Saturday, July 18, 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                                  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%

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

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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