Carty Capital Management
Carty Capital Management



Passive? Yea, right

Good Morning,


What a 10-day stretch huh?  We went from the first month of investors finally coming out of their bomb-shelters, with fears of a repeat of 2008-2009 slowly beginning to recede (only slightly mind you), piling into those wonderful, passive, fix-all-ills ETF channels and then - BANG. 


It took three years for the AAII bullish sentiment to breach a majority - 50% of the crowd. 


It took 10-days for most of that sentiment to ugly as that feels short-term, it is a spectacular and beneficial reality.


ETF's were the thing. 


They were the latest tool created to seemingly promise the average investor that somehow this was all easy - that somehow, Wall Street - of all places - was going to provide you a tool that would permit you to stand tall through the inevitable storms.  A tool that was going to eliminate the weakest link for all investors - their emotional response to unsettling stimuli.  


It was deemed "passive" investing. 


Passive - yea right.


Money floods out of ETF's just as fast - if not faster - than it does from mutual funds.  Indeed, the dirty little secrets of Wall Street abound.  From selling order flow to hedge funds - all the way to creating algo's to pounce on that order flow when it erupts from the ETF world, the public - in my humblest of opinions, still does not understand what at ETF does -- and does not -- do for them.  


That being said - it's all ugly when panic ensues.  There is no good news - not even when it is good news.  The events of the past 10 days have completely washed out the stunning surges in earnings and forward looking investments companies will make in new products, services, productivity and job creating channels. 


Dividend increases?  Ignore them - give me my cash man.


Buybacks - a further shrinking of the stocks you can invest in?  Are you nuts man - send me my cash.


But earnings are going to be up 20% this year.  Screw that - sell my stuff and don't call me about stocks again.  


Wait - but my bonds are hurting me too....gasp!  


Can we just take a brief moment and breathe deeply for a few seconds.  Inhale, hold, exhale.  Inhale, hold....








Let's Review - 


I like to say read 'em and reap....but that's French for, "Hey, long-term investors are getting another gift!"


First - some pictures:


Now, you call it what you like--but that red dot shows what everyone did with their largest ETF in the business the SPY.  Can you say "self-fulfilling prophecy?"


Here's the thing...and I am sorry if this sounds like "I told you so....." but, we did - for months and months - years even: 


You sell a SPY - you sell a piece of all 500 stocks in the S&P 500


Since your order flow is being sold to all the big boys - they know when you are selling your SPY


Since the SPY is a known element, they not only know when you are hitting the panic button - but - and here is the kicker - they know precisely what you are selling.


It does not take a rocket-scientist to figure out what happens next.


BUT, now - more than ever before does take an understanding of how this works, what it means and what the winning investor MUST learn how to do....stand tall, be patient, stay disciplined and find the courage to take advantage of other's age-old errors.  


ETF's did not change the reaction of investors.  It only focused their reactions - and threw gas on the fire at a concentrated pace.  


The proof? 


Look at that red dot again - it way, way surpassed the panicked selling of the same largest ETF in the business seen in the '08-'09 Armageddon by a magnitude of more than 2. 


Nutty right?


There's more...



Now the AAII stuff won't be out for another 48 hours or so - but the CNN sentiment data is clear as well.  Remember this:


"It's not about what's now - it's about what's next..."


With that perspective in mind, consider the red dots on the second chart above showing the Greed and Fear readings over the last 4 years.  They mark in order:


"The worst start to markets in 85 years as 2016 dawned"

"The pre-Election Fears of Trump"

"Last summer's summer swoon"


Indeed, current levels of fear surpass all of those events.


Further - we are back to the Brexit Global Armageddon lows in late summer 2015!  Remember those?


Now here is what a long-term investor should be asking themselves:


Did ANY of those previous fears prove legit?


Was it wise, looking forward at any of those times, to be a seller of the stock market long-term?


Did the world end?  Uhh, no.


Still More...


You gotta give it to the press--they can fit Armageddon into anything right?  The "short vol" trade blows up and they have a word for it "Volmageddon." 


