Carty Capital Management
CFP | Fiduciary



Noise Approaching

Good Morning,


So this week will likely be where most of that Holiday Haze wears off.  Kids will be heading back to school, the markets have had their pension fund flow bump and now, the real work begins.  Before you know it, we will be swamped with data, a flood of earnings reports and far too many opinions on both to fill the air. 


It is the latter item - the earnings reports - we feel the need to focus upon today.  First, a reminder - a 90-day quarterly report does not an investment thesis make.  However, it is important that we recognize this particular upcoming earnings season is set to likely be very different from your typical earnings season. 


Given the tax bill changes and repatriation effects - along with strategy at some companies still unfolding as to how to most effectively use the new rules - we need to realize this sets the stage for a relatively sloppy set of numbers.  On the surface they could look very poor, with lots of misses, tax charges and elements which will be one-off events. 


Let the Data Flow Through....


Recall that when we hear an earnings report, the company focuses on a few items:


Actual results and if/where they differed from "consensus Street expectations"


Any change in longer-term guidance from all known data (we can notch the vagueness of these statements to the rules the regulatory body thought would "help" investors - in fact, it only made it more confusing.) 


There is usually a commentary on the state of business in general and then a specific review on some particulars - usually driven by analyst Q&A and covered in the scripts one can read


This time around though, for Q4 '17 with the added news of tax reform, investors, experts and commentators will all be listening for more.


Q4 '17 financial results as per the usual


Managements' best estimate about what full-year 2018 (otherwise known as full-year '18 guidance) will look like in terms of numbers and growth. 


Herein lies the wild-card as this will be greatly influenced in setting a new foundation based on how the tax will will ripple through the financials - or actions they will take because of same.


Banks Up First


Many of the larger banks will kick it off at the end of the if the market felt a little like it was playing softball - be ready for the fast pitches - as they are coming. 


As the waves begin to roll in, we will hear a good deal about cash repatriation and how that will impact share repurchases, maybe dividends, tax bills and also any longer-term capex investment plans to be announced.  This could lead to short-term earnings glitches and I would not be at all surprised to see multiple knee-jerk reactions in the wrong way.


Not a warning or designed to breed fear - just to keep you aware of the long-term glide path.  


More Details than Normal


If companies chooses to use repatriated funds to give back to owners via share repurchase programs then this could also adjust EPS and forward estimates.  On the other hand, dividend changes, special dividends, and changes to "capex" will show up more in cash flow discussions. 


There is a point:  Given the massive number of changes, do not be surprised to find that we could see the markets go flat or get much more choppy given the run up we have seen into the earnings. 


As stated often before, the short-term trader mentality is that a run-up into earnings announcements tends to set the stage for the "gosh, that's good but we expected that..." type of response and a selling session ensues - even for companies that beat. 


When we see markets sell down into earnings season, the opposite is set - where we tend to more often see, "gosh, that was a little better than we thought..." and even a miss can get a bounce. 


Again, all too short-term for us but designed to help you understand the mentaility of the price action and not be spooked by it.  


Let's stay focused on the current underneath - not the waves on the surface.  


First Week Adjustments Already


The other thing we will see is a somewhat major shift in valuation models, all still to be seen, as information heard on all the fourth-quarter calls sifts its way through the reporting system.  For now, let's check the current first week of Thomson Reuters data for 1/5/18:


Fwd 4-qtr est: $147.94 versus last week's $143.34

P.E ratio: 18.5x

PEG ratio: 1.6x

S&P 500 earnings yield: 5.39%

Year-over-year growth of the forward estimate: 11.46% versus last week's 11.49%


Note the increase in the forward 4-quarter estimate.  This is pretty normal for the first week of every quarter.   Keep in mind though, starting at almost $148 per share with many changes still to flow through, we could easily see $150 in S&P 500 in EPS in 2018, and possibly much higher.


One last item on the boring side of the numbers.  As often stated, you usually see things ratchet down we earnings approach.  Not so again this time around. 


According to Thomson Reuters, check the pattern of projected 2018 S&P 500 EPS growth as we approached this time period:


1/5/18: 12.9%

1/1/18: 12%

10/1/17: 11.1%


Even more interesting? 


FactSet noted in its report on Friday that Q4 '17 S&P 500 earnings estimates have seen "the smallest cuts to EPS estimates since 2010".


Lest it be forgotten from last week's note: 


Bullishness is not as unique as it was a year ago - even 3 or 6 months ago.  Markets are up.  Heck, Ralph Acampora, a guy who has been around as long as I have - and a widely-followed technical analyst, stated last week that he "was so bullish, he needed to sit down."


I sort of wish he had not said that - but nonetheless, this earnings season is going to be one to remember for its lessons on patience and discipline. 


I close with thoughts shared by David Tepper last week on air - a hedge fund guy in NYC - he moved to FL to stop paying state taxes LOL:


Rates Up?


And just in case you were worried about interest rates - well, they are still fine - even if we do expect a bit of a rise.  Fear is still keeping them way down though - and check the comparable yield. 


The 10-year is still less than half of the S&P earnings yield!


In Closing


Make no mistake folks:  We must remain focused on the long-term horizon and the powerful undercurrents driving the US forward - and they are strong and steady.


Yes - earnings seasons always 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 upon us and is set to unfold for the next 30+ years.  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.




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 is healthy.


Forget economics - think demographics.


It's the big picture.  It's the current under the emotionally-driven 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.


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

InvestingMike Williams