The
Closing Bell
6/15//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 Trading Range 21691-26646
Intermediate Term Uptrend 14439-30630
Long Term Uptrend
6585-29947
2018 Year End Fair Value
13800-14000
2019 Year End Fair Value
14500-14700
Standard
& Poor’s 500
Current
Trend (revised):
Short
Term Trading Range 2349-2942
Intermediate
Term Uptrend 1373-3183 Long Term Uptrend 913-3191
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. While
this was not a big week of data, what we got was negative: above estimates: weekly
mortgage and purchase applications, May small business optimism index, May
industrial production/capacity utilization, May core CPI; below estimates: weekly
jobless claims, month to date retail chain store sales, June consumer sentiment,
April business inventories/sales, the May budget deficit, May import/export
prices; in line with estimates: May retail sales/sales ex autos, May PPI/core
PPI, May CPI
The
primary indicators were slightly positive: May industrial production (+), and May
retail sales/sales ex autos (0). I rate the
week a neutral. Score: in the last 192 weeks,
sixty-three positive, eighty-six negative and forty-three neutral.
Update on big
four economic indicators.
Morgan Stanley
business conditions index suffers biggest one month decline in history.
Nothing here to
warrant considering a change to my forecast.
Very little
positive in the overseas stats this week---so no help for our own economy.
[a] April EU
industrial production was down but in line; April UK trade deficit was less
than expected but so was GDP, construction orders, manufacturing production and
industrial production; unemployment was in line
[b] May Chinese
industrial output, fixed asset investment and loan growth were below forecasts
while retail sales were above and CPI and PPI were in line,
[c] April
Japanese industrial production was in line, May machine tool orders plunged and
PPI was below estimates.
Developments
this week that impact the economy:
(1)
trade:
[a] the main
headline was the resolution of the Mexican trade/immigration standoff. While it is a plus for the long term, short
term is just means the absence of a negative {tariffs}. That said, I continue to believe that using
trade weapons {tariffs} to address nontrade issues {immigration} could prove to
be a strategic error, i.e. it draws into the question the trustworthiness of
the US in any trade negotiations,
[b] speaking of
which, US/China war of words continued this week. The good news was that there was no
substantive escalation in this trade battle.
(2)
the Fed: nothing
new out of the Fed. But I remind you
that the FOMC meets next week and the Markets have an 80% probability of a rate
cut by July priced in.
(3)
violence escalated in the Middle East, the most significant
incident being the torpedoing of two oil tankers near the Straits of
Hormuz. Remember a large percentage of global
oil supplies transits that narrow passage.
Any military action that would choke off those supplies would be a
negative for the global economy.
Bottom line: on a secular basis, the US economy is growing
at an historically below average rate.
Although some recent policy changes are a plus for secular growth, they
are being offset by 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 stronger
than expected Q1 GDP dataflow seems to have faded which is not surprising given
the lethargic global economy and the continuing threat of trade wars. So, I see no need to alter my forecast.
The growing risk
of recession.
The Market-Disciplined
Investing
Technical
The Averages (26089, 2886) were off modestly yesterday,
with the DJIA remaining above the minor
resistance level and the S&P below it.
It seems impossible but volume was down even more and breadth
deteriorated. Both ended above their 100
and 200 DMA’s (now support).
VIX was down
3 ½%---ending another unusual day in which it would normally have been up. It finished right on its 100 DMA (now
support) but below its 200 DMA (now resistance).
TLT advanced ¼ %, closing above both MA’s (now
support), in a very short term uptrend and is now less than two points away
from its twenty year up.
The dollar rose ½ %, remaining in a short term
uptrend and above both moving averages
(now support). However, it gapped up on
the open---which, as you know, I expect will need to be filled.
GLD declined four cents, but still finished in a
short term uptrend, above both MA’s (now support) and remains near the upper
boundary of its intermediate term trading range.
Bottom
line: yesterday’s pin action continues
to suggest that the indices have been digesting their strong June advance rather
than being really stymied by a minor resistance level. My assumption remains that upward momentum
has not been broken and a move higher is likely.
However, I
repeat the caveat that low volume, relatively weak breadth and a VIX that is
signalling extreme complacency are reasons to doubt that scenario. In addition, the pin action in the bond,
dollar and gold markets again pointed at their function as a safety trade.
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. After an upbeat start to the year, the economy has
settled back into the doldrums and it isn’t being helped by a slowing global
economy, the fallout from the US/China trade skirmish and the burden of the
carrying costs of too large a deficit and national debt.
My sluggish growth forecast is a slight plus but the odds of
an improvement have declined while those of even weaker growth increased.
(2)
the success of current trade negotiations. If Trump can create a fairer political/trade
regime, it would almost surely be constructive for secular earnings growth.
At the
moment, the elephant in the room is China; and I can’t imagine the Chinese even
considering making any compromise before the 2020 elections. If true, then Trump faces more than a year of
potential bad news on Chinese trade. And
given that he measures his success by the level of the Market, the question is,
will he fold if the Market declines in a meaningful way?
That may
be a moot point right now, but it is a long way to November 2020 and much can
happen. And if he were to fold, the best
scenario would be for the level of US/China trade to return to prior levels for
the short term and the continued cheating by the Chinese for the long
term. In other words, nothing that would
happen to improve corporate profitability or lift the valuation of equities
from their already lofty levels.
Further,
I don’t see anything of near term positive economic significance stemming from
the agreement with Mexico other than the absence of a negative. To be sure, it should have an effect on drug
and human trafficking, a slowing in the growth of the financial burden placed
on our social services and increase in the mean skill set of the annual influx
of immigrants. But again, the impact is
long term and will be of little consequence to near term corporate profitability
and valuations.
(3)
the resumption of QE by the global central banks. While global central bank easing had little effect
on economic growth [except for QE1] and almost nothing to do with Fair Value,
it has been the single biggest factor in equity prices for the last decade. At the moment, I don’t see anything that is
going to change that paradigm.
But it
makes no sense to me that a struggling economy with stunted corporate profit
growth should be valued at ever higher levels.
My question is, when will investors realize that a Fed [a] run by
academics with a flawed model, [b] an inflated view of their ability to control
the economy and [c] whose major accomplishment over the last decade has been the mispricing
and misallocation of assets, has been a disaster? I have no clue for the answer; but Herb Stein
once said, something that can’t go on forever, won’t.
The
catch 22 of QE.
What happens if we get another recession? Another must read from Jeffery Snider.
(4)
current valuations. I believe that Averages are grossly
overvalued [as determined by my Valuation Model].
What is so
mystifying to me right now is that [a] the US economic numbers are not that
great, the global stats are worse and, absent a US/China trade deal, are not
apt to get better---all of which augurs poorly for corporate profits, [b] long
term interest rates are plunging and the yield curve is flattening, both
suggesting that a weaker economy, and perhaps even recession, is in our future,
[c] as I opined above, the resolution to the Mexico immigration issue will do
little to improve the economy and yet [d] equity prices are rocketing toward
their all-time highs.
This
makes no sense, except in the context that the global central banks measure
their success by the performance of the stock Market and act accordingly---in
which case, fundamental economics and valuations will likely remain irrelevant.
As
prices continue to rise, I will be primarily focused on those stocks that trade
into their Sell Half Range and act accordingly. However, 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.
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.
