Saturday, May 23, 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 economic dataflow is coming in better (less bad) than consensus, the US is almost certainly moving into a recession.  That said, there are too many unknowns to make any semblance of a forecast.  In my opinion, the economy will be a question mark at best until there is some visibility to the magnitude and extent of a recovery.
The data this week was upbeat (again less bad) including the primary indicators, making this the third week in a row of stats that were less negative than had been anticipated.  It is still a bit too early to be drawing conclusions about the magnitude of the current economic decline.  But another couple of weeks of this pattern and I think we can conclude that the economy has not just avoided the worst case scenario but also a discouraging consensus forecast.
            Update on Q2 nowcasts.

Overseas stats were again even more promising---bad but not nearly as bad as estimates.

Short term, 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 spending 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  (24465, 2955) turned in a mixed performance on Friday (Dow down, S&P up), leaving the Market in a somewhat confused technical state: (1) neither have closed the 5/18 huge gap up opens, (2) both finished above the top end of the 4/17-4/21 trading range, (3) the Dow is still building a double top formation, (4) the S&P remained within its very short term uptrend; the Dow did not.

My assumption continues to be that equity prices’ bias is to the upside but that effort will be labored.  The resistance presented by both indices’ 100 and 200 DMA’s, the magnetic pull of the 5/18 gap up opens and the pin action in the VIX, GLD, TLT and UUP, supports that notion.

                Update on margin debt.

TLT, GLD and UUP were up.  Their charts remain strong, reflecting risk aversion among their investors.

                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.  But it appears that it has weakened less than generally expected; and that is a moral victory of sorts.  Still, we know little about [a] the ultimate 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.

Yet the Market seems to believe that most of the 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.

Will the politicians be held liable for the damage they have done?

The scientist believes that a majority of those in the most vulnerable population segment infected with the coronavirus that died would not have died in the absence of the coronavirus.  Of course, nothing is said about the results if that group had self-quarantined.

There are two other factors to consider. 

[a] short term, the tensions between the US and China continue to build with the Chinese cracking down on Hong Kong protestors and the US senate proposing to (1) prohibit a company from listing on a US stock exchange unless its financials meet US accounting standards, which almost no Chinese company does and (2) sanction Chinese banks and officials.  So far, the Chinese have not meaningfully retaliated to recent US moves.  But I doubt that will continue especially if we keep sticking our finger in their eye {not that they don’t deserve it}.

[b] longer term, with all the spending to offset the results of a national lockdown, the budget deficit/national debt has gotten 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.  This week, Powell gave his version of the Draghi ‘whatever it takes’ speech on 60 Minutes and again in congressional testimony---which likely means that QEInfinity will be with us for a while {to infinitely and beyond?}. 

Central banks are buying $2.4 billion in assets an hour.

The Fed is walking into a trap.

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.

It is a fake market.
Bottom line:  I believe that the Averages and most segments of the Market are overvalued [as determined by my Valuation Model].  This is not a time to be buying equities.
            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 did not 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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