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Need More Bulbs

Good Morning,

 

The data last week seemed never-ending - oddly enough, mostly positive.  We saw the week end with the Thursday and Friday earnings releases from 4 of the Big Tech names - all of which completely knocked the lights out.  Hence, today's title.

 

The GDP report was solid and even the internals were as well - with records in cash flows, investments, software and even R&D - an often overlooked ingredient, but one that is a positive pre-cursor for things to come in the long run.

 

Keep in mind, when tech knocked the lights out, the market reaction in the momo stocks - along with their already over-weighted impact, took the tech sector into new high territory in more ways than one.

 

The move higher has now caused its weighting in the S&P 500 to balloon up to 24.2%.

 

Let's just be aware this is almost ten percentage points larger than the 2nd largest sector in the S&P 500 - Financials. It's also more than 12x as large as the smallest sector in the index - Telecom. As a final comp, Tech is now as large as the smallest SIX sectors in the S&P.

 

 

 

 

What does that tell us?  It merely means that results will look skewed a bit until year-end - all things being equal.  To give you a sense of the difference the tech monsters are making, the NYSE Composite is now over 400 basis points below the S&P 500 YTD results.

 

This week, we should expect this margin to increase as FB is up to bat and iPhone X sales for pre-orders are likely off the charts as pent-up demand should be significant.

 

For more on the Barbell effect, don't forget to take a few minutes to watch this short video here.

 

The Member benefits this year have been - once again - quite positive.

 

More Internals - Even Better

 

The latest data from Thomson continues to show the unique aspect of rising expectations.  I know this is broken-record stuff but keep in mind that it is very abnormal for earnings expectations to increase as the season unfolds.  The norm is for them to fall and then be adjusted later.  Long-term, these are very good signs:

 

It is likely some companies are providing investors the first hint of calendar 2018 guidance on the Q3 '17 conference calls.  The bigger steps on that pathway will be when Q4 '17 earnings are reported in January-February 2018.

 

Keep in mind that none of this yet incorporates tax reform or the ability to bring dollars back from overseas via repatriation.  While the earnings explosion in tech was the big news Friday, keep in mind a company like Microsoft has over 90% of it's $138.5 billion in cash and short-term investments held overseas.

 

Let's just keep that in mind for drivers of upside surprises in 2019 and 2019.

 

For now, Thomson Reuters data (by the numbers courtesy of This Week in Earnings dated 10/27/2017):

 

Fwd 4-qtr estimate: $142.10

PE ratio: 18(x)

PEG ratio: 1.78(x)

S&P 500 earnings yield: 5.51%

 

Important:  Note the year-over-year growth of the forward 4-qtr estimate is +10.18%, vs. last week's +10.13%.

 

Recall that we have now seen the forward growth rate stay above 10% for the 3rd time in the last 5 weeks.

 

In Summary

 

Just remember - the higher these market numbers get, the more intense the "Altitude Sickness" we often cover will become.

 

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....

 

Pray for that correction.

 

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

 

Generation Y is set to do much greater things - far beyond what the Boomers accomplished - or what can be defined today.

 

Imagine explaining an iPhone X to your buddies in 1982 - and then extrapolate that forward for the next 35 years.

 

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

 

InvestingMike Williams