Saturday, November 23, 2019

The Closing Bell

 I am taking Thanksgiving week off.

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                                 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%

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

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.

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