S&P Intrinsic Value And Update

“Davidson” submits:

Making investment decisions requires monitoring and working through a massive flow of current opinion comparing diverse forecasts with market prices in the context of economic and specific corporate financial trends. That was a mouthful and indeed is the reality of what one needs to do. Net/net, conditions remain as positive as they have been since 2009 even though valuations are no longer steeply discounted. I call your attention to Jon Boorman’s recently published chart, Aug 28, 2018, which is instructive in comparing pundit forecasts to market performance. Jon is a technical analyst* and portfolio manager for Broadsword Capital. One must continuously look through to fundamental economic and corporate trends before making key investment decisions. Doing so has revealed a positive investment context since 2009. Nothing has changed.

*Technical Analysis is based on the belief that ‘The trend is your friend’ and predicts the future.
I do not recommend or use this approach.

Conditions remain for significantly higher equity prices. The Household Employment report was 469,000 lower than last month’s report, but remains solidly in the trend since 2009 and economic expansion. Light Weight Vehicle sales estimated Aug 2018 SAAR(Seasonally Adjusted Annual Rate) of 16.6mil also remains in a range consistent with continued economic expansion. Yes, SP500 valuations have risen due to the impact from the highly over-valued FANG issues entering the index, but looking at the R3000, it is relatively simple to identify many high quality under-valued issues. For this reason the SP500 Value Investor Index is not helpful with market tops but only at recession lows.

Temporary Help Services just hit an all time high which portends higher levels in Household Employment are ahead.

Some worry about inflation and believe portfolios should be shifted accordingly towards commodities. The facts behind inflation reveal it to be tied to periods of excessive Government Expenditure & Investment. We have just exited an 8yr period of a reduction in government spending and flat inflation. The 12mo Trimmed Mean PCE, produced by the Dallas Fed, of 1.94% sits only a little above the 1.7% avg since 2009. Yes, government spending under the current administration has risen a little, but it is not clear that this is inflationary. Real government spending as a percentage of US Real GDP is the lowest at 17.2% it has been since 1947. Whatever the government does today will have far less impact than any previous period. Even if this spending has some inflationary impact not only is it likely to be muted but commodities are not the preferred counter balance. The best investments to counter inflation have always been well run companies which pass inflationary price shifts to customers for whom their wares are the most competitively priced. The better companies practice ‘Lean Processes’ as imbedded the styles of Danaher Business System and the Toyota Business System.(Neither of these issues are current recommendations due to over-valuation, but there are many other attractive situations)