People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences.

Calamitous drops do not scare them out of the game.

– Peter Lynch

Good Morning,

Geez I sure hope someone got the license plate of that truck.  Good riddance to September as a whole.  It delivered just as described in late summer – providing “the worst monthly result since March 2020” according to the financial news channels.  All sorts of terrible headlines are likely to follow as the demons of October’s past haunt the investor.

Today’s quote above is rather timely.

A Weekend Summary

Fear is back friends – and I cannot tell you how positive this is for the long-term investor.  When I say “fear”, I mean that, currently, over 3/4’s of the audience does NOT like the stock market – and cash is overtaking the system.  This after just the first down month since January.

My thought:  thank our collective lucky stars…Amen!

 

The data above is often sort of overlooked.  Once sees the “24 Extreme Fear” and can think “oh well”, but there is much more to glean from this snapshot – and given the importance of sentiment, it is critical to take these times in.

Let’s start at the top of the image:

That first red arrow pointing to the right side of the upper region of the data.  Note the general cloud of fear spreading over the last year – and then recall we are just 5% off record highs – all of which took place in the last 3 weeks.  So what does this mean?  Well, it tells us that not only are we getting great fear readings (contrary bullish), we are getting them within a general fog of fear over the entire crowd, for quite sometime.  This is deep-seeded.

Our hunch?  It won’t burn off for a very, very long time.

Second – the red arrow along the bottom portion of the data, drawn from current levels of fear and back into history.  Notice the key thing on this highlight:  there is VERY little activity below the red line.

Indeed, dire circumstances accompanied the only two periods noted which stand below the current levels of fear:

Late 2018 was the announcement of that all dreaded China Tariff War – yes, the one that is still going on.

March of 2020 is of course the Global Pandemic Shutdown

Do we really think that our current state of affairs is as bad as those two periods of time?

Dire Straits

Yes, not only a good band but indeed the feeling one gets when you look at the fear and sentiment gauges of today.  So, I had our crack research team track down the terrible circumstances that are accompanying the current levels of fear – because, of course, there must be a plethora of good reasons yes?

So, here is the list of those terrible things we must fear:

Record Margins

Record Cash Flows

Record Household Net Worth

Lowest debt levels and costs to asset ratios since 1979

Record Corporate earnings

Record Corporate Cash on balance sheets

Record consumer cash levels – over $21 Trillion now for the rainy decade fund

…and, just in this morning, “a game changer” pill from Merck which apparently crushes Covid

The Point?

The opportunity hidden in all this confusion is substantial:  nothing like this has ever unfolded in this data.  Were you to show anyone (with a record in the investing world) the current sentiment data and the length of time it has persisted in its current “cloud”, to a person they would guess that we are in a long-standing bear market.

We aren’t.  We are 5% off record highs – all of which took place in the month of September.  This, after 7 months in a row of gains.  Amazing how quickly the audience forgets.

I think the over-arching point that continues to be ignored while the general investor audience jumps from one Armageddon even to the next, is a little simpler but hidden nonetheless:

Think of all that we have made it through up to this moment.

Often this is a lightbulb moment.

A simple twist of the prism through which we perceive the horizon ahead and an entirely new paradigm jumps out at you.

Meaning?  Well, one moves from fretting over the next monster, with all the tension and angst to boot – to a vastly more confident standpoint of this:

We made it over all those other monsters since the beginning of time…

So, why fret over the next one?

Hidden From View

Hidden in all the stress and headline chatter, is a reality that will drive the markets forward.  The reshaping of the business world all around us looks messy to the naked eye.  It looks a bit frazzled because that’s what supply chain interruption and demanded redesign looks like.  Make no mistake, the global supply chain will shift – and it will shift to the benefit of the US economy.

While it may take time, China will learn, painfully in some cases, that their wonderful economy exists because we built it for them.  That will only apparent to everyone else – and their leadership – when the supply chain infrastructure has left China…which it is doing now.

The end result – higher margins, better efficiencies and record profits for the US

 

We will, of course, be updating this chart above throughout the Q3 reporting season.  Suffice to say that it is important to recall that the Q3 and Q4 expectation data (red arrows) DOUBLED as Q2 earnings were released.  We suspect we will see the same upward moment on the early quarters of 2022 as Q3 and Q4 data is realized and confirmed (purple box).

In Summary

Yes, these few weeks of setbacks suck.  As stated during every window of weakness, I cannot stand watching it – but watch it we must.  These corrective waves perform a service.  This service is a very strong value for patient, disciplined, long-term investors.  It is never fun – but the storms are designed to reset the future returns.  The dips – and hence, the levels of fear created – define the future rate of return.

This becomes very evident when peering through a long-term prism.

First the trade range breakout structure covered all summer – pretty much right on target

 

But, far more important – note the long-term.  That little arrow way up at the top shows the price action which has spooked over 75% of the audience into extreme fear levels.  Make sense to you?

 

So, as always, we must stand tall and allow these storms to pass – which they do.  Patient investors learn over time (often with some pain in the near-term) that “problems don’t come to stay – they come to pass”.

It’s somewhat like the text I send to Max before each of his games:  Head up, shoulders back, stand tall, lean in and never, never, never back down.

And last for the weekend, consider the lyrics from “Iron Hand” by Dire Straits:

“Well alas we’ve seen it all before
Knights in armor, days for yore
The same old fears and the same old crimes
We haven’t changed since ancient times”

Have a great weekend.

 

Until we see you again, may your journey be grand

and your legacy significant.