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Swimming Upstream

Good Morning,

 

Hey - good news.  Daylight Savings Time ends in two weeks and we can pretend we get an extra hour of sleep!

 

It was a busy week last week in earnings - good for some short-term - and bad for others on wasted knee-jerk reactions.  In essence, this earnings season so far is looking a good deal like the norm emotionally speaking - but with a couple of data exceptions - mostly positive.

 

The Beat Goes On....

 

Keep in mind, there was great chatter about how the hurricanes would drag down company results.  Indeed, several have had short-term impact - including some of the Barbell Economy companies.  Long-term investors have learned not to fret as history shows these - a grand majority of the time - tend to be temporary events and easily made up overt the next quarter or two.

 

Even with those near-term impacts mixed in - the season has so far accelerated, oddly enough.  Recall, it is the norm to see analysts crank things downward for the coming quarters as each new quarter unfolds.  This time, as noted below - it is, well, proceeding on a much more positive slope.

 

Last week was busy - but the tide really starts rolling in this week.

 

Over the next 5 days, over 700 companies will report results, including 180 S&P 500 members representing a large chunk of market capitalization.  Combine that with the numbers from the 87 SP 500 out as of Friday's close and you get just passed the halfway mark by week's end.

 

So, tighten those belts, grab your refreshment(s) of choice - and let's get ready for the ride.

 

The Surprise Trend

 

You won't find it mentioned much in all the hype of the never-ending problems the media chooses to remain focused upon, but the results so far shows a positive view of corporate earnings.  This time around, it is highly likely this will strengthen through the remainder of this reporting cycle.

 

There are a few positives we can glean so far.

 

On the revenue front, growth is edging into acceleration over other recent periods.  The chart below tells the stats.  Total revenues for the 87 S&P 500 members that have reported results already are up +7.3% from the same period last year, which compares to +4.4% top-line growth for the same group of companies in the preceding quarter and still lower average growth rates in the prior periods.

 

 

 

As the Zacks data show - that is not a small revenue beat.  Also, it is on a tougher comp quarter year-over-year than the previous two of 2017.  Recall, the first half was "round-tripping" very low numbers in Q1 and 2 of 2016 due to the energy market dislocation.

 

This trend emerging in the Q3 earnings season, while still early, is notable on a couple fronts.

 

First, estimates for the quarter had not fallen by as much as had historically been the case before we started as we had covered in notes beforehand - even with the hurricane fears.

 

Second, the proportion of positive revenue surprises, a much harder variable to manipulate relative to earnings, is only a shade below the preceding quarter’s record level on a much tougher comp from last year.

 

Finally, again early in the cycle - the revisions trend for the December quarter is shaping up to be very favorable.  Once again, the pattern over the last few years has been that as each new quarterly reporting season unfolds, estimates for the following quarter tend to start coming down.

 

Over the last few quarters, estimates would not fall by as much as was historically the case, hinting at a slowly improving process - but they were nevertheless coming down.

 

The unusual aspect of Q4 estimates so far?

 

This time, they have actually gone up a bit over the last couple of weeks.

 

This will most likely change as more companies report Q3 results and manage the market’s expectations for the December quarter, but it is nevertheless an unusually positive development.

 

Note in the chart below, one can see the shift in Q4 estimates as the quarter has unfolded:

 

 

 

How About Another Perspective?

 

Most assume markets rise for some nefarious reason - especially when they have cash, bonds and ETFs not participating with the rise.  In this case, logic would tell one that the global recovery is becoming more synchronized as data has been showing along the way.

 

Here is the latest from Thomson as earnings roll:

 

Thomson Reuters data (by the numbers from This Week in Earnings, 10/20/17)

 

Fwd 4-qtr estimate: $142.24

PE ratio: 18.1(x)

PEG ratio: 1.79(x)

S&P 500 earnings yield: 5.52%

Year-over-year growth of fwd estimate: +10.13% versus last week's +9.8%.

 

Compare those stats to the 10-year bond selling at 41 times earnings - with an assurance it will not increase for a decade.

 

By the way, if you recall, this is now the second time this month where the growth rate of the forward estimate has exceeded 10%.  While early, this may be showing that this growth rate may be finally looking to turn higher - and above 10% - for a longer duration.

 

This has not happened with any regularity since before 2008.

 

That's Not All....

 

Data releases continue to poke the bears in the nose - even as they assure everyone the end must be near.

 

 

 

 

 

 

In Summary

 

The higher these numbers get, the more intense the "altitude Sickness" we often cover will become.  Make no mistake about this though - "bullishness" espoused in the press is only skin-deep as they say.

 

Let a week or two of red ink unfold in markets - which is what we continue to suggest we pray for - and those bullish feelings will vanish and a whole flock of Black Swans will appear.

 

The next one?  Don't be surprised if you son begin here chatter about the troublesome dollar rally.  Remember - a weak dollar and bad for us and a strong dollar is bad for us.

 

Pick your poison.

 

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.

 

Yes Earnings Seasons Can Be Boring

 

...for the long-term investor who does not care to get involved in the trading/knee-jerk chop.

 

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 picks up a ton this week - with a huge batch of results.

 

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.

 

"Drinks at the new bar on Mars tomorrow at 7:00 anyone?"

 

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

InvestingScott Carty