Second Thoughts, or Just a Pause

Investor’s first read – Daily edge before the open
DJIA: 19,191
S&P 500: 2,191
Nasdaq Com.:5,251
Russell 2000:1,313
Friday, December 2, 2016 8:58 a.m.
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Most people expect the Fed to bump rates on the 13th, so there should be little lasting impact. What may be unnerving is if the Fed Chief Yellen alludes to numerous rate increases in 2017.
The Street has been so preoccupied with expectations of lower corporate and individual taxes and big spending on the infrastructure and the military, that the Fed has taken a back seat. The promises of the Trump administration should be able to override the Fed, for now.
ECONOMY (Not so bad afterall)
Tuesday’s was strong. The second estimate of GDP came in at a plus 3.25 (ann. rate), corporate profits are up 5.2%, Retail sales (chain, department, discount stores) up2.2% in November, the S&P Case Shiller Home Price Index up 0.4% in September, and the Consumer Confidence up 6.2 points to 107.1.
Wednesday’s data was good, as well. The ADP Employment report shows 216,000 jobs added in November, Personal Income gained sharply in October, the Chicago PMI was up. Pending Home Sales were flat.
Thursday’s data equally good. Motor vehicle sales good, not great, jobless claims up more than expected, PMI Mfg. –factory orders and new orders up, ISM Mfg.: Up again, Construction Spend solid.

INFRASTRUCTURE STOCKS
Recently, I mentioned infrastructure stocks as potential beneficiaries under a Trump administration, as well as banks, and drug companies.
Infrastructure stocks have had a big run, and while there will be buyers on pullbacks, there is risk about funding approval.
Infrastructure spending is not a new idea. One year ago, Congress approved a $305 billion bill for highways, bridges and rail lines. Worth noting, it was opposed by Republicans Cruz, Rubio, Paul and Democrats Warren and Carper. Does this suggest headwinds for Trump ?
The 16 sectors that will be competing for funds, if they are appropriated are: Energy, Transit, Ports, Aviation, Levees, Dams, Schools, Roads, Inland Waterways, Waste Water, Hazardous Waste, Public Parks and Rec., Rail, Bridges, Solid Waste, and Drinking Water.
The American Society of Civil Engineers (ASCE) estimates it would take $3 trillion to fix our problems. That’s not going to happen.
It will be a stretch to get $1 trillion approved
This all has the potential for being one of the most inflated bubbles of all time. I give it a better than 50% chance. The burst depends on how rapidly the bubble inflates.
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Corporate earnings.
Factset now sees Q3 earnings for the S&P 500 up 3.2%. On Sept. 30, its projection was for a decline of 2.2%. Q4 is projected at a gain of 3.3%, the year projected to come in at plus 0.1%. Earnings for 2017 are expected to increase 11.4%. Currently, the P/E based on 12 months out is 16.8x, which compares with a 10-year average P/E of 14.3x.
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TECHNICAL
As I noted several days ago, the 7-1/2 economic recovery can serve as a solid base for accelerated growth goosed by the promise of tax cuts and big spend on infrastructure projects, as well as perceived benefits of the lifting of regulations.
All is not well, technically. The Nasdaq Comp. is getting hammered, mostly due to selling in technology stocks.
Yesterday was the first day of December, so some of the weakness may be attributed to institutional window dressing ahead of the year end.
It is a little early for the Street to begin worrying about whether Mr. Trump will be able to get all his ideas passed, even with a Republican Congress. That is a legitimate concern, but we simply won’t know any answers for months, years.
It is worth serious thought before loading up on stocks, betting of promises, especially ones as extreme as these. This was the same Congress that fought every spending initiative by the Democrats over the last eight years.
After such an abrupt rally, based on “expectations,” from a stock market that was overpriced to begin with, this market can correct further. The Nasdaq Comp. has already given back more than one-third of its Trump gain. The DJIA could retreat to 18,778 (S&P:2,170).
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SUPPORT “today”: DJIA:19,067 ; S&P 500:2,184; Nasdaq Comp.:5,196
RESISTANCE “today”:DJIA:19,247;S&P 500:2,199;Nasdaq Comp.:5,271
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THE BEST SIX MONTHS
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.
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SOMETHING FOR JUST ABOUT EVERYONE !
What could be better, promises of lower corporate taxes, less oversight, and BIG government spend on top of a sneaky strong economy ?
That’s what it looks like at this point in time. One thing about the stock market, it loves pie in the sky.
How so ?
Because it defies quantification, or at least until the truth is known. You see, this is more about human nature (greed, fear) and less about reality.
Really, a stock’s price is merely a matter of opinion, which is based on confidence or lack thereof.
This could be the grandest of all bull markets. It has a good start, up 231% in 7-1/2 years. It probably has a lot further to go, so long as the Street salivates over the prospects of a corporate windfall in coming years, and nothing gets in the way to prevent it.
When the end comes, no one will believe the few who warn of it, in fact, they will despise such seers for raining on their parade, despise them even more when the market crashes.
Like I said, it is all about human nature.
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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 16.1% since July. That’s nearly 8 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.
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MY TECHNICAL ANALYSIS of the 30 DJIA Companies:
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 27, 2016, a reasonable risk is 18,556 a more extreme risk is 18,837 Near-term upside potential is 19,556
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 STATUS OF MARKET: bullish
 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.
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Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
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George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
Brooks007read@aol.com
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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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