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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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