3/28/20
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 ?
Inflation ?
Corporate Profits ?
Current Market Forecast
Dow Jones Industrial Average
Current Trend (revised):
Short Term Downtrend 18011-23239
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 Downtrend 2255-2739
Intermediate
Term Trading Range 1813-3398 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 48%
High Yield Portfolio 50%
Aggressive Growth Portfolio 54%
Economics/Politics
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 overall dataflow this week was negative
while the primary indicators were neutral (one plus, two neutral, one negative).
So, I am calling it a negative. Score: in the last 234 weeks, seventy-nine
were positive, one hundred and four negative and fifty-one neutral.
Overseas stats were negative, though, of the
major economies, the Japanese are holding up better than the others.
Importantly, the economic impact of the
coronavirus has become manifest in the EU data and is starting to do so in the
US. Unfortunately, there are no signs of
a peaking in the coronavirus infection/death rate. So, we still have no idea regarding the ultimate
magnitude of the virus’s consequences on economic growth. Until we do, making predictions about the
economy, at least over the short term, is wasted exercise.
I have suspended 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 secular
rate due to the twin burdens of egregiously irresponsible fiscal and monetary
policies---which, by the way, are becoming even more egregiously irresponsible
as a result of measures being taken by the government and the Fed in dealing
with the current crisis.
The
Market-Disciplined Investing
Technical
The Averages (21636, 2541) gave back a portion of this
week’s gains yesterday. That leaves them
in short term downtrends whose boundaries are ~18011/2255 on the downside and
~23239/2739 on the upside.
Very short term,
there remains huge buyside orders in the institutional rebalancing process that
will occur at quarter’s end.
On a slightly longer
term basis, I still think the evidence points to more downside: (1) stocks
condition has largely been worked off, (2) the VIX is not reflecting a
reduction in risk adverseness among investors, (3) both indices experienced gap
up opens on Tuesday [which need to be filled] and (4) some of the most powerful
rallies occur during bear markets. There
is almost no visible support until ~ 15399/1810.
Point.
Counterpoint.
Stocks tumble after Fed announces
a reduction in QE.
TLT, GLD and UUP continued
their volatility. The long bond maintained
its strong upward momentum (weak economy/safety trade) while the dollar sold off
again---which may be an indication of a lessening in the dollar funding shortage
(risk off trade).
Friday
in the charts.
Fundamental-A
Dividend Growth Investment Strategy
The recent decline notwithstanding, the DJIA and
the S&P are still 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 remain so until we have a
handle on the magnitude of the risks currently facing the economy.
The coronavirus or more specifically the peak
in infections/death rates and the economic damage incurred during the ‘social
distancing’ period are the essential pieces of information we need in determining
the overall impact on short term economic growth. The good news is that
[a] with
every passing day, we get more information regarding the progression of the disease
including {i} the success, or lack
thereof, of measures being taken to halt the spread of the virus {ii} its
pattern and length of its growth cycle.
As an aside, given the ingenuity and
industriousness of the American people, I believe that this crisis will not
last as long as the doomsayers predict.
I want to emphasize this point, Every
day, I read accounts of companies and individuals responding to shortages,
helping those in need, and working on solving the innumerable problems
associated with the virus. I don’t see
much of this being considered when projecting the timelines for a return to
normalcy.
[b] all hands are on deck in fighting the
virus. Global central banks are shoveling
money into the financial system to insure its solvency. Governments are busy dreaming up ways to encourage
‘social distancing’ and, at the same time, combat the negative economic effects
of the disease. The point being that the
global powers that be are working hard at curbing the infection/death
rates.
The coronavirus will end the conservative
dogma about big government forever (must read).
Still, the economic consequences of virus in
terms of lost wages, sales and profits are still largely unknown. And until they start to be measurable, this will
be an uncertainly that is going to hang over the Market. I have no doubt that some, perhaps all of the
ultimate negative consequences are being priced into stocks. Indeed, it is possible that they are being
overly discounted. But the point is that
we just don’t know; and until we do, this factor will likely be a disrupter of
valuations.
[c] not helping matters is the current
turmoil in the oil patch. Although, as
you know, I believe much of the impact on the industry and the companies has
been priced in.
(2)
the resumption of QE by the global central banks. At the risk of beating a dead horse, I
believe that the Fed [global central banks] QE policies have led to excessive speculation
and the gross mispricing and misallocation of assets, such as the
overleveraging of marginally economically viable companies or marginally
profitable trades by hedge funds.
As you know, this is the issue that keeps me
awake at night. As I repeat ad nauseum,
the Fed has created the overleveraging of America by allowing {i} companies to
borrow cheap money in order to buy back their stocks at elevated prices, {ii}
other companies to avail themselves of very low interest rates to avoid
bankruptcy, i.e. servicing current unrepayable debt with additional unrepayable
debt, {iii} speculators/hedge funds to use leverage to turn marginally
profitable trades into winners and {iv} foreign governments to finance projects/policies
that might otherwise have been uneconomic.
In my opinion, this misallocation of assets will
ultimately be unwound just as the mortgage financing debacle was in 2009. But we don’t when or how large/painful the
unwind will be. However, I believe that
the liquidity problems currently being experienced in the financial system are
directly related to this issue; though I have no idea how the solution will
manifest itself. Until it does, this is
a negative like the coronavirus except more unknown.
However, given the indifference of the Markets
to the recent massive Fed injections of liquidity, this story may be coming to
an end; meaning that if investors are unwilling to support Fed bailout efforts {i.e.
invest in the companies/securities being bailed out}, those efforts may not be
enough to prevent bankruptcy/insolvency. That is issue number one, i.e. can the
Fed prevent/control/manage the unwinding of the misallocation of assets.
The second issue is, what happens to [a] the
Fed’s credibility {i.e. its ability to conduct an effective monetary policy} if
it loses {has lost} the faith and confidence of the financial markets and, as a
consequence, [b] the pricing of risk. It
is this latter point that most impacts the Markets; that is, if the Fed ‘put’
evaporates, the risk premium applied to security valuation expands. Meaning that, all other things being equal,
P/E’s decline and interest rates go up.
Bottom line: The current selloff notwithstanding, I still believe
that the Averages and certain segments of the Market remain overvalued [as
determined by my Valuation Model]. As a
result, I believe that the stocks in those parts of the Market will continue
under pressure.
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%. As a result, I have been putting cash to work
in these beaten up stocks.
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.
