Consolidation - Breakout Up...or Down ?

George Brooks  |

Brooksie's Daily Stock Market blog  -  an edge before the open

Thursday, September 8, 2011       9:09 am EDT

DJIA: 11,414.86     S&P 500: 1198.62

This stock market would love  to run. Unfortunately, it’s hobbled by the obvious – the Euro-zone debt crisis and fear that another recession is around the corner.

The former should have been solved by now, the latter continues to give us mixed signals. The result: volatility.

The bigger picture suggests global economies and securities markets are still in the midst of a catharsis, purging the excesses, imbalances and abuses that nearly took everything down the tubes in the 2007 – 2009 Great Recession/Bear Market, unprecedented since the horrid 1930s.

In early March of 2009, the stock market rebounded dramatically three months before the nation’s economy started to rise from recession.

But, enormous damage had been done to consumer, business and governmental liquidity here and abroad, requiring deleveraging  and “time” to heal.

The  slide in stock prices that started in early May is shaping up as a test of the March 2009 bear market bottom.  Without a resolution of its problems in Europe  or reassurance our country is not sinking into another recession, a sustained recovery in stock prices is highly unlikely.

   Successful resolution of  these two problems and the consolidation between DJIA 10,600 and 11,11,740 (S&P 500:1100 and 1220) becomes a base for  an assault on the May 2 bull market highs of  DJIA 12,928 (S&P 500: 1376).

   Failure to resolve these problems calls for a breakdown  in the consolidation pattern and a plunge below DJIA 10,000 (S&P 500: 1050).

   In the interim, volatility rules as the stock market tries to find a comfort level which discounts  known and potential negatives.

   Unless President Obama pulls a huge pink rabbit out of his hat tonight, his speech will be met with selling tomorrow, or next week. Tempering that negativity, could be the Federal Reserve, which meets on the 20th.

   No matter what the president does, it is unlikely the U.S. House will approve and that is probably our nation’s biggest problem.  We have pre-schoolers fighting over a big toy here and America be damned. Small wonder China is eating our lunch.

   If we are to emerge from this mess, corporate America and the American people will have to pull it off.

   I really think these years will define who we are as a nation, as a people. Time to do some serious objective homework on the issues, or special interests and crafty pols will do more harm.

Infrastructure Spending:  Housekeeping 101

Note: I will repeat this section from time to time for new readers.

As the recession and bear market were intensifying in the fall of 2009, I speculated that  infrastructure spending would get a high priority for a recovery. I wrote articles for Equities Magazine and compiled information I anticipated would be useful.

   I was wrong, infrastructure spending  got a low priority, and today I am sure the administration has its regrets.

What is attractive about this kind of spending is it stands to employ a lot of people and it can be funded by some government spending, but to a great degree by private investment.

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   When I did my initial research on the nation’s infrastructure I was surprised  to find it encompassed 15 different categories: Aviation, Bridges, Dams, Drinking Water, Energy, Hazardous Waste, Inland Waterways, Levees, Public Parks and Recreation, Rail, Roads, Schools, Solid Waste, Transit, Wastewater.

In 2009, the American Society of Civil Engineers gave each category a “grade” (A through D-)

   I was shocked to learn the GPA for all categories averages a “D,” with an estimated need for investment of $2.2 trillion !

Their 140 page study is available on the following web site.  (Some pages are in full color, so copy with care or it’ll chew up your color ink)

These infrastructure categories  encompass most of the United States. Addressing their vast deficiencies would employ a significant number of workers at all skill levels for many years. Every politician  in both Houses should drool at the potential in the districts they serve.

With all categories of our infrastructure begging for attention, it is beyond comprehension that  our nation’s priorities are squandered abroad. Time to come home.

There is a move afoot to establish a facility for funding infrastructure projects sponsored by  Senators John Kerry (D), Mark Warner (D) and Kay Bailey Hutchison (R).  The vehicle would be the BUILD Act, introduced earlier this year by Senator Kerry and modeled after the  Export-Import Bank Created during the Great Depression.hgh

Whether this will be a facility for funding infrastructure investments is unknown.  Whether Congress approves  additional infrastructure spending is unknown. I thought the following information would be helpful in the event our government decides to pursue this route for job creation while addressing an enormous need.

So what’s the best play ? An ETF may sound like an easy answer, however one of the problems with Infrastructure ETFs is they are generally loaded with utility stocks, ergo not  pure plays.

   I compiled a list of 39 stocks  (not recommendations) with exposure to various categories of infrastructure spending. but have not crunched numbers – a massive job and I currently don’t recommend stocks.  But, this is a start.

There is no guarantee that the government will address the issue, or that any of these companies will benefit enough to have a significant impact on its stock. Eight of the ten largest highway builders are privately owned.

For the most part, these are meat and potatoes companies, NOT alternate energy companies.

ABB Ltd. (ABB), Aecom Tech (ACM), Alamo Gp (ALG), Ameron Int’l (AMN), Astec Inds. (ASTE), AZZ Inc. (AZZ), Caterpillar (CAT), Chicago Bridge & Iron (CBI), Cemex (CX), Colfax  (CFX), Deere (DE), Dover (DOV), Eaton (ETN), Emcor Gp. (EME), Gardner Denver (GDI), General Electric (GE), Gorman-Rupp (GRC), Granite Const’n (GVA), Idex (IEX), Insituform Tech. (INSU), Jacobs Eng. (JEC), Joy Global (JOYG), KBR (KBR), Layne Christensen (LAYN), Lindsay (LNN), Manitowoc (MTW), Martin Marietta (MLM), Mastec (MTZ), MYR Gp (MYRG), Pike Electric (PIKE), Primoris Svcs (PRIM), Shaw Gp.(SHAW), Sterling Const’n (STRL), Terex (TEX), Thompson Creek Metals (TC), Transcanada (TRP), Unites States Lime & Mnrls (USLM), URS Corp. (URS), Valmont (VMI), Vulcan Materials (VMC).

George Brooks


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