5/16/20
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 1343-4978
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
While the shutdown of the economy is
beginning to unwind, the US is almost certainly moving into a recession, at the
very minimum. However, there are too
many unknowns to make any semblance of a forecast. Hence, the economy will remain a negative at
least until there is some visibility for a recovery.
The data was mixed this week, including the
primary indicators. This surprisingly
better than expected performance was in line with stats from last week, i.e.
they were less negative than had been anticipated. That makes two weeks in a row that the
numbers have failed to live up (down?) to depressed forecasts. It is too soon to be drawing conclusions
about the magnitude of the current economic decline; but not too soon to be
hopeful.
Update on big four economic indicators.
New Q2 nowcasts.
Homebuying recovering rapidly.
Overseas stats were even more promising---bad
but not nearly as bad as consensus.
Germany enters recession.
This good
news likely means that those economies around the globe that are re-opening are
doing so at a more robust pace than had been anticipated. But to remain positive assumes that those
reopenings will continue to be effectively executed and that the predicted
‘second wave’ of infections will be well contained. Longer term, the economy
will be shaped by how quickly virus treatments and a vaccine are discovered as
well as the permanent impact this disease/government reaction will have on the
lifestyles and work habits of the nation.
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 (23685, 2863) had another roller coaster day,
finishing up but still within their 4/17-4/21
trading ranges. The good news is that as
long as they remain within those ranges, I have to assume that momentum
continues to the upside. The bad news is
that yesterday’s pin action did nothing to void the developing Dow head and
shoulders formation or the S&P’s double
top. Plus, the VIX’s pin action is
suggesting that any progress to higher stock prices will be labored.
GLD, TLT and UUP charts
remain strong. As I continue to note, they
should not be trading in unison to the upside unless investors are
nervous---and it is not clear that equity investors are nervous.
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 isn’t and won’t be for some time.
The most important unknowns that will clarify this picture are [a] the
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.
That said, given the recent pin action, it
seems that many investors believe that most of these unknowns are already
adequately reflected in stock prices. As
you know, I am not quite that sanguine because, in my opinion, there remains so
much that simply is not knowable; and until it is, this factor, in my opinion,
will remain a potential disrupter of valuations.
There are two other factors to consider.
[a] short term, the tensions between the US
and China continue to build with {i} the introduction of a China sanctions bill
in the senate this week and {ii} the
Commerce Department’s move to block shipments of semiconductors to Huawei
Technologies. The most likely risk here is that the Phase 1 trade deal could
unwind; and if history is any guide, the re-escalation of a trade war will make
the going rougher for stocks.
Further, there has been enough saber rattling
over Taiwan and territorial sovereignty in the South China Sea that this standoff
could escalate into something more serious.
[b] longer term, with all the spending to offset
the results of a national lockdown, the budget deficit/national debt is getting
out of hand. As you know, I believe that
once the national debt reaches a certain size relative to GDP {the US is
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.
(2) the
resumption of QE by the global central banks.
Money printing is occurring with a vengeance by the global central banks---which
unfortunately is necessary to finance the monstrous deficits being racked up
with the coronavirus bailouts.
[Don’t get me wrong, they were/are needed to
compensate for the misguided national lockdown.
But that does not change the fact that the American taxpayer is stuck
with a rapidly expanding government debt or that the pricing and allocation
functions of the financial markets are being distorted by the unprecedented growth
in the Fed’s balance sheet.]
That said, throughout the entire QEInfinity
experiment, investors have shown a disregard for the consequences of the
unwinding of QE; and while there are some signs in the bond, gold and dollar
markets that those investors may have had enough, it hasn’t translated into the
equity markets. Until it does, the bias
in stock prices will remain to the upside.
The Fed has a huge problem (must read):
Bottom line: I believe that the Averages and certain
segments of the Market are overvalued [as determined by my Valuation Model]. As a result, I wouldn’t be buying those
stocks in this Market advance.
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
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.
