4/11/20
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 18210-29540
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 2188-3398
Intermediate
Term Trading Range 1813-3398 Long Term Uptrend 1338-4973
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
the potential impact of government actions 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 mixed with
no primary indicators reported. So, I am
calling it a neutral. Score: in the last
236 weeks, seventy-nine were positive, one hundred and five negative and fifty-two
neutral.
Overseas stats were slightly positive. So, the numbers both here and abroad continue
to come in less negative than I would have expected. My assumption is that now that we are
starting to get March/April numbers, it is likely that these box scores will
turn decidedly negative and remain there for some time. However, it is not occurring yet and that is
a bit puzzling to me.
That said, the signs of a peaking in the coronavirus
infection/death rate are growing and, hopefully, that means the doomsday health
scenarios will prove wrong. On the other
hand, in my opinion, the government attempts to counter the effects of the virus
may prove a disaster for the economy. But
until we have a better picture, 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.
The
Market-Disciplined Investing
Technical
Thursday, the
Averages (23719, 2789) had another strong
day on the back of the Fed’s ‘kitchen sink’ bail out move. The great Market news is that (1) investors
appear to be back enthusiastically embracing the Fed’s expansive monetary
policy [‘the put’] and (2) the Fed has basically expanded its ‘put’ to cover even
riskier securities. The good Market news
is that (1) new higher lows have still
been set, leaving the possibility that a bottom has been made, (2) both of the indices
closed above the upper boundary of their short term downtrend for the third
day, resetting their short term trends to trading ranges [18210-29540,
2188-3398], (3) both have developed very short term uptrends and (4) both
pushed decisively through a key Fibonacci retracement level.
As you know, I haven’t
believed a Market bottom had been made. Given
Thursday’s pin action, it is time to admit that I have been wrong, certainly on
a near term basis.
On buying stocks
after big rallies.
Sentiment has recovered
out of deep pessimism.
TLT and UUP traded fractionally within their prior close,
leaving their technical picture unchanged.
On the other hand, GLD soared, finishing above the upper boundaries of
its very short term and short term uptrends.
Clearly, it needs to successfully challenge those boundaries for this
move to have any technical significance; and, as you recall, it has tried three
times to do so and failed. Still, if
this challenge is successful, it suggests that investors have added a new
element to the Fed ‘put’---inflation.
Thursday in the
charts.
Fundamental-A
Dividend Growth Investment Strategy
The DJIA and the S&P are 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. This week provided evidence that many regions
of the world and the US are experiencing/have already experienced peak coronavirus
infection/death rates. That clearly is
good news on the medical crisis and for Market psychology.
But the economic consequences the government/Fed’s
actions to combat the 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 will ultimately have to be included in any valuation
analysis. I have no doubt that some,
perhaps all of the potential negative consequences were priced into stocks at
the March 23 low. Indeed, it is possible
that they were being overly discounted.
But the point is that we just don’t know; and until we do, this factor
will remain a potential disrupter of valuations.’
(2)
the resumption of QE by the global central banks. Which is occurring with a vengeance certainly
in the US. Prior to this week, the Fed was
already pumping vast quantities of liquidity into the financial system. Then, it tripled down on Friday, initiating a
program to include the purchase of low grade credit.
As you know, one of my major concerns has been the
collapse of the high yield bond market brought on the massive downgrading on
near junk bonds. This would occur
because many bond funds/insurance companies can’t own junk bonds; so, if a
portion of the bonds in their portfolios are BBB rated and are downgraded to
junk, the funds would be forced to sell them.
That in turn would [a] cause liquidity {pricing} problems in the high yield
market {as the bond funds/insurance companies liquidate their holdings} and [b]
increase the difficulty of raising additional financing for those companies
whose bonds were downgraded.
This new Fed program would come to the rescue of [a]
Wall Street, i.e. the bond funds and insurance companies and [b] the inefficient
and poorly managed companies that should go bankrupt but will now be able to
continue to finance their operations, i.e. issue bonds that no one would buy
without the Fed standing as the buyer of last resort.
Of course, in the first instance, the Fed’s
actions should help avoid financial crisis and that is a plus both for the
economy and the Markets. That said, it
only encourages speculation and abets the gross mispricing and misallocation of
assets. In short, it only makes worse
the problem that the Fed originally created---a drag on the efficient allocation
of limited resources in our economy [inhibiting growth] and the mispricing of
risk which when, as and if corrected would lead to a considerable downside in asset
prices.
The free markets are dead
Here is what the Fed is buying.
But will it do any good?
Bottom line: I believe that the Averages and certain
segments of the Market are overvalued [as determined by my Valuation Model]. As a result, I wouldn’t be buying those
stocks in this Market advance.
Nonetheless, there are certain segments of the Market that have been
punished severely with the stocks of the
companies serving those industries down 30-70%.
As a result, I will be putting cash to work in these beaten up stocks on
any Market decline.
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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