Carty Capital Management
CFP | Fiduciary



Beyond Half Full

Good Morning,


Fact:  The vast majority, well above 95% of the "news" we currently ingest each day is bad.  Something to worry about, some reason that things may turn out poorly.  We are fed data to drive worries about almost everything:  monetary, economic, political, terrorism, racial concerns, global events, nuclear bombs, energy wars, the Middle East, geo-political events and overall infighting across far too many fronts - IF one pays attention to the headlines.


However, if one dares to look around beyond all the perceived ugliness, things are not that bad at all.


Technology is changing everything - most for the better even if a few things require we adapt to change.


Healthcare is the best in the world.


The consumer base is fully employed - with many millions more jobs available for the taking once educational and training catch up.


We have a limited supply of inventory almost anywhere in the pipeline - making it very, very tough to even get a recession entrenched (more on that later)


We live in a country that people still risk dying to get too....


It's been a very long time since the number have things that are going well has matched the current number of things that are going well.


Still - too many fret.


Make no mistake:  history proves that fear is the investor's most significant cost in all of their investing and wealth-building goals.


The Choice We Make


Everyone knows that we have heard many times before:  One can see the glass as half- empty or half-full.  I would argue we have a third choice as well....


The glass is almost full.


I suspect, in the years ahead, we will see it running over - repeatedly - given the nature of the pipeline of demand ahead.


All Eyes on Deck


Yep, it is that time again - earnings.


Just a reminder: Let's be grateful that markets have generally had a steady upward slope to them for the last few weeks - heading into the earnings season.  As we saw last quarter, I would simply remind that when you see a run-up into earnings, you tend to see a bit more of the “buy the rumor, sell the news” garbage.  Yes, I know it does not make sense and it is not assured to do so.  I simply want to put that out there so one is not surprised by it.


That is short-term trading - not investing.  We will stay focused on the latter.


I am just suggesting that we should not be surprised to see some of that price action this time around as well.  That should not cause any real stress as we are coming into a solid calendar time period and history shows the run to the finish line is more often than not, overall positive.


In fact, a recent seasonality report from Bespoke shows that October, November, and December have been the #2, #3, and #5 best months for the DJIA over the last 20 years. Even more to confirm?  Over the last 20 years, the Dow Jones Industrial Average has gained an average of just 1.32% in the first nine months of the year, but then it delivered a 5.46% average gain in the fourth quarter.  Pretty interesting indeed.


Good Things Still Being Missed


The latest from the Commerce Department shows durable goods orders continue to rise - 1.7% in August - and again, consensus expectations of a 1% increase.


Also - a key measure of business investment, namely core capital goods, rose 0.9% for the eighth time in the past nine months. In the past three months, business investment is running at an 8% annual rate.  This should help us see a steady increase again in GDP growth.


Speaking of GDP


The Commerce Department also revised their second-quarter GDP calculation up to a 3.1% annual pace, up from 3% previously estimated.  In the second quarter, consumer spending grew at a 3.3% annual pace, while business spending grew at a robust 7% annual pace (up from 6.2% previously estimated).


One More Look


As we get ready for the waves of numbers to begin to roll again, let's just be aware of the normal knee-jerk reactions which tend to be driven by very short-term, algo trading these days.  As tough as it is sometimes, we need to make certain we look beyond this junk - typical of any earnings season - and stay focused on the long-run demand building for the US.


