12/14/19
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 24332-34632
Intermediate Term Uptrend 16032-32301
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 2981-3451
Intermediate
Term Uptrend 2676-4166 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. As was the single primary indicator: November
retail sales (-). The call is negative. Score:
in the last 218 weeks, seventy were positive, one hundred negative and forty-eight
neutral.
Overseas data returned to its heretofore negative
trend, continuing to support the notion that the global economy is a drag on
our own.
Developments this week that impact the
economy:
(1) trade:
[a] China: while there appears to be some
sort of agreement, we don’t know exactly what the terms are. Or if we ever will. It does seem likely that Trump won’t impose
those additional tariffs tomorrow and that is a minor plus. However, given what we know at this point, I
don’t think any conclusion can be made beyond that.
The latest.
For skeptics among you.
My bottom line hasn’t changed. I don’t believe that there [is] 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. That said, any agreement that removes tariffs
and increases Chinese purchase of US ag products will be a minor short term
economic plus.
[b] in
addition, the Canada, Mexico, US trade treaty appears to be making
progress. That is a positive. Remember Canada and Mexico are our second and
third largest trading partners.
[c] on the other hand, it looks like the Donald now
has his sights set on Europe.
(2)
fiscal policy: the Treasury reported the November
budget deficit this week, which not surprisingly continued to grow. Congress then added insult to injury, reaching an agreement
on a $1.37 trillion FY2020 budget deal. This at a time of full employment
and a record national debt. I repeat
Rogoff and Reinhart’s thesis [with which I agree] that when the national debt is
above 90% of GDP [which it is], it acts as a restraint on growth.
(3) monetary
policy: the FOMC met this week. Nothing
really changed from the QEInfinity narrative except that it pledged to make that
policy even greater if the dollar funding problem returned.
True to its word, the following day the Fed
announced that it would pump $500 billion into the financial system to counter
any potential disruption in the repo market. While I have to give it credit for
anticipating this problem, what is troublesome is that these high powered
intellects still don’t have a clue of why it is happening. True, they point to year end liquidity needs;
but this factor has never demanded this kind of response in the past.
Banana republic money debasement.
My concern is that there is a major
bank/financial institution with huge counterparty exposure that is teetering on
bankruptcy. To be sure, US banks are
much better prepared to deal with a situation like this than they were in 2008,
but European and Chinese banks are not. And
turmoil in the EU or Chinese financial system will still have spillover effects
on their and the global economies.
(4) global
hotspots. Brexit. Johnson’s landslide victory pretty much assures a Brexit. However, I don’t believe anyone has a handle
on exactly what the economic consequences are for the UK or the EU. To be sure, they could be positive. But the point is, no one knows.
(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 fiscal and monetary headwinds.
My forecast remains that the US will avoid recession.
The
Market-Disciplined Investing
Technical
The Averages (28135,
3168) were largely unchanged in Friday’s trading. So, nothing changed with respect to those
multiple gap up opens down below or my concern that this is not healthy and
could be an indication that the Market is entering or has already entered a
blow off top. On the other hand, the
S&P reset a new very short term uptrend (the Dow has not). Volume was down; breadth mixed. The VIX fell another 9 ½ % and now is safely
back in territory indicative of complacency.
The long bond rose
1 1/8%, rebounding from Thursday’s beating.
While its short term momentum remains down (1) as it is still below its 100 DMA, (2) it continues trade in a trend of lower
highs and (3) is now approaching the lower boundary of its very short term
uptrend. However, it is developing a
series of higher lows potentially creating a pennant formation which would be
more a sign of confusion or uncertainty than negative sentiment.
The dollar was unchanged,
ending below its 100 DMA for a third day, reverting to resistance. It remains near the lower boundary of its short
term trading range.
Gold was up ½%,
continuing to bump up against the upper boundary of its very short term uptrend
as well as its 100 DMA. While it remains
in that trend of lower highs, it is also developing a trend of higher lows---very
similar to the trading pattern of TLT.
The VIX and the
S&P are clearly pointing at higher prices, while TLT, UUP and GLD are
suggesting uncertainty among its investors.
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 this remains the
case, US economy will be a neutral for
the Market.
(2) the
[lack of] success of current trade negotiations. At this moment, all the press
notwithstanding, we still don’t know what the terms of the Phase One US/China agreement
are. As I have repeated ad nauseum, I don’t believe an agreement will be [has
been] 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.
Not helping, with
the ink hardly dry on the mystery US/China trade, Trump opened up another
dispute. This time with the EU. While not as big a factor as China in the economics
of US trade, it still keeps the level of Market uncertainty elevated.
Of course, there was
developments from which investors can take heart. NAFTA 2.0 is working its way
to completion and that should be is a plus for corporate profits and equities.
(3)
the resumption of QE by the global central banks. Both the Fed and the ECB renewed their
dedication to QEInfinity this week. And the
Fed upped the ante by announcing a massive infusion into the US financial
system in anticipation of another the repo market freeze up at year end. Since liquidity is what has fueled the stock
market rise the last decade, this injection should initially be a plus for
equity prices. However, if the problems
in the repo market reflect some underlying weakness not yet obvious to the
gurus in the Fed and this flood of money doesn’t solve the problem, this could
be the trigger for the loss of faith in the Fed.
My bottom line remains the same. Because QE, QEInfinity and NotQE have been
and remain 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.
The profit gap.
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.
Mom and pop investors are not the ones
chasing performance.
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.
