The Closing Bell
Current Economic Forecast
2018 estimates (revised)
Real Growth in Gross Domestic Product 1.5-2.5%
Corporate Profits 10-15%
Real Growth in Gross Domestic Product 1.5-2.5%
Corporate Profits 5-6%
Current Market Forecast
Dow Jones Industrial Average
Current Trend (revised):
Short Term Uptrend 23689-33939
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 2600-3500
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%
The Trump economy is a neutral for equity valuations. This week’s data was upbeat: above estimates: weekly purchase applications, August housing starts/building permits, August existing home sales, the September housing index, weekly jobless claims, the September Philadelphia Fed manufacturing index, August industrial production/capacity utilization; below estimates: month to date retail chain store sales, the September NY Fed manufacturing index, August leading economic indicators, Q2 trade deficit ; in line with estimates: August retail sales/ex autos, July business inventories/sales.
The primary indicators were also a plus: August housing starts/building permits (+), August existing home sales (+), August industrial production/capacity utilization (+), August retail sales/ex autos (0) and the August leading economic indicators (-). The call is positive. Score: in the last 205 weeks, sixty-seven were positive, ninety-one negative and forty-seven neutral.
This is the first up week since August 17th ---and that report ended a string of four upbeat weeks at which point I was about to remove the yellow flashing light. Then we got the last month of negative stats. Now this week. We have lived with this data pattern (i.e. short spurts of positive numbers which suggest my forecast is spot on followed by short spurts of negative data which suggest I should lower my forecast) for the last five or six years. It would appear that to date nothing has changed. I should be getting used to it. Still is we get another two to three weeks of favorable numbers, I am going to remove the yellow flashing light.
Overseas, the stats were mixed, again, providing little reason to alter my opinion that the global economy is a drag on our own.
[a] July EU construction output and trade surplus were above forecasts; the August UK CPI, core CPI and PPI were below estimates while core PPI was in line; The August German CPI was also below projections; August UK retail sales were lower than expected; the August EU CPI and core CPI were in line; the September EU consumer sentiment was lower than anticipated but EU and German economic sentiment were better,
[b] the July Japanese all industry activity index was up less than forecast; the Japanese trade balance was much smaller than expected; August CPI was below consensus,
[c] August Chinese fixed asset investment, industrial production and retail sales were below forecasts.
In addition, global auto sales are expected to decline this year and the OECD lowered its 2019 global economic growth estimate.
Developments this week that impact the economy:
- trade: Thursday, a Trump official said that Chinese tariffs could go as high as 100%. Then Friday afternoon, Trump torpedoed the US/China negotiations saying that he wanted a total deal, not a partial one.
The Chinese exited stage right.
- fiscal policy: no news this week.
- monetary policy: the Fed came through with the expected 25 basis point rate cut but left investors confused [as usual] because the narrative from the policy statement following the FOMC meeting [slightly hawkish] was at odds with the tone of Powell’s post meeting press conference [slightly dovish]. In that presser he also raised the possibility of renewed QE.
That was pretty much a duplicate of the ECB’s policy update last week, i.e. lower rates though it is actually restarting QE.
Somewhat surprisingly, the central banks of Japan, England and Switzerland did not follow the leaders and left rates unchanged---and England and Japan’s economies are even less robust than our own. The narratives from the post meeting statements pointed to the fact that they have so few bullets left in their policy guns that they want to wait until it is absolutely necessary before using them. And they have a point. Our Fed does have a bit more policy leeway.
Lost in all policy gobbledygook is the fact that the lion’s share of central bank policy moves over the last ten years has been a negative [asset mispricing and misallocation] for global growth and will remain so as long as they pursue their irresponsible QE. The only beneficiaries of this policy have been the securities market which are now grossly overvalued.
- global hotspots. the main headline this week was the attack on Saudi oil facilities, again demonstrating just how fragile the Middle East environment is. The good news is that the damage was not as extensive as originally thought; meaning a shortage of oil does not appear to be a threat to the global economy.
Also positive is that Trump has responded with additional sanctions on the Iranian regime rather than military action. So, for the time being, the situation seems contained.
***overnight, US to deploy additional troops to Saudi Arabia.
Edging closer to a Brexit deal.
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.
