The
Closing Bell
7/13/19
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 23375-33605
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 2506-3450
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. Not
much data this week and what there was, was slightly negative: above estimates:
May consumer credit, month to date retail chain store sales, weekly jobless
claims; below estimates: May jobs openings, the June small business optimism
index. May wholesale inventories/sales, June PPI; in line with estimates: weekly
mortgage/purchase applications, June inflation/core inflation.
There
were no primary indicators reported.. This is pretty thin gruel upon which to
make a directional call; so, I am rating this week a neutral. Score: in the last 196 weeks, sixty-three positive,
eighty-nine negative and forty-four neutral.
As you know, while
I have not changed my forecast, I did start the yellow light flashing. This week stats provide little informational
value one way or the other.
The overseas
data was slightly negative with the EU and China mixed but Japan bad---not that
helpful for our own economy.
[a] May German industrial production was below
forecasts; its inflation rate was in line, but wholesale prices were above
projections; the May UK trade deficit and construction spending were upbeat,
GDP was in line and industrial production was below estimates; May EU
industrial production was better than expected,
[b] June Chinese vehicle sales and PPI were less
than anticipated while CPI was in line; exports dropped less than consensus
while imports decreased more; new loans were below forecast while social
spending was more,
[c] May Japanese machine tool orders, June bank
lending, June economic sentiment and June PPI were below projections while
industrial production was above.
Developments
this week that impact the economy:
(1) trade:
not much on the trade front this week following the US/China ceasefire. Of note, however, is that as part of the new
trade truce, China said that it would increase its purchases of US goods. So far, that hasn’t happened. I have to wonder how long that remains the
case before Trump renews the trade confrontation.
Trump’s Huawei reprieve was a huge mistake.
The other item worth mentioning is Trump’s increasing
calls for a weak dollar. His reasoning
is that it helps trade---which initially it does. However, it also makes US assets [read US
Treasury debt] less attractive, i.e. it takes a higher interest rate to lure
investors, hence prices fall. If the government
wasn’t running massive deficits that might be okay. Unfortunately, it is; and that makes financing
those deficits more expensive.
So, a weak dollar has two negative secondary effects:
higher interest rates and exacerbating the federal deficit. In my opinion, the dollar is like the stock
of a country in the sense that you want investors to have confidence in its
future value---and that means a stable (or higher) dollar.
Counterpoint (and a must read):
(2) monetary
policy: of course, the big news of the week was the capitulation of the Fed to
the Market, which is to say, an ultra-dovish policy where the only question is
how many more rate cuts are in our future.
I did my
rant in Thursday’s Morning Call, so I won’t be repetitious except to note that
[a] the Fed’s economic and policy narratives are not consistent and [b] despite
the Fed’s previous unprecedented QE policy, the result was a below average
economic recovery {even if you assume it made a positive contribution to the
anemic economic growth rate, which I don’t} and the massive mispricing and
misallocation of assets.
(3) tensions
in the Middle East remain at a slow boil. The violence remains contained but
the war of words goes on with abandon. The
bad news is that the threat of violence remains which if it occurs could lead
to severe economic consequences in a worst case scenario. Remember a large
percentage of global oil supplies transits the Straits of Hormuz, which is
bordered on one side by Iran. Any
military action that would choke off those supplies would be a negative for the
global economy.
US weighing
UN ‘snapback’ sanctions against Iran.
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. Indeed, the recent dataflow has been negative
enough that I have started the yellow light flashing for a possible downgrade
in my forecast.
The Market-Disciplined
Investing
Technical
The Averages (27332, 3013) had another good day, with
the S&P finally closing above the 3000 level. Both are above their MA’s and
in uptrends across all time frames. Still
volume was down, remaining anemic; breadth was again mixed. In addition, last Friday’s gap up open still
needs to be closed. My assumption is
that they will challenge the upper boundary of their long term uptrends (29947,
3191), though the aforementioned conditions remain a potential early warning of
a reversal.
The VIX fell 4 1/8 %, drawing ever closer to its
historic lows---which should provide pretty stiff resistance. That said, it finished
below both MA’s and in a very short term downtrend. So, impetus is lower.
The long bond rebounded 1/8% from Thursday’s shellacking.
Importantly, it held at an obvious minor support level. Given its big runup since late May, the consolidation
so far has been well within the bounds of ‘normal’. Nonetheless, it is above both MA’s, in a very
short term uptrend and has a gap down open which needs to be filled. The big question, which I raised yesterday,
is how TLT will act longer term in response to the Powell’s recent surprisingly
dovish tilt.
And:
The dollar was down five cents, but still ended
above both MA’s and in a short term uptrend---not what I would expect with
Trump crying for a lower dollar and the Fed seemingly accommodating him with a more
aggressive expansion of monetary policy.
GLD was up 5/8 %, leaving it above both MA’s,
in a short term uptrend and in a very short term uptrend. Still, it has made one gap up and one gap
down opens and those need to be dealt with.
Bottom
line: despite being overbought (and
getting more so) on weak volume, deterorating breadth indicators and the need
to fill gap up opens from the prior week, my assumption remains that the
Averages are on their way to challenging the upper boundaries of their long
term uptrends.
The other
indicators appear to have shaken off the initial shock of the Fed’s push to
QEIV. However, I would like to see
another week of trading before drawing any conclusion about whether the Fed’s
action has altered their investors’ outlook.
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.
The big
question is how the slowing economy will impact the second quarter earnings season
which will begin next week.
My sluggish growth forecast is a neutral but that could change
if the stats continue to deteriorate and/or the upcoming earnings season and
forward guidance prove disappointing.
(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. While investors got jiggy with the recent trade truce, I believe that the
Chinese are just buying time and that, ultimately, they will not even consider
making any compromise before the 2020 elections, if ever. The current evidence of such is that China
has yet to fulfill its promise made as part of the ceasefire to increase
purchases of US goods---this after Trump reversed a portion of the sanctions
against Huawei. If that doesn’t change,
then Trump [a] will likely re-ignite the confrontation and [b] he would then face
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.
(3)
the resumption of QE by the global central banks. That is now occurring worldwide. I reviewed above the increased dovishness of
our Fed. In the EU, Draghi is stepping
down but not before suggesting a resumption of ECB QE; and he is being replaced
by Christine Lagarde who many believe is even more dovish than Draghi.
I have
maintained for some time that the key to the Market is monetary policy, more
specifically, the total capitulation of the Fed to the whims of the equity market. At the moment, I don’t see anything that is
going to change this paradigm of central market/stock market co-dependency.
That makes
no sense to me but that is what we are stuck with. Unfortunately, I have no clue when this model
changes; but Herb Stein once said, something that can’t go on forever, won’t. (must
read):
(4)
current valuations. I believe that Averages are grossly
overvalued [as determined by my Valuation Model].
At the moment,
[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 falling,
suggesting that a weaker economy, and perhaps even recession may be in our
future, and yet [c] equity prices are at their all-time highs. The only explanation that I have for this is in
the context that the global central banks measure their success by the
performance of the stock Market and act accordingly. As long as that is the paradigm, 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. 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.
