2/1/20
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 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 24674-37135
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 3076-3575
Intermediate
Term Uptrend 2724-4224 Long Term Uptrend 1320-4955
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 total
dataflow this week was marginally upbeat; however, the primary indicators were
negative (two neutral, two negative). The call is negative. Score: in the last 226 weeks, seventy-four
were positive, one hundred and two negative and fifty neutral.
That is somewhat disappointing in that a
three week positive trend in the stats has been broken. Of course, as I repeatedly note, a see saw pattern
of economic growth has been with us for a decade. So, no surprises here. That said, the new trade treaties should
provide some positive bias to economic growth both short and long term; and
that will hopefully insure no recession.
On the other hand, the coronavirus will likely act as an offset
in the short run, meaning this erratic pattern of global growth may remain with
us for a while. At the moment, I continue
to believe that this epidemic will have a short shelf life, economically speaking.
Hence, the economy should keep growing in
line with my forecast (sluggish but positive) with no immediate concern about
recession. Longer term, I still believe
that the economy is facing fiscal and monetary policies that are impediments to
higher growth.
Update on big four economic indicators.
The latest Q1 GDP nowcasts.
The overseas data had another very upbeat
week with the Japanese economy showing particular strength. I am not sure how long this positive numbers
flow can last in the face of the coronavirus,
But as of the end of this week, the global economy is supportive of US
economic growth.
Developments this week that impact the
economy:
(1) trade:
on the back burner for the time
being. But the positive impact of the
US/China and USMCA deals should start to show up later in the quarter.
(2)
fiscal policy: the latest CBO forecasts were
released this week. They projected a $1 trillion deficit in FY2020
and expect that number to grow every year in the foreseeable future. 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 held its January meeting this week, leaving rates and Not
QE unchanged. In its post meeting narrative, it slightly
downgraded the economic outlook for the US, pointing at something that we have
known all along; to wit, QE has done little to stimulate economic growth.
Indeed, it has inhibited growth through
the mispricing and misallocation of assets.
Our weekly dose of Jeffrey Snider.
A distortion of QE: German banks hoarding
cash.
(4) global
hotspots. the coronavirus outbreak in China remains the key variable in this
category. It continues to spread and, as
a result, the economic fallout worsens. I
still believe that this is an event that has a relative short shelf life. That is, I don’t see it effecting global growth
six months from now. So, any economic negative
that results will be temporary. On the
other hand, I could be wrong and if this blows into a major crisis, then
clearly, global economic growth will slow more significantly than I expect.
In addition, Brexit is now upon us. The UK formally exited the EU last
night. It now has until 12/31 to work
out terms of a new relationship the EU, especially with regards to trade. Both sides have a lot to lose in the absence of
an agreement; but never underestimate the ability of a politician to make a
mess of a situation. In any case, the
headlines are likely to be volatile in the months ahead.
(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 long term secular growth 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. Offsetting the latter short term is the likely
negative impact on the global economy of the coronavirus. Longer term, 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 (28256,
3225) got hammered yesterday. However, they
still ended above both MA’s and in short, intermediate and long term uptrends. So, there has hardly been a loss in long term
momentum.
On the other hand,
really significant support doesn’t exist until the Averages reach their 100 DMA
[27740/3110] and the lower boundaries of their short term uptrends [24756/3076].
Volume rose. Breadth was terrible; indeed, some indicators
are nearing oversold territory. The VIX popped
22%. It is now approaching a nine month
price high, supporting the breadth indicators that a technical rest may be in
the cards short term.
The long bond was
up 1%, continuing its ongoing directional momentum change to the upside
(pointing to a sluggish economy; i.e. no lift off). Although there are two gap up opens below
that need to be filled.
The dollar was
down another 3/8%. Recall that Thursday,
it touched its 200 DMA (now resistance) but fell back. So, the retreat continues. Plus, it remains below both MA’s, in a short
term downtrend and is still the ugliest chart on the block. While it is attempting to close that big gap
down open from 12/23, my assumption remains that the dollar will continue to
weaken.
Gold was up ½ %,
closing within very short term and short term uptrends and above both MA’s.
TLT, GLD and UUP continue
to trade like the economy is not near any kind of ‘lift off’. The Averages are leaning in that direction
but are not quite there yet.
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. However,
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.
On the other hand, the coronavirus epidemic
will almost surely have a negative effect on short/intermediate term economic growth. That said, exogenous events with a short
shelf life rarely have an influence on long term equity valuations. Furthermore, as long as the Fed and its fellow central
banks continue to pump money into the financial system, the Market impact should
be contained,
(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. The FOMC and Bank of England met this
week. Both appear on goal to continue their
own versions of QE and, perhaps, even expand these programs.
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.
The Fed’s view of valuations may be misguided
(must read).
As prices continue to rise, I will be primarily
focused on those stocks that trade into their Sell Half Range or fail to meet
the minimum financial quality criteria for inclusion in our Universes 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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