First, all of us here send our best wishes to you and yours for a safe, enjoyable, relaxing and

rewarding Labor Day Weekend Holiday.

Enjoy time with friends and family – and stay healthy!

Good Morning,

Read this after all the fun for the weekend : )

A thought first, from Mr. Munger:

“It’s not supposed to be easy. Anyone who finds it easy is stupid.”

-Charlie Munger

Ok, so there…it’s out there, for all to see. He said it, not me. : )

Second, “it’s a wrap” as our Emmy-Award Winning Videographer always likes to say. The summer, officially is done once we all get back to work next week.

As is normally the case, we can expect the cobwebs and summer fog to take another week or so to work themselves out of your system…unless of course the truck that ran over the market 48 hours ago is part of a caravan of trucks.

Ok, so I am kidding – a little. Look, on this long-term pathway to one’s successful wealth management plans and goals – some of the turns up the mountain just suck. No way around it friends. Rest assured, yours truly would surely also like it much better if there was a magic pathway to outrun all the days like the last couple.

I would be remiss if I did not remind you that in the grand scheme of things, it was expected. Every summer has a swoon. This one just waited until the last few official days of the season to get rolling.

There is good news in the storm passing through.

As you may have guessed, sentiment was immediately hammered. I’d like to give you a sense of the immediate reaction to pain versus the extended reaction to gain. Let’s try to follow these graphics – and my elementary effort to create a sense of action unfolding on same (by the way, we covered many areas of this in”Hat Trick”earlier in the week in case you missed it):

We saw a move to the downside this week which represented a little less than 12% of the last 6 months of upside movement.

Yet, we erased 30% of the bullish sentiment in short-term indicators:

It gets even more strange when you dig into the theme of on-going sentiment. Using movingaverages which smooth out the weekly swings – sentiment has gotten worse during the entire rally!

By the way – this is very good news for long-term investors. And it helps explain why we still see both outflows in equity from the public and the massive increases in cash in the bank.

Read ’em and reap:

Pay special attention to the points right below that chart above. We are higher today in markets (after the churning week) than we were in January of 2018 – and yet sentiment is half those levels.

Note also that the pink dot presents an even more compelling sign – the March lows of the Covid waterfall panic showed Bullish Sentiment much higher than where we are now. In other words, the 10,000 DOW-point rally caused lower bullish investor sentiment.

The next image down is the weekly data on AAII – it was released before the action on Thursday and Friday – so we can be confident a reading in the 20’2 next week is nearly a given. Excellent I say.

Once again, this panic is setting up like all the other panics in history. Investor sentiment rarely returns to previous levels of confidence until massive rallies have unfolded – taking markets far beyond the previous comparable highs.

What Now?

Well, it is just a hunch here but I would not be surprised to see the stock vigilantes press markets lower to drive Congress to move forward with another bill to help those still without jobs. After all, as we suggested the entire month of August – a swoon is normal. And now we have this “dead spot” for data.

Sadly, nothing but bad news will be rained down upon us as the media becomes the machine to drive political angst and unrest.

When we learn to ignore them – and their revenues fall – they MAY finally get the message. They are off the leash on many fronts, intent for the most part, on seemingly turning people against each other. Sad indeed. They may also learn that their business model of the last 25 years is broken, flawed – and indeed harmful to their own customers. We can hope so at least.

In the meantime, the reality is that companies are massively – and quickly – making themselves new again.

Every single operational, management, production and inventory channel is being reworked, redesigned, enhanced or replaced.

Earnings and Q2 Summary Highlights from DataTrek:

The advantage of looking at the “S&P 500 EPS curve” is that with the election looming in 10 weeks, and investors wondering where to look for stability,it remains best to look beyond 2020 and into 2021/22 for a more important view of the forward earnings curve. As stated often, the market is about “what’s next” – period – and don’t forget it.

The dollar EPS estimate for 2020 is finally above $130, after bottoming near $124. More important though is that the S&P 500 2021 EPS estimate has risen to $166 and still stands solidly above the 2019 final print of $162. We already saw how “far off target” analysts were for the last quarter.

As such, I have high confidence they will be vastly too conservative for 2021 and 2022 as well.

Companies are adapting much more quickly than the audience understands.

That means surprisingly higher margin pathways ahead.

DataTrek’s blog (cut-and-pasted below) notes that analysts have “barely touched”their Q3 and Q4 ’20 estimates (also a positive):

Now, let’s check the final Q2 highlights:

  • 84% of companies beat analysts’ earnings expectations. That’s a record back to when FactSet started collecting the data in 2008. The prior record was Q2 2018’s 81%.
  • Of the major sectors, Technology and Health Care had the largest beat percentages, at 94% and 92% respectively. Energy was the worst, at 65%.
  • The amount by which S&P 500 companies beat estimates, 23.1%, is also a record. The prior record was 14.7% in Q1 2010 (i.e. coming out of the Great Recession).
  • Q2 earnings were down 31.8% from the same quarter in 2019, but this was not as bad as Q1 2009’s -35.4% decline (the bookend for the prior point).
  • That Q2 2020 wasn’t as bad as Q1 2009 comes down to less-bad revenue declines. Q2 2020’s top line comparison was -8.7%; Q1 2009’s was -11.5%.

Be confident of this:

The market does not care about 2020. As stated months ago – 2020 is a mulligan. Markets will surely have setbacks along the way (to retrench and shake off weak hands) for sure – but the focus is on:

The New Economy-

The driver of the future normal

The picture of what things will look like in 2021, 2022 and beyond.

The”Decades of Disruption”have only just begun.

In Summary

The tougher you punch America, the higher and stronger she rebounds. It’s how we are all built – together. This week was just another step on the pathway. Yes, no one likes watching steps backward. Yet, weeks and months of “up” demand setbacks to reset.

Rest assured you do not want to a see a market simply go straight up. Consider this reality when you see ugly days and weeks for the markets:

“Stocks decline on news that if there were no declines there would be no risk and if there’s no risk there’s no opportunity and we all want opportunity so stocks declined.”