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Bubbles – and Amnesia

Good Morning,

I am fairly certain an odd cloud is rolling over the landscape.  How else does one explain this chart (inserted twice – same chart)?:

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 Just in Time for Halloween

Everyone is already scared.  I added the hand-drawn red line in the second chart.  It is there to help you see a condition which I would call unprecedented. You may be as astonished as I am to note that 98% of all weekly bullish sentiment readings since the March 2009 Apocalyptic lows are now higher than our current readings.

Further, the 8-week moving average of this data is down to 28.92%.  This moving average takes a long time to change.  Its’ peak since the March lows?  That occurred on December 11, 2014 – at 49.83%.  The S&P 500 at the time was 5.5% lower than where it stands now – but its taken nearly 2 years to travel that pathway – with more than enough chop and angst along the way.

It reminds me so much of 1982 that it is spooky.

No More Bulls

Essentially, I would argue this is the equivalent of the notorious Magazine Cover sentiment results.  Over the long-term , they are almost always wrong.  Likewise, note the latest weekly snapshot (first chart) sets yet another record.

Last week’s bullish sentiment reading from AAII marks the lowest reading since the week before the Brexit vote.  Importantly, the market’s chop and lengthy trade range (being tested right now per your video from two weeks ago) has done its job.

Bullish sentiment has now been below 40% for 48 straight weeks and 82 out of the last 83 weeks.

These are circumstances one normally expects after a bear market has occurred. Reality and sentiment are portraying two completely different environments.  As bizarre as it all seems, history is clear:  this is very good news for long-term investors.

The Earnings Turn is Upon Us

While the press will inundate us with a “6th quarter of earnings recession” news over the next 15 days, they will as always leave out a few important facts.  Analysts regularly spend the final weeks of a quarter bringing earnings down.  As a result, shares weaken, earnings then beat and shares rise.  It is usually a choppy ride with hiccups along the way.  This time should be no different.  But as long-term investors, we must endure that near-term to gain the long-term.

Here is your latest data snapshot:

First, Thomson Reuters and FactSet are expecting the following for Q3 ’16 S&P 500 earnings growth as of September 30 ’16:

Thomson: -0.5%

FactSet: -2.1%

Per FactSet, this could be the 6th straight quarter of negative earnings growth for the S&P 500.   Don’t count on it.

As noted, analysts’ consensus S&P 500 earnings growth overshoots to the downside on a regular basis.  As reporting begins, the actual earnings growth for the quarter starts to get revised higher.  Dr. Ed and I cover this often each quarter.

Here is a recent history (courtesy of FactSet’s Earnings Insight) of the S&P 500’s “upside surprise”:

Q2 ’16: +4.4%

Q1 ’16: +4.1%

Q4 ’15: +1.2%

Q3 ’15: +5.3%

Q2 ’15: +4.1%

Q1 ’15: +6.5%

Using the above numbers, the average “upside surprise” for the last 6 quarters was +4.3%.

One can somewhat easily add this average upside back to the negative expectations noted above and find we are seeing the turn to positive YOY growth.  Oddly enough, the fact that earnings revisions this quarter have been more positive than negative, could find the actual results we’ll see in 6-8 weeks may provide for a slightly larger surprise.

The cloud which energy has provided as a masking of “these terrible earnings” is also lifting – just as prices try to stabilize.  Recall from early notes that I pointed out most of the shale activity here in the States has now become profitable at between $38 and $47 a barrel, depending on the region being drilled.

Thank technology expansion and young Gen Y engineers.

The data set from Thomson Reuters and FactSet for expected Q3 ’16 Energy sector earnings and revenue growth is noted:

Thomson: -65.9% decline in earnings growth

Thomson: no estimate for revenue growth published yet

FactSet: -67% decline in earnings growth

FactSet: -12.5% decline in revenue growth

Why is that good?  The -12.5% revenue decline noted by FactSet would be the smallest rate of YOY declines for the sector since it peaked in Q3 ’14.

The hilarious part of it all?  If we happen to see oil stabilize in the $50-$60 range, we may find ourselves “shocked” by the pace of earnings recovery in 2017-2018.

Be careful though:  when that good news happens, we will all be told how bad it is.  We will be told of the coming “inflationary shock ahead” along with rapidly rising rates.  The Black Swan Hunters will never be lacking for bad news to spook you with…pray for a correction.

One Last Note

If you are terrified about rising rates – don’t be.  Rates will rise when one thing happens:

Fear recedes = rates rise

As you can see from above, fear and remains deeply seeded across a wide audience. The moment you feel it may be gone – wait for the next 3 to 4 day minor setback of 500-800 points. You will see fear – clearly – front and center.

I stand by the argument that it will take many years of significant price increases to get people remotely giddy about stocks again.


