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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