Here is the latest from Thomson - the trend is still solid.  Note we did see a little bit of the ratchet down I have noted before as we come in for delivery of the earnings avalanche.  The stage is set for beats (outside of the hurricane related events):


The big banks will kick off the Q3 '17 earnings season this week.  But let's check the revisions for the Q4 '17 estimates by sector since July 1, 2017.  Again, recall these are usually moved down:


Per Thomson Reuters I/B/E/S, here are the numbers:


Cons Disc: +10.1% vs. 11.8% as of July 1 '17

Cons Spls: +9.2% vs. +8.7% as of July 1 '17 (weaker dollar has to be aiding better growth)

Energy: +91.3% vs. +118% as of July 1 '17

Fincl's: +15.8% vs. +16.5% as of July 1 '17 (down some last 13 weeks - not much - and mostly trade rev related as warned by a few of the big ones)

Healthcare: +6.8% vs. +7.5% as of July 1 '17

Industrials: +11.9% vs. 15.7% as of July 1 '17

Basic Mat: +23.5% vs. +20.3% as of July 1 '17 (note the upward revisions)

Real estate: -0.2% vs. +0.5% as of July 1 '17

Technology: +12.3% vs. +10.4% as of July 1 '17 (note upward revisions)

Telecom: +0.5% vs. +0.9% as of July 1 '17

Utilities: +3.7% vs. +3.8% as of July 1 '17


S&P 500 overall: +12.3% vs. +13.1% as of July 1 '17


Don't forget market weighting:  Technology, Financials and Healthcare comprise about 53% of the S&P 500 by market cap.  Telcos, Utilities, Basic Materials and Real Estate combined sum to about 12% of the S&P 500 by market cap.


For Q4 '17 estimates, the sharpest upward revisions occurred in the Technology, Basic Materials and the Consumer Staples sectors.  Worries over production issues around the Apple iPhone 8 or the hurricanes seem to have not (yet) impacted Q4 '17 estimates for the Tech sector.


But - we will keep you updated as these are just consensus estimates and can (and likely will) change with the release of Q3 '17 earnings starting this week.


That noted, the pattern and structure of revisions continues to be positive.


Already 2018 for The Market


I stand by this idea:  pray for a correction.


Once you ramp in the 2018 earnings, markets will, at best, be slightly undervalued in a 2.4% interest rate market.  Let's have this as an early look from Thomson data.  These show the changes in full-year 2018 sector estimates since July 1 '17:


Cons Disc: +10.2% vs. 11.9% as of July 1 '17

Cons Spls: +8.2% vs. 8.0% as of July 1' 17

Energy: +35.5% vs. +43.1% as of July 1 '17

Financials: +14.1% vs. +12.5% as of July 1 '17

Healthcare: +8.5% vs. +9.0% as of July 1 '17

Industrials: +10.6% vs. +12.2% as of July 1 '17

Basic Mat: +17.9% vs. +12.7% as of July 1 '17

Real Estate: +7.3% vs. +7.9% as of July 1 '17

Technology: +12.1% vs. +11.5% as of July 1 '17

Telco: +1.7% vs. +2.0% as of July 1 '17

Utilities: +5% vs. +6.3%


S&P 500: +11.4% vs. +11.8% as of July 1 '17


Note the continued upward strength already in Consumer Staples, Financials, Basic Materials and Technology for next year.  Let's keep this on an even keel though.  Temper any enthusiasm as these will get refined and be more realistic after 2018 guidance starts being articulated with the release of Q4 '17 earnings coming up for the next 6 weeks.


One more time:  when looking at the data and stats above, when we see upward revisions to sector growth estimates pre-release, more often than not, it acts as a positive for that sector since the typical pattern is downward revisions going into earnings from what are typically inflated growth estimates.


Let The Games Begin!


The next earnings flood is headed our way.  Let's keep praying for a correction - even a mild one.  It would only take a week or two before there would be no one feeling bullish, and the world would keep on ticking.


Besides, as soon as we are done with the earnings chop - The Holiday Season will be upon us!


No rest for the weary as they say - but remember, the glass is almost full!


Demographics Rule The Long-Term Game


Planning is critical as always.


But we must stay focused on the right pitch and be confident that is remains very early in the game.


Long-term currents win over time - not short-term, emotional waves.


I will use that line again from our videos:


Think Demographics, Not Economics.  We are in great shape!


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

InvestingMike Williams