“Governments never learn.  Only people learn.”

– Milton Friedman

 

Good Morning,

What a summer. huh?  So much for the terrible (fill in the blank) and its aftermath.  Summer has another week or two to go, not officially, but by market haziness and dreadfully low volumes.  For the second summer in a row, there was nothing one could refer to as a summer swoon.  Sure there were those two really ugly days – but a “swoon?”  Nah – nothing to report there.

The earnings season for Q2 became so good that it almost got lost in reporting.  There were so few misses that the media needed to find something else to chatter about.  In the end?  Well, in the end, no record was left standing.  The “comeback” from a global pandemic shutdown continues to weave its way into the record books, shattering anything most of the crowd expected.

Margins are robust – we expect them to expand another 20%+ plus over the next 24 months, from 11.5% or so in 2021 to over 14% by 2023.  Blame technology for that – and layers and layers of “new ways to do things” in every single industry or service area of the US economy.  The momentum is significant.

 

No Potholes?

One could begin to get lazy and assume that it has gotten too easy.  Heck, without a direct interruption today, we will witness the 7th positive month in a row for the S&P 500.  Pretty amazing given the massive amount of ink wasted in January fretting over “the January indicator.”

Sure there are potholes ahead.  We may fall into one this afternoon.  No fretting allowed though, because the lessons of the last decade or so should be very front of mind as a long-term investor.  Think back to just the start of 2008.

What if I told you then of the crash coming?  What if I told you the global economy would almost come to a complete stop?  What if I told you of the Brexit scare?  Or the China scare?  Or the Greece scare?  Or the tariff wars?  Or the political unrest?  Or street riots?  Or the pandemic and those brief windows of time when the global economy really did get shut down – deliberately?

What if I explained, in detail – the terrible things that would unfold for us all since the dawn of 2008, and then I added this: “but the good news is the markets will be about 400% higher than it is right now…you just have to sit there and wait.”

The point is this:  you get through the last decade and the lesson is simple:  you can get through anything – period.

And About Those Earnings….

Well, Q2 reporting is officially over and the season is closed.  The results?  Nothing short of, well, stunning is likely an understatement.  Keep in mind the increases were not just big for a recovery comparable – they were big in comparison to the 2019 quarter – well before the shutdown!

…read ’em and reap:

Where does one start?  The purple area highlights the just finished Q2 at 94% increases YOY in earnings.  Nearly $100 Billion more in collective earnings versus the expected blowout numbers before the reporting began.   Recall, the expectations started at “just” a 61% YOY increase.

The even larger benefit?  As Q2 unfolded, expectations for Q3 and Q4, due to increases from company announcements, also more than doubled from where they began as noted in the green highlight.  That blue star is there because we suspect that as we get close to April of 2022 and Q1 earnings are set to be released, the 4% growth number doesn’t stand a chance.

Rates and Inflation?

The media got so lost in the positives of the earnings season that the only financial fear they could drive you to worry about was “inflation and interest rate pressures” we were sure to see.  Well, somewhere in that mess, no monster was birthed.  As the chatter increased, rates fell.  If it was not such a mind-bender for the naysayers, it would be somewhat comical watching them work so hard to find trouble under anything that resembles a rock.

For the record, let’s review:

The chart above goes back a ways – about 40 years.  Note that highlighted area – a very long period of time where rates have been under 4%.  In fact, it has been nearly 15 years now.  And the 5 years before that?  Below 5%.  In other words – nearly 2 decades of sub-5% rates on the 10-year.  Those who can wrap their minds around the idea that everything is changing – and I mean every single thing – will recognize that a digitized economy finds very few forces which cause rates to rise for extended periods of time.

The point?  Expect rates to be somewhere below, say, 3% for the foreseeable future.  And those margins we spoke of above?  That expansion will set the stage for much more dividend payout as capital is returned to shareholders in the years ahead and the market of stocks continues to shrink.

Why So Glum?

The latest data about consumer confidence shows that while still in the upper region of readings, we saw a big drop as the new Delta process has unfolded in media coverage.  Add that to the political events in DC and on the ending of the 20-year war – and you get an audience that is far from “too robustly bullish” – still.  Oh yes, and that rainy decade fund we keep referencing shows we have tilted up to $20 Trillion.

 

Rest assured as that gigantic mountain of money sits around and collects dust, we will all be awash in “experts” shouting from the rooftop about the coming inflation storm.  We will be visited by consistent stories of how crude oil is going to explode in prices even as we approach 2030 when two of the largest auto makers will have made it impossible to buy a gas engine car – but why be swayed by the facts right?  LOL

Speaking of Stocks

A small note for clients on BOX.  Shareholders have been getting “proxy phone calls” and this is a new thing.  I thought it might be beneficial to cover just so we all know why it is unfolding.  In two words:  new technologies.

So, here is why the BOX calls are happening.

Recall that over many years, the “Proxy Process” was a voting process for important events at the corporate or Board level and are often driven by institutional holders who typically own most of the publicly traded companies of importance.  They have been done by paper, in the mail, for years.  You would receive a small envelope or a mini-catalog style book and a voucher to vote.

This particular event is coming from an activist holder (Starboard) who has a history of coming into boards, adding themselves via proxy fights and then creating change internally for better efficiencies and operations – and/or often a sale of the company – usually ending with higher valuations for stockholders down the road.

Management, in these cases, will sometimes fight in order to retain control, etc etc.  That is why they call it a “proxy fight.”

In any event, as noted, these processes have been historically handled via paper voting processes by mail.  Well, technology has now advanced that process to robocalls to phones with recorded messages – and soon (I suspect) we will move to secure, interactive voting and texts over your phones – all with the idea that you accomplish the same things but you save millions and millions and millions in mail, printing and time costs to operate…not to mention the trees.

I sure hope this helps ease any concern and also helps you see and understand the changing landscape.

As to the process itself for BOX in this case, I suspect Starboard will win in their effort and I think that will be a good thing for the value of the company and the future value of the shares.

So a win-win after all the calls : )…patience, my friends.

What’s Next?

Well, it’s September and October – home of many market setbacks over the years.  I wouldn’t be at all surprised to see everyone come back from the summer hiatus and “sell” the great news they missed.

Embrace setbacks.  Embrace the next wave of fear.  Embrace the next “Armageddon.”

Why?  We won’t get many more of them to take advantage of – and as we have seen, recoveries and the overcoming of setbacks are happening faster…and faster…and faster.

I just have one thought we should keep in mind:  bring.it.on.

Tighten that belt.  Fall storms are always ready to pounce.  Stay focused as this is a long game – and the first pitcher is not even up yet.

Pray for a correction…

Most important of all:  Have a great last couple weeks of summer and a safe and very enjoyable Labor Day Weekend.

 

Until we see you again, may your journey be grand

and your legacy significant.