5/23/20
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 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%
Economics/Politics
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
Technical
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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