Carty Capital Management
CFP | Fiduciary



All Quiet on the Western Front

All Quiet on The Western Front

Good Morning,


"What we learn from history is that people don't learn from history."


"Chains of habit are too light to be felt until they are too heavy to be broken."


Two more oldies but goodies from Mr. Buffett.  We see these two elements unfold almost every day in practice all over the country.  The good news?  I shall borrow another quote from Warren to answer:


"It is not necessary to do extraordinary things to get extraordinary results."


So for the last week or so, "records" have been thrown around like pennies at a wishing well.  The constant hype can mistakenly lead the audience in the wrong impression - further embedding the "altitude sickness" we often refer to and which is hard at work in a vast portion of the audience. 


Here is my point.  I provide you a week of "fake closes" after a Friday record high close in the market:








Now, which sounds a bit more risky if you are already afraid of the "height" in the market price:


"The DOW Races to Its 6th Record High Close In a Row"




"Dow Rallies Almost 1/2 Percent in a Quiet Week"


Both headlines are correct given the example.  This is where we begin to enter the perilous psychology web of the law of large numbers.  Hundreds of points will begin to be the norm - and at the same time - mostly meaningly in a two-way battle.  Sooner than we think, there will be days where more than 1,000 points will be traveled, and that too will be normal.  


Small Is Big


While too many focus on the big headlines, it is small business which drives most of the jobs market.  People tend to only look at the monthly employment report - often even misunderstanding the important elements of same, well beyond the headline number.  


That's why we suspect it is very positive that the Small Biz Optimism Index hitting a 35-year high is not a bad thing at all.  It blends nicely with the time overlaps we have been suggesting we focus on from a generational perspective. 


Recall it was also 35 years ago when the Boomers were just beginning to take the reins of the economy's growth engines.  Now, it is Generation Y - and right on time - small business is feeling those positive impacts.


Do not underestimate the long-term nature of these events - even when we get corrections.


Check it out:


Along with each report, the head of the Association usually adds a little flavor of the respondents comments.  Here it is:


Not since the roaring Reagan economy has small business optimism been as high as it was in November's data.  This according to the National Federation of Independent Business (NFIB) Index of Small Business Optimism, released this week.


The President of the NFIB commented in the report:  “We haven’t seen this kind of optimism in 34 years, and we’ve seen it only once in the 44 years that NFIB has been conducting this research.”


He added:  “Small business owners are exuberant about the economy, and they are ready to lead the U.S. economy in a period of robust growth.”


Let's face it folks....staying fearful of 2008 and 2009 is no longer logical - and has become exorbitantly expensive.  Review those quotes above from Warren again.  


It's Official


While the bullish sentiment from AAII finally saw a bounce this week, after a more than 17,000 point rally from the 2009 lows, it has remained a record below majority bullishness. 


This is now three years running where the bulls have not owned 50% of the market.  And if you think this "bounce" is significant - don't.  I say again, give me a month of red ink and I will show you a crowd in the bunkers and bulls in the 20's again.  




While most yawn as markets continue to churn upward - along with earnings, the latest weekly stats showing those forward projections continue to mount, providing a solid base for any hoped for correction as 2018 dawns:


Here is the latest Thomson Reuters data:


~Fwd 4-qtr estimate: $142.54

~PE ratio: 18.6x

~PEG ratio: 1.7x

~S&P 500 earnings yield: 5.38%

~Year-over-year growth of the forward estimate: +10.92% vs. last week's +10.79%


Needless to say, these number remain solid - and expansive - especially in a 2.40 to 2.50% 10-year bond world. 


By the way, there is zero assumption in this data for any benefit from tax cuts.  


On that front, I would be remiss to not mention them since it appears we "may" be close to seeing some agreement.  Here is the deal though....


Let's first make sure we do not count on anything before it is done - but the major historical tax cuts of the '20s, '60s, '80s, and 2000s did indeed each fuel rapid economic and significant market gains.


In order, it was Coolidge, then the Kennedy-Johnson, then Reagan, and finally Bush in 2003.  And the gains?  Nice....


Just remember that this time around, the corporate tax cuts are more important than personal tax rates. 


Massive corporate cash hoards are stored overseas. 


A successful lowering of corporate rates could generate a one-time economic burst if this cash is repatriated and used more productively.


To see just how bad our rates are - check below:


In Closing


'Tis The Season


Enjoy Time with Family and Friends!


Make no mistake folks:  The rare US Barbell Economy is upon us and is set to unfold for the next 30+ years.


Sit back and fasten your seat belts - it's going to be a wild ride.  Of course, there will be lots of stops along the way up this mountain where it will feel like the world is ending.


And change? 


Well, let me suggest we see it this way - it's like Bachman-Turner Overdrive told us when I was a kid:


"You ain't seen nothin' yet..."  




Patience and discipline.  In this game, pray for corrections... 


The dirty little secret is this: 


He/She who moves less wins.


Long-term thinking always wins out over short-term trading.  Worrying about the next setback sells lots of ads but makes almost no money for you.  History proves it.  


Forget economics - think demographics.


It's the big picture.  It's the current under the emotionally-driven waves.


Demogronomics keeps us on the leading edge of that long-term direction - but it also demands a much larger, far more patient view of the economic elements at work.


Our Wishes for the Very Best of the Holiday Season!


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

InvestingMike Williams