The Closing Bell
4/19//14
Statistical Summary
Current Economic Forecast
2013
Real
Growth in Gross Domestic Product:
+1.0-+2.0
Inflation
(revised): 1.5-2.5
Growth
in Corporate Profits: 0-7%
2014
estimates
Real
Growth in Gross Domestic Product +1.5-+2.5
Inflation
(revised) 1.5-2.5
Corporate
Profits 5-10%
Current Market Forecast
Dow
Jones Industrial Average
Current Trend (revised):
Short
Term Trading Range 15330-16601
Intermediate Uptrend 14696-16601
Long Term Uptrend 5055-17405
2013 Year End Fair Value
11590-11610
2014 Year End Fair Value
11800-12000
Standard
& Poor’s 500
Current
Trend (revised):
Short
Term Uptrend 1813-1990
Intermediate
Term Uptrend 1760-2560
Long Term Uptrend 739-1910
2013 Year End Fair Value 1430-1450
2014 Year End Fair Value
1470-1490
Percentage Cash in Our Portfolios
Dividend Growth
Portfolio 43%
High
Yield Portfolio 47%
Aggressive
Growth Portfolio 46%
Economics/Politics
The
economy is a modest positive for Your Money. It was
another slow, holiday shortened week in
which the data was mixed: positives---weekly mortgage and purchase applications,
March retail sales, the April Philly Fed index and March industrial production
and capacity utilization; negatives---February housing starts, the April NY Fed
manufacturing index and March CPI; neutral---weekly retail sales, weekly
jobless claims and February business inventories/sales.
While the data
was sparse, three of the primary economic indicators were out this week: housing
starts were poor, industrial product was excellent, retail sales were up but
there was some question about their internal make up. In short, they were mixed; and mixed is to be
expected in our sluggish forecast.
Hence, they were in line with our expectations and sufficient enough for
me to kill the economic warning light.
Update on big
four economic indicators (medium):
Our outlook
remains:
‘a below average secular rate of recovery
resulting from too much government spending, too much government debt to
service, too much government regulation, a financial system with an impaired
balance sheet, and a business community unwilling to hire and invest because
the aforementioned along with...... the historic inability of the Fed to
properly time the reversal of a vastly over expansive monetary policy.’
The pluses:
(1)
our improving energy picture. The US
The
negatives:
(1) a
vulnerable global banking system. No
news on this score this week. That doesn’t
mean that this risk is any less.
‘My concern here.....that: [a] investors ultimately
lose confidence in our financial institutions and refuse to invest in America and
[b] the recent scandals are simply signs that our banks are not as sound and
well managed as we have been led to believe and, hence, are highly vulnerable
to future shocks, particularly a collapse of the EU financial system.’
(2)
fiscal policy. All quiet among our ruling class with the Passover/Easter
holiday, except for this (short):
(3)
the potential negative impact of central bank money
printing: The key point here is that [a] the Fed has inflated bank reserves
far beyond any comparable level in history and [b] while this hasn’t been an
economic problem to date, {i} it still has to withdraw all those reserves from
the system without creating any disruptions---a task that I regularly point out
it has proven inept at in the past and {ii} it has created or is creating asset
bubbles in the stock market as well as in the auto, student and mortgage loan
markets.
This week:
[a] Fed policy
got even murkier when the most dovish member of the FOMC made a hawkish speech while
Yellen gave her most dovish statement ever.
In addition,
some mystery entity is gobbling up Treasuries via the Belgian central
bank. While there is no way of knowing if
it is our own Fed counteracting its own tapering, the bottom line is that
someone is doing it,
[b] the economic
news out of China continued to be very downbeat. However, on Monday the Bank of China made a very
explicit statement that there would be no stimulus. To be sure, those guys lie a lot; but to
date, their actions are reflecting their words,
[c] finally, the
data on the Japanese economy is equally bad.
In response, the Bank of Japan is threatening a QEInfinity squared ramp
in monetary growth---in the sure knowledge that its past QE and QEInfinity
attempts to stimulate the Japanese economy have not been just an abject failure
but have crushed the Japanese workingman {higher prices, higher taxes}. One has to wonder if the electorate will put
up with more of the same.
In response to
this, investors spent the week in a state of euphoria induced denial, picking
and choosing which events to focus on and ignoring anything that smacked of
cognitive dissonance. I can understand
this behaviour if it was clear that the central banks were going to continue
pumping as hard as they can [don’t fight the Fed].
