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End of the World…

Good Morning,

Fifteen years ago today – the entire world was numb.  Most had not moved from their television screens for many hours as the fires from Ground Zero still burned and reality was just setting in.

What a pathway we have been on since.

Yesterday, as I recovered from jet lag coming off the Hong Kong trip hours before, I watched “Sully” as we were at the same time marking the 15-year anniversary of the 9/11 attack.  It was a blessing to recall the Miracle on the Hudson with the New York skyline in the background.

All at once, we were able to remember how we call came together at one time – twice.  It was a flood of emotions seeing how well Americans can do things together when all the chips are on the table.  Oddly, as I relived the real-life events the world watched on the Hudson that day, it struck me that without the lessons of 9/11 years before, the miracle may have had a different ending.

Numbers

Everyone is likely focused on the 400-point drop in the DOW on Friday.  Here are some interesting numbers as well:

Flight 1549

Souls on Board:  155

Length of Flight:  208 seconds

Deaths in Accident:  0

Incredible.  If you have not yet seen the movie – do so.  Take a box of tissues.  Enjoy.

Fear Returns

Last week we covered the consistency of fear seen in many indicators for months on end. We have covered the record-breaking lack of bullishness in the crowd even as record highs were reached.  I stated three things throughout the summer lull:  a) more red ink would make them even less bullish, b) fear would be quick to return and c) pray for a correction.

Well, Friday’s abrupt about face sure woke everyone from their summer slumber.  The Friday evening media flood and weekend articles in anyway related to markets or the economy were filled with the expected dire projections.  I love this one – it was the ominous theme of the weekend:

“A Correction is Coming and There is Nothing You Can Do About It”

Let’s hope so anyway.   Readers of these morning notes are not surprised by the events of Friday.  It is perfectly normal to see a market move back into previous breakout ranges for support.  The summer bounce was shaved by a chunk in one day as volume spiked and the crowd quickly showed their real feelings about risk: they want none of it.   Oddly enough, this is just what you want to see.

The problem?  The structure of corrections is changing.  Machines, stops, too many “hedging” tools and public fear all work to make these seem more volatile than they really are in the larger picture – but they end quickly.

The reality?  Most investors are in cash and bonds – extremely underweight stocks.  As a percent of the large crowd – few likely did anything on Friday though the media process will lead you to believe it was massive.

Don’t fall for it.  It’s a game that has been played since time began.  While all that we fear unfolds – parallel to that same track – history proves markets rise over time.

I have stated the same for years here.  Show me some red ink – days or weeks – and I will show you a crowd quickly become as afraid as they were in the final weeks of the Great Recession bear market.

Put Away Your Sharp Objects

Ok – yes, Friday was a bad day for bonds and an ugly day for stocks. The S&P 500 plunged 2.5%, managing to find support at 2015’s highs (see chart below).  The VIX rose from 12.5 on Thursday to a 10-week high of 17.5 on Friday.

Any Good News?

Long-term investors need to remain focused on the cushion provided by the Barbell Economy.  It shows consistency as well:  Yes, it sells off along with markets – but the cushion remains steady.

Don’t overlook this unrelenting fact:  The Barbell is where most economic energy is being exerted as the two largest generations in the history for the US churn forward – slowly and steadily.

Better News?    

The forward P/Es of the S&P 500/400/600 dropped sharply on Friday to 16.5, 17.5, and 18.3.

Meanwhile, the forward revenues of these three stock indexes rose to new highs during the first week of September.  Forward profit margins also continue to firm as we edge closer to the energy debacle round-trip.

The bottom line?  Well, while most fret over short-term price action and run again from stocks, the top and bottom lines of the S&P 500 are looking very good according to the consensus of reports – even as struggles will continue.

The overall business environment remains extremely competitive and that process increases at each turn.  Companies main focal point remains simple:  stay laser-focused on cutting costs and maintain/improve profit margins.

Oddly, these are not events history suggests investors should be running from.

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 Two Charts Above

The first chart shows you the trade ranges we covered for close to two years as the markets worked through their “earnings recession” and fears became deeply embedded.

I had recently noted being surprised we had not yet seen markets go back and test the breakout region from mid-summer.  In the long run, it is very positive to see this unfolding now.   I am confident we will find this to be a productive step in markets even though I do not expect it to cause anyone to rush in and buy stocks (also a good thing).

On the contrary, if it can last for more than a couple days (the Brexit panic), I suspect we see continued outflows from equities, inflows to bonds and a more bearish tilt in sentiment.

