Military Spend Over Infrastructure

Investor’s first read – Daily edge before the open
DJIA: 19,954
S&P 500: 2,275
Nasdaq Com.: 5,563
Russell 2000:1,373
Thursday, January 12, 2017 8:13 a.m.
Are doubts creeping in about the next two-to-four years, that all the bluster about tax cuts, deregulation and the big spend is just that – bluster, or maybe none or little of it will happen for years ?
Doubts can be healthy, they temper blind enthusiasm. My guess here is a lot will be tried and some of these issues will see passage, but fall short of the original target.
I am pretty sure of one thing the United States will be on a war footing in the spring of 2018. Two things. For one, it would juice the economy at a time it may be stalled and may push the deficit hawks to act on military expenditures. Two, it would ensure support for the mid-term elections. The Bush administration did this in 2002 prior to the invasion of Iraq. Voters do not want big changes when their country may go to war.
This suggests the Trump administration will talk of infrastructure spending, but focus on an increase in military outlays.
Stocks rebounded yesterday from a mid-day selloff that was triggered by President-elect Trump’s comment that he would pressure drug companies to bid for government contracts.
Drug stocks plunged, pulling the market averages with them before the market stabilized.
It is important to note here that based on yesterday’s skittishness, the Street is very uneasy about what Trump will do next, ready to hit the exits if he does something irrational.
That suggests a series of mini flash-crashes in the future.
Q4 earnings reports will begin to flow Friday, and Alcoa (AA) will not be the one to kick it off. They’ll report on the 24th. Selected status downgrades: Goldman Sachs (GS) to Sell from neutral, likewise for Travelers (TRV) and Chevron to hold from buy, as well as Ariad Pharm (ARIA), AMAG Pharm (AMAG), Surgical Care (SCAI), and Scotts Miracle-Gro (SMG).
I have always questioned the merit of the institutional grading system. I question the value of such great emphasis on quarterly reports, since it detracts from the big picture. The tendency is for analysts and managements to low-ball estimates to avoid a report that falls short of guidance and Street projections. Stocks can get hammered even with a “beat” if the beat was not great enough. Silly !
All that said, the Street wants action and will push for it. Since no one knows the outcome of all the corporate perks planned by the Trump administration, odds favor the upside with mini flash crashes in the interim when doubts set in.
SUPPORT “today”: DJIA:19,796;S&P:2,262; Nasdaq Comp.:5,531
RESISTANCE “today”:DJIA:19,796;S&P 500:2,278; Nasdaq Comp.:5,569
There is a chance, not huge, but enough to take seriously, that our nation is coming apart at the seams, that divisiveness will trump cooperation, civility will yield to incivility, progress will yield to more gridlock, and demonstrations will cross the line to bloody violence..
Until last week, I steered clear of politics in my posts. I strongly think President-elect Trump is a major “risk” factor and that has to be addressed.
He is both predictable and unpredictable. Predictable in the fact he cannot tolerate criticism or opposition without rejection and retaliation . Unpredictable in that no one (including himself) knows what he will do under the kind of serious situations that confront a president every day.
The President-elect should busy himself with more important things than tweeting a counter attack on anyone who confronts him.
This behavior has persisted since he began his campaign and is truly scary. As President, such inability to ignore criticism suggests a skin too thin for this job.
As I have said before, I think Donald Trump is a mistake, and when you make big mistakes, you pay a price, and that could be injurious to investors.
It’s one thing to run a company where you have employees who will do as they are told, or get fired. That is not how the office of the Presidency works.
So much of the market’s stability depends on confidence, he does not breed it, he undermines it, and that can hurt investors.
It is possible that given an opportunity the Republican Party will dump him, I think they really want Pence. The Republican establishment has no future with Trump. He will soon be fighting with them, as well.
Corporate earnings (update)