Certainly, if
more monetary easing is forthcoming, the transition process to normalized
monetary policy can be postponed; but I see nothing in the above developments
that makes that a certainty. Further,
what I do believe is that [a] at some point, electorates are going to rebel
over policies that only make their life worse and [b] whether they do or not,
history tells us that when, as and if a transition begins {i} the Fed will
bungle it and {ii} the longer it takes, the greater the pain.
(4)
a blow up in the Middle East or someplace else. Ukraine is now in the midst of a serious
police [military] action as forces are being deployed to stamp out pockets of
pro-Russian dissidents. Meanwhile, Putin
has warned both Obama and Merkel that the country is on the verge of civil
war. For the strife to continue [which
seems likely] and him to do nothing [which seems unlikely] is probably not a
good assumption. There was some sort of
squishy agreement on Thursday attempting to de-escalate tensions. But that already seems to have gone by the
wayside. I maintain my belief that
whatever the outcome, Putin will be happy. Indeed what better time to invade than
a long Easter weekend.
My bottom line:
‘If He [Obama] would actually do something (pledge to reinvigorate NATO, resume
negotiating the treaties with Poland and the Czech Republic) to project
American power and show Putin that He is dead serious about preventing further
expansion from Russia, I could get behind the Guy. Sure it would likely send nervous tremors
through the Markets---but it would be a long term positive. But trying to scare Putin with a lot diplomatic
bullshit accomplishes nothing because Putin doesn’t care and doesn’t respect
Obama enough to think that anything He does will materially impact Russia. Indeed as I have voiced many times, my
concern is that Putin responds to these antics by kicking Obama in groin,
humiliating Him publicly. I suspect that
the Markets would be even less enthralled with this scenario.’
The showdown
between the US and Russia (medium):
(5)
finally, the sovereign and bank debt crisis in Europe and
around the globe. The economic data out
of China and Japan this week were terrible.
China has stated reasonably forcefully that it will not stimulate the
economy and has shown its willingness to allow companies and investment trust
to default. Of course the latter does
not encompass the banks nor is it likely to; but given the level of
counterparty liabilities that exist outside the banking system, damage could
still extensive if defaults began to snowball and get out of control.
Japanese
economic policy enshrines the very definition of insanity. These guys are in a decade long recession,
the recent gargantuan expansion of money supply has only made matters worse and
now the government is considering doubling down on this losing strategy. I have no clue how this situation resolves
itself but it seems likely to me that the Japanese electorate is not going to
be happy and the risk that the yen carry trade gets crushed substantial.
Of course, as I
continue to note, to date the various government leaders have managed to keep
their respective crises under control.
Clearly, they may be able to continue to do so. However, this narrative is not a prediction
of disaster; it is an analysis of risks facing the US economy and securities
markets. And the risk is one or more of
these situations spins out of control.
Bottom line: the US economy continues to progress,
disastrous Fed and fiscal policy notwithstanding.
Fed policy remains
uncertain as we lurch from one contradictory statement to another. I
continue to believe that (1) this is a sign that the Fed has no idea about how
to extract itself from a disastrous QEInfinity, (2) this means that it will
once again bungle the transition to tighter money and induce more pain in the
Markets than they might otherwise have had to suffer and (3) because QE has had
so small an impact on the economy, then the transition process will be
manageable, economically speaking---the pain being felt in the securities
markets.
Investor
daydreaming aside, the Chinese government continues its new policies [the
government is not the answer, re-introducing ‘moral hazard’ into the investment
equation] in spite of a flow of disappointing economic data. If it
sticks to its guns, then I believe that there is apt to be some discomfort
along the way, not just for the Chinese but for the rest of the globe. To its credit, it has managed the process
reasonably well to date---the operative words being ‘to date’.
The weak EU and
Japanese economies are also areas of concern.
This week
(1) inflation
in the EU fell, raising hopes of an ECB easing.
To be fair, the ECB has been reasonably firm in its monetary policy to
date; so all things being equal, it has the room to be more accommodative. However, [a] it has not been clearly
established that the ECB can legally pursue the easing policies it has proposed
and [b] the EU’s problem is more centered on its banking system in that the
banks are highly leveraged and own a substantial portion of their host countries’
sovereign debt. Even if we assume the
ECB eases monetary policy, the question is, will it be any more effective than
the US or Japanese. And with the EU
economy in worse shape than the US, the issue remains the ability of the
sovereigns to service their debt and the solvency of the banks that hold it.