Note the red line at the bottom of chart 1 above.  It highlights volume levels.  After being paltry all during August (expected) they quickly rose on Friday as selling ensued.  Why point this out?  We reached into the region of volume pace which typically goes along with the end of things – not the beginning.  How quickly we panic these days.

The second chart is a great one from Dr. Ed.  As noted above, forward multiples fell sharply on Friday as markets shaved points and the forward earnings increased.  As such, take an extra moment and let your mind-eye gaze backward across the paths of green, blue and red lines on the second chart.

You will note that forward P/E ratios have now fallen back in all three weighted indices:

For the large caps – we are back to levels first seen in late 2014.

For the mid caps – we are back to levels first seen very early in 2014.

For the small caps – we are back to levels first seen in late 2013.

Pretty soon – all we will be discussing is 2017 and 2018 projections.  Let’s face it:

Time flies when you are witnessing a secular bull market grind its way higher as almost no one believes in it.

Generation Y is Deflationary

Years from now this will become more clear for many.  The technologies, from apps to the cloud, which are being unleashed on our economy by Generation Y – are very deflationary.  That’s not something to fear – as it creates a nice balance in the structure of things.  It also helps margins expand and – in time – they will flourish as Gen Y moves higher up the corporate ladder.

We can see it real-time today.  After being warned for years that QE would destroy the value of the US dollar and that inflation would burn us all – the exact opposite has unfolded.

Today we are told the strong dollar is hurting overseas profits and experts are nearly begging for inflation.

Far from the beckoning fears and expert calls for the ghosts of inflation, rates remain subdued near zero. There continues to be significant undershooting of actual inflation rates and the 2% inflation target of the BOJ, ECB, and Fed for their favored measures.

In the US, the core personal consumption expenditures deflator, excluding food and energy, was up 1.6% y/y for July.

Meanwhile:  average hourly earnings rose just 2.4% y/y during August, the competitive pressures of which were covered in your notes last week (see links above).

Silent Period?

As the window of time closes for any FedHead to chatter about US rate hikes, all eyes now nervously await the idea of whether or not 25 basis points will crater life as we know it.

Please guys –  take a breath – count to 1000.

Check your Barbell Economy Portfolio data and relax.

Let them chatter, let them meet, let them raise.  How many times have we collectively (and unproductively) been convinced to fear things since 9/11?  It struck me over the weekend that the correct answer is:  far too often.

A rate hike or two will mean almost zero to the average company – even less to many others.  Our fears have become monsters that wreak havoc only on emotions – and because of that, very poor long-term investment decisions are being made.

As much as I know many do not feel this way:  these fits of mini-panic tend to be good for the market.  Study history – your best results come right after the worst pricing nightmares.

They feel bad for a little while – and then pass.

In Closing (Broken Record Warning)

Step back and focus on demographics – not economics.

We are in far better shape than understood by most.

Effectively navigating this massive “baton shift” underway between powerful generations requires patience, planning, discipline….and on days like Friday, a steady 8-week supply of the new fruit-flavored TUMS.

Did I mention patience and focus?

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

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Jason No Comments

Beige, Red, and Blue

Good Morning,

Hope this note finds you well.  I am sorry for the late note – am flying back from overseas after a 4-day conference – jet lag and all.  Back to normal schedule each day to start the week.

So the last couple days were filled with new Apple colors and Beige Books.  Today – it’s all about this noon-stop enchantment with the Fed and rates.

The beige book told us things were pretty steady – not much different than a normally slow August.  A couple regions were slower, a couple faster and the consumer was steady. Bank of America’s Moynihan told everyone this morning that the consumer is healthy with retail sales up 4.7% YOY in the latest data.

Here’s an idea:  Stop paying attention to the world in 30-day soundbites.  You have much better things to do.

Meanwhile, the media is telling us what they always tell us:  dreadful things await. My hunch is they speak of nightmares packaged in 25-basis point rate hikes.  Geez.

As I have suggested for months – pray for a correction.  Could this be it?  Maybe.  If so, fantastic – in a word.  We get another great sentiment washout (watch how quickly fear spikes), finish up these ridiculous election campaigns, gag on which ever one of these morons wins – and then…boom:

We all get on with life and the very surprising growth demand ahead.

Don’t worry, the howling at the moon will continue all the way up the mountain.  The need to sell fear and the readiness for the crowd to buy it is like throwing a bag of crack into a drug house.

