Betting on Lower Taxes, Big Spend

Investor’s first read – Daily edge before the open
DJIA: 18,868
S&P 500: 2,176
Nasdaq Com.:5,294
Russell 2000:1,302
Thursday, November 17, 2016 9:11 a.m.
The Street is in a hurry to buy, expecting the Trump Administration and the Republican Congress will slash taxes, lift regs., and spend a trillion dollars on the infrastructure. The buying can persist off and on for many months until it knows whether or not all, part of, or none of all this happens.
This can be a bonanza for corporate earnings – a surge in revenues along with significantly lower taxes, the latter for most corporations, the former for industries that benefit from the spend.
That’s the bullish side of the issue.
The bearish side is there is no justification for this post-election surge if none or only part of the scenario happens, and that won’t be known for at least a year. The market was somewhat overvalued before the surge.
It makes a good story in the interim, and there is nothing the Street likes more than a good story.
Corporate earnings.
Factset now sees Q3 earnings for the S&P 500 up 2.9% well ahead of negative projections several months ago. Q4 is projected at a gain of 3.6%, the year projected to come in at 0.2%. Earnings for 2017 are expected to increase 11.4%. Currently, the P/E based on 12 months out is 16.6x, which compares with a 10-year average P/E of 14.3x.
The market is in a brief pause after its seven day run up. It caught the Street by surprise (self included), and the question investors face now is, buy after a sharp run up, or wait for a pullback ?
Speculative fever is mounting as is pressure on money managers to get in on this. What if the market really soars 20%, or 40% ?
Tough call !
If the Trump Administration fails to achieve most of its goals, this market is very over priced and especially if it goes higher in anticipation of success.
An individual investor, traders, hedge funds, etc. can bail out quickly if he/she sees trouble. Fund managers can’t.
SUPPORT “today”: DJIA:18,841; S&P 500:2,175; Nasdaq Comp.:5,290
RESISTANCE “today”:DJIA:18,919;S&P 500:2,186;Nasdaq Comp.:5,311.
The six months between November 1 and May 1, tend to outperform the six months between May 1 and November 1, labelled the “Best Six Months” by the Stock Trader’s Almanac which began tracking the pattern in 1986.
iShares 20-Year Treasury ETF down 14% in 4 months
Long-term bonds have gotten hammered in the last three months. The iShares 20-yr U.S. treasury bond ETF has lost 14.6% since July. That’s nearly 6 times the yield an investor expected over 12 months. Obviously, bonds can be risky. Let’s not forget the name of the game is to buy low and sell high, which applies to long bonds as well as stocks.
A survey of economists reported by Bloomberg yesterday calls for U.S. inflation to surpass the Fed’s target in every quarter of 2017, which if even half true should depress long-term bonds even more.
The Employment Situation report came in Friday, 161,000 jobs were added in October, the unemployment rate was 4.9%.
On occasion, I technically analyze each of the 30 DJIA stocks for a reasonable risk, a more extreme risk, and an upside potential over the near-term. I add the results of each, then divide by the new DJIA “divisor” (0.14602) to get the DJIA for those levels. This gives me an internal check on the DJIA itself, especially if certain higher priced stocks are distorting the averages.
As of November 11, 2016, a reasonable risk is 18,401 a more extreme risk is 18,354 Near-term upside potential is 19,017
 STATUS OF MARKET: Neutral – trending to bullish
 OPPORTUNITY: RISK: Opportunity !
 CASH RESERVE: 25% – 35%.
 KEY FACTORS: Uncertainty of election to be resolved in two days, earnings slide may be over.
Note: Source of weekly economic calendar and good recap of indicators:
*Stock Trader’s Almanac
George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
Investor’s first read, is a Game-On Analysis, LLC publication for which George Brooks is sole owner, manager and writer. Neither Game-On Analysis, LLC, nor George Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized or as investment advice as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment in keeping with their tolerance for risk.

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