Saturday, November 2, 2019

The Closing Bell


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%


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%

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

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.

No comments:

Post a Comment