Saturday, May 2, 2020

The Closing Bell


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%


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%

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

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