If you are also afraid of a bubble, don’t be.  Our economy is morphing into a wave of strength many will find hard to understand.  The generational shift will be with us for decades.  Yes, ups and downs will occur.  No doubt bear markets will unfold – from higher and higher levels with larger point spans to fret over.  Disasters will occur and so will crashes.

That stated, if you are fearful of bubbles, do not mistake that for being contrary.  How bad is it?  Morgan Housel tells us that according to various media sources we now have at least 14 bubbles:

A new real estate bubble.

A bond bubble.

A tech bubble.

A VC bubble.

A startup bubble.

A stock bubble.

A shale oil bubble.

A healthcare bubble.

A dollar bubble.

A college tuition bubble.

A Canadian housing bubble.

A central bank bubble.

A social media bubble.

A China bubble.

Let’s keep this simple:  Everything that rises beyond the price the doomsday sellers think it should be – is a bubble.

Here is the kicker though:  The word “bubble” wasn’t anywhere in our global economic lexicon 25 years ago!  Not in textbooks, not in papers, not in schools.  But now we have bubbles everywhere.  Excuse me while I choke on my coffee laughing.

Power Underneath The Noise

Time of great change is upon.

The generational baton shift is unfolding.

In the late 70’s / early 80’s it was the Baby Boom…now it is Generation Y – with Gen Z right behind it.

Think first inning, first pitch – long game – and sure to be lots of ugly twists and turns ahead.

Decades of demand are already built into our nation’s demographic fabric.

The economy we are seeing unfold will change everything we “know” today.  The dynamic world of tomorrow is set to be as surprising to us all as it would have been to your buddy in 1982 when trying to explain an iPhone….to anyone who would listen.

Simple is the Toughest You Will Ever Do

Patience, discipline and focus make up the primary pathways upon which long-term investors are rewarded for taking risk.

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

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Jason No Comments

Nothing But Needles…

Good Morning,

The Fed is on tap – and the various nail-biting contests are officially underway.  Office pools seem to be split down the middle as to whether a 25-basis point hike will bring on Armageddon…or a yawn and then a nap.  Fighting through the various elements in the media cycle to find anything under the category of “positive” is like trying to find a specific needle in a stack of needles.

There are a couple of things we may want to keep in mind – they are relatively simple butrequire a degree of faith in both history and the future:

Markets generally do not plummet when the entire planet is expecting them to do so.  No matter where you look, sentiment stinks.  Investors, managers, cash balances, conferences, hedge fund guys, experts getting airtime – it is across the board.  I have yet to hear anyone on air or in print celebrate that we continue to make it over the mountains ahead.  Life has not ended, the apocalypse has not arrived, black swans are not falling from the sky – and markets a a tiny bit off their most recent all-time highs.

By the way – “all-time” is Italian and it means, “it has never ever, ever better before this moment in time.”

Since about six weeks ago – markets have been doing the tightening for the Fed.  Once again, if they finally pull the trigger today – they will be following markets – not leading or controlling them.  Yet another example of why this years long effort to blame the Fed for low rates has been such a bunch of sh… – uh, hogwash.  I would have used another word but I have promised to no longer speak in that manner.

I will state this as clearly as I can.  There is a reason the markets are on highs:  it’s simple. Keeping it that way in all this crazy mess we call markets is the very difficult task at hand. Here it is:   B.a.r.b.e.l.l. E.c.o.n.o.m.y.

Review Stats

Since most are overlooking that simplicity, markets continue to struggle far too much with concerns over interest rates.  The Fed may have itself in a pickle but not for the reasons so many assume.

As noted often, fear is the driver of rates in our society for the better part of the last decade.  An avalanche of money “seeking safety” has decided that this safety they long for comes to us in the form of bonds at near record low rates – or negative rates in some places.  How a vast crowd could get so twisted in their thinking is still beyond me but be that as it may, it has become so.

The issue the Fed is faced with is how does one unwind that fear in a manner where the short-end (typically the quickest to react to Fed rate hikes for example) can rise without triggering a negative yield curve while the long-end is pressured to the downside via the fear-driven rampage of buying.

In recent weeks that adjusted only slightly with the long-end rising ahead of a feared rate hike.  That noted, vast amounts of money continue to roll into bond funds at the expense of equity funds as we noted in notes for you late last week.


Are we really at the stage of underlying fear where a 3-5% fallback in major averages is defined as “volatility?”  I grabbed a snapshot below to give you a feel for what these pullbacks from highs have appeared as – in percentage terms – since the Great Recession lows of March 2009.  Let’s take a look:

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Seen from this perspective, recent “volatility” seems – well – not very volatile at all.  Let’s see if we can continue to keep our wits about us as all others lose theirs.

More Data – Solid Foundation

While way too much energy will be expensed this week on the issues of will they hike or not, be assured that no matter the decision – it will leave at least half of the audience disappointed.

If they hike, a rash of headlines will usher in terrible events coming our way due to 25 basis points more in interest costs.

