6/6/20
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
The economic dataflow is coming in better
(less bad) than consensus, meaning that while the US is almost certainly in a
recession, it is likely not as deep and will not be as long as originally anticipated. 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 as well as the impact that
the virus/lockdown will have on American work, social and spending patterns.
The data this week was upbeat, including the
primary indicators and especially the stunning jobs report. It is still a bit too early to be drawing
conclusions about the magnitude of the current economic decline or the recovery;
but the jobs reports certainly suggests that the worst is behind us.
Overseas stats were once again very promising.
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.
Economic predictions are useless right now.
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
On the back of
that blowout jobs number, the Averages
(27110, 3193) exploded higher. Both
of the indices remain in very short term uptrends. The DJIA finished above its 200 DMA (now
resistance; if it remains there through the close on Wednesday, it will revert
to support). The one negative is those
huge 5/18 gap opens that remain unfilled---made worse but another set of significant
gap up opens on Friday. Still my
assumption continues to be that equity prices’ bias is to the upside. Indeed, we could be in the midst of a blow
off top.
GLD weakened
again, falling below the upper boundary of its very short term uptrend but more
importantly making its first lower low since the bounce that started in
March. Meanwhile, the long bond continues to make a
new lower low and ended below its 100 DMA (now support; if it remains there
through the close on Tuesday, it will revert to resistance). The dollar was also down again on volume,
remaining in a newly reset very short term downtrend. GLD remains the strongest of the lot but
yesterday’s weakness confuses the fundamental picture with respect to growth and
inflation.
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 is not but that surprising jobs report suggests that it may resume quicker
than almost anyone expected. That is
great news short term. It also suggests
that that Mr. Market was dead on in anticipating a more rapid improvement in
the economy than I or anyone else that I have read anticipated.
That said, to judge the economy’s long erm secular
growth rate, we still need to know more 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.
In my opinion, it is those factors that will
ultimately play a key role in determining the Market’s Fair Value; and there
remains so much about them that we simply do not know. In the meantime, investors are valuing many
equities at the same or higher valuations than pre-coronavirus, pre-US/Chinese
trade tensions and pre-riots levels. In
short, however upbeat this weeks’ economic data has been, its effect on stock valuations
may be overdone.
There are two other factors to consider.
[a] short term, the tensions between the US
and China continue to build. This week,
the US imposed restrictions on the Chinese media and barred Chinese passenger
plane flights to the US. The risk here,
of course, is a major schism {or worse}with a huge trading partner which would
certainly be a negative for the economy and potentially the Markets.
[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, the EU and Japan are 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 and profitability. I believe that stunted economic growth will
ultimately work its way into equity valuations.
Trump says that there is more to come.
(2)
the resumption of QE by the global central banks. Money printing is occurring with a vengeance by
the global central banks. This week, the
ECB plugged its firehose into the EU financial system. As you know, I believe that global central
banks’ QEInfinity policies have destroyed one of the Market’s primary functions
which is the pricing of risk and the efficient allocation of capital; and that there
will be an ultimate price to pay.
That said, throughout the entire QEInfinity
experiment, investors have shown a complete disregard for its consequences. Until they do, the bias in stock prices will
remain to the upside.
The unintended consequences of the Fed’s debt
purchase program.
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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