Saturday, March 7, 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                                 25047-37509
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                         2756-4256                                                          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 positive, as were the primary indicators (one plus, two neutral).  I am calling it a positive.  Score: in the last 231 weeks, seventy-eight were positive, one hundred and three negative and fifty neutral. 

Update on big four economic indicators..

The latest Q1 nowcasts.

Overseas data was slightly negative; but like the US numbers, they are likely irrelevant due to 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.

For the moment, I am 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

The Averages  (25864, 2972) took investors on another wild ride yesterday, closing off more than 1% but only after rallying hard in the last hour’s trading.  The technical highlights were  (1)  the S&P finishing below its 200 DMA for a second day [now support; if it remains there through the close on next Tuesday, it will revert to resistance], (2) both indices traded down to near major resistance levels [for the Dow, the lower boundary of its short term uptrend {25047}; for the S&P, the lower boundary of its short term trading range {2855}] and bounced for a second time.   That suggests the possible development of a bottom.

TLT and GLD aggressively resumed their push to new highs while UUP was ripped again.  So, nothing changed technically.

                Friday in the charts.

                The VIX, the credit bubble and stock prices.

Fundamental-A Dividend Growth Investment Strategy

The recent decline 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.  The Fed didn’t disappoint this week, announcing a 50 basis point cut in the Fed Funds rate following an unscheduled meeting.  The importance of such a move is emphasized by the amount of the increase [25 basis points having been the norm of late] and that fact that it was done at an unscheduled meeting [the Fed has only raised/lowered rates following an unscheduled meeting nine times in its history]. 

So, the Fed put a major exclamation point on its preparedness to fight any economic [Market] weakness resulting from the coronavirus.  Unfortunately, there are several problems: [a] lower interest rates aren’t going to entice businesses/consumers to reengage in behavior that they stopped due to fear of the virus, [b] the Market poo pooed the whole Fed maneuver, dropping 500 Dow points on that day, and most importantly [c] the Fed used up a lot of what is left of its arsenal to fight economic/liquidity problems.

Having ranted about this all week, I will end there with the observation that this could mark the beginning of the Market’s loss of faith in the Fed’s ability to bail it out.  If so, expect more downside.

The Fed rate cut was a big mistake.

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) last 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.

No comments:

Post a Comment