2/15/20
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 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%
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 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
Technical
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.
Counterpoint.
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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