Saturday, April 25, 2020

The Closing Bell



4/25/20


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                                  6923-38141

                        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.  While the shutdown of the economy is beginning to unwind, 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 equally bad as last week’s.  In addition, three primary indicators were negative.  So, I am calling it a negative.  Score: in the last 238 weeks, seventy-nine were positive, one hundred and seven negative and fifty-two neutral. 

Overseas stats were also pretty ugly.

As I noted earlier this week, the April numbers, as expected, are awful and will likely stay that way---at least into May. 

The good news is that a plan is now in place for re-opening America; and indeed, some states are now in the process of emerging from lockdown.  In addition, 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.

Don’t count on the Fed for a ‘V’ shaped recovery.

This intolerable shutdown must end.

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  (23775, 2836) ended the week on a positive note.  However, there was little change in the technical picture, leaving the very short term question, will the indices recoup last Friday’s highs and regain their upward momentum or will they fall short and make a low lower than Tuesday’s?   The VIX may have given us a signal on Friday when it made a new low off its March high (suggesting decreasing uncertainty/higher stock prices).

A long term question is, was this move off the March low ‘a buy the rumor (recovery)’ rally and the Market is setting up to ‘sell the news’?

Update on investor sentiment.

TLT, GLD and UUP all finished in uptrends.  GLD was the standout again, making another new high.  Safety trades---which is somewhat at odds with equities’ pin action.
           
            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---which it clearly isn’t and won’t be for some time.  Unfortunately, the really bad economic news is just starting to be reported,  So, we have no idea about the magnitude of the economic consequences of the government/Fed’s actions to combat the virus in terms of lost wages, sales and profits.  We also don’t know whether or by how much this whole coronavirus affair will alter Americans’ long term living/spending habits.

Stop the panic and re-open.

Nassim Taleb on bailouts.

Key dates for lifting the global lockdown.

On the other hand, we do know that there is now a roadmap for exiting the current closure and that the journey has begun.  We also know that the drug companies are working 24/7 to come up with treatments/vaccines for the coronavirus.  So, the answers to all the unknowns are and will continue to become more apparent each day. 

Which means the Markets are and will be working overtime attempting to discount the effects/aftereffects of the pandemic.  In fact, it seems that many investors believe that the current Market pin action already accurately reflects those effects/aftereffects, i.e. the worst has already been discounted.

As you know, I am not quite that sanguine because, in my opinion, there remains so much that simply isn’t knowable; and until it is, this factor, in my opinion, will remain a potential disrupter of valuations.
                              
Weighing an economic crisis against a health crisis.

Exacerbating the problem of recovery is the turmoil in the oil industry.  What is occurring right now [extreme oversupply, prices getting hammered] speaks not only to the extent to which the disruptions in the oil industry impacts the shape of an economic recovery but also provides a perfect example of the major beef I have with Fed policy, i.e. the mispricing and misallocation of assets.  The point being that cheap money led to overinvestment, overproduction and overemployment that must now be unwound---the process of which will only weaken any economic recovery.


(2)   the resumption of QE by the global central banks.  Money printing is occurring with a vengeance in the US and has been joined by the ECB and the Bank of Japan in the quest to decimate the global forest lands. 

To be sure, a liquidity crisis has been averted [for the time being].  The question is, is the Market’s current exuberance a function of this surfeit of liquidity or is it a reasonably accurate reflection of the current value of future cash flows.  My answer is the former though I acknowledge that all that free money will likely keep the Market’s bias to the upside, at least in the short term.

Fed reduces weekly asset purchases again---but then the Market is up 18%.

Nonetheless, I continue to believe that there will ultimately be both an economic and Market price to pay for the Fed’s unprecedented mishandling of monetary policy.  The gross mispricing and misallocation of assets will, at some point, have to be reckoned with.

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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