3/14/20
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 Trading
Range 21732-29540
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 2765-4265 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 50%
High Yield Portfolio 52%
Aggressive Growth Portfolio 56%
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 dataflow this week was positive (no primary indicators). I am calling it a positive. Score: in the last 232 weeks, seventy-nine
were positive, one hundred and three negative and fifty neutral.
Overseas stats were mixed; but like the US
numbers, they are likely irrelevant because have yet to reflect the rapid
global increase in the coronavirus infection/death rate and its consequences on
economic growth. Unfortunately, at the
moment, no one has a handle on the extent of the economic losses associated
with combatting the virus. 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.
The
Market-Disciplined Investing
Technical
The Averages (23185, 2711) roared back yesterday from a
very oversold condition aided by a huge short squeeze in the final hour of
trading. Nonetheless, the S&P
remained below [a] the lower boundary of its short term trading range for a
third day, resetting to a downtrend and [b] the lower boundary of its
intermediate term uptrend for a third day; if it remains there through the
close next Monday, it will reset to a trading range. On the other hand, the Dow ended back above
the newly reset lower boundary of its short term trading range, voiding
Thursday’s break.
TLT, GLD and UUP
maintained the major reversals that began on Tuesday. TLT
remained positive; GLD is now challenging its 100 DMA; and UUP continued
its huge rally, setting it up to go from the most negative to the most positive
chart.
The question
remains ‘are the reversals in TLT, GLD and UUP just a trading blip or are they
starting to forecast a major change/incident in the economy as they did from
late 2018 to their recent peak (low)?’ ---for instance, a
Market rattling credit/liquidity event which would explain higher yields, lower
gold prices and a strong dollar.
Where
has all the liquidity gone? (must read):
Friday
in the charts.
Fundamental-A
Dividend Growth Investment Strategy
The recent decline notwithstanding, the DJIA and
the S&P are still 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 magnitude of the risks currently facing the
economy.
[a] lower oil---the known known. Not a plus but a known. Low oil prices can be easily plugged into the
production/GDP models, providing analysts with a decent estimate of the impact
on the profitability of the oil industry as well as those segments of the
economy that use oil either as a source of energy or a feedstock. The effects are clearly not all bad. And they can be roughly calculated and,
therefore, discounted. The point being
that the net negative result of lower oil prices is likely reasonably well
reflected in current prices.
That said, there is one known unknown and
that is security of the debt held by many oil and gas producers. (see [c] below)
[b] the coronavirus or more specifically the peak
in infections/death rates---the known unknown.
The good news is that based on the experience in China and South Korea,
we are getting a handle on how rapidly the virus spreads, the casualty rates
and the timing of peak infection/death rates.
But two is a small sample and in one case {China}, the government {i}
has extraordinary power to fight the virus via closing businesses and quarantining
individuals, cities, provinces that other more democratic governments don’t
possess and {ii} lies a lot, making their statistics suspect]. Still it is a start.
On the other hand, 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.
Is there a better approach?
[c] the financial distress on corporate
balance sheets---the unknown unknown. We
know that the Fed has created the overleveraging of corporate America via the
mispricing of risk {the cost of money}.
It has led some companies to borrow cheap money in order to {i} buy back
their stocks at elevated price and other companies to avail themselves of very
low interest rates to {ii} avoid bankruptcy, i.e. servicing current unrepayable
debt with additional unrepayable debt.
In my opinion, this misallocation of assets
by corporate America 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.
(2)
the resumption of QE by the global central banks. The ECB joined the QEInfinity crowd this
week. The Fed also shoveled a massive
amount of liquidity into the repo market.
But for a second time in a row, the Market didn’t care. Powell et al have another chance to impress
investors next week when the FOMC meets and is expected to lower rates
substantially. Their success [or not]
will likely have an impact on the Market.
Investors’ worries seem to be focused on
those highly leveraged corporate balance sheets mentioned above. If this problem results in the massive
downgrading of corporate credit along with bankruptcy among the marginal
businesses kept alive by cheap credit, I think it likely that the credibility
of the Fed and its whole QE regime may be lost.
And, in fact, that may already be happening.
Whether it is occurring now or sometime in
the future, I continue to believe that the unwinding of the mispricing and
misallocation of assets will negatively impact the Market.
Jeffery Snider takes another rip at the Fed.
Bottom line: The current selloff notwithstanding, I still believe
that the Averages and certain segments of the Market remain grossly 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%. It is time to start putting our 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.
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