Saturday, May 16, 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                                  6965-38183

                        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                                     1343-4978
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%

While the shutdown of the economy is beginning to unwind, the US is almost certainly moving into a recession, at the very minimum.  However, there are too many unknowns to make any semblance of a forecast.  Hence, the economy will remain a negative at least until there is some visibility for a recovery.
The data was mixed this week, including the primary indicators.  This surprisingly better than expected performance was in line with stats from last week, i.e. they were less negative than had been anticipated.  That makes two weeks in a row that the numbers have failed to live up (down?) to depressed forecasts.  It is too soon to be drawing conclusions about the magnitude of the current economic decline; but not too soon to be hopeful.

Update on big four economic indicators.

New Q2 nowcasts.

Homebuying recovering rapidly.
Overseas stats were even more promising---bad but not nearly as bad as consensus.

Germany enters recession.

This  good news likely means that those economies around the globe that are re-opening are doing so at a more robust pace than had been anticipated.  But to remain positive assumes that those reopenings will continue to be effectively executed and that the predicted ‘second wave’ of infections will be well contained. Longer term, the economy will be shaped by how quickly virus treatments and a vaccine are discovered as well as the permanent impact this disease/government reaction will have on the lifestyles and work habits of the nation. 

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

The Averages  (23685, 2863) had another roller coaster day, finishing up but still within their  4/17-4/21 trading ranges.  The good news is that as long as they remain within those ranges, I have to assume that momentum continues to the upside.  The bad news is that yesterday’s pin action did nothing to void the developing Dow head and shoulders formation or  the S&P’s double top.  Plus, the VIX’s pin action is suggesting that any progress to higher stock prices will be labored.

GLD, TLT and UUP charts remain strong.  As I continue to note, they should not be trading in unison to the upside unless investors are nervous---and it is not clear that equity investors are nervous.
                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.  The most important unknowns that will clarify this picture are [a] the magnitude of the economic consequences of the government/Fed’s actions to combat the virus in terms of lost wages, sales and profits and [b] how much this whole coronavirus affair will alter Americans’ long term living/spending habits.

That said, given the recent pin action, it seems that many investors believe that most of these unknowns are already adequately reflected in stock prices.  As you know, I am not quite that sanguine because, in my opinion, there remains so much that simply is not knowable; and until it is, this factor, in my opinion, will remain a potential disrupter of valuations.

There are two other factors to consider. 

[a] short term, the tensions between the US and China continue to build with {i} the introduction of a China sanctions bill in the senate this week and {ii}  the Commerce Department’s move to block shipments of semiconductors to Huawei Technologies. The most likely risk here is that the Phase 1 trade deal could unwind; and if history is any guide, the re-escalation of a trade war will make the going rougher for stocks. 

Further, there has been enough saber rattling over Taiwan and territorial sovereignty in the South China Sea that this standoff could escalate into something more serious.

[b] longer term, with all the spending to offset the results of a national lockdown, the budget deficit/national debt is getting out of hand.  As you know, I believe that once the national debt reaches a certain size relative to GDP {the US is already there}, the debt has a stifling effect on economic growth.  Even under the best case {‘V’ shaped} recovery scenario, that extra debt will still be there, usurping capital from the private sector and inhibiting its growth.

(2)   the resumption of QE by the global central banks.  Money printing is occurring with a vengeance by the global central banks---which unfortunately is necessary to finance the monstrous deficits being racked up with the coronavirus bailouts. 

[Don’t get me wrong, they were/are needed to compensate for the misguided national lockdown.  But that does not change the fact that the American taxpayer is stuck with a rapidly expanding government debt or that the pricing and allocation functions of the financial markets are being distorted by the unprecedented growth in the Fed’s balance sheet.]

That said, throughout the entire QEInfinity experiment, investors have shown a disregard for the consequences of the unwinding of QE; and while there are some signs in the bond, gold and dollar markets that those investors may have had enough, it hasn’t translated into the equity markets.  Until it does, the bias in stock prices will remain to the upside.

The Fed has a huge problem (must read):

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