Good Morning,

 

Funny how things work sometimes.  This weekend as Irma mowed over Florida and thankfully, jogged right around our region – leaving mostly just lost power – I was reminded of a verse from the Sunscreen song:

 

Don’t worry about the future or worry but know that worrying
Is as affective as trying to solve an algebra equation
By chewing bubble gum
The real troubles in your life are apt to be things
That never crossed your worried mind
The kind that blindsides you at 4 p.m. on some idle Tuesday
Be assured, as Max was getting checked in for his new school, the very last thing we were thinking about was a Cat 5 hurricane.

 

I will say this though, and I mean nothing negative here – the Weather Channel guys have almost overtaken the financial channel talking-head guys for the ability to “get attention” as they say. Heck, I’d argue that a few of those guys “on scene” deserve an Academy Award nomination.

 

All jest aside, we wish the very best for all who were in the way of that ugly storm – even as many can be very thankful that it weakened quickly once it hit the state.

 

And Now for The Better Stuff…

 

Hey, not much changed in the last 72 hours.  The investor audience remains very nervous as your sentiment data vividly shows – even as we tip-toe around new records. Just remember, when you are already at a record, one more point is another “record” but not really right?  You get the drift.

 

Also recall, the best selling headline on Wall Street is always going to be about the “thing” that will end the bull market.  It will always be the most hyped, it will always be the toughest to work against and it will almost always sound the smartest.

 

Meanwhile, notice the perception in the crowd of those who suggest good times are coming – better than most expect.  It often is seen as “too risky” or outright “unaware of how bad things are….”.  Comically, even as the NASDAQ is now at record highs as well, I can recall the very same crowd’s perception when we spoke of trouble in paradise in early 2000.

 

Then, importantly, it was deemed as foolish to own anything other than tech stocks. Today that same psychology pushed the masses to load up on 10-year paper at 2.10% while shunning household names growing at twice the rate.  To prove this insanity further still, the same 10-year paper earned between 8 and 9% back in 2000, when it was scoffed at for a shot instead at Dell, Cisco and anything “.com”.

 

Indeed, times change – but people usually do not – in masses.

 

The Calendar

 

This is a normally sloppy time of year with little real direction.  We can wish it were different – but like most times – it does serve a purpose in the grand picture.  As this time of year passes – usually until we get to the earnings warning period for Q3 data (a couple weeks off still), fears grow, angst increases and trepidation is the name of the game.

 

Investors look for any clue of the next curve ball.  There is a reason we have a phrase “wow, that was out of left field…”  It’s because it is a surprise.

 

Trying to guess (and believe me – it is a guess) the next curve ball is a fool’s errand and a sure route to poor results – along with higher blood pressure.  Just re-read the verse above.

 

The Big, Big Picture

 

Ken, Sam and I always feel a little bit frustrated in that demography takes time roll over us like long waves at the beach.  They come in sets – but they last for decades.  The ripples go far and wide.

 

This knowledge helps to instill the most valuable asset any investor can obtain – patience.

 

Patience to let the growth unfold

Patience to outlast the constant fear mongering

Patience to build confidence upon

Patience to keep the emotions still

 

Long-time clients and readers know that I spent many years as a kid ocean racing sailboats.  It was a dream.  Indeed, many life lessons learned in the middle of the largest storms we faced.

 

Only when we faced them, there was no one there.  No phone to call, no cell, no internet – just howling winds in the wires, rippling of the sails, huge water over the bow, significant waves ahead and behind and, what seemed like a very tiny boat.

 

I am so grateful for those periods and for the guys I sailed with – I was the youngest of course.  Some of their advice as we plowed through storms:

 

“Mike, don’t listen to the wind…watch the bow and look forward…always forward..”

“Mike, look past the waves – focus on the current…”

“Mike, storms are not idle, they don’t stay – they pass…”

 

Notice how much of that can be valuable in your investing outlook.  Just a thought.

 

Here is the deal:

 

Our economy is transforming into a monster.  A productive, highly advanced machine that will take us to heights we can only currently imagine.  Your reward will come from your willingness to think beyond the “day-to-day” heartbeat driven by fear and instead, let your mind take in the larger reality.

 

The Boomers will still do many great things.  They changed it all.  They created more wealth any generation has ever accumulated.

 

Generation Y will do even more – with better tools, better minds, better processes, better technology and better outcomes.

 

Patience…..

 

The Barbell

 

Together, they make up the Barbell Economy – a rare structure indeed – and one that is set for the US for the next 30-40 years.

 

Winners will be patient

Losers will be traders

Winners will plan, act and stand strong

Losers will always react

Winners will be confident in history and people and demographics

Losers will react to every new headline (there will be few good headlines)

 

Ask yourself this:  How many ads do you think the Weather Channel would have sold had the headline been:

 

“Irma will be very, very tough – lots of power will go out but we will come back stronger in a week or two – so be patient.”

 

Not nearly as eye-catching or heart-stopping as,

 

“Largest Hurricane on Record Set to Devastate All of Florida.”

 

Some may wonder what that has to do with markets and investing.  My answer?

 

Far more than you may realize.  It’s all about our emotions, perceptions and the ability to control one’s mind while all others about you are losing theirs.

 

I like this quote from Mr. Emerson:

 

Shallow men believe in luck.

Strong men believe in cause and effect.

Ralph Waldo Emerson
Let me Bring This to a Close…

 

Many will tell you things must end.  Heck, we have been hearing that the entire trek up the mountain.  I have heard it since DOW 970 in 1982.

 

Reality shows us a few different things though – but we must retain the strength to stand in the storms even as our emotions wilt at times.  It is that strength that builds the patience which brings us the rewards – over time.

 

Last for now – they always tell us markets are overvalued.  Not really.  Let’s check:

Great chart from Calafia above.  Some background which has been covered before so please forgive the repeat:

 

Back then I observed that stocks were fairly valued according to a standard measure of P/E ratios (prices divided by 12-month trailing earnings per share from continuing operations). Values are best measured against quarterly annualized measures of after-tax, adjusted corporate profits that is produced in the National Income and Product Accounts (NIPA).

 

This measure of profits is based on information supplied to the IRS, and it is then adjusted for capital consumption allowances and inventory valuation. It’s been calculated the same way since 1947, and we can be reasonably sure it doesn’t artificially inflate profits (who would overstate their profits to the IRS?).

 

Art Laffer long ago taught the value of using NIPA profits. He called it simply “true economic profits.”  Using this measure, which is calculated quarterly, also gives us a more timely measure of profits, compared to using a 12-month average of profits.

 

The bottom line – stocks are not historically overvalued when compared to previous trouble spots.  For a good framework in your mind, check the tech bubble times, the early 60’s, early 70’s and mid-80’s are good as well.

 

Closing Thoughts

 

All is good – chop should be expected.  It’s the calendar, not the economy.

 

If by chance, you leave a VM on my cell and it does not get immediately returned, try a text – they seem to be working better than VM for the next couple days I suspect.

 

Let this chop unfold – the best data says we are in fantastic shape for long-term investors.

Hey I know this is confusing and the headlines are always tough on everyone.  Chop and churn and in the end is good for the market.

 

When we pass these seasonal weak spots on the calendar, the stage will be set with a solid undertone of fear.

 

It is the oldest tool in the stock market war chest:  the wall of worry.

 

Don’t become a part of it – benefit from it instead.

 

Stay focused on the Barbell Economy and demographics.

 

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