(2) Japan announced that GDP growth would not meet
its forecasts. Its solution, more
QE. Again that had investors all
atwitter. But for the life of me, I can’t
see how this economic mess resolves itself without some real pain.
Finally, military
confrontation is now occurring in Ukraine and Putin is telling us and the
Germans that he ain’t happy about it. My
best guess is that when all is said and done, Putin is happy, oil prices are
higher and the US looks like a shadow of its former self. I just hope Putin spares us Obama’s public
humiliation.
In sum, a resilient
US economy is something about which to rejoice but is it facing a number
potentially troublesome headwinds.
This week’s
data:
(1)
housing: weekly mortgage and purchase were both up;
March housing starts were disappointing,
(2)
consumer: weekly
retail sales were mixed; March retail sales were slightly better than expected,
weekly jobs claims rose less than forecast,
(3)
industry: February business inventories were below
estimates but sales were better; March industrial production and capacity
utilization were quite strong; the April NY Fed manufacturing index was well
below estimates while the Philadelphia Fed index was much better than consensus,
(4)
macroeconomic: March CPI was hotter than anticipated.
The Market-Disciplined Investing
Technical
` The
indices (DJIA 16408, S&P 1864) had another volatile week, but finished up every
day. None of their primary trends were
broken, although the S&P touched the lower boundary of its short term
uptrend and then bounced. Plus both of
the Averages both broke above below their 50 day moving averages.
The S&P
closed within uptrends across all timeframes: short (1813-1990), intermediate
(1760-2560) and long (739-1910). The Dow
remains within short (15330-16601) and intermediate (14696-16601) term trading
ranges and a long term uptrend (5055-17405).
They continue out of sync in their short and intermediate term trends.
Volume on Friday
was up but that was largely a function of options expiration; breadth deteriorated. Not surprisingly, the VIX suffered some
serious whackage as prices soared; though it continues to offer no directional
help with the Market. It finished within,
but close to the lower boundary of, its short term trading range, below its 50
day moving average and within an
intermediate term downtrend.
The long Treasury
was up neatly Monday through Wednesday, than gave much of it back on
Thursday. I will be paying close
attention to TLT next week to see if Thursday’s action was just noise or a sign
that the bond crowd is revising its outlook.
Still it remained within a short term uptrend and an intermediate term downtrend
and above its 50 day moving average.
GLD’s chart
remains a dog. It is within both short
and intermediate term downtrends and below its 50 day moving average.
Bottom line: the indices weekly pin action was quite
strong. Of course, a bounce was not all
that surprising given that the prior week was one of the roughest in the Market
since February. How much of it was just
a rebound from a very oversold condition and how much a renewed round of
euphoria, is the question before us at the moment.
From a
standpoint of the fundamentals, the fact that prices rose on both good and bad
news suggests that investors seem to have a rekindled belief that the central
banks will expand money supply into infinity.
I have a problem with how they could have gotten to that position (like
ignoring any Fed statement that doesn’t fit the theme as well as the explicit statement
of the Bank of China that no stimulus is forthcoming). But what I think doesn’t matter. If the Market believes it, prices are headed
up and will likely challenged the upper boundaries of the Averages long term
uptrends.
On a technical
note, the last lower high was circa S&P 1873. If it can close above that level, a very
short term downtrend will be negated. If
not, then our attention returns to the lower boundary of the S&P short term
uptrend.
Meanwhile, we
have a trendless Market; so there is really not much to do save using any price
strength that pushes one of our stocks into its Sell Half Range and to act
accordingly.
Fundamental-A Dividend Growth Investment Strategy
The DJIA (16408)
finished this week about 40.2% above Fair Value (11700) while the S&P (1864)
closed 28.3% overvalued (1452). Incorporated
in that ‘Fair Value’ judgment is some sort of half assed attempt at getting fiscal
policy under control, a botched Fed transition from easy to tight money, a
historically low long term secular growth rate of the economy and a ‘muddle
through’ scenario in Europe and China.
While it was
another slow week for economic releases, several covered important segments of
the economy which kept the quality of information factor high. In general, the stats, especially the primary
indicators, mirrored our forecast. So I am
turning off the economic warning light. That
leaves the economy as the bright spot in our Market outlook. Unfortunately, this positive performance is
built into our Models; so it provides no relief from with our valuation problem.
Fed induced
confusion over monetary policy continues.
