11/16/19
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 24132-34432
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 2653-3563
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 negative: above
estimates: weekly mortgage/purchase applications, October CPI and PPI; below
estimates: month to date retail chain store sales, weekly jobless claims, the
October small business optimism index, October industrial production/capacity utilization,
the November NY Fed manufacturing index, September business inventories, the
October budget deficit; in line with estimates: October core CPI, October retail
sales/ex autos.
The primary indicators were also negative: October retail sales/ex autos (0)
and October industrial production (-). The
call is negative. Score: in the last 214 weeks, sixty-eight
were positive, ninety-eight negative and forty-eight neutral.
No reason to alter my forecast that the economy
struggling but not sliding into recession.
After a week of upbeat stats, the overseas
data once again turned ugly---providing little reason to alter my opinion that
the global economy is a drag on our own.
[a] above
estimates: September EU industrial production, trade surplus and its November economic
sentiment; November German economic sentiment and the flash Q3 GDP growth;
weekly UK unemployment, September unemployment and preliminary Q3 productivity;
below estimates; the September UK trade deficit, industrial production,
construction output, consumer earnings, GDP and October retail sales, CPI and
PPI, Q3 EU employment change; in line with estimates: October German CPI, the
second estimate of Q3 EU GDP growth,
[b] September Japanese machinery orders,
October machine tool orders and PPI and the preliminary estimate of Q3 GDP growth
were below forecasts; September industrial production was above.
[c] October Chinese CPI was better than
consensus while PPI, auto sales, loan
growth, fixed asset investments, industrial production and retail sales were
below.
Developments this week that impact the
economy:
(1) trade:
who knows. The circle jerk continues and
the news flow seems to be taking on the characteristics of white noise. In any case, in a Tuesday speech, Trump
delivered a balanced message on trade, then Wednesday morning issued a harsh
statement, threatening to increase tariffs on China even further if there was
no Phase One deal---which drew an equally harsh Chinese response. Plus, there were reports that China was resisting
the proposed size of ag purchases as well as provisions against technology
transfers and enforcement. On Friday came a new dose of happy talk from Kudlow.
As I noted Thursday, trying to figure out what is really happening is a waste
of time.
Perhaps the most potentially significant
headline came from Germany where a report stated that an estimated 25% of its
global businesses are relocating plants outside of China due to the
difficulties associated with that country’s industrial policy. If a large portion of the world’s major
international companies were to follow suit, that could be a major influence in
altering unfair Chinese industrial policy and IP theft. ‘Could be’ are clearly the operative words.
That said, 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.
I usually ignore doomsday
forecasts, but I thought this was worth review.
(2) fiscal
policy: the October budget deficit came in larger than anticipated (surprise,
surprise). Interestingly, in Powell’s testimony
[see below] he noted that fiscal policy was on a ‘unsustainable course’. As you know, I agree with that
completely. Although I would note that, ironically,
keeping interest rates artificially low so that the government can deficit spend
at a very low cost contributes to enabling it to do so, i.e. if rates were at
normal levels, the cost of financing the national debt would be considerably
higher and would likely act as a governor on profligate spending.
(3) monetary
policy: Powell
testified before the Joint Congressional Economic Committee. In it, he repeated the narrative from the
last FOMC meeting---no more rate cuts in sight, but no increases either even if
the economy starts running hot and most importantly, NotQE is alive and
well. In that testimony, Powell may have
had his Bernanke moment: "there’s nothing that’s really booming now that would want to bust."
The latter point was bolstered on Thursday when the
Fed laid out its fourth quarter NotQE schedule revealing lots of free money.
How central bankers are stealing from savers.
Here is another great piece from Ed Yardini
(a bull, I might add) explaining why the Fed’s expansive monetary policy has
not worked, is not a plus for the economy and is sowing the seeds of the next
financial crisis.
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.
[b] Brexit.
nothing new.
[c] I am
adding the ongoing unrest in Hong Kong to this list. The turmoil has gone on too long with no
lessening in the violence. The risks
here are that {i} the disorder could spread into China or {ii} China could
intervene and the US responses by shutting down trade talks or, even worse, adding
new punitive measures on US/China trade.
***and lo and behold, overnight,
(5)
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 (28004,
3120) had a blockbuster day, regaining the momentum that in Friday’s Morning
Call, I speculated they had lost.
Breadth was strong and the VIX was down 7 ½ % pointing to an increasingly
overbought condition. Volume, as usual, was down.
My assumption
remains that momentum is to the upside; but there are still some short term
negatives: (1) October 11th
gap up opens need to be closed and (2) the VIX and breadth suggest equities are
overbought.
The bond market rested
after a strong performance earlier in the week.
The good news is that it bounced off the lower boundary of its short
term uptrend on Thursday; the bad news is that it remains below its 100
DMA. Clearly, a successful challenge to
the upside would indicate an end to price weakness and the thesis that the
economy is strengthening. But
that hasn’t happened yet.
The dollar was
down ¼ % and is nearing the lower boundary of its short term uptrend. Nonetheless, it remains above both MA’s and
in uptrends across all timeframes.
Gold declined ¼ %,
retreating off the upper boundary of its very short term uptrend and remaining
below its 100 DMA. Like TLT, a successful challenge to the upside would suggest
a change in momentum and question the thesis that the economy is strengthening.
The UUP, TLT and
GLD’s pin action continues to support the notion that the economy is improving though
they are all nearing support/resistance levels which if successfully challenged
would indicate otherwise.
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 continue to believe that 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, Powell reiterated the narrative
from the last FOMC meeting and the Fed backed it up a day later, releasing its Q4
Not QE liquidity injections which continue at a high level.
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].
Currently, the economy [whether US or global]
offers little reason to assume that the secular dividend growth rate will move
higher in the future. On the other hand, third quarter earnings season surprised
to the upside and that lessens the uncertainty of any cyclical fall corporate
profits [dividends].
Of course, as usual, I have to conclude that NotQE
makes all other factors 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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