12/7/19
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 24278-34578
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 2672-3572
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 positive. However, the primary indicators were
mixed: November nonfarm payrolls (+), October construction spending (-) and
October factory orders (0). The call is positive. Score: in the last 217 weeks, seventy were
positive, ninety-nine negative and forty-eight neutral.
Update
on ECRI weekly leading index.
Except for Japan, the overseas data was quite
positive---but we need a good deal more of this before I alter my opinion that
the global economy is a drag on our own.
Developments this week that impact the
economy:
(1) trade:
[a] China: who knows. The news flow this week remained a confusing
montage of serial positive and negative US/Chinese trade stories. Added to this mix was the US support for the
citizens of Hong Kong and China’s muslim minorities---which clearly didn’t make
the Chinese happy.
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. 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, Trump threatened steel and aluminum tariffs on Brazil and Argentina
and counter tariffs on France in reaction to that country’s new tax on digital
revenues. While I am not sure conducting
a multi front trade war is the best of ideas, if implemented, these tariffs
would likely have minimal impact on our economy.
(2) fiscal
policy: nothing this week.
(3) monetary
policy: nothing this week except, you know, NotQE to infinity.
(4) global
hotspots. The bills supporting the protestors in Hong Kong and condemning the
Chinese treatment of muslim minorities clearly doesn’t increase the odds of
trade deal.
(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 (28015,
3145) had a gangbusters’ day on Friday, creating yet another gap up open to
join with Wednesday’s and that of October 11th in addition to the
gap down open on Tuesday. I noted
earlier in the week that all these conflicting gaps suggest a trading range
near term. But their increasing
frequency also suggests a hyper speculative investor mindset which could be symptomatic
of stocks either entering or having already entered a technical blow off. In addition, it makes no sense to me (and
makes me nervous) for the VIX to be at a level (it was down another 6 ¼% on
Friday) indicative of complacency in the midst of all these volatile openings.
On the other hand,
while the long bond gapped down on Monday and gapped up on Tuesday, it spent
the rest of the week quietly filling both.
In the process, its positive long term momentum is starting to be challenged
given that (1) on Friday the 100 DMA
reverted to resistance, (2) it continues trade in a trend of lower highs and
(3) it is approaching the lower boundary of its very short term uptrend.
Conversely, the dollar
which had been exhibiting relatively stable pin action, gapped up on Friday’s
open, negating Thursday’s challenge of its 100 DMA.
GLD shared in last
week’s volatility. It had a gap up open
on Tuesday which never got filled. Then
gapped down on Friday’s open, leaving two gap opens in the same week. Both need to be closed.
The volatility in TLT, UUP and GLD reinforce
the notion of a very speculative mindset among 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, 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.
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.
QE has wreaked havoc on quant funds.
(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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