11/2/19
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 24036-34336
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 2647-35474
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. It was a busy week data wise and the results were
upbeat: above estimates: September pending home sales, weekly mortgage/purchase
applications, the October ADP private payroll report, October nonfarm payrolls, the October
manufacturing PMI, October construction spending, advance Q3 GDP growth and the
price indicator as well as the PCE price index, the September trade balance;
below estimates: weekly jobless claims, October consumer confidence, the
September Chicago Fed national activity index, the October Chicago Fed PMI, the
October ISM manufacturing index, September wholesale inventories, the October
Dallas Fed manufacturing index; in line with estimates: the August Case Shill
home price index, month to date retail chain store sales, September personal
income and personal spending.
The primary indicators were also positive:
the advance Q3 GDP growth rate (+), October nonfarm payrolls (+), October
construction spending (+), September personal income (0), September personal
spending (0), The call is positive. Score: in
the last 212 weeks, sixty-eight were positive, ninety-six negative and forty-eight
neutral.
After a month long trend of negative numbers,
they turned decidedly to the plus side this week. As always, one week doesn’t a trend make. However, it does reinforce the notion of an
ongoing erratic data pattern that is the sign of a struggling economy but not
one sliding into recession.
Overseas, the stats were negative (again), providing
little reason to alter my opinion that the global economy is a drag on our own.
[a] September
EU loan growth, October consumer confidence, economic sentiment, industrial
sentiment and services sentiment and Q3 and unemployment were disappointing while October business confidence, Q3 GDP
growth was above, Q3 inflation was in line; September UK consumer confidence
and consumer credit loans fell more than estimates while the October
manufacturing PMI was above; September German unemployment was in line; October
inflation was above expectation while retail were below,
[b] September
Japanese retail sales, industrial production, housing starts and October
consumer confidence were ahead of forecast while October CPI and core CPI were
below,
[c] September Chinese industrial profits, the
manufacturing and nonmanufacturing PMI’s were less than anticipated and its
trade deficit was more while the October Caixin manufacturing PMI was a plus.
Developments this week that impact the
economy:
(1) trade:
who knows. Early in the week, US
officials said that the Phase One US/Chinese
agreement may not be ready to sign on the original schedule. Then, a Chinese trade representative blasted
the US for its ban on the use of Chinese 5G equipment and another source said
it doubted the Phase One pact would get done.
Finally, on Friday, both sides were talking like Phase One was a done
deal.
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 a sham and will take place because Trump folded.
(2) fiscal
policy: nothing new this week.
Trump assumes the mantle of ‘King of Debt’.
The US spent hundreds of billions and GDP
slowed. (must read):
US government debt reaches $23 trillion.
(3) monetary
policy: the FOMC met this week and once again had a narrative that everyone
could love. It lowered rates, suggested
that it was done lowering for now but that a rise in rates was not in the cards
anytime soon. Of course, this is all
bulls**t. Raising or lowering the Fed
Funds rate by 25, 50 or 75 basis points from the current exceptionally low
level is irrelevant in the economic scheme of things.
QE/QT has been, is and will forever be the
driving force in the financial system.
And at the moment, NotQE is pouring money into it. Meaning [a] the government can finance its
obscene deficits more easily, [b] inefficient companies that are a drain on the
economy’s resources can live for another day and [c] the major players in the
financial system can continue to speculate and drive asset mispricing and misallocation
to further extremes.
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. This situation
remains quite fluid. We are not likely
to know the real consequences of the change in US policy for some time.
[b] Brexit.
the British Parliament passed the Brexit deal but voted to delay
implementation. The EU granted the UK an
extension on implementing Brexit until December. And Parliament agreed to elections in
December. So, Brexit should be below the
fold for at least a month.
(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 (27347,
3066) put Thursday’s disappointing pin action in the rear view mirror and did a
moonshot on Friday, reversing Thursday’s technical negatives (1) the Dow reset
its very short uptrend to up and (2) the S&P bounced off the boundary of
its very short term uptrend. Volume was down
and breadth improved. The VIX fell 7 %, moving
it back toward its 7/25 low (= S&P 7/25 high).
Is the Market about to ‘melt up’?
My assumption
remains that momentum is to the upside; but there remain some negatives: (1) the Dow is now out of sync with the
S&P, (2) October 11th gap up opens need to be closed, (3)
breadth is near overbought territory and (4) the VIX is getting stretched to
the downside---a short term negative for stocks.
TLT fell ½ %, but still
remained above its 100 DMA, leaving momentum to the upside. The dollar was down again, finishing right on
its 100 DMA and below the lower boundary of its short term uptrend for a second
day (if it remains there through the close on Monday, it will reset to a
trading range). Gold rose fractionally, remaining
back above the upper boundary of that pennant formation. However, I am still uncertain about the
strength of the directional move following the breakout from the tip.
I believe that we
are at a potentially critical juncture in the Markets. We know the S&P is telling us to tip toe
through the tulips. But to date, the Dow
is not confirming it. The rest of the indicators are near levels that, if
successfully challenged, would mark a directional change---with the dollar and
gold potentially pointing to an economy that is weakening while bonds the
reverse. How they follow through should tell
us a good deal about underlying investor sentiment and economic
outlook.
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 broke a month long trend of negative
stats and gives me comfort that the erratic dataflow pattern of the last ten
years is intact, lessening my concern about recession.
(2)
the [lack of] success of current trade
negotiations. We got multiple headlines
this week; many contradictory. So, I am
not sure where the Phase One pact stands.
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.
My bottom line remains that there will be not
be such a deal until at least November 2020;
and there is a strong likelihood that it won’t even happen then. The only deal that I see in our future is one
for show which either accomplishes very little or, if there is any substance,
it will involve Trump folding.
(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.
In addition, the FOMC met this week, lowered
rates and promised not to raise them anytime soon.
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]. 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. On the other hand,
third quarter earnings season surprised to the upside.
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.
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.
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