4/4/20
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 17093-22132
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 2170-2637
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. Nonetheless, it is clear that
the US is moving into a recession, at the very minimum. Hence, the economy will remain a negative until
there is some visibility for a recovery.
The overall dataflow this week was negative as
were the primary indicators (no plus, no neutral, three negative). So, I am calling it a negative. Score: in the last 235 weeks, seventy-nine
were positive, one hundred and five negative and fifty-one neutral.
Now that we are starting to get March/April
numbers, it is likely that this box score is ordained to be negative for some
time.
Overseas stats were positive, those numbers
being dominated by the stats out of Japan and China---the latter of which lies a
lot. However, the data from Europe was also
plus, just not as upbeat as from Japan/China.
That said, given the current situation in Europe, I have little doubt
that those numbers will soon be solidly negative.
While there are a few hopeful no signs of a
peaking in the coronavirus infection/death rate in the US, 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.
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.
Thoughts on a post
coronavirus economic model.
The
Market-Disciplined Investing
Technical
Yesterday, the
Averages (21052, 2488) moved lower, but
not below Wednesday’s and Thursday’s intraday lows. Meaning that there remains the probability
that a higher low has been formed. It
hasn’t occurred yet. We need follow
through to the upside to establish the fact---the importance of which is that
it would create the possibility that a bottom has been made. Supporting that notion is the pin action in
the VIX which declined this week (implying a declining level of uncertainty
among investors).
As you know, I don’t
believe a Market bottom has been made---that thesis is now being tested. In the meantime, the indices remained within
short term downtrends whose boundaries are ~17093/2178 on the downside and ~22132/2637
on the upside.
TLT, GLD and UUP were
up nicely again, an indication that investors are still gravitating to them as
safety trades.
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. There is no point in being repetitious. Nothing has changed in the last week; so, my
conclusion is the same:
‘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.’
(2)
the resumption of QE by the global central banks. To quote myself from last week’s Closing Bell
‘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.’
Corporate debt reckoning.
And it is already happening.
I won’t beat that horse again except to repeat
my conclusion: ‘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.’
The Fed grows its balance sheet to $5.8 trillion.
But is tapering its rate of growth.
Bottom line: 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.
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