2/29/20
Statistical
Summary
Current Economic Forecast
2019 estimates (revised)
Real Growth in Gross Domestic Product 1.5-2.5%
Inflation +1.5-2%
Corporate Profits 6-9%
2020
Real Growth in Gross Domestic Product ?
Inflation ?
Corporate Profits ?
Current Market Forecast
Dow Jones Industrial Average
Current Trend (revised):
Short Term Uptrend 24985-37447
Intermediate Term Uptrend 16100-32301
Long Term Uptrend 6860-38078
2019 Year End Fair Value
14500-14700
2020 Year End Fair Value
15100-15300
Standard & Poor’s 500
Current
Trend (revised):
Short Term Trading
Range 2855-3303
Intermediate
Term Uptrend 2752-4252 Long Term Uptrend 1329-4964
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
Spread of the coronavirus and concerns about
its potential impact on economic activity have raised enough questions about the
expected cyclical growth prospects for the US that I am suspending my 2020
economic outlook until the coronavirus’ ‘impact on economic activity’ becomes
clearer.
The total dataflow this week was back to positive,
as were the primary indicators. I am
calling it a positive. Score: in the
last 230 weeks, seventy-seven were positive, one hundred and three negative and
fifty neutral.
Update on big four economic indicators.
Update on Q1 nowcasts.
Overseas data was slightly positive; but like
the US numbers, they are likely irrelevant.
***overnight, the
first signs of the coronavirus economic impact?
However, these upbeat stats are rendered
virtually meaningless by the rapid global increase in the coronavirus infection/death
rate and the likely consequences on economic growth. Unfortunately, at the moment, no one has a
handle on the timing of the containment effort, the extent of the economic
losses associated with combatting the virus, the magnitude of any
fiscal/monetary response and whether or not that response will positively
impact economic growth. Until that starts to happen, making predictions
about the economy, at least over the short term, is wasted exercise.
***overnight in US
That, of course, hasn’t stop me from having
an opinion which, as you know, is that this virus would have only a temporary
effect on global growth and that will dissipate over time. Clearly, the longer we go without a visible
peak in the coronavirus’ infection/death rate, the less ‘temporary’ the effect
on global growth. So, for the moment, I am
acknowledging that I was too optimistic regarding the cyclical impact of the
coronavirus and suspending my short term economic forecast.
Longer term, I am not altering my long term
economic outlook, which is that the economy will continue to grow at a subpar
rate due to the twin burdens of egregiously irresponsible fiscal and monetary
policies.
The
Market-Disciplined Investing
Technical
Getting evermore
oversold, the Averages (25409, 2954) continued their waterfall formation.; though
the DJIA did manage a 500 point rally off of its intraday low. The Dow ended below its 200 DMA for a fourth day,
reverting to resistance. The S&P
finished below the lower boundary of its short term uptrend for a third day,
resetting to a trading range and below its 200 DMA for a second day (now support;
if it remains there through the close next Tuesday, it will revert to
resistance).
The pin action in
the long bond remains quite strong and continues to suggest ‘safety trade’ or economic
weakness.
On the other hand,
GLD has now retreated back below the upper boundaries of its very short and
short term uptrends. The chart remains strong
(still acting as a safety trade) though
GLD’s upward momentum has been stymied by the aforementioned uptrend
boundaries.
The dollar was the
big loser this week. As I noted
yesterday, it broke below the lower boundary of its very short term uptrend on
Thursday, negating it. Then ended below
both its 100 and 200 DMA on Friday. I am
not sure what this weakening/breakup in the TLT, GLD, UUP ‘safety trade’ wall
means. But with so much going on in the
Markets, it needs to be monitored closely for whatever informational value it
can provide.
Friday in the charts.
Fundamental-A
Dividend Growth Investment Strategy
This week’s sell off notwithstanding, 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. I am clueless about the prospects for economic
growth over the next twelve months and will almost certainly remain so until we
have a handle on the peak coronavirus infections/deaths. Until we have that information, the future
rate of economic growth is simply unknowable.
It seems reasonable to me to assume that the Market is currently in the
process of adjusting to that hard reality and likely will continue to do so until the economic impact of the
coronavirus can start to be discounted in a meaningful way.
(2)
the resumption of QE by the global central banks. As one might expect, with the Market in free
fall, all investors’ eyes have turned to the central banks for another heavy
dose of monetary easing---which, by the way, has been forthcoming. It just hasn’t had its usual stimulative effects
on securities prices.
Powell put a little mustard on that hot dog
Friday, writing a post on the Fed’s website basically saying that the economy
was in good shape and that if the economic effects of the coronavirus proved
negative, the Fed was prepared for action.
But what good will that do? What good is another cut in the Fed Funds
rate when the bond market is screaming higher [lower in yield]? Who needs extra liquidity with which to
speculate when the Dow is down 500-1000 points daily?
I have said in these pages every week that as
long as investors believe that QEInfinity is a plus for the Market, stock
prices should maintain their upward bias irrespective of valuations. I think that that thesis is about to be
tested.
Bottom line: I believe that Averages are grossly overvalued
[as determined by my Valuation Model], though clearly becoming less so.
Nonetheless, there are certain segments of the economy/Market that have
been punished severely with the stocks
of the companies serving those industries down 30-70%. It is time to start putting our cash to work
in these beaten up stocks. Accordingly,
the Dividend Growth Portfolio bought FedEx (FDX) this week.
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.
