9/14/19
Statistical
Summary
Current Economic Forecast
2018 estimates (revised)
Real Growth in Gross Domestic Product 1.5-2.5%
Inflation +1.5-2%
Corporate Profits 10-15%
2019
Real Growth in Gross Domestic Product 1.5-2.5%
Inflation +1.5-2.5%
Corporate Profits 5-6%
Current Market Forecast
Dow Jones Industrial Average
Current Trend (revised):
Short Term Uptrend 23600-33840
Intermediate Term Uptrend 14513-30732
(?)
Long Term Uptrend 6849-30311(?)
2018
Year End Fair Value 13800-14000
2019 Year End Fair Value
14500-14700
Standard & Poor’s 500
Current
Trend (revised):
Short Term Uptrend 2590-3490
Intermediate
Term Uptrend 1383-3193
(?) Long Term Uptrend 937-3217 (?)
2018 Year End Fair Value 1700-1720
2019 Year End Fair Value 1790-1810
Percentage
Cash in Our Portfolios
Dividend Growth Portfolio 56%
High Yield Portfolio 55%
Aggressive Growth Portfolio 56%
Economics/Politics
The Trump economy is a neutral for equity
valuations. This week’s data was mixed: above estimates: weekly
jobless claims, weekly mortgage/purchase applications, August consumer
inflation expectations, September consumer sentiment, July wholesale
inventories/sales; below estimates: month to date retail chain store sales, the
July job opening report, the August
small business optimism index, the August budget deficit; in line with
estimates: August retail sales/ex autos, July business inventories/sales.
Dealers
choice: July consumer credit (which soared); August CPI and PPI/core PPI (which
were higher than expected), August export/import prices (lower than
anticipated). I rated these as dealer’s
choice because whether they are interpreted as positive or negative depends on
your perspective. Higher consumer credit
could be viewed as signifying growth and
positive consumer sentiment or it could be seen as the last gasp of an
overextended consumer. Higher CPI/PPI
would be considered a plus by the Fed (approaching their goal; though it would
a negative for the Market in that would likely slow/halt monetary easing) but a
negative if you are a consumer. The
reverse would be true for August export/import prices.
And there is always the chance that those numbers could be bad for everyone.
The primary indicators were neutral:
August retail sales/ex autos (0). The call is neutral. Score: in the last 204 weeks, sixty-six were positive,
ninety-one negative and forty-seven neutral.
This leaves the yellow warning light
flashing.
Overseas, the stats were positive, led by
good numbers out of the UK. This is, of
course, a hopeful sign but one week is no trend; and if there is a hard Brexit
in October, those upbeat stats will likely reverse. So, I need to see more of this before
altering my opinion that the global economy is a drag on our own.
[a] the
July German trade balance was larger than anticipated, August CPI was in line
while PPI was down; July UK construction spending, GDP growth, personal income
and industrial production were above estimates while the trade deficit was less
than forecast; the unemployment rate was below projections; July EU industrial
production was very disappointing but the July trade surplus was a positive,
[b] Q2
Japanese GDP growth, the price index and private consumption were in line,
capital expenditures, August machine tool orders and PPI were well below
estimates while July industrial production and capacity utilization were above,
[c] August Chinese vehicle sales were
disappointing, CPI and PPI ran hotter than consensus, while loan growth was in
line.
Developments this week that impact the
economy:
(1) trade:
the US/Chinese trade talks were a fountain of good news this week. The Chinese
first reduced tariffs on a number of products ahead of next month’s negotiation;
Trump responded by delaying the increased tariffs until October 15th;
and the Chinese then lifted the restrictions on the import of US agricultural
products. If this de-escalation leads to
a meaningful resolution to Trump’s concerns [unfair industrial policy and IP
theft], Hallelujah. Clearly, it is a
meaningful start. However, for the
moment, I remain ever the skeptic:
[a] the Chinese communist party has its 70th
anniversary in October. This is a major
celebration for them and they undoubtedly want it free of any controversial
headlines.
[b] Trump has more to lose on a short term basis
than China, i.e. he has a 2020 election to worry about and Xi doesn’t. In the absence of him folding, the Chinese
can afford to string Trump along until, at least the 2020 elections and I continue
to believe that they will do just that.
