Carty Capital Management
Carty Capital Management



And Then Silence

Good Morning,


So here we are - approaching the tail-end of the latest earnings season.  Too many will make the mistake of moving into that short-term, mental process of "what have you done for me lately..."  We suggest that would be an error.


A little history may help to start the week off.  One can look back to years of returns and find that it is not abnormal at all to see a couple good years in market indices be followed by one that feels more like a pause.  There is logic which backs this market structure up.  It relates to the simple idea that as increases in market values finally sink in after the terror of 2008-2009 only slightly wears off - rates feel some upward pressure.  This is NOT a bad thing - but it does cause an equilibrium problem on a short-term basis.  


We have had periods in the past where strong earnings growth is delivered, yet P/E's actually fall as prices "stall-out" to digest previous year's gains.  This should not cause anyone a major fear or concern - no matter how ugly the headlines get.  You would be better served by focusing instead on "what's next...?"


History also shows that those years of "pause" are followed a vast majority of the time by years where the markets accelerate to the upside again "from a better value base" as earnings move upward.  My point?


IF we end 2018 with smaller then hoped for gains, be confident that the stage is then set for a significant valuation reset in 2019 as solid earnings will only serve to make the numbers look even better.


Speaking Of Earnings


Here is the latest from Thomson Reuters I/B/E/S data (by the numbers):


  • Fwd 4-qtr est: $158.07 vs. last week's $157.78
  • P.E ratio: 17.4x
  • PEG ratio: 0.86x
  • S&P 500 earnings yield: 5.75%
  • Year-over-year growth of the fwd est: +20.27% vs. last week's +20%


Once again this week, the Thomson Reuters data showed a sequential increase in the S&P 500 "forward 4-quarter estimate" to $158.07 and a y/y growth rate of over 20% which continues to indicate that the positive story around S&P 500 earnings flows unabated.  I have a hunch most are still just ignoring it however.  


Just recall the note from above, boredom may once again step in soon given the nearing end of the latest earnings parade.  It is important to note the PEG ratio (my bold) - I think it is fascinating that we have risen this far from 2008-2009 panic lows and are still below a 1.00 level for valuation.  


The "bad news" of course, remains centered around the "apoplectic" perception of the rise in rates as the fear bubble only slightly burns off.  (If you did not get to see the bond video we did for you back in January - please review it here again.  Your Password is BondReview0118. ) We saw how quickly it can be refilled as the passive SPY saw record outflows 10 days ago.  The good news for long-term investors?


The outflows continued last week - even as stocks worked to find a stable footing as the panic began to subside a bit.


Better Yet?


Fear remains nicely embedded again in the CNN Fear and Greed Index. 


Both charts below suggest continued chop and churn should provide solid values for the long-term investor who is patient enough to look beyond this latest panic attack:



The point is pretty basic - 17,000 points up - and it was "ho-hum" all the way.  A few thousand points down and it was "get me outta here now....!!"


I don't mean to be repetitive - but this is almost exactly what you would want to happen as a long-term investor. 


The only thing better?  That it lasts a little longer than a week or two. 


The Larger View?


As one might expect, far too much of the commentary focus these days has been on the recent volatility.  Many prognosticators have been sizing up the likelihood of more selling in the weeks and months ahead - and there is enough of that to fill way too much airtime. 


Broader media attention has filled other spots with relentless coverage of Russia, anything related to Trump problems, sex scandals and now gun control. 


Here is what is being missed.  This same garbage has happened for a hundred years. 


In hopes of breaking from the constant negative and/or foreboding news cycle, let's also make sure to give weight to the ever-present positive in the U.S. economy: the spirit of innovation.


It is this spirit of innovation that drives the Barbell Economy in the directions we speak of often.  A patient and disciplined view of the larger drivers of our future - namely people - will help clearly define for you a more productive philosophy...


Over wide spans of time, people make markets. 


The Barbell Economy is real. 


You can ignore it, you can disagree - but the two largest generations of our time are the driving force of growth for the next 40 years. 


In time, innovative and well-run companies standing in that Barbell structure will be set to generate long-term profits, and the shareholders (owners) who patiently invest for the long-term will hopefully participate in the value creation that takes place as a result.


Of course, not all innovations are useful, desirable - or even successful for that matter.  Often failures lead to better results when they require retooling. Further, many times an innovation seems great at the outset only to realize later that it's actually harmful to society or the environment.


But there is a key, underlying takeaway:  the world's biggest and best companies are constantly striving to innovate in inefficient industries and sectors, increasingly turning to technological solutions which fix broken, tired, old processes and systems.  We can see it all around us.


As such - panics like the one the markets are currently finding their way through tend to be good for the long-run.  They reset values and perspectives and provide the long-term investor new opportunity to be patient and disciplined.  


No one ever stated it would be easy.


Be assured of this: if it were easy, the returns available would be insignificant.


In Closing  


Many will still feel more comfortable always aligning with the negatives.  That we will not likely change. 


In reality - the prayed for correction has begun and is working through the system.  As is always the case, opportunity is hidden and it takes time to unfold. 


For long-term investors, hunting season is open...time to start looking.


This will sound completely nutty - but be grateful for the latest bouts of panic.  


The wall of worry has been rebuilt nicely...though chop and churn as aftershocks are always likely - and normal.  


Demogronomics keeps you on the leading edge of change but there is a cost:  it requires a much larger, more patient and disciplined view of the elements at work.


It's the long-term currents we need to invest upon - not the short-term waves which will assuredly always roll ashore to block the horizon - just as they are now, causing doubt in the minds of millions once again. 


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.  


In the end, like it or not, long-term investors have learned this: 


Demographics Rule The Long-Term Game


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

InvestingMike Williams