“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.

You need to keep raw, irrational emotion under control.”

— Charlie Munger


Good Morning,

What a week.  The “pre-earnings” roller-coaster continues.  The chatter and the growing problems are becoming incessant.  The louder the noise, the less likely the topic is set to be a real issue.  The real issues of concern are the ones that come out of left field when no one expects them.

When everyone is already talking about a problem, it is generally 70% past us.

Oh yes, and there are plenty of problems.  Supply-chains, inventory, worker-shortage, inflationary spirals, dollar rising (recall right before this the problem was that the dollar was falling), etc., etc.  The comedy of course is the mixed-messaging being shouted from the rooftops and breathless screams and the all-too-often-used terms like, “collapse”, “plummet” and “dire” just to name a few.

For example, why would the dollar be rallying hard if inflation really was here to stay?  Likewise, we are still 25 basis points below the early-Spring bounce in rates (up to 1.77% at the time) for the 10-year, and that is after multiple “dire inflationary indicators…”

The bottom line?

The shutdown effects are indeed still rippling through the system.  As the summer began we suggested it would span “2 -3 quarters ahead” and we suspect that is still the case.  When you pay people not to work in a growing economy full of change, then you can expect the results we now have:  shortage or workers where needed, rising costs until equilibrium is met and a massive squeeze in getting things moved around.

The main point?  Rest assured this is much better news than is it were the opposite:  no demand, slowing economy, lagging jobs needs, rising unemployment and a falling JOLTs reading (instead of all-time record highs).

For sure – the darkness and ghosts of Hallows Eve are visiting quite early this year.

What Everyone Is Waiting For…

Take your pick on the current poison of choice:  Notice Covid has become a shadow of its former self.  Instead, it is debt deadlocks, budget fights, debt-ceilings, government shutdown, inflation concerns, interest rate concerns (at all of 1.54%) and political infighting.  Plenty to choose from – little good to come of any of it.

The more vital focus is the underlying current:  which remains strong and expansive.  Earnings from the last two quarterly reports were so massively outsized, as the system opened back up, that most in the analysts community were left with their heads spinning.  We can count on the idea that “catching up” to the new world and the early stages of massive digitization across all sectors and business models.  The CAPEX curve ahead should be significant – but, and this is a key but – the government will need to get through its antics in DC for corporate spending to be unleashed.

This is not anything new – so let’s stay focused on the good:

Estimates for 2021 Q3, whose early reports have started coming out, are NOT going to move up as much as had been the case in the comparable periods in the last few quarters. That said, the revisions trend remains positive and could very well gain steam as the reporting cycle gets underway.

Total Q3 earnings for the S&P 500 index are expected to be up +26.1% from the same period last year on +13.8% higher revenues. This would follow the +95.0% earnings growth on +25.3% higher revenues in Q2


Problem?  Yes – the squeeze on the system overall is driving cost pressures amid the supply-chain disruptions and labor/material shortages noted above will keep the spotlight on margins, which are expected to be up year-over-year as well as sequentially in Q3.  This “margin trajectory” over the coming periods will be a key source of chatter over “uncertainty in the earnings outlook” given “the lack of visibility” with respect to the duration of inflationary pressures.

By the way – just to clear things up:  there is ALWAYS a “lack of visibility” when discussing the future.

You’d think most would have figured that out by now since it has been that way…forever.  But, alas, for some reason when someone utters, “Bob, I really cannot give you specifics due to the lack of visibility….”, they sound so much smarter and on the ball.

I digress.  The momentum in “pace of growth” has clearly stalled this summer as noted.  That’s ok friends – and should be completely expected.  One cannot post massive gains and then continue that same pace of growth on top of new records.  It simply is not the way compounding unfolds.

For the year, the S&P 500 earnings are projected to climb +42.7% on +13.6% higher revenues in 2021 and increase +9.6% on +6.6% higher revenues in 2022. This would follow the -13.0% earnings decline on -1.7% lower revenues in 2020


Keep this in mind, those growth rates (very likely to still be short of real-time aspects) imply the following annual S&P500 earnings levels:

The implied ‘EPS’ for the S&P 500 index for 2021, as of September 28th, is now $193.38, up from $135.53 in 2020.

The index ‘EPS’ works out (currently) to $211 – $220 for 2022, and then,

Somewhere between $233 and $245 in 2023.

Think about that for a second:

As the New Year arrives in a few short months, we will begin noting that the S&P 500 is priced at a sub-19 P/E on 2023 earnings.

Like I said, the ghosts and goblins have arrived early this year.

As ugly as it is when these periods of fear roil the market, the focus is:  bring it on.

This battle likely has another few weeks to go – and then the next foundation should be set as fears continue to support more surprises to the upside.

Fears are once again settling in deeply:

Note there are again far more bears than bulls in the latest AAII data for today


Notice that we now have 40% more bears than bulls, with 72% of the audience not liking the stock market over the mid-term.  The fear and greed index agrees – to the tick


Be assured, while the number can indeed remain choppy, then nearly 3/4’s of the crowd is already out – the market is entering the “upside is the surprise” stage for the next move up the mountain.

Patience and discipline remain your key allies as we trudge through the rest of this fog.


Until we see you again, may your journey be grand

and your legacy significant.