“The stock market is designed to transfer money from the active to the patient.”

~Warren Buffett

 

Good Morning,

Closing out the Q3 earnings season has become a bit boring in its coverage.  My sense of things?  The media could find few monsters in a string of reports that consistently beat estimates, even as the “inflation war” rages on.  I suppose they realized the “scary stuff” needed to come from somewhere else, hence – yet another record-setting earnings season is quietly put to rest.

Expect more records – with a pause here and there along the way.

Margins – Expanding

Do not underestimate what is unfolding in the margins the business world is creating.  Also note that while we are setting records for this year, next year – and the one after that – are set to rise even more

 

If you are looking for the culprit as to what is causing this process to expand – think technology.  Then think “early stages.”  Why is this all important?  Rising margins support more investment in efficiencies, productivity and growth.  They also drive larger increases in dividends over time – which further support higher prices at a relatively steady clip.

As boring as it may sound, the shedding of the “old way” is just getting started – and as each new layer of technology is added, more doors for even better efficiencies, new services and new enhancements to our lives, open up.  Think of the domino effect – in a good way.

But also remember this:  it all unfolds in the shadows, away from the lights of media buzz – and while all the other nasty, scary stuff is being covered for you 24-hours-a-day.

The Season Almost Complete

As noted above, the Q3 earnings season is about done and the books almost closed.  The data below shows you that while the analyst world began the season expecting roughly 26% growth YOY in earnings and just under 10% growth in revenues, they were once again a bit behind the 8-ball

 

At just under 40% and 17% respectively, the blue highlight shows you that this was quite a beat.  Headwinds exist – for sure – as the supply chain is being remade in all the mess.  Expect the results to turn into tailwinds as the bottlenecks abate, shipping gets caught up, factories get replaced, repositioned and fully staffed – and the great inventory rebuild begins in earnest.  All those empty shelves and lengthy receipt dates on ordered items are not related solely to the “shipping” problems at our ports.

Instead, they are a combination of things happening in the middle of a blinding dust storm if you will.  The largest:  more demand than supply.  More orders than inventory, more new orders, than the speed and capacity to fill them.  Yes, messy indeed.  But note also those are all good things, no?   For sure, none of us would want the opposite.

The Larger Event

Covid’s shadows are long-lasting.  China will experience the brunt of the shift as their consumers like American goods, not copies and the corporate world will find it difficult to place important supply chains in-country for at least the next decade or two.  Try being a CEO today and have your board approve your needed secure pipeline support somewhere in China.

No instead, focus on the very demographic issues we have highlighted for years.  Almost everything happening around us today is because of that main current driving us all forward.  Remember in all the mess and angst covered in the media, that we are the only developed nation on Earth with the healthy demographics we have now.  The two largest generations of consumers ever in America – both pushing record-breaking demands in their own important sectors.  The Barbell Economy® is real

 

…and if we can remain patient during all the turmoil, the long-term investor wins.

“After”

For the many who wonder “why in the world are we at record highs with all the confusion and disruption…?”, consider these elements:

 – – > on-shoring, with more and more manufacturing and supply chain support coming back to the US

 – – > massive margin gains, driven by tech – creating earnings base increases

– – > significant household expansion as Gen Y leaves parents homes (expect 40-50 million more over the next 10-12 years)

– – > the focus on “what’s next” instead of what’s now…

In other words, all of the things we are watching and being told are terrible for us – will, in due time – turn into positive tailwinds.  This “after-effect” is what the market is focusing on and what capital is flowing to build.

Sure, there will be drawdowns along the way – one cannot stop that or “guess” a way around it.  Long-term investors have learned for many decades now that the only route to the largest, most productive rewards is through the storms.  Tough – yes.  Uncomfortable at times – for sure.

But that is why, as they say, this is called “investing” and not “fun.”

Fever Breaking?

One more thing to consider as we head into your nice weekend…the fever may be breaking just as we hear the highest pitch screams about “inflation.”  Here is a pre-cursor

 

Notice, shipping rates have fallen by over half in the last 6-7 weeks.  These are typically “leading” indicators as to a squeeze in the supply chain.  As we have stated often, we see another 2-3 quarters of this before factories can catch up with increasing demand, but this is a pretty solid sign that some of the worst of the bottleneck is easing.

In Closing

It is hard to imagine, I know, how well things are going – even as significant problems lay ahead.  This is a process – and it is one that America has proven repeatedly she overcomes and goes on to new heights.  Ask yourself this:  “We handled a pandemic – do you really think a supply chain crunch will be our defeat?”

Of course not.  That said, the law of large numbers is real – even in markets.  The higher the averages get, the more shaky it may feel, but those are emotions, not facts.  There is no doubt corrections will come – expect them, pray for them – but do not run from them.  They have a healthy purpose over time as history has proven over and over again.

Buckle up, stay patient, remain disciplined and focused on the long-term horizon.

More later – have a great weekend.

Until we see you again, may your journey be grand

and your legacy significant.