6/27/20
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 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%
Economics/Politics
The economic dataflow continues to come in
better (less bad) than consensus, meaning that while the US is in a recession
[a] the worst is probably behind us and [b] it was 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 (and primary indicators) this week
was upbeat again while the overseas stats were overwhelmingly positive.
Short term, the economic recovery continues though the
question of progress was raised this week as the second wave of coronavirus
infections appear to be upon us albeit sooner than many anticipated. 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
The Averages (25015, 3009) got beaten like a rented mule yesterday
on elevated volume and horrible breadth.
Plus (1) the S&P closed below its 200 DMA; now support. If it remains there through the close next
Wednesday, it will revert to resistance and put it back in sync with the Dow
[i.e. acting as resistance], (2) both indices are in very short term downtrends
and (3) they still have those ‘island tops’ weighing on them. There was one
potential bright spot---the VIX’s pin action was quite subdued for such a big
down day, suggesting that investors may be less alarmed than stocks indicate.
Hence, the short
term the technical picture has gotten shakier.
Nonetheless, I am sticking with my assumption that the Market’s bias is
to the upside---at least until/unless the Averages revert their DMA’s to
resistance.
Gold jumped back
to the level of Tuesday’s seven year high which was clearly a positive. The long bond was also strong, greatly improving
its short term technical picture. The
dollar was also up again, but only fractionally so. It was unable to make a second higher
high. Higher gold and bond prices and a
lower dollar suggest a weakening 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. The recent data clearly shows that a bounce off of a recessionary low is
occurring---which is clearly a plus.
However, there are negatives to temper our optimism [a] the collapse in
economic activity has been so pronounced that any recovery will have to be significant
just to regain the prior level of economic activity, [b] a second wave of the
virus appears to be up on us; the question is, how much will it impact the
current rebound. The good news is that we
will know the answer reasonably soon, [c] we have no idea about either 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 or how much this
whole coronavirus affair will alter Americans’ long term living/spending
habits. In short, the economy may have
seen the worst but we have idea about what is to come.
More coronavirus data.
In my opinion, those factors will also ultimately
play a key role in determining the Market’s Fair Value [as determined by my
Valuation Model]. But, as I noted above,
there remains so much about them that we simply do not know; so, any attempt to
determine Fair Value would of necessity be by the WAG [wild ass guess] method. In the meantime, investors are pricing many
equities near the same valuations of pre-coronavirus, pre-US/Chinese trade
tensions and pre-riots levels. That
seems overly optimistic to me.
There are two other factors to consider.
[a] short term, US relations with China remain
tenuous. 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 {and it seems likely that yet another
stimulus bill will be enacted}, 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 current 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) QEInfinity/Forever. That was helped along this week by the FDIC
loosening the restrictions of Volcker Rule, the net effect of which was to allow
banks to increase the leverage on their capital---just what this asset price
bubble needs. The good news is that the
Fed imposed restrictions on stock buybacks and dividends for at least the third
quarter [for all the good that will do].
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.
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.
