Carty Capital Management
CFP | Fiduciary



Killer Curve

Good Morning,


A real shocker huh?  What a first few weeks.  Going into my 36th year in this industry, I must tell you, it never gets boring.  With the proper perspective, there is always good news somewhere.  And for the patient, long-term investor - well - I must say, the news rarely gets better than we are seeing unfold for the years ahead. 


Yep, that makes me a tad bit nervous as long-time readers know I like it better when everything feels bad LOL.  You can be assured there is a correction out there somewhere but our theme remains the same - bring it on! 


It will be a good thing, not a bad thing. 


Besides, with AAII data showing bulls dropping like flies on any pause in the upside - and that tidy little $11 trillion in the bank, there is plenty of fuel before the world is "all-in" as they say.  


So when it does come, don't run and hide.  Instead, turn the prism a tiny bit, let the light shine through and think of it this way for the many years ahead:  thank your lucky stars. 




Well, let's check the rearview mirror for just a second - and then, just as quickly, we will focus once again through the windshield' where the future is after all:


Thought Processes for the Chart Above:


1 - Yes, this is the rally structure since the lows of the end of the world back in early 2009.


2 - Watch the red arrows - and learn from them...they connect lows in the market with the high volume red bars you can see through the image in the background.  It's how we read panic in the market....we call them "the footprints of fear..."  The crowd consistently proves they will sell based on fear waaaaaay faster than they will buy based on logic.  


3 - One can view the "acceleration" of improvement in the world of business going forward by noting the angle of the colored trendlines.  Green is the base trendline, the dotted blue line is another gear higher - and then, the current acceleration is yet another in solid purple.  


4 - It's difficult - but try not to read too much into the data.  Markets are a buffet of human reactions - perceptions of the future, fear and comfort all blended together.


5 - Remember where your feelings were back in the lows of 2009.  And take this as a lesson the next time they arise - and they will arise at some stage.


Always remember that humans look at the market today and perceive it through the lens of past events, knowledge and emotions. 


The market, on the other hand, tends to be a discounter of the future...




Business looks through the windshield


Humans look in the rearview mirror


History suggests one is productive...the other one - not so much.


...end of today's lesson.


Better News?


Earnings are continuing to accelerate - and there is still over half of the Q4 '17 earnings season to go.  Let's check the stats:


This week, let's check the earnings data and begin to let it sink in that a tremendous number of things are going in the markets favor.  Also shown is the S&P 500 earnings yield when compared to the 10-year Treasury or "Fed Model" calculation as Dr. Ed likes to call it.  The point? 


The S&P 500 is still undervalued relative to the 10-year Treasury yield.


It is important to take note of the accelerating pace of growth in the forward 4-quarter earnings estimates.  Importantly, there is still more acceleration ahead in that we are not even halfway through the Q4 reporting process yet. 


Keep this in mind too:  note the P/E as of Friday was the same as the end of the year, suggesting this is on earnings increases and not the expansion of P/E multiples.  


It was a big deal going over 10% growth as we noted back in the November/December notes.  But now, it is even more staggering to see that same forward earnings growth rate accelerate into and beyond the 15% range - something not seen from this large an earnings base - ever.


Mark Your Calendar


I don't want to cause concern - just make sure you put this on your calendar.  We will likely hear all sorts of nasty "Armageddon-like" stuff this time next year when the media hype will sound something like, "Markets are in trouble as the pace of growth slows...." 


Just keep in mind it will be nonsensical for the most part but the lapping effect of these big surges cannot help but to find a pause (in the pace of increases) for Q1 of next year.  It's just like then you hear we have terrible Holiday Sales.  It's almost always a record, they are just throwing you off by referencing the pace of growth on the base.  

And That is Not All


Yes, earnings are increasing rapidly, the trickle-down effect of which is still being misunderstood.  But there is more happening in this larger market and economic event....and as stated often before - the game is just beginning:


Global economic activity is accelerating across the board - in a synchronized process.  Indeed, just last week, the IMF once again raised their growth forecast for both 2018 and 2019.


One should assume, in order to be competitive, the fuse lit by the bold steps taken in the U.S. on the tax and regulatory from will be followed by other countries.  Expect efforts to enact reform-boosting for growth benefits in other regions as well.


Given the massive deflationary forces of Generation Y, inflationary pressures remain low - confusing a tremendous number of experts looking at old tools. 


Held in check by globalization,  rapid technological change drivers and the Gen Y disruption, I'd argue that the Philips curve and other historic measures of productivity may no longer be very effective indicators. 


Bottom line here?  To think that somehow our economy is something remotely like 10, 20, 30 or 50 years ago is simply foolish.  Sorry. 


The Cat's Out of the Bag  


Much change will unfold whether one likes it or not. 


With inflationary measures deceiving some, interest rates remain comparably very low given growth, record GDP and record earnings.  Besides, as noted often, real rates remain negative in the Eurozone and Japan despite accelerating growth.


Both the BOJ and ECB just last week worked to reaffirm their QE - putting a lid on U.S rate pressures and fears.


While S&P forward earnings over already well passed $150 per share for 2018, look for something closer to $162 - $170 per share in 2019.


Surprisingly, what analysts are not likely ready for is that we suspect free cash flow growth is set to be even stronger than earnings growth - allowing for debt paydown, share buybacks and increases in dividends.  


The tax law changes are not just about more earnings at the bottom line.  It will also drive capital spending as plans unfold over the next few quarters.  I suspect by mid-summer or so we will see that this channel will also grow more than currently expected, well into 2019 as we get even more signs of an improving, global economic cycle.


The Bottom Line?


After years of being harnessed as covered so often in the Obama years, America is open for business again. With all the excitement over tax benefits, many have forgotten there is more to do.  Look for the U.S to put together a significant infrastructure investment program.  This should be a solid boost for 2019, adding again to steady growth.


To cap it all off, as these positive domino effects flow cohesively together and work down into the system, I suspect we will see more M&A activity as well - likely accelerating across all borders.


I repeat - pray for a correction.


In Closing


It is rare indeed that we see the economic forces align as powerfully as they are coming together now.  This is all on top of the globally-leading, powerful and steady Barbell Economy effect we have embedded in the US for the next 30+ years. 


Be patient and disciplined friends.  These forces are real and they give us a positive foundation for steady and continued long-term upside in global stock markets.


So yes - a correction in this type of environment is a gift.


The world we live in is changing - rapidly.  Its' pace of change will likely be far more forward-looking than the crowd can be - hinting at analysts remaining well behind the 8-ball, just as they have been since 2009.


Get comfortable with larger numbers. A 100-point move today means almost nothing. 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 - tighten your seat belt and maybe learn yoga.


Stay focused.  We are seeing the unfolding symptoms of the undercurrents we have covered for years.  They have not changed - they merely get stronger over time as the generational Barbell Economy moves ahead. 


The long-term horizon trends remain productive, strong and steady.  Even better for long-term investors able to remain patient and disciplined during the storms?


They are still being grandly and profoundly misunderstood.


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


And for the new readers fretting over the media chatter about this being the "9th inning...", try not to fret too much.


This is tough to wrap one's mind around - as tough as it was in the very early dawn of the 80's - the really important stage of this 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.


But Just Remember.....


Patience and discipline are your very best friends in a secular bull market.  


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. 


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.


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

InvestingMike Williams