A Big – Rapidly Changin’ World

As I peer over the harbor of Hong Kong and watch a storm roll in, the city lights go dark behind the clouds and rain.  I am listening to a rehash of the other news of import in the last few hours:  the long awaited Apple announcements.

I’ve picked up a couple interesting tidbits and some really, really idiotic comments from experts covering the release.  I mean this is numbskull kinda stuff.  Check it out:

As they were covering the new Apple Watch, Version1 was called – and I am quoting, “Nothing to write home about yet.” That reference came from a reporter on CNBC.  He then went on to say, “Well, Apple has only sold a little over $5 Billion in watches in the first 15 months…”

Just to be clear:  My brain went numb after that.

Two thoughts:  We have “reporters” giving us news who feel a brand new product revenue launch of $5 billion is not good enough?  and – Investors actually listen to this crap still? While I am no Apple hype guy, let’s be real:  name one other company in the history of companies which has created multiple multi-billion products from scratch – this quickly.

The best news about Apple is not their product – it is more important to contemplate what their product does, how it empowers, what it unleashes and the wave of productivity it pushes – non-stop.   But that’s for another note…right?

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Another interesting piece:  Apple now does $28 Billion a year in service revenues alone. All by itself, their services unit would be a Fortune 100 company.  Put a 15 cap on that net and add in their $260B in cash (I think the reporter above overlooked that little asterisk). You get $540B of their $560B market cap.  Someone missed something somewhere.

The Pentium Chip from Intel which powered Microsoft Office back in the mid-90’s had 3.2 Million transistors on it – a mind-bending number back then.  The new iPhone 7’s chip carries 3.2 BILLION transistors.

And we are bitching that they took away the earphone plug?   I cannot decide whether to laugh my ass off or leap from the nearest first story ledge.

I find it stunning we have reporters asking from their perch just outside real work whether or not Apple “under-delivered”.  Are we forgetting the $260 Billion in cash again.

My point?  We have gotten way, way too lost in data and noise and impatience and media “expert” stupidity.

Brexit Who?

For those on vacation this summer it would have been easy to miss market selloff surrounding the UK’s vote to exit the European Union near the end of June.

Recent economic data seem to support the idea that the UK is quickly rebounding from any economic slowdown in the immediate wake of the June 24 vote. A service sector index rose to 52.9 in August, up from 47.4 in July.

The 9/5 WSJ reported, “Monday’s results follow a strong reading of the manufacturing sector PMI index, which last week posted the joint-largest month-to-month jump in 25 years, placing it above June’s pre-referendum level. Official data last month on retail sales showed Britons shrugged off the referendum result in July and kept spending, while a long-running household survey carried out by market research firm GfK Ltd. found consumer confidence recovered in August after collapsing in July.”

For those needing something to fret over, not to worry:  the EU economy’s expansion slowed slightly in August. IHS Markit’s Purchasing Managers Index for the Eurozone fell to 52.9 from 53.2 in July.

Best idea to come from this menagerie of unwarranted fear?

Next summer, let’s remember that going to the beach can be a good business decision – for you and your portfolio.

Tight Quarters

For those feeling a bit hemmed in the last few weeks, it appears we have set yet anther record in the technical followers camp.

Check the chart below:  For the last 40 trading days – a window spanning back to mid-July – the difference between the S&P 500’s highest and lowest daily closing price has been a razor thin distance of just 1.75% (today is the exception – but should run stops pretty quickly – perfect).

Shocker?  It should be – it’s a level of thin sideways trade the US stock market has never experienced before.  The chart shows the 40-trading day high/low closing price spread for the S&P 500 since the index began in 1928.  Never has a 40-trading day period seen a lower spread.

Think about it:  as the all-too-feared Brexit vote unfolded and we edged into the tail-end of this terrible Presidential run, the stock market embarked on its flattest trek ever.

The chatter is having its way.  The noise is once again clouding judgment.  How many times have we seen these fits?  This is good for the market.  Give us a week or two – or three of red ink.  Maybe even a mini-panic.  Then, study history – your best results come right after the worst nightmares.  They feel bad for a little while – and then pass.

Like it or not – every single market return number you have ever reviewed – was riddled with these same types of “setbacks” hidden in the trail up the mountain.

Take a deep breath – red ink is a friend to the long-term investor.

Think demographics – not economic.  We are in great shape folks.  Just takes patience, planning, discipline….and a steady 8-week supply of the new fruit-flavored TUMS.

Did I mention patience and focus.

Have a great weekend…the fog will lift sooner than we fear.

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

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