Saturday, June 13, 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                                     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%

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

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.           

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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