2/8/20
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 24818-37279
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 3088-3583
Intermediate
Term Uptrend 2732-4232 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 upbeat; however,
the primary indicators were negative (one positive, two negative). Still I am
calling it a positive. Score: in the
last 227 weeks, seventy-five were positive, one hundred and two negative and fifty
neutral.
This gets the dataflow back on a constructive
trend which as I noted above is likely the result of increased optimism
following the signing of the two trade treaties. Still I am not revising my forecast because
(1) on a short term basis, we don’t yet know the economic impact of the
coronavirus and (2) on a long term basis, the economy must still overcome the burdens
to growth stemming from egregiously irresponsible fiscal and monetary policies. 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.
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.
Update on consumer credit.
Overseas data was a bit more balanced though
still weighed to the positive side. I am not sure how long this upbeat 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.
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. 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 (29123,
3327) backed off their all-time highs (29373/3337) yesterday. I don’t view this as anything particularly ominous. After all, prices were up in a virtual
straight line for almost a week. So,
some consolidation makes sense. At the
moment, my assumption is that the indices are in a very short term trading
range defined by their all-time highs on the upside and the mid-December gap up
opens (28394/3215) on the downside.
GLD and TLT charts
continued to recover from the pasting that they took early in the week. Importantly, they both made higher lows
during their sell off---a sign of technical strength. It looks to me like the
prices of GLD and TLT are headed higher.
UUP was the
standout chart of the week. It appears
to be reversing what has been an ugly technical picture---on Friday, it closed
above its 200 DMA for a third day and
above its 100 DMA for the first day. If
both these challenges are successful, UUP will be well on its way to
re-establishing a price uptrend. That would put it in harmony with GLD and TLT. When that happens, usually the theme is ‘safety
trade’.
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 corporate profits 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 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,
***overnight update on the coronavirus.
Sooner or later, this fake economic boom will
end.
(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. 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, the rest of the global central banks seem poised to do the
same should economic conditions worsen in their jurisdiction.
Much of this week’s Market surge was likely
due, at least partially, to the Chinese exuberant embrace of monetary
stimulus.
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.
Fed released its latest Monetary Policy
Report which, as you might expect, was dovish in tone.
(4)
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: 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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