11/23/19
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 24189-34489
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 2655-3565
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. The dataflow this week was mixed: above
estimates: October housing starts and building permits, October existing home
sales, October consumer sentiment, the November Philly Fed manufacturing index,
the November flash manufacturing and services PMI’s; below estimates: the November
housing index, weekly jobless claims, month to date retail chain store sales,
the November Kansas City Fed manufacturing index, October leading economic indicators;
in line with estimates: weekly mortgage/purchase applications, the November
flash composite PMI.
However, the primary indicators were
slightly positive: October housing starts/building permits (+), October existing
home sales (+) and October leading economic indicators (-). The call is positive. Score: in
the last 215 weeks, sixty-nine were positive, ninety-eight negative and forty-eight
neutral.
This marginally upbeat week for stats is no
reason to alter my forecast that the economy is struggling but not sliding into
recession.
The overseas data remained negative---providing
little reason to alter my opinion that the global economy is a drag on our own.
[a] above
estimates: the November flash EU consumer confidence index, the November German
and EU flash manufacturing PMI’s; below estimates; the September EU construction
output, October German PPI, the November German and EU flash services and
composite PMI’s, the November UK flash manufacturing and services PMI’s; in
line with estimates: Q3 German GDP growth,
[b] the October Japanese trade surplus
contracted markedly, the October CPI was in line; the November flash
manufacturing PMI was below estimates while the services PMI was above and the
composite PMI was in line; ,
[c] October Chinese CPI was better than
consensus while PPI, auto sales, loan
growth, fixed asset investments, industrial production and retail sales were
below.
Christine Lagarde first speech as head of the
ECB.
Developments this week that impact the
economy:
(1) trade:
who knows. The news flow this week remained
a confusing montage of serial positive and negative news stories. Any outcome wouldn’t surprise me.
My bottom line hasn’t changed. I don’t believe that there will be a deal
that incorporates the primary issues of Chinese industrial policy and IP theft
before November 2020, if at all. Any
other deal will be not be a long term positive for the US and will take place
because Trump folded. That said, any
deal that removes tariffs and increases Chinese purchase of US ag products will
be a minor short term economic plus.
(2) fiscal
policy: congress passed and the president signed a continuing resolution that
keeps the government open until mid-December.
(3) monetary
policy: the Fed released the minutes of the latest FOMC meeting, in which we
learned nothing new about Fed policy [rate cuts are over but no increases are likely
even if economic growth picks up and {drum roll, please} Not QE will be around until at least May 2020 {and likely
a lot longer}].
In addition, the Bank of China joined the
Gang of Three [the Fed, the ECB and the Bank of Japan] in the global liquidity
fest by lowering interest rates and bailing out yet another bank [the fourth, I
think].
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 beneficiary of this policy has been
the securities market which are now grossly overvalued,
(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. Israel stirred the Middle East pot a bit by
declaring its own West Bank settlements legal {rockets followed}.
[b] Brexit.
Johnson and Corbyn took a page from the democrats, engaging in a
promised give away free for all. Polls show
a victory for the Tories.
[c] the
situation in Hong Kong grew worse. The
level of violence remained about the same {high} level. Making matters worse, congress passed a bill
supporting the protestors which drew an animated response from the
Chinese. Clearly, this doesn’t increase
the odds of trade deal.
[d] impeachment:
I will continue to avoid political commentary. Though I believe that the 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 causes 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. Indeed, any 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 (27875,
3110) rallied, keeping the current consolidation off a very overbought condition
quite mild. The VIX fell 6%, suggesting
continued investor complacency. Volume
was low. Breadth improved which left
stocks near overvalued territory. In addition, the S&P joined the Dow negating
its very short term uptrend. All this
suggests that more backing and filling is likely over the near term.
The bond market was
up 1/8%, finishing above its 100 DMA for a third day, reverting to support. If it maintains this upward momentum, it
suggests that the bond boys are back betting on a weak economy or safety trade
scenario. The only remaining negative is that it is still in a very short term
trend of lower highs.
The dollar was up 3/8%,
holding above both MA’s and in short term and intermediate term uptrends. That implies a strong economy or a demand for
safety.
Gold was down ¼ %,
retreating further from both the upper boundary of its very short term uptrend
and its 100 DMA (now resistance). However, it is
still above its 200 DMA and in very short term and short term uptrends.
The UUP, TLT and
GLD are all at or near inflexion points. How they trade through those inflexion
points will tell us a lot about how their investors are viewing the economic
prospects and importantly, whether they agree with the stock boys. Right now, the picture is a bit muddled.
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, though I still believe that it is not falling into
a recession. As long as the US economy
grows at a subpar rate but avoids a recession, this factor will be a neutral for the Market.
(2) the
[lack of] success of current trade negotiations. At this moment, who knows. I do think the odds slightly favor the Phase
One agreement if the assumptions are that [a] it only includes some kind of modestly
beneficial economic trade off {ag purchases versus lower tariff} and [b] it
will not occur until the outcome of the 2020 elections is clearer. That said, any deal at any time will likely
be a short term positive for the Market.
But as I have
repeated ad nauseum, I don’t believe an agreement will be reached that adequately
addresses the issues of Chinese industrial policy and IP theft---which are why
there is trade war in the first place. And that will continue to overhang the
Market.
(3)
the resumption of QE by the global central banks. This week, the Fed released the minutes from its
last FOMC meeting in which it again confirmed that NotQE will continue,
injecting liquidity at a high level.
Plus, China joined the easy money crowd.
My bottom line remains the same. The Fed’s monetary policy has been a negative
for the economy and will continue to be as long as it is focused on keeping the
Markets happy versus following its dual mandates. However, because it is Market friendly,
stocks should continue to do well until the Fed either reverses its policy or
investors figure out just how punitive that policy has been for the economy.
(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]---which will continue to count
for little as long as the global central banks are pumping liquidity into the
financial system.
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 and Kroger to the
Dividend Growth Buy List.
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.
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.
