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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

The Fallen

Good Morning,

As you may have expected from previous notes about the topic, sentiment continues to falter on every little hiccup in markets.  I know 400-points down sounds like a lot – but from an 18,500 starting point?  Really?  Not.

Indeed, for the mass audience and the media, 400 points down now immediately triggers the 2008-2009 video reel library and Black Swan chatter abounds.

When will it end?  Likely at much higher prices, with far, far less than $9 Trillion sitting in the bank.  It will be when “bond” has become a new 4-letter word marking foolishness and almost no one remembering anything bad about markets or equities.  In other words – a long time from now.

Sentiment Wilts – Again

You did not expect otherwise did you?  The snapshot below is clear:

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 Fallen and They Can’t Get Up

Here is what we have for the bulls now for well over a year++:  When the market goes down, bullish sentiment retreats while bearish sentiment spikes – ala this past week.  The kicker is this: when the market does manage to fool the masses – and rise, bullish sentiment barely budges – more or less staying steady.

In the latest week, which obviously includes the ugly couple days starting on Friday, bullish sentiment declined from 29.75% down to 27.94% – or nearing again the levels seen at the bottom of the pit in 2009!  More amazing?

This also sets another record:  the 46th straight week and the 80th time in the last 81 weeks that bullish sentiment has been below 40%.

Said another way – 72% of investors surveyed nationally don’t like the stock market.

At what level do you think they will like it?

Surely not at lower prices.

While bullish data is still a brain-bender, bearish sentiment spiked quickly this week.  As selling cascaded into the market, bearishness went from 28.48% last week to 35.92% this week.  A quick check will show that 7-point increase was the largest since mid-June (yep – Brexit days).

The fact is – fear runs deep.  There is still a constant emotional reaction, widespread among individual investors, to the risk of being left with no chair to sit in “when the music stops.”

Hauntings of 2000-2003 and 2008-2009 remain as fresh as yesterday.  At the first hint of trouble, sentiment shifts rapidly.

Long-term investors need to be very grateful this is still the case.

Technical Review Backdrop

I prepped a short little video review of the SPY charts from a technical perspective.  I figured you may find some time over the weekend to review.  The upshot?

Markets are doing what they normally do – testing breakout regions and building price supports.  This chop is actually health for the long-term structure one wants to see.

You can view the short video here.  It just takes a few minutes.  I hope you find it helpful.

Improvement Anyone?  

While red ink hits the market for a bit, it may be too early to brag about improvements but we must.

Seems the manufacturing data are improving – again.  I suspect this matches up with data in recent weeks from other regions as well – all showing that the pain felt in this sector (driven primarily by huge setbacks in energy-related orders output) is slowly abating.

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 I know – red ink makes it tough to look forward – but that’s where the money is made.

The Empire State Manufacturing Survey chart above is a series of diffusion indices distilled from a monthly survey of New York regional manufacturing executives and seeks to identify trends across 22 different current and future manufacturing related activities.

Yesterday’s release showed a general improvement for both current and future assessments of manufacturing activity, with the current activity index rising to a still contraction level of -1.99, while future activity also increased, rising to a level of 35.43.

By the way – the latter is nearing highs seen in all of 2015 and 2016 – another hint that we are burning off the energy negatives.  Slowly but surely.  This is also part of the reason it has felt like that US economy has been walking through quicksand.

One more note:  while everyone complains about AI – let’s be thankful some robots exist. If they didn’t, who would man the factories which are producing near all-time record output?

Heck, homebuilders are short guys who will build houses – they can’t find enough of them.

Imagine trying to staff a new factory with just people.

Be thankful that robots are coming to the rescue instead of fearing the advances the technology shift provides for the rest of us.  Thank Gen Y for the push.

Results and Bearishness

An interesting piece from Morningstar, the creator of those God-awful “style boxes.”  They out out an item on fund managers results with data up to the end of August and covering the last 5 years.  It’s pretty ugly.  Take a look:

Here is the simplicity of the back-drop to this data which is most often overlooked when reading the bullet points.  Having been one in my career and with some of my very best friends being great fund managers, most do not recognize the culprit lurking in the background of this data.

It’s emotion.  The very knee-jerk reactions that so often quantify terrible judgment in hindsight.  In a nutshell?

The fund manager tends to see significant withdrawals as prices wilt.  This causes two things: a) a demand he / she sell when prices are low to meet redemptions and, b) a lack of capital to buy stocks while they are cheap.

On the flip-side, the fund manager tends to see inflows only after markets have risen. They are then faced with having to buy the very same stocks at higher prices.

Sounds simplistic – but the public tends to see a mirror image of their emotional reaction waves ripple through the “results” published by the fund manager world.

Last on this front – be careful what you wish for:  ETF’s are not what most people understand them to be.  They are becoming one of the primary causes of the chop we see when sell alarms do ring.

Long-term investors cannot possibly believe that the massively increasing wave of double-digit moves in specific stocks, seconds after an earnings note headline is released, is driven by John Doe and his broker, right?

Closing Thoughts

We hope you have a wonderful weekend.  Check the video above.  The fears of yesterday still haunt markets.  That’s good.

I have stated this repeatedly so let’s keep it in mind:  anytime you think people are too bullish – just give me a few days red ink and I will show you a terrified crowd again. This week is no different in the larger view.

Setbacks are your friend if you remain focused on the long-term horizon, and what is shaping up here in the US.  As much as the media coverage only covers the dark views, many parts of our economy have never been better.

Seeing through all the pitches in the dirt is critical – and it is what investors get paid for – taking risk.  Very significant waves of demand are building in our economy.  As is almost always the case, those understandings will not be clear in the mainstream until they are obvious.

And count on this:  when demand is rolling ahead rapidly.  When we start hearing of shortfalls, when Gen Y footprints are everywhere to be seen and months of waiting for some product pipelines becomes clear to all – we can be absolutely certain that terrible news will cloak all of those events as well.

Stay focused, stay patient, stay on your long-term pathway.

The Barbell Economy is unfolding as expected.

The chop in the market is healthy and a benefit for long-term investors.

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

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