11/9/19
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 24095-34395
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. The dataflow this week was negative: above
estimates: month to date retail chain store sales, weekly jobless claims, the
October ISM nonmanufacturing index, the October NY ISM; below estimates: weekly
mortgage/purchase applications, preliminary November consumer sentiment, September
consumer credit, September factory orders, September wholesales
inventories/sales, the October services and composite PMI’s, preliminary Q3
nonfarm productivity and unit labor costs; in line with estimates: the
September JOLTs report, the September trade deficit.
The primary indicators were also negative:
September factory orders (-) and preliminary Q3 nonfarm productivity (-). The
call is negative. Score: in the last 213 weeks, sixty-eight
were positive, ninety-seven negative and forty-eight neutral.
The numbers were back in the negative this
week. However, I am sticking to my forecast that the economy struggling
but not sliding into recession.
On the other hand, the Market, at the moment,
seems to think that the economy is about to achieve ‘lift off’. I see no evidence of that. Unquestionably, a trade deal would help short
term. But remember that (1) before there
were any tariffs, the economy was growing at a subpar rate., and (2) when tariffs
were imposed, many pundits forecast that they would cause a recession; and that
hasn’t happened. In short, tariffs haven’t
had that big an impact on US economic growth; so, why would their elimination have
an effect? As I point out endlessly, the
major sources of restraint on US economic growth has been, is and will remain irresponsible
fiscal and monetary policies.
ECRI weekly leading index.
For the first time in a long time, the stats overseas
were upbeat. And universally so. As always, one week does not a trend
make. But just having a positive data
week brings some hope that conditions have ceased deteriorating. Nonetheless, it provides little reason to
alter my opinion that the global economy is a drag on our own.
[a] above
estimates: the September German trade surplus, the final October German and EU manufacturing,
services and composite PMI’s, the final October UK and services construction
PMI‘s, the October German construction PMI; below estimates September German
industrial production; in line with estimates: September EU retail sales, the
September EU PPI,
[b] September Japanese cash earnings,
household spending and leading economic indicators were above forecasts; the October Japanese services and composite
PMI’s were lower than expected,
[c] the October Chinese Caixin services PMI
was below consensus while the composite PMI was above; as was the October trade
surplus.
Developments this week that impact the
economy:
(1) trade:
who knows. Early in the week, it looked
like a Phase one deal was close to being finalized. Then Chinese first poured cold water on that
narrative, but later reversed field and supported it. Then Friday morning, Navarro sounded negative
on a deal. As I noted Thursday, trying
to figure out what is really happening is a waste of time.
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.
(2) fiscal
policy: nothing new this week.
(3) monetary
policy: this week [a] the Bank of China, lowered interest rates, joining the
other major central banks in a race to see how much liquidity can be pumped
into the global financial system but [b] the Bank of England left rates
unchanged {at 75 basis points}.
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.
(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. Indeed, any progress is a miracle
given all the aforementioned fiscal and monetary headwinds. My forecast remains that the US will avoid
recession.
Jeffrey Snider thinks otherwise
(must read):
The
Market-Disciplined Investing
Technical
The Averages (276781,
3093) drifted higher yesterday on lower volume and but good breadth. The latter remains in overbought territory.
The VIX fell 5 1/8%---nearing its 7/25 low and putting it in sync with breadth.
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.
TLT was down another
½ %, finishing below its 100 DMA (now resistance) and a short hair away from
the lower boundary of its very short term uptrend and only a couple of points
from its 200 DMA. If these levels hold,
then TLT will likely have found a bottom; if not, the next visible support
level is 20 points away.
The dollar was up another
¼%, maintaining its upward momentum. Clearly, the longer it sustains this uptrend,
the more in harmony it gets with stocks.
Gold was down 5/8
%, ending below its 100 DMA for a second day (now support; if it remains there
through the close on Monday, it will revert to resistance). However, it finished well above its 200 DMA
and the lower boundary of its short term uptrend; meaning it has plenty more
room on the downside before meeting any significant support.
Dollar investors
are almost surely of the same mind as equity investors in the belief that a
stronger economy is dead ahead. TLT and GLD
investors are also moving in that direction; but nothing is confirmed yet.
One observation. The numbers simply aren’t confirming a
strengthening economic scenario. Of
course, as I noted Friday, Markets are forward looking; and they likely are
assuming a trade deal will lead to a pick-up in economic growth. As I discussed
above, I don’t buy that thesis.
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. This week’s
data was back in the red; though I continue to believe that this only means
that the economy is struggling to grow, 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. However, 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 [a] the Bank of China lowered interest rates, joining the other
major central banks’ liquidity dump and [b] the Bank of England left its key
rate unchanged---though at a very low 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]---which is determined by the
present value of future dividend growth.
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 continues
to surprise to the upside and that lessens the uncertainty of any cyclical fall
corporate profits.
Corporate profits are not as good as you
think (must read).
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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