Good Afternoon,


For many stocks this has been an ugly earnings season.  That’s not because of results but because of reactions.  While I always say I will ignore what near-term reactions unfold in markets due to ill-perceived emotional events, sometimes it surprises even me.  The good news?


When a company surprises to the upside, speaks positively about the pipeline and demand and then watches their stock get shelled for some other odd reason, like, “the stock had run up into earnings”, then long-term investors can realize over time that the stock just became more valuable.  Sadly, it’s the classic “buy the rumor, sell the news” type of action which is focused on just one thing:  movement.


The better news?  For now, the second busiest week of Q2 announcements is a few hours a way from being “in the books.”  Then?  The rest of August.


Results So Far?


Stats are good – with some broader issues unfolding behind the scenes which merit our attention:


First – warnings were very light coming into the season which we had noted in early July. This becomes important when one realizes that this comes on top of easy beats from a significant portion of those reporting.  Cap this off with very light overall reductions in Q3, Q4 and 2018 expectations (recall it is normal for these things to trail off as each earnings season unfolds) – and you get a solid backdrop of growth ahead.


My hunch?  Global recovery is finally helping pull the economic cart up the mountain.  For so long, the world waited for most of the work to be done by the US economy.  Finally, the weight is being distributed.


Note:  the correlation between massive fears about the “euro” collapsing as it was “setting multi-year lows” just a summer ago and the now “robust numbers coming from Germany” is not an accident.  It’s math.


So highlighted, what is everyone chattering about now in the currency world?  A weak US dollar.  Yes, for those keeping record, that is the same US dollar which started out 2017 in the news as well.  The “genius” assumption then being used to scare you?


“Be warned:  The dollar’s strength is very likely to continue and will harm 2017 earnings.”


Shifting Sands


Back at the ranch – another 1,000 point notch was made on the Dow – even as the equal-weighted S&P 500 stands just a tad bit higher than +8% for the year (a much safer way of seeing that the broad market is really up to – and not the oft-quoted major 3 indices.)


Jobs remain solid as was seen today in the data beat.  Wages are growing but be assured someone will complain and tell you why it’s bad and something to fear.  Many remain on the lookout for that inflation monster, ISM’s remain near highs, rates remain near lows.


On rates, note again that a few weeks ago when the latest fear and angst about rates exploding upward began, the 10-year was at 2.17%.  As I type – after the jobs beat and much higher earnings results as noted below – that 10-year is rocketing higher, to 2.28%.


Yes – it is higher – but we have lived and the economy has growth with rates much higher.


Keep in mind that it is normal to see, for example, dividend payers, see their prices get hurt during periods of feared rate increases.  We have a hunch there are no more this year – and if there is one, the market has already assumed it.  What one usually sees in the dividend growth world is this order of events:


Fear sets in over rate hikes

Prices fall as “bond competition” rolls in (real name is fear trade)

Prices stabilize

Dividends increase a little faster over ensuing quarter or two

Prices return to their long-term trajectory upwards


Key words in all of that?  Long-term and fear.


You see, there is only one emotion which truly causes one to move into this thinking process:  “Gosh rates are rising to (pick a number) 3.10%.”  Gasp.


Next thought:  “I better move capital to that 3.10% for 10 years because it is now competing more with my 3.90% dividend income stream growing at 7% a year and adding cap gains opportunity over the same 10 years…and it’s ‘risk-free’….”


While it is non-sensical as always – it is driven not by logic but by an enormous fear of the future – now nicely coined “economic uncertainty.”


On second thought, I suppose that does sound smarter than “terrified.”


Back to the Earnings – and then a hint on Sentiment!


Results from 350+/- S&P members are in.  Total earnings are smashing expectations – and up 11% overall.  Revenues are 5.9% higher than last year.  Beat rates are higher still with 74% beating earnings and 68% beating revenue expectations.


Keep in mind, there are still 150 more to come in the S&P 500 alone.  If they merely meet expectations, growth overall will come in around 9.7% for earnings and 5.3% for revenues over last year at this stage.


Yes Q1 2017 growth rates over last year were higher indeed.  Just recall as noted earlier this week in your updates, that this is against a much lower bar set in the ugly Q1 of 2016. It is perfectly normal to see the pace of growth subside a bit as you get farther away from the bottom of the pit.  It’s all math.


The good news?  All-time record highs in almost every category from cash flow to assets on balance sheets.


While the 2018/2019 numbers will surely change, the Street analysts are penciling in +10.9% for 2018 and another 8.6% for 2019.  The point?  They have been behind the 8-ball since the Great Recession.


Where Did Sentiment Move?


Hey, guess what?  Bullish sentiment rose!  Slightly.


The title of the day comes from this topic – showing that for a record 135th straight week, the bulls remain less than a majority. This as a total of 15 straight 1,000-point markers have been breached.


Let’s read the tape:

Here is where it gets interesting.


Even after a rise these last two readings, we are still in the 30’s and sitting in the bottom 15 percentile of all historical readings of this data back to the 80’s!


Further, just there was a big move from the neutral camp.  Recall a few weeks ago, we noted here that when you see high neutral readings, the historical norm was to see them move to the bears camp.


Sure enough, this week there was a big drop in that category – 9.4%.  Guess where 80% of them went?  To the bearish camp.


And this during the week yet another 1,000-point marker was breached.

At any time in history, had you and I been shown the sentiment data alone, the very last thing we would assume, knowing nothing else, would be that markets were meandering around at all-time record highs.


I will be afraid when everyone else is excited – and the money is following.


With more than $10 Trillion sitting scared in the bank, and trillions more in bonds and passive ETF’s, we are nowhere near that now.


Think demographics – not economics.


Patience always stands as the tougher requirement – especially during the worst of the summer churn and haze ahead.


Sadly, one needs to just trudge through this and focus on the long-term, working hard to ignore the scare tactics in the headlines.


Enjoy the beach and travel plans ahead.  Time with loved ones and friends is sacred – enjoy, be well and please travel safe!


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