Carty Capital Management
CFP | Fiduciary



Voodoo One

Good Morning,


I was always fond of a saying I heard in my first few years in this business, "Sometimes you eat the bear and at others, the bear eats you."


I always get that thought flashing through my head during earnings seasons given the continuous and rising occurrence of really ridiculous responses to various quarterly reports - good and bad.


First, let me apologize.


Anyone who knows me also know I am never sick.  Indeed I hate it when I am not at 100%.  I make it a personal challenge to never miss a day of work!  Last week, I had one of the worst migraine headaches I can recall ever having - so I am sorry that I lost a day or two of writing the morning note.  I was here - it just hurt too much to stare at the lit screen and try to type.  Those with migraines know what I mean.


Any how - all seems well and for the long-term investor - to see continued volatile churn during earnings seasons is a good sign.  Not until every response is - for one reason or another - a good response - do we need to fret a ton.


How Are Earnings?


In a word - solid.  In fact, looking at the latest forward data, acceleration comes to mind - and in a consistent pattern rarely seen.  Of course, the moment you mention something about upside and accelerating earnings you become overwhelmed at the howling about "yea, but those are really signs of the can't get any better....."


To which I respond, "that has been the message for at least the last 10,000 points...", so get used to it.


The Stats:


For the nerds who like data, note this:


Recall that the year-over-year growth rate of the S&P 500 forward earnings estimate tracks the "expected" forward growth rate of the S&P 500 earnings vs. that same expected rate one year prior.


These elements adjust as calls are done and reports flow into the system.  As already noted, there is a real stretch going on as the tech sector of the market now covers nearly one-quarter of all returns and the market-weighted indices are currently skewing much higher than the equally-weighted indices or portfolios.


Just keep in mind it is all good for the long-term, patient investor:


Thomson Reuters provides a forward 4-quarter estimate each week, which for this quarter represents the sum of the bottom-up estimates from Q4 '17 through Q3 '18.


Now, as of Friday's data close, the "forward 4-quarter" estimate of $142.16 grew 10.58% vs. the same estimate on November 4th, 2016.


The good news is that acceleration is still getting better:  The 10.58% reading is a new post-2008 high for the "growth rate" of the S&P 500 forward estimate.


Some might understandably ask, "Telling us what exactly?"


Well, it tells us that the "one-year forward" S&P 500 earnings estimate, from an expanding collection of quarterly reports, is growing at a slowly accelerating pace.


For more insight let's check how the forward estimates have moved since late September '17 before the current earnings season got rolling::


11/3/17: $142.16, +10.58%

10/27/17: $142.10, +10.18%

10/20/17: $142.25, +10.13%

10/13/17: $141.90, +9.81%

10/6/17: $141.87, +9.52%

9/29/17: $137.62, +10%


(Source: Thomson Reuters data)


Now interestingly, in the past when we have witnessed an increasing growth rate in forward earnings, you tend to see "P.E expansion" in the S&P 500 like so many experts cover on TV.


Except we haven't.


You won't ever hear this from the pundits when talking about valuation, but - and this is a big but - the S&P 500's forward P/E ratio today stands at just about the same level it was when 2017 started.  Check the list again:


11/3/17: 18.2(x)

10/6/17: 18.0(x)

7/7/17: 17.4(x)
4/7/17: 17.4(x)

1/6/17: 17.15(x)


While no one piece of data moves the world - it is a compelling positive that even with sentiment finally waking up a tiny bit after years of rally - valuation being "stretched" is not one of the arguments to fear.


More Positives






This week, we should expect margin to continue to increase in the tech end of the market.


For those who fear the end of things, consider the facts:  The US is facing the very early waves of change as our economy begins to take more of the reins of the "Barbell Effect."  This shift is set to cause more change in the next 15 years than we have seen in the last 100 years combined.


Almost every aspect of what we do, experience and see in daily life will change so rapidly that many items will feel a little scary - but change they will.  Instead of fearing things like AI and robots, note that historical change such as this has always led to more jobs, higher paying jobs, larger economic output and new frontiers of growth.


Demogronomics keeps you on this leading edge but requires a much larger, more patient view of the elements at work.


For more on the Barbell effect, don't forget to take a few minutes to watch this short video here.


Your private password to the video is "GenYupside35"


The Member benefits this year have been - once again - quite positive.


Even Better


Keep in mind that none of this yet incorporates tax reform or the ability to bring dollars back from overseas via repatriation.  While the earnings explosion in tech was the big news Friday, keep in mind a company like Microsoft has over 90% of it's $138.5 billion in cash and short-term investments held overseas.


Let's just keep that in mind for drivers of upside surprises in 2018 and 2019.


In Summary


Just remember - the higher these market numbers get, the more intense the "Altitude Sickness" we often cover will become.


It's the long-term current we need to invest upon - not the short-term waves which will assuredly always roll ashore to block the horizon.


Those waves are the noise too many will likely continue to be lost in...and the reason the long-term game is so hard to win based on fearful activities.


I thought this was an interesting quote one may want to consider when thinking about long-term planning and wealth management:





Play it Again Sam....


Pray for that correction.


In the end, like it or not, long-term investors have learned Demographics Rule The Long-Term Game


Generation Y is set to do much greater things - far beyond what the Boomers accomplished - or what can be defined today.


Imagine explaining an iPhone X to your buddies in 1982 - and then extrapolate that forward for the next 35 years.  We will see things look a lot more like Star Trek than we can currently imagine for all the Trekkies out there.


That Roddenberry guy was indeed a genius.


Until we see you again - may your journey be grand and your legacy significant.



InvestingMike Williams