Last week, I published this chart that showed that compared to the strength of the economy as measured through GDP the markets were extremely overvalued.
As you can see, the markets are trading very close to the peak of where they stood at the end of the dot com boom and bust which resulted in the NASDAQ crashing 75% soon afterwards. Then I went on to show how it took 16 years for the NASDAQ to recover.
But this morning we got this data:
GDP Q1 (first estimate): +0.7% vs. +1.2% consensus, +2.1% in Q4.
Real consumer spending rose just 0.3% vs. 3.5% in Q4 and Q1 estimates of 0.9%. This is what is called “Anemic Growth”, and this happened because the consumer is flat broke as this also came out today:
Consumer spending increased just 0.3% in Q1 as a bump in inflation, delayed tax refunds and shopping ambivalence factored in. A lower level of home heating was also a consideration due to moderate weather in some areas of the U.S. Spending on larger ticket items such as cars and home appliances dropped, while services spending also came in weak.
I especially like the inclusion of “lower level of home heating” because in the past couple of Q1 GDP slumps much of the blame was on cold weather keeping shoppers at home. This year we had beautiful weather and the shoppers still stayed home, so the drop had to be something else and now it seems that warm weather is also a problem.
So what we have going on here is that the economy has slowed, but stocks have gone up past Mount Everest levels as investors are clueless and are setting themselves up for some serious disappointment. What they have done is bet the farm and the family on whether President Trump can convert his rhetoric into reality.
Update on the Government Spending Bill
As I write this, we just had this happen:
The U.S. House of Representatives has passed a stop-gap spending bill to keep the government running an extra week.
If it goes through the Senate, it will buy Congress time to reach a deal to fund the government until September.
It comes just hours before a deadline for funding federal agencies expires, threatening a second government shutdown in four years.
Republicans have been forced to make several concessions, the latest on funding for so-called Obamacare.
If the Senate continues the passage of the bill, it will be sent to President Trump to be signed into law.
So the chances are that the shutdown will be averted.
Model Portfolio waiting for the big move
In our model portfolio, we are just waiting for the tax cuts proposed by the President to be made into law and then we will simply just add 1% to each of our existing 22 holdings and take us 66% in stocks, leaving 34% in cash. The reason we have not done it as of yet is because the tax cut has not happened, and if it does not happen, for whatever reason, the 21,000 Dow 30 could hit 15,000 in a real hurry. We are still making money as the stocks we have in our portfolios are the best out there, and if everything gets passed, then we will just invest 22% more and increase our rate of future gains.
But since stocks are at Mount Everest levels, to go all in now and have the tax plan not pass would be suicide. I have been giving you big picture analysis so far this year, but at the end of this article is a Main Street vs. Wall Street listing of every stock in the S&P 500. FROIC (free cash flow return on invested capital) is Main Street Performance with anything above 20% being what we are looking for and the PRICE TO BERNHARD is Wall Street Valuation with anything below 15 being great but anything above 30 considered terribly overvalued. At the end of the list, you will see the totals for the entire index. Total FROIC is 13% so Main Street is doing Average but the PRICE TO BERNHARD is 36.84, or +22% more than what is considered bad news and is insanely overvalued. But, as we have seen, just because markets are overvalued does not mean that cannot keep going up. It is as if investors are paying the equivalent of nearly $50,000 for a Toyota Prius with a sticker price of $25,000. They are paying more because they have no idea what the real value should be.
With Tesla (NASDAQ:TSLA) they have actually made it more valuable on Wall Street than Ford (NYSE:F), even though Ford sells 6 million cars vs. 67,000 for Tesla. So basically a local town garage band is getting bigger billing on Wall Street than the Rolling Stones and the Beatles combined. Eventually, reality will show up and either the President will achieve his goals or he will not. The markets will likely surge higher or crash depending on the outcome. We are prepared for either scenario and will not be selling anything. We will only buy more if/when the tax cuts are made into law.
Analysis of the S&P 500 Index components
Note: As I write this, the Senate just passed the short-term funding bill, and apparently, we can expect that the government will be funded until September.
Most of our companies have reported well this quarter while some have missed on revenue slightly, but our portfolios are strong nevertheless and are prepared for whatever shows up.
If you have any questions, please feel free to ask them in the comment section below and don’t forget to hit the “Follow” button next to my name at the top of this article. We are now able to analyze indices and have begun the process of analyzing ETFs, Mutual Funds and certain popular portfolios managed by gurus of the investment world. That effort will, of course, be in addition to providing analysis on individual stocks. Our Friedrich Global Research now more than 15,000 stocks in 28 countries: U.S., Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Denmark, Estonia, Finland, France, Germany, Hong Kong, Iceland, India, Israel, Ireland, Japan, Malaysia Mexico, The Netherlands, New Zealand, Russia, Singapore, Sweden, Switzerland and the United Kingdom. We are still adding coverage of new countries every week and plan to continue the process eventually reaching 37.
DISCLAIMER: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.