Saturday, May 9, 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                                     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.  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

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.

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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