to NotQE. We will know more by the end of next week.
(4)
impeachment. as I noted above, the more vicious this
battle, 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. Plus, the Trump
impeachment process gets more divisive every day. Ultimately, there could be a spillover effect
on stock prices.
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; and right now, the Fed is delivering a dove’s wet dream. 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.
On the inequality in the distribution of
wealth (must read).
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, 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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