5/9/20
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 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 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.
Although the overall US dataflow this week was
negative, it was less negative than had been expected---which is an offhanded
positive of sorts; that is, it suggests that the economy is not only avoiding a
worst case scenario but may not be as bad as generally anticipated. Keep in mind that this is one week’s data.
So, it is too soon to draw a firm conclusion; but it is hopeful.
Overseas stats followed a similar
pattern---bad but not as bad as forecasted.
The really good news is that economies around
the globe are re-opening albeit with strict guidelines for social distancing
etc. But to remain positive assumes that
the predicted ‘second wave’ of infections will be well contained. So, short term, any economic rebound is now
dependent on how effectively the re-opening of America/the global is executed. 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
Technical
The Averages (24331, 2929) got off to another great start
on Friday but, unlike the preceding couple of days, managed to finish strong. Both of the indices closed above their 4/17
highs; and the S&P ended right on the level of its preceding 4/29
high. It appears the standoff of the last
three weeks is getting resolved to the upside---though it will take a couple
more upbeat days to confirm it.
GLD and the long
bond sold off while the dollar was basically unchanged. All their charts remain strong; but that is
what is a bit confusing. They shouldn’t
be trading in unison unless investors are nervous---and equity investors appear
anything but 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.
Who has the burden of proof?
At the moment, the Markets are working
overtime attempting to discount the effects/aftereffects of the pandemic. And judging by the recent pin action, it seems
that many investors believe that the current Market already accurately reflects
those effects/aftereffects, i.e. the worst, or most of it, 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.
The latest from David Stockman.
https://www.zerohedge.com/markets/david-stockman-inflation-gold-personal-freedom-post-covid-19-world
Unfortunately, in the last couple of weeks, an
additional problem has been heaped on the coronavirus/government shutdown effects/aftereffects---the
possible resumption of a trade war with China.
Trump has been pretty aggressive in suggesting the spread of the coronavirus
was the result of either a premeditated action by China or its gross
negligence. Either way, the Chinese are
not happy; and the recent trade agreement is at risk of falling apart. That said, on Friday, Mnuchin announced that
the respective trade negotiators had met by phone Thursday evening and agreed to
continue implementing Phase 1 of the trade deal. Let’s hope.
(2) the
resumption of QE by the global central banks.
Money printing is occurring with a vengeance by the global central banks. The Bank of England met this week and
reiterated its interest rate and QE policies, joining the Fed and ECB in their devotion
to QEInfinity.
All this activity is an attempt to avoid a
global liquidity crisis which seems to have worked to date. The problem is the consequences---one of
which I believe will be the repricing of risk.
A possible sign of that occurring is the recent squirrelly price action
in bonds [US short term rates on the verge of going negative] and gold and the
dollar [both advancing in price] which not only suggests safety issues in those
markets but is incompatible with a rising stock market. I am not smart enough to know all the reasons
why this dichotomy in performance is occurring or how it gets resolved. But it suggests caution.
Powell puts ‘current economic
issues’ as subject of a 5/13 speech.
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.
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