Carty Capital Management
CFP | Fiduciary



The Big, Bad Wolf

Good Morning,


Indeed - it's all flooding back into our systems.  Almost everything is bad news again.


Call me a broken record if you must - but this is good.  Real good.


Rates, Trump, politics, race, sex, Trump, earnings, Trump, trade wars, Trump, North Korea, Trump, Russia, Trump, Academy Awards and Hollywood, Trump. 


Um, I suspect you get the drift. 


It never ceases to amaze me that we cannot function with everything just being ok for long at all these days. 


Sentiment shows it - media shows it - chatter, comments, calls and emails show it.  The anger of "waiting so long to feel good again about the markets - only to see them once again spank the newcomers who were only slowly receding from their bomb shelters" is clear and seems to be embedding itself more deeply as we proceed. 


It's as if there is this growing feeling of "I won't be fooled twice..."   


Be that as it may - the reality is more stark:  Relatively small percentages of households actually have a good deal invested in "markets" so even as the bears want you to believe that market action will have some dire and permanent impact on us as a nation - is, well - shall we say - lacking some validity.


As Warren states unequivocally: "In America, investors have the wind at their backs."     


Note he does not say, "...all the time, whenever you invest."   


Sentiment Burned at the Stake


The red ink in markets last week continued the overall trend of pressure on the sentiment side of the spreadsheet - a very good thing indeed:



These two charts above tell you much.  The audience is frightened again - and to extremes not often witnessed.  Read 'em and reap as I always say, just know this ahead of time:  that gnawing feeling in your gut that "this time we are in trouble for sure..." is a tough thing to fight.


It's why they call it "building wealth over the long-term", instead of "fun."


In a perfect world, this chop and churn would last for another couple weeks - such that at least the top three reading dials on the first chart above turn red with fear.


If we can see that unfold, you can pretty much be confident that fear is once again at the forefront of the collective mind of the audience.


Meanwhile, Earnings


Well, spectacular would be a good work.  Stunning, surprisingly strong, surging and significant readings would also all be good descriptions.


Let's take a look at the latest from Thomson Reuters...


There are some important aspects to consider as too many fret over near-term market action (a good thing by the way).  For example:


Since November 17, 2017, through this past weekend of March 2, 2018, the forward 4-quarter estimate has increased every week from $142.30 to this week's $152.81.


This is very rare run for positive S&P 500 forward estimate revisions.


The very early stage of the 80's comes to mind when looking for the last time it happened - not a coincidence.  


As stated previously – we should not be concerned, long-term, if markets now work through an extended “buy the rumor, sell the news” window of internal churn. 


As stated – it is a good thing - and healthy for the long-term, upward trend. 


Now, let's see the Thomson Reuters data:


  • Fwd 4-qtr est: $158.21
  • P.E ratio: 17.0x
  • PEG ratio: 0.83x
  • SP 500 earnings yield: +5.88%
  • Year-over-year growth of fwd estimate: +20.57% vs. last week's +20.27%


The giant fly in the ointment of course - is the bond world. 


When the current corrective window began on January 26th, the 10-year Treasury yield closed the week at 2.66%. 


Now, the 10-year Treasury yield has seen a rise to Friday's close of 2.86% - a 20 bps clip since the market duress started.


Clearly – one end of the Barbell (the tech/young side) continues to get most of the attention as Technology shines above all other sectors.  As much as this likely means we should become accustom to more chop as we rise up this long-term mountain – technology will indeed change much of what we know today as Gen Y really takes control of the future. 


Recall – the game is still in the warm-up stages though.


As bonds have been clocked, the safe trade of dividend growth regions of the market is clearly feeling the brunt of that false “bonds are competitive” narrative.  I suspect that wears off in the next quarter or two. 


For now, let’s bask in the sun of the falling sentiment – a solid support tool for the investor looking for long-term deals - and the impressive improvements in earnings. 


Just note - there is still much that companies have not found in future benefits see to fall to the bottom line. 


We should not assume they have "figured it all out" in one quarterly announcement season.  




As much as things change - they often (sadly) remain the same.  Human nature falls solidly into that camp.


It is this spirit of innovation and demographic powers in place are driving the Barbell Economy in the directions we speak of often. 


A patient and disciplined view of the larger forces defining the future will help clearly define for you a more productive philosophy...


Over wide spans of time, people make markets. 


The Barbell Economy is real. 


You can ignore it, you can disagree - but the two largest generations of our time are set to drive U.S. growth for the next 40 years. 


In time, innovative and well-run companies standing in that Barbell structure will be set to generate long-term profits, and the shareholders (owners) who patiently invest for the long-term will hopefully participate in the value creation that takes place as a result.


As such - panics like the one the markets are currently finding their way through tend to be good for the long-run.  They reset values and perspectives and provide the long-term investor new opportunity to be patient and disciplined.  


No one ever stated it would be easy.


Be assured of this: if it were easy, the returns available would be insignificant.


For long-term investors, hunting season is open...time to start looking.


Be grateful for the latest bouts of panic.  


The wall of worry has been rebuilt nicely...though chop and churn as aftershocks are always likely - and normal.  


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.  


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