Saturday, February 15, 2020

The Closing Bell


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%


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                                 24877-37339
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                                     3102-3597
                                    Intermediate Term Uptrend                         2737-4237                                                          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%

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 turned negative again; plus, the primary indicators were negative (one neutral, one negative).  I am calling it a negative.  Score: in the last 228 weeks, seventy-five were positive, one hundred and three negative and fifty neutral. 

So, despite the increased optimism following the signing of the two trade treaties, the numbers just won’t stay consistently positive.  Leaving me no alternative but leave my forecast unchanged:

(1)    on a short term basis, we don’t yet know the economic impact of the coronavirus. What we did find out this week was that the Chinese have been lying about the magnitude of this problem---it now being much greater than originally portrayed.  I am still not going to alter my longer term view that the coronavirus will not impact secular economic growth, but clearly the scale of its potential effect on near term economic growth continues to increase,

Latest anecdotal evidence out of China.

(2)    on a long term basis, the economy must still overcome the burdens to growth stemming from egregiously irresponsible fiscal and monetary policies---both of which were headlines this week as [a] the Trump FY2021 budget revealed more of the same spend, spend, spend and [b] in Powell’s Humphrey Hawkins testimony, Powell conceded the QEInfinity was alive and well and dwelling in the Eccles Building.

Debts, deficits and growth (must read):

I am not convinced that the pluses derived from the trade treaties will have much effect beyond providing a source of additional underlying strength that will prevent the economy from slipping into recession.
Update on big four economic indicators.

Latest Q1 nowcasts.

Overseas data was pretty evenly balanced; though I am not sure how long it can remain so in the face of the coronavirus.   But as of the end of this week, the global economy is supportive of US economic growth.

Bottom line:  on a secular basis, the US economy is growing at an historically below average rate. 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.  However, short term the coronavirus will almost surely have a negative impact on global economy growth.  The questions are (1) are what are the stats going to look like when the impact of the coronavirus becomes manifest?  At the minimum, it would seem reasonable to assume that there will be a period of weak numbers, and (2) how long will that effect last?  My assumption is that any decline/slowdown in economic activity will be short lived.  In other words, it will almost surely influence 2020 growth estimates but the impact will dissipate through the year.

The Market-Disciplined Investing

The Averages (29398, 3380) turned in another mixed performance yesterday (Dow down, S&P up).  However, the Dow held in its very short term uptrend, remaining in harmony with the S&P and suggesting additional upside momentum.  The visible resistance levels are 32301/3594.


GLD,  TLT and UUP continued their strong move as safety trades.  UUP ended above the upper boundary of its short term downtrend for a second day; if it remains there through the close on Tuesday, the short term trend will be reset to a trading range.   

                Clearly, there is currently a dichotomy between the economic expectations of equity investors and those in GLD, TLT, and UUP.  Somebody is going to be wrong.

                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  the signing of the US/China and USMCA trade agreements reinforces my conviction that the economy will not fall into a recession.  That should keep secular corporate profit growth on a somewhat even keel which is a plus for stock prices.

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 a lasting 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 resumption of QE by the global central banks.  In an attempt to offset the economic impact of the coronavirus, the Bank of China is shoveling liquidity into the Chinese financial system with both hands.  Meanwhile, back at the ranch, Powell conceded this week that QEInfinity is now a permanent fixture of monetary policy. 

As long as that remains the case AND investors believe that it is a plus for the Market, stock prices should maintain their upward bias irrespective of valuations.

That said,  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.

Bottom line:  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 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.

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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