Saturday, February 29, 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                               ?
                        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%

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

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.

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