Quote of the Week

“I’d be a bum on the street with a tin cup if the markets were efficient.” – Warren Buffet

Technical Corner

I said I would not do it. I did it anyway; I promise I will not do it again. Making predictions and comments about the new tax cut/tax reform bill is a fool’s play. 

Every time I comment, the bill changes. Therefore, I am going to wait until Congress makes up its mind and sends a completed bill to the president. Besides, the bill may not even make it out of the Senate. With the Roy Moore situation, the Democrats may actually win the seat in Alabama, thus lowering the Republican majority to 51/49. We will be certainly living in strange times with a Democratic Senator from Alabama.

More than a few Republicans may vote against the bill. Senators Flake, McCain, Coker, who are not running for reelection, Senator Johnson who opposes the bill, and Senator Collins who is troubled with how the bill cuts money from Medicare and Medicaid are possible no votes.

Last week was a slow week for the markets. The Dow was -0.27%, the S&P 500 was -0.13% and the NASDAQ was +0.47. This week is starting great. Maybe the last two weeks the market decided to rest for a while before climbing again.

The UPI remains the same at 25 out of 100 for the S&P 500. Our allocation for most clients remains the same: 85% equities, 0% bonds, 10% alternatives, and 5% cash.

Larry’s Thoughts –

The Economy is Accelerating

I have been calling the U.S. economy a “Plow Horse” economy for the last year. The economy has been slow but steady for quite a while with no sign of a recession on its way.

A plow horse is always slow, but that slowness hides underlying strength because it was not in danger of slipping or falling. Now the economy is accelerating.

Halfway through the fourth quarter, monthly data releases show real GDP growing at a 3%+ annual rate. If that holds, it will make for three consecutive quarters of growth a 3% or higher. The last time that happened was 2004.

Last week saw retail sales, industrial production, and housing starts all come in better than expected for October, the latter two substantially better.

While retail slew grew “just” 0.2% in October, that came on the back of a 1.9% surge in September. We just got a buy signal on Consumer Discretionary, and it is at the top of our Leaders and Laggards list. This is all good for spending this Holiday season. Overall sales and those excluding volatile components like autos, gas and building materials, all are a signal of a robust consumer.

Meanwhile factory output surged 1.3% in October, tying the second highest monthly gain since 2010. Production at factories is now up 2.5% from a year ago, and is accelerating. By contrast, factory production was down 0.1% in the year ending October 2016 and unchanged in the year ending October 2015. The current revival is not due to the volatile auto sector, where output of motor vehicles is down 5.9% from a year ago and the production for auto parts is down 0.3%.

The last piece of last week’s good economic news was on home building. Housing starts surged after a storm-related lull in September. Single-family starts, which are more stable than multi-family starts, add more per unit to GDP, tied the highest level since 2007. Housing completions hit the highest level since 2008. People buying houses spend more on furnishings than people moving into apartments do.

Put it all together; things are looking up. It appears that it is no longer a “Plow Horse” economy.

How does the proposed tax cut/tax reform legislation fit into all this growth? If it does not pass will the markets sell off? I do not think that a failure of the tax cut/ tax reform bill will have a long-term effect on the markets. The Developed International economies are doing well, and the Emerging Market economies are doing great. With the world in a recovery mode, things should do well for the foreseeable future.

By the Numbers

LATE IN THE YEAR – The S&P 500 index has closed at its calendar year high during the month of December in 18 of the last 32 years, i.e., 1985-2016. The index’s high close (so far) during 2017 (a value of 2594) was achieved on Wednesday 11/08/17. The S&P 500 consists of 500 stocks chosen for market size, liquidity and industry group representation. It is a market value weighted index with each stock’s weight in the index proportionate to its market value (source: BTN Research). – Michael A. Higley, BTN 11-20-2017

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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs. The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly. Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.

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