1/25/20
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 24674-37053
Intermediate Term Uptrend 16100-32301
Long Term Uptrend 6849-38067
2019 Year End Fair Value
14500-14700
2020 Year End Fair Value
15100-15300
Standard & Poor’s 500
Current
Trend (revised):
Short Term Uptrend 3057-3556
Intermediate
Term Uptrend 2715-4215 Long Term Uptrend 1315-4950
2019 Year End Fair Value 1790-1810
2020 Year End Fair Value 1870-1890
Percentage
Cash in Our Portfolios
Dividend Growth Portfolio 56%
High Yield Portfolio 55%
Aggressive Growth Portfolio 56%
Economics/Politics
With the signing of the US/China and USMCA
trade treaties, the Trump economy is a slight positive for equity valuations. The
dataflow this week was upbeat with the primary indicators evenly split. The
call is positive. Score: in the last 224
weeks, seventy-four were positive, one hundred and one negative and fifty
neutral.
That keeps the positive trend of the prior two
weeks intact, suggesting that, at the least, the economy is in no near term
danger of sinking into recession. That,
of course, is my forecast. Longer term, I
still believe that the economy is facing fiscal and monetary policies that are impediments
to higher growth.
The overseas data followed suit with a very
upbeat week. So, it is not surprising that
global investors are feeling a bit more positive; and clearly it is supportive
of US economic growth.
Developments this week that impact the
economy:
(1) trade:
[a] with the signing of the US/China Phase one,
the deal has removed a short term economic negative. More importantly, inclusion of provisions curtailing
Chinese IP theft is a longer term plus, assuming that the Chinese live up to
the agreement. Clearly, if they do, I will have been proven wrong. But that is OK; because it will be an added positive
to US economic growth prospects.
[b] the Canada, Mexico, US trade treaty has been
signed. That is also a big plus. Remember Canada and Mexico are our second and
third largest trading partners.
(2)
fiscal policy: nothing this week. Though 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.
And that is not helped by an endless expansion of the deficit.
Counterpoint (sort of).
(3) monetary
policy: Not QE continues which, in my
opinion, only exacerbates the mispricing and misallocation of assets. This ultimately distorts the pricing of risk. Sooner or later, the piper will have to be
paid,
More from Jeffrey Snider.
What if the Markets increasingly distrust the
Fed forecast?
(4) global
hotspots. The most important headline in this category this week is not Brexit
or some escalation in the Middle East conflict [s]. Rather it is the coronavirus outbreak in
China that could potentially affect global travel/commerce. It is too soon to know how serious this
problem will become but the news flow continues to get worse.
(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. While the data has
improved of late and the newly signed trade deals should, at the least, help
the US avoid an economic downturn, more is needed before I will consider any upward
revisions to my forecast.
The driving causes behind my below average
growth outlook are 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 but may improve somewhat as a result of the trade treaties. Still, 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 (28989,
3315) had their first rough day in a while, apparently on rising concerns over spread
of the coronavirus. Nonetheless, they still closed above both MA’s and in
uptrends across all timeframes. So, as yet there is little danger of spoiling
their charts. Volume was up; breadth weakened but remains in overbought territory.
And.
The VIX surged 12 %,
ending above both its 100 DMA (now resistance; if it remains there through the
close next Tuesday, it will revert to support) and its 200 DMA (now support; if
it remains there through the close next Wednesday, it will revert to support)
and a developing very short term downtrend. At the moment, it appears that it is just
following equity prices versus anticipating a larger move. So, I am not reading too much into its price
action.
The long bond had
another good day (up 7/8 %), finishing above its 100 DMA for a third day,
reverting to support. It looks to be in
the process of a directional change to the upside; though there is a gap up
open below that needs to be filled. It is
also appears to be challenging the sentiment that the economy is growing stronger.
The dollar was up
again yesterday, but remains below both MA’s and in a short term downtrend. On the other hand, for the ugliest chart on
the block, it has had a decent week and is starting an attempt to close that big
gap down open from 12/23. For the
moment, my assumption remains that the dollar will continue to weaken.
Gold was up another
½ %, closing within very short term and short term uptrends and above both MA’s.
The chart of the S&P
is clearly pointing at a stronger economy.
Those of GLD and UUP not so much; and TLT may also about to challenge
that scenario.
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. My forecast remains that the economy continues
to struggle forward against multiple headwinds.
Though clearly the signing of the US/China and USMCA trade agreements
removes one of those impediments and reinforces my conviction that the economy
is not falling into a recession.
Remember though that the pattern of US economic
growth for the last decade has been erratic, that is, periods of promising
growth followed by periods of little to no growth At the moment, I see no reason to assume that
this pattern has changed.
Finally, in an environment in which corporate
earnings are dramatically overvalued, a modest improvement in profit growth expectations
[due to the trade agreements] will only make overvaluation slightly less so.
(2) the
success of current trade negotiations. See above.
My bottom line is that
Trump’s attempt to reset the post WWII global trade paradigm is meeting success
and that is a plus for US economic growth.
At the moment, I am not saying that it will provide the fuel for any ‘lift
off’ in growth; but it should reduce the odds of a further stagnation in US
economic growth or worse.
(3)
the resumption of QE by the global central banks. This week in her first meeting as head of the
ECB, Christine Laguard chose to keep the wave making at a minimum. Rates and QE were left unchanged. So that leaves all the major central banks on
full QE mode. As you know, I believe that QEInfinity has, is
and will continue to create distortions in pricing of risk which, in turn, leads
to the mispricing and misallocation of assets. As such, it is a negative for the efficient
growth of the economy.
Nonetheless, on a short term basis, QE,
QEInfinity and NotQE have been and remain Market friendly. Meaning 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 and the improvement in our trade regime should
have a positive impact on secular growth and, hence, equity valuations. 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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