The Market-Disciplined Investing
The Averages (26934, 2992) retreated yesterday. But it was a quad witching day; and there are so many technical considerations on such a day, it is very difficult to make any trend judgments. Volume soared but again that was a function of quad witching. Breadth was negative. The indices have basically been treading water over the last week and the September 4th gap up opens need to be filled. So, some very short term weakness would not be surprising. However, the Averages remain above both MA’s and in uptrends across all timeframes. My assumption is that they will continue to move to the upside---the next major level to be challenged being their all-time highs (27398, 3027).
The VIX spiked 9%, though it still ended below both MA’s (now resistance) and is in (reverse) sync with the Averages. However, it is close to its 100 DMA and should it successfully challenge that resistance level, it would point to more downside in stock prices.
The long bond rose 1 3/8 % and continued to pull away from the recent sharp downward trajectory---to the point that it may have made a near term bottom and may resume its long term upward momentum. It did all of this while remaining well above both MA’s and in uptrends across all timeframes. So, the long term trend in rates remains to the downside. And that September 4th gap down open still needs to be filled.
The dollar was up ¼ %, remaining the most stable of the indices that I follow. It finished above both MA’s and in short and long term uptrends. Somewhat surprisingly, investors seem unphased by the continuing global dollar shortage problem.
The Fed is clueless about what is going (must read).
GLD increased 1 1/8%, trading back near that minor support level that I have been watching since last Friday. Indeed, it seems to be following the same pattern as TLT, i.e. building a base, having never challenged either MA’s or its very short term and short term uptrends. Plus, it still needs to fill the September 4th gap down open.
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 seem to be stalling at current levels. I don’t see that necessarily as a long term negative; though it could indicate that they may be about to close the September 4th gap up open.
The dollar has definitely regained its upward momentum. TLT and GLD appear to have halted their downward momentum and are attempting to rebound.
I remain concerned about gap opens, increased volatility and low liquidity in other indices and individual stocks.
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:
- the extent to which the economy is growing. The economy continues to struggle forward against multiple headwinds, not the least of which are the weakness in the international stats and the fallout from the US/China trade dispute. The very recent data has become less bad; but that just fits the erratic dataflow of the last five years.
Latest Gallup poll shows declining economic confidence.
At the moment, I am sticking with my sluggish growth forecast which is a neutral for equities.
- 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.
After a frenetic week of kissing up to each other, the news flow did a 180 this week. The US threatened 100% tariffs, Trump said that a partial deal was no deal and the Chinese picked up their marbles and went home.
As you know, I don’t believe that the Chinese have any incentive to negotiate on their industrial policy and IP theft, at least until after the 2020 elections and maybe not even then. Clearly, I could be dead wrong. If I am and Trump gets the changes he wants, 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.
- the resumption of QE by the global central banks. That is now occurring worldwide. [a] two weeks ago China lowered bank reserve requirements, [b] last week ECB lowered rates and [c] this week the US followed suit. On the other hand, the Banks of England, Japan and Switzerland declined to lower rates further. However, the reason given was that they have been so loose for so long that they had few policy bullets left and they wanted to hold off using them in case there was an emergency need. That hardly says tight or tightening monetary policy. So, the bottom line is that in aggregate, the global central banks continue to ease.
I have maintained for some time that the key to our Market is monetary policy, more specifically, its co-dependency with the Fed. Investors recently seem to be questioning their faith in the Fed’s ability to navigate the US economy through an increasingly trying economic climate. Indeed, I was surprised by the relative lack of enthusiasm regarding the ECB and Fed rate cuts and promise of renewed QE. 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.
- current valuations. I believe that Averages are grossly overvalued [as determined by my Valuation Model]. The economy [whether US or global] isn’t improving. Gosh only knows what will happen in the Middle East. True there could be a trade deal that would brighten the outlook. But there has been so many ups and downs in the negotiations, I think that a healthy dose of skepticism on a positive outcome is warranted.
Of course, as usual, I have to conclude that all of the above are irrelevant as long as investors believe the central banks have their back. While 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, I am clearly in the minority. Nonetheless, I also believe that investors will ultimately awake to the damage the monetary regime of the last decade has done and the unwinding of these effects will not end well for them.
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.