Saturday, June 6, 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%

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

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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