Yellen spoke this week and delivered her most dovish performance ever. Like last week’s FOMC minutes, investors
elected to zero in on her latest pronouncement and ignore the prior hawkish
comments of both her and several other high ranking Fed officials. Investor reaction aside, I don’t see anything
clarifying about Yellen’s remarks when taken in the context of everything else
that we have heard from the Fed in total.
This keeps me of the opinion that the Fed is shooting in the dark when
it comes to a transition to normalized monetary policy---which in turn means a
higher probability of a botched transition and, hence, more pain with the
caveat that the pain will be felt less in the economy and more in the Markets
for the simple reason that the QE’s have had more impact on the Markets than on
the economy.
The biggest
risks to the Market, in my opinion, come from potential negative events
overseas. China heads the list as its
economy slows, bankruptcies are increasing, its financial markets are going
through a massive deleveraging, the yuan carry trade is being unwound and the
government insists that it will allow the markets to take their own course.
Japan and to a
lesser extent the EU are having problems getting any economic growth; and
worse, so far the only remedies the ruling classes are considering is doubling
down on policies that already haven’t worked (QE). Of course, that is exactly what the Markets
want because it means more ‘money for nothing’ carry trade profits. To be fair,
the politicians have thus far managed to maintain control of their
difficulties; and they may very well continue to do so until their respective
economies are out of trouble. The risk
is that they won’t.
Ukraine isn’t
going away; I suspect because Putin doesn’t want it to go away. It seems a foregone conclusion to me that
this situation will end as Putin wants it to.
Figuring out what form that will take is above my pay grade, but I
seriously doubt that he is concerned about any fallout from the US. My real concerns are that (1) the US get humiliated
in the process because I don’t think that will be well received by the Markets
and (2) in the fallout from any invasion/military action, the price of oil will
likely spike.
Overriding all of these considerations is
the cold hard fact that stocks are considerably overvalued not just in our
Model but with numerous other historical measures which I have documented at
length. This overvaluation is of such a
magnitude that it almost doesn’t matter what occurs fundamentally, because
there is virtually no improvement in the current scenario (improved economic
growth, responsible fiscal policy, successful monetary policy transition) that
gets valuations to Friday’s closing price levels.
Bottom line: the
assumptions in our Economic Model haven’t changed. The assumptions in our Valuation Model have
not changed either. I remain confident
in the Fair Values calculated---meaning that stocks are overvalued. So our Portfolios maintain their above
average cash position. Any move to
higher levels would encourage more trimming of their equity positions.
I can’t emphasize strongly enough that I
believe that the key investment strategy today is to take advantage of the
current high prices to sell any stock that has been a disappointment or no
longer fits your investment criteria and to trim the holding of any stock that
has doubled or more in price.
Another
must read from Lance Roberts (medium):
What individual investors are doing? (short):
Who’s buying? (short):
The latest stats on this quarter’s
earnings and revenue ‘beat’ rates (short):
DJIA S&P
Current 2014 Year End Fair Value*
11900 1480
Fair Value as of 4/30/14 11700 1452
Close this week 16408 1864
Over Valuation vs. 4/30 Close
5% overvalued 12285 1524
10%
overvalued 12870 1597
15%
overvalued 13455 1669
20%
overvalued 14040 1742
25%
overvalued 14625 1815
30%
overvalued 15210 1887
35%
overvalued 15795 1960
40%
overvalued 16380 2032
45%overvalued 16965 2105
Under Valuation vs. 4/30 Close
5%
undervalued 11115 1379
10%undervalued 10530
1306
15%undervalued 9945 1234
* Just a reminder that the Year
End Fair Value number is based on the long term secular growth of the earning
power of productive capacity of the US
economy not the near term cyclical
influences. The model is now accounting
for somewhat below average secular growth for the next 3 to 5 years with
somewhat higher inflation.
The Portfolios and Buy Lists are
up to date.
Steve Cook received his education
in investments from Harvard, where he earned an MBA, New York University, where
he did post graduate work in economics and financial analysis and the CFA
Institute, where he earned the Chartered Financial Analysts designation in
1973. His 40 years of investment
experience includes institutional portfolio management at Scudder. Stevens and
Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment
banking boutique specializing in funding second stage private companies. Through his involvement with Strategic Stock
Investments, Steve hopes that his experience can help other investors build
their wealth while avoiding tough lessons that he learned the hard way.
No comments:
Post a Comment