Factset now sees Q4 earnings for the S&P 500 up 3.0%. On Sept. 30, its projection was for a decline of 5.2%. Growth rates in 10 of 11 sectors have been reduced since Sept. 30. The growth rate for all of 2016 is est. at +2.2%. Earnings for 2017 are expected to increase 11.5%. Currently, the P/E based on 12 months out is 17.1x, which compares with a 10-year average P/E of 14.4 and a 5-year P/E of 15.1.
FYI: There was some missed estimates in 2016, Q3 in particular where earnings growth surprised the Street. Along with a firming economy, this was a contributor to the year year-end rally in addition to promises of tax cuts, dereg., and a big spend..
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 January 6, 2017, a reasonable risk is 19,926 a more extreme risk is 19,879 Near-term upside potential is 20,288.
These companies possess something unique, that is not reflected in the price of the stock, until it is discovered ! There are fewer today than 20-30 years ago, reporting requirements and the ability of computers to uncover hidden values has culled the landscape.
Today’s opportunities usually develop after a brand name stock gets pummeled beyond reason. I noted Viacom Friday at $40.90 ($42.15 today) as one possibility.
Not all VIACOM subsidiaries are at max (MTV, Paramount, Home Entertainment, DreamWorks, BET networks) but a base is there for development. Then there’s Paramount Pictures (content).
Motion picture companies with huge libraries of what is now called content almost went out of business in the late 1960s, including Disney (DIS). No one wanted them.
In 1979 I wrote a BUY on 20th Century-Fox entitled “How to Take Over 20th Century-Fox for Practically Nothing.” I wrote that to accomplish this you had to make a cash tender offer for twice its price at that time, sell off most of its assets,(TV stations, Aspen Skiing, Coca-Cola Midwest, foreign theaters, L.A. real estate to become Century City, $76 million in cash) to get your tender money back and you are left with its film production and distribution company and film library (incl. Star Wars ) all an estimated value of hundreds of millions of dollars and growing at warp speed as television networks started to scramble for content.
What, which triggered my recommendation was the irregular trading in the stock, which I detected watching the trades pass on the screen in a broker’s boardroom. The stock would trade up on heavy volume, then trickle all the way back down on light trading. This could only be detected by watching the trades on the tape
The irregular trading in Fox kept happening, leading me to the conclusion the Specialist on the NYSE floor (who is supposed to maintain a fair and orderly market) was letting a big investor accumulate the stock.
I visited management in L.A. and later addressed the Fox annual meeting, recommending they change their Specialist. Herbert Jay Siegel (Chris-Craft Inds.) had filed a disclosure of acquiring 5.3% of Fox a month prior, but assured Fox it was for investment purposes only.
But someone was still buying. Variety gave me nice ink on the matter that week, but nothing was done by Fox about the Specialist on the floor.
In 1981 Fox was acquired by Marc Rich and Marvin Davis then sold to Rupert Murdoch who had to become a U.S. citizen in order to control the television holdings gained in the acquisition.
I wrote the following in 2007 as I became increasingly aware of “risk.” I was not aware of how disastrous the subprime mortgage/housing bubble situation had gotten, just appalled how extreme the use of derivatives had become. As most of you know the bear market/recession that followed took us to the brink of a total meltdown. I am again concerned for the market, not so much about derivatives but the Trump presidency.

Perfect Storm Looms
The perfect storm in our financial markets is looming.
….It will take a heroic international effort to avert a meltdown of huge magnitude…
….Trading in everything may have to be stopped until some sort of sanity is restored
….This can get real ugly. No one has a handle on the leverage amassed in derivatives
….No one has a true handle on how precarious the situation out there is, and that uncertainty feeds on itself, prompting increased selling…With few buyers, stocks tank.
…Only when a cauldron of fear begins to boil, do you have a market that is reasonably safe to invest in.

George Brooks – August 19, 20
 OPPORTUNITY: RISK: Selective opportunity ! Risk is reality at some point
 CASH RESERVE: 25% – 35%.
 KEY FACTORS: Speculative fever driven by expectations of tax cuts, lifting of regs., and lots of money dumped on economy.
Note: Source of weekly economic calendar and good recap of indicators:
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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