5/2/20
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 6934-38152
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 remained awful,
although there was one positive primary indicator (versus three negative). For the time being, I am going to suspend the
running score since we know the numbers are going to continue their negative
trend for God knows how long.
Overseas stats were just as bad, though there
were a few upbeat stats out of Japan..
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. An even more important question 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.
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
So much for month
end rebalancing. The Averages (23723, 2830) followed Thursday’s negative
pin action with another substantial down day.
In the process, they (1) voided their newly reestablished very short
term uptrends and (2) closed below their 4/17 trading high. That puts they once again in that 4/17-4/20
trading range which also incorporates the 50% Fibonacci retracement level off
the 3/23 low. Major Fibonacci levels
tend to have act as significant resistance/support---in this case,
resistance. The technical question is,
can the bulls mount another effort to break above the 4/17 highs or have they
shot their wad, meaning prices are going lower?
Cash reserves keep
building.
TLT and GLD recovered
nicely yesterday; both maintaining solid uptrends and pointing to the weaker
economy, a need for safety or both. One
the other hand, the dollar is rapidly losing its upward momentum, also a sign of
the poor economy but not a need for safety.
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.
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. Indeed, this week Gilead Sciences reported favorable
results for a drug being tested to treat patients with the coronavirus. No conclusions yet; but it is illustrative of
the point.
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.
Q 2 nowcasts.
Update on the Swedish plan.
Regrettably into this pot of optimistic recovery
stew, we may have to start mixing the odds of increased trade tensions between
the US and China. So far, the only
developments have been verbal; but this week, Trump said that he was considering
preventing a US retirement plan from investing in a fund that holds Chinese
securities. On the surface, this is one
of those ‘so what?’ actions. But there
are also stories about tariff hikes. If conditions
deteriorate further, they will likely become an additional drag on economic activity
and hence, corporate earnings and valuations,
(2) the
resumption of QE by the global central banks.
Money printing is occurring with a vengeance by the global central banks. The Fed and ECB both met this week and reiterated
their devotion to QEInfinity.
To be sure, a liquidity crisis has been
averted [for the time being]. But the hole
the central banks dug [i.e. the mispricing and misallocation of assets] for
themselves following the financial crisis is just getting deeper. Which I think means that the consequences of
an unwinding of said policies becomes worse.
The only question is when.
In the meantime, in my opinion, the Market’s
current exuberance remains a function of this surfeit of liquidity versus any
reasonably accurate reflection of the current value of future cash flows. But, also in my opinion, all that free money
will likely keep the Market’s bias to the upside, at least in the short term.
Why is the Fed buying all those Treasuries?
Another bubble.
Fed cuts pace of QE, but……….
The Fed is stuck at zero bound.
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.
No comments:
Post a Comment