Carty Capital Management
Carty Capital Management



Foggy is Good

Good Morning,


Just about all aspects of the still young earnings season are coming in pretty nicely.


Expectations were dragged down again as analysts tried to calibrate for the hurricane impact but so far, it appears that have again overdone to the negative side.  Time will tell as we still have several busy weeks to go but let's take a look:


S&P 500 consensus forward revenues and earnings have risen to new record highs again this week.  The forward profit margin forecast was steady at a record high of 11.1%, which is its first since September 2015.  This is up from a 24-month low of 10.4% that was expected back in March 2016 as many tried to get beyond "the worst start for markets in 80+ years."


Here is the larger picture though -


2017 results are becoming more and more irrelevant as forward earnings per share is rapidly converging to the consensus earnings estimate for next year, which currently stands at $145.55 for the S&P 500.  Note also that 2018 consensus will become increasingly irrelevant next year as forward earnings converge with the estimate for 2019, which is now at $159.09.


Just as a side note, based on earnings one year out, you average those two numbers together and we see the S&P's overall P/E is somewhere around 16.8 at current levels.


Overpriced?  You tell me.


The 10-year bond is selling at 42.7 times earnings - guaranteed to never improve once purchased.


But like Mr. Berra said:


“It's tough to make predictions, especially about the future.”


Go figure.


More Insights for Q3...


Accelerating growth trend once you account for the big boost in Q2 as the lapping of previous ugly quarters last year from the energy pit.


52 Members of the S&P 500 have reported - earnings are up 13+% YOY and revenues have increased more than 6.8% - neither are too shabby.


Just over 76% have beaten earnings expectations while 73% have topped revenue forecasts.  Of course, all these will change as the season continues but comps are solid so far.


Bottom line - all-time high records across the board, set in Q2, will fall in Q3.




Don't be surprised to see some lackluster responses in the market action while we get through the earnings parade.  Recall there was a solid push upward leading into the season so, near-term at least, chop may be the name of the game.  Then a run to the finish for the Holiday Season which should be very solid.


Check the latest jobless claims:




That's a new low!  Just weeks after the two major hurricanes, this economy is humming along so well that we have completely erased the blip upward during the storms - and then some.


Note the differences between now and Katrina and Sandy from previous storm seasons.  A positive take-away?  Well, with a record high number of jobs still open for the taking - and a solid trajectory in consumer earnings - where the heck is the problem?


Have we reached a point in investor psyche where the crowd literally is unable to see the good - or worse, must have a problem to fret over?


More Support


More good news:  Little has changed on the sentiment end of the puzzle.  Just over a thrid of the audience feels good about the market - the rest, well - not so much.  Sure, that is higher than two weeks ago by 3%, but we are at record highs in the markets and two-thirds still see "economic uncertainty" and feel better on the sidelines:





Make no mistake about this:  give me a week or two of red ink - which is what we continue to suggest we pray for - and those bullish numbers will be in the 20's before you can say "Black Swan."




Keeping up with the Joneses and the other Fed regional surveys, manufacturing activity in the Philadelphia region continues to chug along as the Philadelphia Fed’s survey of manufacturing activity came in, get this, "higher than expected" for October.  Surprise right?


Not - it rose to 27.9 compared to forecasts for a reading of 20!  Imagine missing the projection on one thing you are supposed to know by - oh - just 40% or so!.  By the way, lost in the shuffle, October’s reading represents the 15th straight month that manufacturing activity showed growth and this latest data is the strongest monthly reading since May.


On a positive note, the current period of steady overall strength we are witnessing has not been too common throughout the survey’s history!


More of the Same On Tap


Expect fears, concerns and angst in the audience to continue to rise under the following conditions:


a) the market continues it's quiet, sometimes choppy and sluggish rise upward, for which more will be concerned that the crash is surely coming....and


b) the market takes a step down for a month or two, for which the crowd will run because the crash has arrived.


And, yes, on a Friday morning - that was intended to elicit a small bit of laughter.


Yes, I know - Boring


But hey, it is Friday - and we sure send our best weekend wishes to you and yours.


When you get a few minutes, make sure you click on this link and watch one of our videos.  A reminder of the surprising strength that many will not see coming.  By the way - the password is:  GenYupside35


It's the long-term current we need to invest upon - not the short-term waves which will assuredly always roll ashore to block the horizon.


Those waves are the noise too many get lost in...and the reason the long-term game is so hard to win based on fearful activities.


Play it Again Sam....


The earnings season is flowing - with a steady flow of beats - more on that tomorrow.


Expect more but pray for that correction.


I sure would like to see one.


In the end, like it or not, long-term investors have learned that Demographics Rule The Long-Term Game


Generation Y is set to do much greater things - far beyond what the Boomers accomplished.


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


InvestingMike Williams