Good Morning,

Well, sadly the extreme churn we had noted as the year ended for potential set-up for the earnings season launch for Q4 has been unfolding.

These near-term events are creating the trade range revisits, internal lashings, extreme weak hand liquidation and all the lower lows in sentiment that long-term investors want to see for the next foundation buildout – and the next trek up a very long mountain of growth ahead.

Before you read further, I caught this old quote over the weekend from Mr. James Grant who interviewed me years ago – it is about emotions – and their strength to literally blind the investor audience:

“To suppose that the value of a common stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Welles when he told them martians had landed.”

~ James Grant

The issue that is distasteful in all of these unsettling phases is, of course, the process of going through the storm.

In very short order – the misery/emotional process of scorn has turned on Tech.

It is rapidly turning into the most hated market sector, even as business and demand records are set.

Chips are exploding, demand for tech is exploding and corporate capex into tech – for 2022 and beyond – will only be in excess of what it was in 2021 and even the year before.

In a word – incredible – yet also, so opportunistic if patient.

Another word? 

A gift – with an extra dose of patience demanded.  Keep in mind that Dividends, the bulk of most portfolios are doing just fine – thanks – so stability is pretty reasonable.  This Tech shellacking and hating of all things Tech will pass as weak hands finalize liquidations.  That could carry on for a bit longer — but it will be vital to watch what is being overlooked.

Earnings Strengthening

You may recall in the last couple weeks of the year, we noted for you that the analysts were ratcheting down earnings growth for Q4 data from a peak of 19.9% YOY to about 19.0% right at the last week.

Oddly, enough, even as we are told inflation is all the rage – and here to stay forever now – quietly – those earnings expectations have already risen back to the previous highs at 19.9% growth – and the season’s surprises have not even begun.

…we will, or course, track as they unfold – and we remain confident we can expect the number to be missed badly by scared analysts – just like the previous 12+ quarters

 

The reality is this:  this will be repetitive but helpful:  one much prefers seeing stark raving mad terror roiling markets on pricing set-ups before earnings seasons begin.  It sets the stage for bigger surprises to the upside as the psychology has turned decidedly sour.  Just recall that economies do not work like emotions.  Yes – we must overcome short-term swings for long-term focus and wealth gains.

The Upside?

…we can expect, as the season unfolds from prices now once again mired in the very same trade ranges of the last 7 – 8 months, this utterance – often, “Gosh, that was not as bad as we thought it was going to be…”

Analysts are so terrified now, I would not at all be surprised to see 80% beat rates again – but let’s just let the game come to us.

Long – Term Focus Demanded

I am sorry if some of this is repetitive but it bears noting – This force is NOT changing

 

We need to consider another fog bank type atmosphere.

We had it back in April and May of 2021 – we had it in mid-summer 2021 and we have it now.   A fog bank is an incredibly powerful tool working against the psyche of many in the audience.  It is why they are terrified again – more manic-depressive in the short-term than they should be for their own good.

It is imperative that long-term investors fight off that viewpoint as we settle in on creating the next foundation al move upward.

In a fog bank, everything is bleak.  One perceives same across the entire horizon ahead.  Two things fix the fog bank.  If one, for example is sitting in a plane ready for takeoff, for example, a rise of a couple thousand feet often breaks into blue skies and sunshine – only leaving one to look back down and see more clearly that it was an isolated scripting in ones fears.

The other way to leave the fog bank is to just let it dissipate – or, say, if driving, surpass the boundaries and slowly watch the landscape ahead clear.  In essence, we are witnessing yet another complete misunderstanding of the major change unfolding around us.  The Tech shellacking, 6 months from now – or less – will seem nearly comical to many.

Facts Help Standing Tall in The Rebal Storm of 2022

Our economy is not lacking growth – it is accelerating

Our economy is not lacking margin expansion – it is accelerating

Our economy is not lacking household wealth or income – it is at new records

Our economy is not lacking a corporate structure cutting investment – it is accelerating

Our economy is not lacking jobs – we don’t have enough people to fill them all

Our economy is not lacking new services – they can’t build chips fast enough to deliver them

As in every circumstance like this when short-term winds blow coldly over the waves of fear lashing through the winds, it is important that we quiet our collective mind – and focus on the underlying currents driving extreme forces which benefit the US economy.

But Rates Mike…

Yes, I know – an inflation firestorm is upon us – apparently.  Tech and growth is dead apparently.  The Fed – after trying to “build” inflation since the 2008-2009 collapse is suddenly completely out-manned apparently.   Seemingly, after all of the things we have encountered and overcome – specifically in the strenuous last couple years – and stretch even further back to the Great Recession, now we have succumbed…

Absurd – but easy to fall into the trap.  

That is – painfully, why investing is not called fun.  Because often, well, it can be rather cumbersome in the short-term.

A Better View

While we may not be completely there yet, it is VITAL to the proper psyche of the massive changes afoot for our economy, that we learn to flex a “contrary muscle” we all carry with us.  We merely choose to use it or let it lay dormant.

So how does one counter the epic and rapid shift of so much bad news and fear from a contrary thinking perspective?

Simple – first – what are the “experts” telling you?

Inflation out of control – and here for good.

The supply chain is shattered and cannot be fixed.

Transportation of goods is not functioning.

Manufacturing is falling behind.

Do you really think this is what it will look like 3-6 months from now?  Were they correct 3-6 months ago?

…first lesson:  remember they were not telling you this before.  The shouting from the rooftops is on TILT now because it is the new fear, the hooks are set – and it is working well to gain new attention.

Remember:  Lesson:  What’s Next?

Next is remedies.  Recall the US is the in business of repair, overcoming, better processes, improving, learning and getting over mountains.  Indeed, as a global force, we are the best in the business of doing all of those things: and business, my friends – is very good.

Key inflation pressures are peaking – first in cost of goods for manufacturing pipeline – still at records high demands.

Bottlenecks in completion of movements of goods are slowly easing – while demand keeps rising.

We DO have some inflationary pressure which will take another quarter or two to bring back down – wages.

Why?  When you double the national minimum wage, you build wealth and cause a short-term spike in costs.  Investments in new synergies, productivity tools and efficiencies are required and take time.  That is what we are witnessing.  Read the quarterly reports of companies and you will see – very vividly – just how quickly they are attacking thee problems.

Our manufacturing base has never been stronger.

The on-shoring process is well underway (as expected) with little end in site – and gaining energy.

Our manufacturing output has never been higher.

React to headlines and month-to-month or week-to-week shenanigans – and you pay dearly in the end.

In essence, the contrary view is this: and again, it is what we have stated since October:

We likely see that most of the “current terrible problems” will be sorted out and operating more smoothly by summer.  Sure, chop is part of the deal – and it generates value.  The squeezes being witnessed today in this highly-charged environment – are NO different than every churning squeeze in history:

…we are creating the forces of future rates of return as “problems” find remedies

 

 

Until we see you again, may your journey be grand

and your legacy successful.