If they do not hike, a rash of headlines will flood our screens about how the Fed is stuck, it has run out of tools, debt is out of control, QE is still haunting us and all that is left is to finish our underground shelters and buy more guns.

While more fret over that, what do you say we focus in on the barbell economy issues which are set to continue to drive us forward:

Builders Feeling Pretty Good

I still find it rather comical that the Great Recession we still fear a repeat of on any inkling of red ink, was wrapped around the real estate world and fraud in the debt markets.  While obvious to everyone now, the expert view back then was we would never use up the supply of homes available to live in.

The good news is we now know what forever is:  About 7 years.

Home supplies are wilting to levels not seen since the early 80’s – with population demand rising rapidly.  The NAHB just noted this morning that builders are feeling good and its index jumped 6 points to a new one-year high – leaping over expectations of just a marginal increase.

Here is the deal:  We are at a 50-year low on home ownership rates – and we have the largest generation in the history of the US just beginning to buy homes – in a vast landscape of depleted inventory.  Here in Chicago, buildings for condos and rentals are going up everywhere one looks downtown.

With cap rates on most deals still ranging from 6 to 8, one can assume more and more capital will move into real estate as bonds begin to sting more and rate-starved investors look for the next pool of investment capital to exploit.

Bottom Line:  There are tens of millions of kids who will move out over the next decade – and our shrink-wrapped, Fedex style economy with little supply ini the pipeline is not ready for the demand wave coming.

Speaking of Money

More good news – we have more of it than ever before.  Even as asset managers and investors alike see their sentiment swoon as though a multi-year bear market has already unfolded, wealth has reached levels never before seen in the US – on an overall and per-capita basis.

Keep in mind that well before all the ink dries on the various charts showing these new data points worldwide, be assured we will be told it’s all really bad news anyway, based on some “outside reason” which will surely not last – so enjoy it while you can.

Check it out:

Calafia shows us that as of June 30, 2016, the net worth of U.S. households (including that of Non-Profit Organizations, which exist for the benefit of all) reached a staggering $89.1 trillion.

Get this:  that’s about 40% more than the value of all global equity markets, which were worth $63 trillion at the end of June, according to the latest stats on Bloomberg.

Importantly, household liabilities have not increased at all since their 2008 peak

The value of real estate holdings now slightly exceeds that of the “bubble” high of 2006

And, obviously, financial asset holdings have risen since pre-crash levels, thanks to the $9 Trillion in savings deposits and gains in bonds and equities alike

One last thing:  you may recall back in housing bubble days, we were told our real problem was we were not saving enough.  Well guess what – we fixed that item.  And now?  Yes, that is correct – we are now told our problem is the consumer is not spending.

If this twisted process of media expertise was not so sad it would be funny.

Hard to Ignore

Life in the U.S. has been getting better and better for generations.

While the naysayers and those who prefer you remain afraid of the future will tell you it is all about debt and bubbles, the facts provide a far more productive view.  The typical household has cut its leverage by over 30% (from 22% to 15%) since early 2009.

Debt as a percentage of assets is back to levels seen in the late 80’s!

Households en masse have been the beneficiary of strengthening balance sheets over the past seven years with a cushion of the previously noted $9 Trillion now sitting idle in the bank.  Unfortunately, as social programs have expanded under very poor fiscal polices, our Federal government has more than doubled its debt burden over that same period.  Well, there is a legacy for you I suppose.

The Bottom Line

I could make these morning notes go for pages.  The data that one should be focused upon remains solid – but that does not mean we escape all pullbacks and chop.

Finding and focusing upon that data in a sea of negative, gut-churning, fear-mongering headlines is today’s more difficult emotional challenge.

Think I am kidding.  Check this graphic from CNBC over the weekend.  I just had to include it:

Yes – that is a train included in the picture to make sure you get the point.

Closing Thought for The Day

This remains the reason driving our morning notes:  stay focused on the proper horizon – and the growing portions of our economy.

This “weak recovery” economy is far stronger than most understand it to be.  Even though it is messy at times, we do continue to overcome many hurdles.  Recall the momentum is being driven by a very significant and rare “baton shift” in a very long race.

The fact that portions of our economy are changing so rapidly could even be driving some of the deep-seeded angst and recurring fears.  Masses don’t like change – but adapt we must.

But here is the deal:  People make markets.

We can make it more difficult if we choose – but why?

The Barbell Economy is an effort to simplify the noise and even work to eliminate some of it.  If we can focus upon the areas of the economy which are growing – and which have vast channels of demand in their pipelines, then we can begin to step back far enough from the markets to escape the emotional hand-wringing.

Chop is fine, corrective action is also a plus at times.  Long-term is the reward to the investor.  Stay on your plan, stay focused and patient.  We are in great shape for the long-term growth waves at hand.

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

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