(2) fiscal
policy: as noted above, the August
budget deficit was larger than anticipated and almost assures that this fiscal
year’s deficit will be in excess of $1 trillion. Meanwhile, Trump wants another tax cut and
every Dem presidential hopeful that is still breathing has their own Christmas
list of spending projects. Growing the budget
deficit and national debt will only make economic growth more difficult
[assuming that the theory of excessive debt as a percentage of GDP inhibits
growth is correct].
(3) monetary
policy: Draghi delivered an early Christmas present to the Markets, lowering
interest rates [with some provisions to offset the negative effects on bank
reserves] and restarting QE; though as I noted in Friday’s Morning Call, the
move wasn’t quite as dovish as originally thought. Still, it would appear that the race is on to
ever lower rates and more QE. We will
know soon enough as the FOMC and Bank of Japan meet next week.
You know my position: central bank monetary
policy has been a negative [asset mispricing and misallocation] for global
growth and will remain so as long as they pursue their irresponsible QE. To be clear, my point is that economic growth
would have been more robust in the absence of QE. The only beneficiaries of this policy have
been the securities market which are now grossly overvalued. (must read)
(4) global
hotspots. the Middle East hostility continues to simmer, while Hong Kong,
Italy, the UK [Brexit] and the Japanese/Korean spat have the potential for
economic disruption.
Latest UK poll on Brexit.
Bottom line:
on a secular basis, the US economy is growing at an historically below
average rate and I see little reason for any improvement. The principal cause of the restraint being totally
irresponsible fiscal (running monstrous deficits at full employment adding to
too much debt) and monetary (pushing liquidity into the financial system that
has done little to help the economy but has led to the gross mispricing and
misallocation of assets) policies.
Cyclically, the US economy continues to limp
along which is not surprising given the lethargic global economy and the
continuing trade wars. Indeed, this
progress is a miracle given all the aforementioned fiscal and monetary
headwinds. That said, the yellow warning
light is still flashing.
The
Market-Disciplined Investing
Technical
The Averages (27219,
3007) turned in a mixed performance yesterday (Dow up, S&P down) but
finished above both MA’s and in uptrends across all timeframes. Volume continues low while breadth pushed
further into overbought territory. The two
negatives that I see are (1) the indices failure to move higher on more positive
trade and monetary policy news and (2) the gap up opens from eight days ago still
have to be closed.
The VIX fell 3 3/8
%, ending below both MA’s (now
resistance) and is mirroring the indices move toward their July highs. I am watching for any deviation from this symmetry
as an indication of a Market reversal.
The
long bond was down 2 1/8 %. It is continues
to rapidly correct the strong advance from July. As I noted previously, TLT had reached extremely
overbought territory; so, its pin action is not that surprising. It still remains above both MA’s and in
uptrends across all timeframes. Therefore,
on a longer term basis, the trend in rates remains to the downside. And that gap down open nine days ago still needs
to be filled. Nonetheless, the recent increase in
volatility, the lack of liquidity, the gap opens in all our indicators suggest that
the level of investor uncertainty on trade and monetary policy is quite high---which
leaves a question mark about where TLT is headed.
The
dollar was down four cents, but is now the only indicator that reflects any
kind of stability. This week, it has
closed two gap opens and remains above both MA’s and in short and long term
uptrends. I think that this at least partially reflects
the global dollar shortage problem which I frequently refer to; and that is
largely a result of lousy monetary policy---which is not apt to change.
GLD
was down 7/8 %, closing above both MA’s, in very short term and short term
uptrends. But it closed below that minor
support level that I referred to on Friday. While it still needs to fill the gap down open
from nine days ago, the yesterday’s pin action could be pointing at lower
prices near term.
Bottom line: long term, the Averages are in
uptrends across all timeframes; so, the assumption is that they will continue
to advance. Short term, they have regained
upward momentum; though I find it troubling that their advance has not been more
dramatic given upbeat news on trade and monetary policy. However, they are only a short hair away from
their July all-time highs (27398,
3027).
From a technical standpoint, those
gap opens, the increase volatility and lack of liquidity make me uneasy. I think this a time to be firmly on the
sidelines.
Friday in the charts.
