4/18/20
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 6909-38127
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, the US is almost certainly 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 the worst
that I have seen since the financial crisis.
In addition, three primary indicators were negative. So, I am calling it a negative. Score: in the last 237 weeks, seventy-nine
were positive, one hundred and six negative and fifty-two neutral.
Overseas stats were mixed, though that in
itself is a positive. Still, as we leave the February’s numbers behind and get
deep into March and April, the overall trend in data will surely be negative---at
least in the short term.
The good news is that a plan is now in place
for re-opening America and the pharmaceutical industry is driving hard to hoop
to come up with both treatments and preventive vaccines for the
coronavirus. So, the prospects for
economic recovery gain visibility daily.
The rapidity with which it occurs will depend on how effectively the
re-opening of America is executed and the virus treatments and vaccines are
approved---though both remain largely unknown.
The big remaining question to me is what permanent impact this
disease/government reaction will have on the lifestyles and work habits of the
nation. Until we have a better picture
of the speed and magnitude of the recovery and the shape of the aftermath,
making predictions about the economy, at least over the short term, is wasted
exercise.
***overnight update.
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 (24242, 2874) regained some momentum Friday, remaining
above the lower boundaries of their very short term uptrends. While they appear headed for a challenge of
their 100/200 DMA’s, I don’t see how they can sustain their current rate of
ascent much longer. Plus, they are becoming overbought. So, expect consolidation at some point; but
probably not enough to halt upward momentum.
TLT got whacked
but still had a great week, leaving its technical picture unchanged (positive). GLD fell again but its momentum remains to
the upside. The dollar was off slightly
but the distinguishing characteristic of its chart is the development of a
pennant formation. Not surprisingly,
this all suggests economic weakness.
Friday
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 a
plus for the medical crisis and for Market psychology.
The bad news is that the overall economic
consequences of the government/Fed’s actions to combat the virus in terms of
lost wages, sales and profits are largely unknown. Unfortunately, what we do know is that this
week’s primary indicators as well as corporate earnings reports show that
conditions have gotten pretty ugly---which seems unlikely to improve, at least,
until the nation goes back to work
The good news is that there is now a plan for
that. Plus, we know that the drug
companies are working 24/7 to come up with treatments/vaccines for the
coronavirus. Still, none of this has
happened yet; and more importantly, we don’t know whether or by how much this
whole coronavirus affair will alter Americans’ living/spending habits.
Nonetheless, we are closed to the answers
than we were this time last week. So,
the discounting process is near if it hasn’t already started. That said, it is apt to be a messy affair
since there is so much yet to be revealed.
In short, while the potential negatives may have been were priced
into stocks at the March 23 low, we have no clue if that is correct; 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 as QEV has come to the rescue of the bond funds, insurance companies, municipalities, foreign central
banks, inefficient and poorly managed companies, the local bowling league, Sesame
Street and anyone else who had their hand out.
To be sure, it prevented a liquidity crisis [for
which regrettably it created the preconditions with QE’s I through NotQE]. And, in case you didn’t notice, it has also proven
quite popular with the ‘buy the dip’ crowd.
Unfortunately, it only encourages further speculation, abets the gross
mispricing and misallocation of assets and juices the aforementioned preconditions
for another liquidity crisis. Thus, long
term, it only makes worse the problems that the Fed originally created; but
short term, all that new free money will likely keep the Market’s bias to the
upside.
The latest Fed moves.
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.
Buying the dip may not work this time.
Human selling versus machine buying.
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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