6/13/20
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 1352-4987
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 again; no primary
indicators were reported. Given the
recent trend in the numbers, it is becoming increasingly clear that the worst
is behind us.
Overseas stats were disappointing. This is the first down week in some time. So, the issue is whether this is an outlier
or the beginning of a trend. I favor the
former because much of this week’s negative data was from April which was
before signs of recovery began to appear.
Short term, while the overall economic trend
is becoming more positive, to remain so assumes that the current re-openings
will continue to be effectively executed and that the predicted ‘second wave’
of infections will be well contained. Speaking of which, it appears that it is
already occurring. However, this time
our leaders, at least on the national level, are telling us that there will be
no lockdown. I have long opined that
there never should have been one in the first place---that there were plenty of
steps to be taken that would protect the most vulnerable but still allow the
country to function economically. That
thesis appears about to be tested.
There was never going to be a ‘V’.
Longer term, the economic growth will be influenced
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
The Averages (25605, 3041) recovered about one half of
Thursday’s losses, though volume declined and the VIX’s pin action is not
encouraging. The good news is that the
Dow bounced up off its 100 DMA and the S&P its 200 DMA. The bad news is that they both voided their
very short term uptrend and created ‘island tops’---a negative technical
formation.
My assumption
remains that the Market’s bias is to the upside, though that is clearly in
question. The issue is, where will the
indices find support? If they can hold
at the level of their DMA’s, then that assumption will remain operative. A break below those levels would point to a
retest of the March 23rd lows.
Gold rose, but is
still struggling to reestablish upside momentum. The long bond was also up. And it too continues to battle to regain upside
momentum. The dollar was up for a second
day. However, it has a lot more work to
do to correct an ugly chart. GLD and TLT
up and UUP down suggests a weak economy.
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 the numbers of late
have been better than predicted. That is
great news short term. However, as I noted
above, [a] the second wave of the virus may already be upon us and [b] it
appears that the government will not send the country into full lockdown mode
even if there is a second wave.
So, the unknown is how big a human and
economic toll will the virus take in the absence of a shutdown. As you know, I do not think that it will be
that great; but that is one man’s opinion.
On a longer term basis, coronavirus’ effect
on the economy’s secular growth rate, in my opinion, will depend on [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. https://www.realclearmarkets.com/articles/2020/06/12/buckle_up_were_nowhere_close_to_done_with_this_496033.html
In my opinion, it is those factors that will also
ultimately play a key role in determining the Market’s Fair Value [as
determined by my Valuation Model]; and there remains so much about them that we
simply do not know. In the meantime,
investors are valuing many equities near the same valuations of pre-coronavirus,
pre-US/Chinese trade tensions and pre-riots levels. That seems overly optimistic to me.
The politicians have destroyed small
business.
There are two other factors to consider.
[a] short term, the tensions between the US
and China continue to build. 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 the resulting stunted economic
growth will ultimately work its way into equity valuations.
(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
Fed reiterated its dedication to throw as much money at the economy for as long
as necessary to insure economic [Market] wellbeing. As you know, I believe that global central
banks’ QEInfinity policies have done little to spur economic growth and, on the
contrary, 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 both for the economy and the securities markets. The recent Fed actions will only make matters
worse.
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.
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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