I have another word:  moronic.


Here is the Reality


Nothing one can ever plan on will change the reactions of the public.  The next time you hear it will, grab your wallet and - run.  Now, this is not at all designed to cause even more fear - even though I completely understand and respect why and how it can.


We humans - and yes, we ALL do it - tend to take whatever happens in markets - and with our money we worked so hard for - and assume it will blanket the entire knowable, seeable, future.


It doesn't, it won't - it never has...think about it logically for a moment and I am sure you will agree. 


Just as the DOW three thousand points ago did not mean stocks only go up and it's easy and "passive" - the DOW today and the ugly feeling we all have - as disquieting as it is - does not mean Armageddon LXXVII has arrived and things are all going to hell.


But that sure does sell a lot of newsletters, books and trading systems.  


Here is another dirty-little secret: 


I don't know how to "trade".  I have only learned how to invest.  I only know how to perceive a long-term pathway.  I have been fortunate to learn from some of the best...and I awake everyday grateful for same.  


There was always a common trait for them:


Patience...and the ability to see beyond unavoidable, emotional churn, reaction and panic.


We try to diagram the same for you here in these notes each week.


Now, Just One More....


This chart above is remains the most fascinating to me - and getting more so as we wash out the latest panic. 


The waves of ETF forced selling shown above, have pushed a massive number of stocks down below their 50-day moving average.


Note carefully just how wide-spread the forced selling has been due the nature of the ETF's.  The red dots now show we at levels seen only a few times before:


...all the way back to the end of the tech bubble

...the pit of the 2008/2009 Great Recession

...election fears in 2016


Think carefully here - looking forward from those points - were they good times or bad times to be an owner of equities?


OK, OK - One More


Earnings are through the roof - and will eventually become the value again.  In fact, note the ratios forming during the selling wave - even as earnings rise:


On a trailing - a very conservative way of looking at things after a tax act which will drive earnings at least 20% higher - the value in the market is cheaper than seen in years.


On top of that, here is the latest from Thomson Reuters from the earnings season:


Fwd 4-qtr est: $157.28

P/E ratio: 16.4x

PEG ratio: 0.84x

S&P 500 earnings yield: 6.1% vs. last week's 5.62%


Year-over-year growth of forward estimates is now +19.6%.  That is the highest since the late 1990s when Tech was growing at 35%-40% per quarter.


So while panic was bleeding into the market - earnings were rising.  As such, the S&P 500 earnings yield has jumped because the forward estimate (numerator) rose this week, while the S&P 500 (denominator) fell hard.


The S&P 500 earnings yield is now at its highest print since the China devaluation and crude oil correction ended in February 2016!


I do not recall seeing this level of consistent upward revisions to weekly data - but it should be perceived as good news.


YES, rates will rise - but we have been stating that for years.  Many will call it perilous - we will stick with normal and expected.


Panic is valuable - but only for long-term investors focused on the Barbell Economy and the powerful demographics being overlooked - and totally misunderstood by most.


In Closing


So, in the end - one is left with a simple set of thoughts that we must focus on logically as we have seen it all before.  Same song - new verse:


Do I go with the earnings evidence, the fundamental readings, the packed jobs markets, the record incomes, the $11 Trillion still in the bank? ....or


Do I go with the dumb-ass morons who have once again created something that really does nothing in the end but cause strife, fear, stress, short-term disconnects from reality and more fees - having nothing at all to do with investment values?


Something worthy of pondering I suspect.  


The prayed for correction is here.


This will sound completely nutty - but be grateful for it.


Demogronomics keeps you on the leading edge of change but there is a cost:  it requires a much larger, more patient and disciplined view of the elements at work.


It's the long-term currents we need to invest upon - not the short-term waves which will assuredly always roll ashore to block the horizon - just as they are now, causing doubt in the minds of millions once again. 


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


Play it Again Sam....


In the end, like it or not, long-term investors have learned this: 


Demographics Rule The Long-Term Game


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


InvestingMike Williams