Carty Capital Management
Carty Capital Management



Think in Years

Good Morning,


Hate to tell you this - but we have been dead wrong.  The pace of earnings dropping to the bottom line is happening far faster than even we expected - and I am pretty sure we had a fairly rosy view of things.


Some may think that is bad - just remember, you heard it here first (6,712 times), this game is just getting started. 


Just because emotions can cloud memories, I repeat that this does NOT mean every week, month, quarter or even year is "better."  Long-term trends include bad windows within them - sometimes several.  Indeed I fully expect some type of ugliness will interrupt this party at some stage.  


It will hurt, feel terrible, make you doubt all your impressions - and then, it will be over.  The green flag will wave - and the race will be on again.  Here is an interesting chart we included in a presentation for clients yesterday.  The rules for viewing are below the image:


Simple rules for the chart above:


1 - Blue is an image of bull market lengths and height of returns.


2 - Orange is for bear market lengths and depths of losses.


3 - Stare at how much blue there has been since 1926


4 - Stare at how much orange there has been since 1926


5 - Ask this question:  "Why in the he$$ am I always worrying about the orange?"


...end of lesson.


But Mike - Rates Are Rising!


Yes, that is correct - the patient is out of its coma and being weaned off their meds.  Now, too many will assume I am referencing some sort of Fed action or QE or something of the sort - not even close.  QE has been over for years.  It was totally misunderstood by 99% of investors and almost 100% of experts anyway.  It was never "keeping rates low" and it did not "ignite a firestorm of inflation..."


The coming off the meds reference was plain and simple:  The air in the bubble of fear is finally, slowly beginning to seep out just a tiny bit.  Keep in mind, it is my humble opinion that the fear bubble since 2009 has been the largest bubble of all time.  


It has caused standing room only at bond auctions all over the globe for years and years.  It has caused people to horde nearly $11 Trillion in US bank accounts - for a rainy day.  Good Lord, we wouldn't need that much money for 40 days and 40 nights of rain.  It's all fear folks - and a sincere and deep hatred of risk.


Here is the ugly little secret about risk.  Everything that "works out" and everything that "doesn't work out" in the investing work is always carrying risk.  Period.  Always has been since the beginning days of investing.  Always will til the end of time.  By the way, at the end of times, your account statement won't matter so stop fretting over it.


Back to bonds. 


I promised a deeper review of bonds - and that video can be found here for you


Just click on that link and then enter this password:  BondReview0118 (please note it is case sensitive and that is a zero)


Here is what the world of interest rates looks like this morning..steady and stop panicking guys:


...and guess what is also getting even better - yep - jobs - with millions more available where those came from as soon as we can get these new engineers and tech wizards educated and out of school:


Speaking of Good Things


Earnings are, can I put this mildly....KNOCKING THE LIGHTS OUT.


The trickle down effect of the tax impact, repatriation flood and the regulatory rollback is just beginning to reach the bottom line.  Once again, the first batter is just warming up and it is a very long game. 


Dozens of major companies employing tens of thousands of people are having out $2,500 - $5,000 bonuses, adding to stock grants and increasing pay.  Don't forget the continued spread of that dreaded disease we call "shockingly steady margin increases" being driven by Gen Y and new productivity tools. 


Just yesterday General Dynamics announced a 260 basis point increase YOY on margins.  Seriously?  Ouch. 


Pray for a correction folks.  The data say this is set to go on for a very long time. 


Earnings Rocketing


With 89 companies form the S&P 500 reported already, combing for nearly 25% of total market cap in the index, earnings are up 8.9% and revenues are higher by 7.7%.  Roughly 80% have beaten EPS estimates and 74% have beaten revenue estimates.  In essence, Wall Street is still - after 9 years - behind the 8-ball in understanding this process unfolding.


A couple charts below are important from Zacks - and interesting to note the evolution of the effect of taxes.  It's 1982 all over again - just much bigger numbers:


The chart above shows you the pace at which earnings projected for Q1 18 (from the announcements of Q4 17 over the last 6 weeks or so.  Pretty impressive and a pace of surging ahead not seen in decades.


The chart below shows you how this spreads out over all of 2018.  A strong foundation indeed.  Pray for a correction - and when/if we are lucky enough to get one - don't fear it, embrace it as a benefit for the long haul ahead:


Before I go today, I just need to include one more item for you - the latest in AAII sentiment.  You recall DEC ended with a bang and a rocket-shot to 59% bulls.  One can surely say the market has seen a positive tilt for the start of the year - so far anyway. 


And yet, well, read 'em and reap.....bulls have actually fallen by almost 25% of their previous levels!


Let's be thankful and grateful folks


We are living in incredible times..... 


So patience friends...


In Closing....a reminder...


Expand Your Mind - and soon. 




The world we live in is going to change - by miles and miles - and the pace will pick up.


In market terms, we are not too many years away from a normal day's move in our markets having 4 digits in it. 


If that makes you nervous - buy more TUMS.


In Closing


The undercurrents have not changed - they merely get stronger over time as the generational barbell economy moves ahead. 


We must remain focused on the long-term horizon and the powerful forces driving the US economy forward. 


They are strong and steady. 


Better yet for long-term investors able to remain patient and disciplined?


They are still grandly and profoundly misunderstood.


Yes, earnings seasons are often choppy, always too 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 better markets for the long-term investor. 


The rare US Barbell Economy is set to unfold for the next 30+ years.  I like to joke with people who chatter about us being in the 9th inning.  Not.


This is tough to wrap one's mind around - as tough as it was in the very early dawn of the 80's - the game has not even begun. 


Far from the 9th inning, picture yourself arriving at the stadium early, walking in and the stands are still mostly empty.  You hear the crack of batting practice echoing in the seats and see the net still covering the home plate area. 


Players are stretching in the outfield and the managers are in the dugout playing with the line-up cards.


The pitchers are still warming up in the bullpen.


Strap in folks....the ride is still ahead of us.  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, short-term 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....including this upcoming earnings season.


Have a nice weekend.


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

InvestingMike Williams