Fundamental-A
Dividend Growth Investment Strategy
The DJIA and the S&P are well above ‘Fair
Value’ (as calculated by our Valuation Model), the improved regulatory
environment and the potential pluses (?) from trade notwithstanding. 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. The economy continues to struggle forward
against multiple headwinds. The very
recent data has become less bad---but that is no reason to stop the yellow
warning light flashing. That said, in
the last two weeks, the Market pin action is suggesting better times
ahead---which could be correct in the short term if we get some kind of trade
deal.
At the moment, I am sticking
with my sluggish growth forecast which is a neutral for equities.
(2)
the [lack of] success of current trade
negotiations. If Trump can create a
fairer political/trade regime, it would almost surely be constructive for
secular earnings growth.
Everything was coming
up roses this week as the Trump and the Chinese seem to be falling all over
themselves to de-escalate trade tensions.
I have observed previously that I believe the Chinese motivation is for
calm during the 70th anniversary bash of the Chinese communist
party---which is a major event for them.
So, I am officially withholding judgement on the odds of a successful
outcome to the trade negotiations until after the party is over.
Clearly, I could be
dead wrong about the odds of an agreement that incorporates reform in Chinese
industrial policy and IP theft. If Trump
gets that, then the outlook for increased trade and a stronger economy improves
markedly. If Trump gets out maneuvered,
then while the short term prospects for growth will rise, the US will still
stuck with the longer term burden on unfair Chinese industrial policies and IP
theft.
(3)
the resumption of QE by the global central banks. That is now occurring worldwide. [a] last week China lowered bank reserve
requirements and [b] this week ECB
lowered rates. The FOMC and the
Bank of Japan meet next week. While we
can’t know the outcome of these proceedings, the Market is pricing high odds at
the moment for further easing by both.
I have maintained for some time that the key
to the Market is monetary policy, more specifically, its co-dependency with the
Fed. Investors recently began to
question their faith in the Fed’s ability to navigate the US economy through an
increasingly trying economic climate. Indeed,
I was surprised this week by the relative lack of enthusiasm regarding the ECB
cut. So far, there is not enough to
suggest a change in the paradigm of central bank/stock market co-dependency. However, the risk is heightening that this
could occur.
(4)
current valuations. I believe that Averages are grossly
overvalued [as determined by my Valuation Model], even considering:
[a] better economic data, which the recent
pin action in the Markets suggests is happening or about to happen. At the moment, however, the US economic
numbers are not that great. Neither are
the global stats. So, there is no
assurance that this is occurring.
[b] an improvement in the trade outlook. Progress seems to be happening. But, there is
nothing clear on the real source of the US trade dispute with China---its
industrial policy and IP theft. While
any trade deal, good or bad, will almost assuredly improve the short term
economic outlook, it will do nothing from long term valuations if the US
doesn’t halt the aforementioned policies.
On the other hand, the real driving source of
the Market’s advance is the global central banks being all in on their support
of equity markets. For the last decade, they have measured their success by the
performance of the stock Market, acted accordingly and been victorious. As long as that is the paradigm, fundamental
economics and valuations will likely remain irrelevant.
However, I still believe that these monetary
policies of the last decade have stymied not aided economic growth, that they
have created valuation bubbles through the mispricing and misallocation of
assets and that they have led to a pronounced inequality in the distribution of
wealth. And I believe that the unwinding
of these effects will not end well for equity holders.
As prices continue to rise, I will be primarily
focused on those stocks that trade into their Sell Half Range and act
accordingly. Despite the Averages being near all-time highs, there are certain
segments of the economy/Market that have been punished severely (e.g. health
care) with the stocks of the companies serving those industries down
30-70%. I am compiling a list of
potential Buy candidates that can be bought on any correction in the Market;
even a minor one. As you know, I recently
added AbbVie to the Dividend Growth and High Yield Buy Lists.
Bottom line: fiscal policy is negatively
impacting the E in P/E. On the other
hand, a new regulatory environment is a plus.
Any improvement in our trade regime with China should have a positive
impact on secular growth and, hence, equity valuations---if it occurs. More important, a global central bank ‘put’ has
returned and, if history is any guide, will almost assuredly be a plus for stock
prices.
As a reminder, my Portfolio’s cash
position didn’t 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.
