Carty Capital Management
Carty Capital Management



Bask in the Light

Good Morning,


Here it is - the latest earnings season is upon us.  I swear the last one just ended about 74 minutes ago.  My wife keeps telling my it's a sign of Alzheimers.  I tell her she's nuts.  She ignores me.  You get the picture : )


Wait...what was I talking about?


Oh, yes - earnings.


So I already noted several times that this earnings season will be one for the record books.  Based on the first few to trickle in - let me tell you my gut feeling:


A ton of people still don't get it.


They don't get how good this economy is going to become.


They don't get that a bunch of tour buses are starting to show up in the parking lot.


They don't get that the freeway exit is backed up because there is a line of tour buses stretching - oh, maybe 10 to 15 years long. 


Sure - I want a correction.  Indeed, I am on record 474 times suggesting we pray for a correction - make this one 475.  However, those are short-term emotional elements.  They are rearview mirror events.  


For long-term investors today - consider a correction sometime in 2018 as a complete GIFT.  Grab it and give it a big hug. 


Running from it, trying to find a way around it, trying to time it, fearing its likelihood and judging how bad it might be are all traits you will find a) a waste of time and b) very, very expensive in the long run.


Nutty right?


When we are done with the Q4 earnings season, I strongly suspect we will be within a quarter or two of $150 forward earnings on the S&P 500.  That puts us somewhere around a forward P/E of 18 in  world of bond prices at or near 40 times earnings.  When the earnings yield on the S&P is more than double that of the 10-year treasury, you can historically remind yourself of two things:


a ton of investors still hate stocks


only higher prices make those investors like stocks more


A Slow Burn


We have stated this often: 


"Rates today are not low because the Fed is controlling them.  The Fed controls nothing.  The Fed follows - and these days, talks - a lot.  Rates are low globally because investors in general are terrified of perceived risk.  They have been taught that bonds are 'safe' and that stocks 'hurt'". 


That pain has caused lines around the block for buyers of anything in the bond market...and that is why rates are low.  Note this:  rates will begin to rise when that fear fever breaks.  As fear burns away, so too will low rates."


Now, while it has been going on for roughly 18 months now, the slow burn caught headlines in the last few days are the 10-year "spiked" above 2.50% (just a mere 40 times earnings)...but the rest of the world stayed pretty steady.  Calls for Bond Armageddon 7.0 (the other 6 were wrong), will prove to be wasted energy too:


Repeat after me....the 10-year is still less than half of the S&P earnings yield.


Woe is Me - Inflation


Yes, the other monster is lurking we are told.  It is up top a whopping 2.0% with last months revision - downward to just a 0.1% change MoM.  Here is the longer-term picture though - let's review - focus on the blue line from Doug's chart below:


Train your eyes on the range of 1% and 3%.  Going back to the year 2000, roughly 92% of the readings have been within that range. 


Today, we find ourselves at record highs in almost everything business related, from truck tonnage to GDP to manufacturing to earnings - and we are smack in the middle of the core PPI inflation range of the last 17 years.  


Not too shabby...unless you just like buying into the fear-mongering.


Uh, On Second Thought...


Lots of chatter last week about the breakout in AAII bullish sentiment.  We noted it here too.  I don;t like it that the readings were high - but I reminded us all that the 80's and 90's were filled with years of high readings.  The key is the $11 trillion dollars in the bank sitting idle - all little tiny indications of the idea that the "bullish feelings" are just that - and skin deep as we noted.


In just a week - it seems they had second thoughts of being way out on that limb and feeling good again.  Bullish percent dropped by almost 10 points (20% of the whole) - a huge move:


One more time folks:  pray for a choppy, sometimes ugly earnings season.  We get one of those and I'm taking bets on bulls in the 20's again.  It's all good.


Detroit Dead - Uhh, No.


Showing once again how bad consensus really is, note the latest announcement from GM.  Yes, that GM.  While everyone is expecting the next wave of driverless car technology growth to come from the West Coast - they forgot a whole bunch of stuff still goes on in messy old Detroit.  


Funny how that works right?


Keep in mind, the Ford's, GM's and "old-line" auto suppliers have not been sitting around and saying "oh, gosh, guess we will just sit here and wait 235 years for TESLA to make enough cars for everyone to use in the driverless new world."


A Couple More Items Today


I thought you would get as big a kick out of this as I did.  The week started off with warnings of:




The reason.  An age-old monster that was brought out of moth balls after many months:


Just one thing to say about that - as stated before every time it arose as an Armageddon event:  Not gonna happen.


One more thing about that headline. 


Remember this - at DOW 25,000, 100-points is a 5-minute move. 


It's a snapshot in time. 


Expand your mind - and soon.  Why? 


Here's why:  We are not too many years away from a normal day's move in our markets having 4 digits in it. 


If that makes you nervous - buy more TUMS (and Bourbon) soon - but keep your hands off mine : )


In Closing


The undercurrents have not changed friends. 


We must remain focused on the long-term horizon and the powerful forces driving the US economy forward. 


They are strong and steady. 


Better yet for long-term investors able to remain patient and disciplined?


They are still grandly and profoundly misunderstood.


Yes - earnings seasons always stink.  They are supposed to stink. 


They are choppy, short-term minded and they do things (good and bad) that they really shouldn't do.  Or should I say they cause investors to do things they shouldn't do. 


Alas, that makes markets for the long-term investor. 


The rare US Barbell Economy is set to unfold for the next 30+ years.  I like to joke with people who chatter about us being in the 9th inning.  Not.


This is tough to wrap one's mind around - as tough as it was in the very early dawn of the 80's - the game has not even begun. 


Far from the 9th inning, picture yourself arriving at the stadium early, walking in and the stands are still mostly empty.  You hear the crack of batting practice echoing in the seats and see the net still covering the home plate area. 


Players are stretching in the outfield and the managers are in the dugout playing with the line-up cards.


The pitchers are still warming up in the bullpen.


Strap in folks....the ride is still ahead of us.  Of course, there will be lots of stops, rests and short-term setbacks along the way - all the way up this mountain - where it will feel like the world is ending.




Patience and discipline.  


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.  Hope for it is healthy.


Forget economics - think demographics.


It's the big picture.  It's the current under the emotionally-driven, short-term 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....including this upcoming earnings season.


Have a nice weekend.


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

InvestingMike Williams