7/18/20
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 7006-38224
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 1362-4997
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 continues to improve
though the US remains in a recession.
However, the worst is probably behind us. That said, on a short term
basis, it appears that the ‘second wave’ of the coronavirus is already upon us
and that is sure to restrain progress.
Longer term, 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 (and primary indicators) this week
was upbeat again, this time markedly so.
The overseas stats were positive, but just barely.
Short term, the economic recovery continues though the
question of additional progress remains as lockdowns are being re-imposed
nationwide How well it is contained will
almost certainly affect the shape of the recovery (V, U, W, etc.).
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.
Whatever the shape of the recovery, I am not
altering my belief that long term economy will grow at a historically 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
Friday was a mixed
day for the Averages (26671, 3224)---Dow
down, S&P up. The Dow still finished
above its 200 DMA for a fourth day, reverting to support and resyncing with the
S&P. On the other hand, it has not filled
its ‘island top’ gap on a closing basis.
Meanwhile, the S&P has been unable (to date) to push through its
June high and in the process is potentially creating a double top. But, as I said yesterday, there are more
pluses than negatives in the indices technical picture. So, I am sticking with my assumption that the
Market’s bias is to the upside.
Gold had a good
day, regaining some of the momentum lost on Thursday. The long bond was down but retains a solid
chart. On the other hand, the dollar was back testing the lower boundary of its
short term trading range. While there is
strong visible support (it has unsuccessfully tested this level three times), a
break would be a likely negative omen for the 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. In normal times, the rate of economic growth
would be an important component of most serious analyst attempt to determine
Fair Value. But these aren’t normal
times---the Fed has destroyed price [risk] discovery. So, all the factors that I might employ in
determining Fair Value have been rendered meaningless. Therefore, I am not going to waste your or my
time elaborating on them as I have in past missives.
The bottom line is that [a] the economy maybe
recovering but weakly so, [b] there are potentially huge negative unknowns that
will determine its future course and we have no clue how they will reveal themselves
but [c] as long as the Fed {the central banks} flood the world with liquidity,
they will have little impact on stock prices---unless something occurs to alter
investor attitude and action.
Small firms cutting workers to survive.
Searching for the ‘V’ shaped recovery.
(2)
QEInfinity/Forever.
As you know, I believe that massive injections of liquidity by the
global central banks’ QEInfinity policies have done little to spur economic
growth and, indeed, have inhibited it by destroying the functionality of 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.
That said, throughout the entire QEInfinity
experiment, investors have shown a complete disregard for its consequences and
instead have used the increased liquidity to bid up asset prices to grossly
inflated valuations. Until that changes,
the bias in stock prices will remain to the upside.
Project
Zimbabwe.
Valuations
are entirely fabricated.
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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