Carty Capital Management
CFP | Fiduciary

Blog

Blog

Feeling Hunted

Good Morning,

 

It's getting pretty dangerous to be in the good news business.  There is a real sense that if you tell someone that the good tidings have just begun - well, you just don't understand.  If you explain, logically, that history is pretty basic on this stuff - the important stuff - the driver of real economic activity, well, you are being imprudent and not aware of the real risks out there. 

 

Let's be clear - there are always real risks.  Every moment you invest for a gain, there is risk.  If you expect any return, ever, there is a risk. Never let that element of knowledge leave your mind.  But make sure this following element sits right next to that one:

 

It has been that way since the beginning of time.  It will never cease to be that way.

 

Now, the higher prices rise - with the hoped for corrective action along the way sprinkled in, the louder the naysayers will get.  Why?  Not because of danger.  Not because of some secret knowledge of the end of all things.  Not because they "know" the date of the next 2008-2009, which is all everyone wants to know.  It's none of that at all.  

 

It's this:  they are not in. 

 

It makes no difference if it is a run in tech, tulips, banks, real estate or cryptos.  The ones on the outside will always tell you foolish the ones on the inside are - plain and simple.  That is stated to make it neither good nor bad.  It is stated just to present a set of simple facts that likely carry about 95% of the reason we hear much of the howling at the moon on any set of circumstances that become very pitched shall we say.  

 

The Frog

 

You have heard about the one with the fror sitting in a pot and the water starts to boil.  Well, the chatter has always been about the frog and stock investors. 

 

Here is the thing:  It's more likely it was bond investors all along. 

 

My concern for them remains the same.  There is simply NO good reason to own bonds.  There are many different alternatives providing multiple benefits in the future that give much more flexibility than a guaranteed flat rate for 10 years. 

 

The only reason people still line up to buy bonds at less than 2.55% is?  Yes...simple:  FEAR.  Make no mistake - there is no other reason.  Ditto for everyone in these other countries below as well. 

 

By the way - as much as our rates should likely be a bit higher, it will be tough to get there with global demand for debt vehicles and competing rates we see below.  

 

Idea?  Give a big giant round of thanks:

 

Yes - I know....the 10-year is still less than half of the S&P earnings yield.

 

Speaking of Earnings.

 

Hold on to your seats.  I may have been wrong again.  My hoped for choppy, corrective, worried earnings season with lots of noisy reporting numbers (yes, I did hope for that) - may not get a chance to get started.  
 

The latest weekly update from Thomson on earnings updates is a barn-burner - the best increases seen since 2007 - before Armageddon 2.0.  For newcomers, Armageddon 1.0 was the Great Depression and Armageddon 1.5 was the Tech Crash in 200-2003.

 

Back to my point....it's good news all around.  So pinch yourself like I did.  

 

Check the numbers this week (read 'em and reap as they say):

 

Fwd 4-qtr estimate: $150.32 vs. last week's $147.94 

 

P.E ratio: 18.5x.

 

PEG ratio: 1.40x.

 

S&P 500 earnings yield: 5.40% vs. last week's 5.39% (despite the 3% S&P rally for 2018, the S&P 500 earnings yield has actually increased the last two weeks)

 

Year-over-year growth of fwd estimate: +13.24% vs. last week's 11.46%.

 

(Source: Thomson Reuters I/B/E/S, "This Week in Earnings" dated 1/12/17)

 

Now I know that most readers are not numbers junkies like me.  Yes, I admit it - I am a numbers addict.  Here is the point though:  It is HIGHLY unusual to have two consecutive big bumps up to start a year when rolling over for forward earnings.  It simply does not happen.  

 

Further, even though the market had a solid first two weeks, one can see the earnings yield rose even higher! 

 

The last big point in this major update set of bullish numbers?

 

The substantial jump in the "y/y growth of forward estimate" to 13.24%.

 

That is pretty darn solid to see an almost 200 basis-point sequential increase in the S&P 500's forward growth estimate - again, in the second week of a new year which usually carries the big boost in week one. 

 

Hence, let's review:  the forward estimate two weeks ago was $143.  We have seen a $7 increase in the forward estimate in two weekly updates and the season has just begun.  I suspect $150's are in the cards by Q2 - if not sooner. 

 

Last for now on this front: 

 

In a world of 2.50% - 3.50% interest rates, markets with expected growth of 13% and trading at 18x earnings is a historically very reasonably-valued stock market.

 

It will be interesting to see if we get any of the bulls to come back to the game. 

 

Screens are green for the start but there is a ton of headline chatter about "exuberance" and all the "experts" are telling the sheep how foolish they are to own stock. 

 

It reminds me of back in 1982 when 30-year bonds were paying 15%. 

 

Wall Street was telling the investor crowd they were idiots to own those because of inflation. 

 

"We will take those dirty old things off your hands for you - so inflation does not eat you alive...."  Right.... 

 

And guess who is selling investors all those 2.50% bonds today, "because they are safe and prudent as a part of every portfolio?"

 

I rest my case. 

 

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.

Expand Your Mind - and soon. 

 

Why? 

 

The world we live in is going to change - by miles and miles.

 

In market terms, 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.

 

Remember.....

 

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 instead...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