“Never bet on the end of the world, It only happens once.”

~Anonymous

 

Good Morning,

I owe you an apology – I didn’t get a morning note out all last week due to travel, so I will catch up today.

It wasn’t because little was going on – it was just nothing really important nor anything we hadn’t already covered.

Economic data – better.  Inflation – another false monster.  Earnings – overwhelming analysts.  Delta – the latest scare tactic.

By the way, the 10-year is down to 1.225% this morning – or 81 times earnings.

The title today – “Peak” – will be heard a whole bunch in the next few weeks as earnings flood in.  We recently pointed out that numbers are going to get so shockingly good, that we will likely see “selling the news” even more.  Last week proved that out as well.

The bottom line:  Very few investors really understand what happened in the pandemic.

The “missed element” is the same thing that happened in our economy on the 20th of October, 1987, the day after 9/11 and the week following March 15, 2009.  What was it?

Everything changed – forever. 

Whatever did not work before – ended.

Everything that worked afterward was brand new.

Those that were waiting for “normal” to return rested safely on the sidelines.

The cumulative effect?

$19 Trillion sitting aside – safely out of that ugly old stock market which just 4 days ago set an all-time new high.  There were, of course, many good reasons for being “prudent.”  Indeed, most suggesting anything other than said “prudence”, were quickly categorized as one of those “really not understanding how bad things are out there.”  Sadly, I have been told that I don’t really understand how bad things are “out there” at least once a year – since 1982.

As earnings continue to ratchet higher, “peak earnings” will be all you hear about.  It is highly likely that the chop we are watching unfold – right on time – will continue a bit longer.  It is further likely that the “experienced experts” who will parade across the media screens in the coming three busiest weeks of the Q2 earnings season, will reference “peak earnings” at least once – per interview.

Suggestion?  Chuckle if you must, otherwise, ignore it at all cost and go back to enjoying your vacation.

The corrective action and internal churn is doing EXACTLY what you want it to do.

It is pushing all short-term traders out of the market again – just days after all-time highs.

I know – I have to pinch myself as I admit to not ever having seen anything like it before.

The level of deep-seeded fear in place – is stunning.

Better?  It is a blessing for all long-term investors.

Let’s Take a Look…

Grab that cold drink and walk through these snapshots with me as we gaze into the remaining summer haze of 2021.  Note this beforehand – there is likely more to come as the news becomes so good – it will not be believed.  I suspect we see a reading in the teens shortly after the open.  Further, the angst created by the price drops now, will drive the price gains of the future.

…read ’em and reap

 

There is so much messaging in this one image.  I will take a shot at highlighting the most valuable elements.

The purple line in the lower portion of the image:  This is the lowest reading all year – meaning lowest level of confidence, highest amount of fear.  Shocking right?  Further, there are only two periods left where people were more afraid than now:  The first shots of the China Tariff War (LOL) in the last quarter of 2018 – and – you guessed it, the pandemic shutdown waterfall of last year.

The green arrow in the upper portion of the image:  At the close yesterday, “extreme fear” readings of 23 were registered.  It can only go to zero.  It got to 6 at the pandemic low.  Give it another week – and we likely see lower teens – or single digits.  Yet another shocking amount of value being built as we speak.

The red arrow marks one month ago”  prices are a tad bit higher – and fear levels have doubled.

The AAII data (slower moving indicator) echoes the same fear

 

The latest AAII bullish readings have dropped to 36% also the lowest of the year – meaning two-thirds of the crowd is NOT bullish.  The red arrow highlights 2021’s highest bullish reading of 56% back on 4-7-21.  To help you see how funny that is, I have inserted the image from the close on 4-7-21.  Oddly enough, it was about 6% (lower).

The internals tell you the same story – everyone is leaving as volume drops to – zilch – or less

 

The image above is a snapshot of stocks still above their 50-day moving average…a sign of internal churn and selling – just as we suggested for July.  The blue line is a little hint for you.  If you take the time to look at all the other periods (few of them left) where the readings were below this blue line, you will find only one thing:

They were ALL times to be owners of the market – not sellers of the market – even when they stunk up the joint.

The Odd Part of the Puzzle

You knew there had to be an odd part right?

In your notes just prior to the Q2 earnings season kicking off, we had this chart in your notes

 

We suggested then – “the highlighted column projected for Q2 – after the record-shattering Q1 data complete – is way, way short…”

So, here we are – less than 10% into the Q2 reporting season – and the chart is now sitting here

 

It is $20 Billion higher in profits – on less than 10% of Q2 reporting complete.  We suspect it gets better from here.

Here is the point – by the end of Summer – maybe closer to the beginning of Q4, we will be hearing about earnings for 2022.

Currently they are set to work into the $212 – $220 area.

This suggests that the S&P is priced at something about 20 times earnings.

The US Treasury 10-year bond sells for a tad bit over 81 times earnings (this morning).

Where do you think the “deal” is…?

Where do you think capital will be better rewarded over those 10 years ahead?

The Next Big Thing

I will tell you in advance, this is going to be very hard to believe and get your arms around in a world of nothing but bad news.  Here it is:

This game has just begun.  This is a new bull market.  This is a new economy.  This is a brand new ballgame.  Everything is changing – nothing will be “like it used to be…”, so don’t wait around expecting that to arrive.

The driver?  Tech reshaping everything.

There is over $5 Trillion in cash on company balance sheets – and growing.  Free cash flow has never been higher.  We suspect we are in the beginning stages of a massive capex surge.

As companies see the margin expansion resulting from the tech investing of 2020, there will be even more of it.  The jobs market has over 9 million jobs open – with a massive shortfall of educational capacity to fill those jobs.

Expect robots to fill those spots – while we expand the know-how of the workforce.

All of it will be good – even if a bit unsettling while it unfolds.

Trillions will be spent to advance services, deliveries, supply-chain efficiencies, manufacturing and industrial capacity.  In an odd way, the economic reaction to the pandemic shutdowns will end with the US economy being even stronger than it has ever been, with years of massive industrial and manufacturing investments back into the US – just beginning to unfold.

Meanwhile – pray for some more chop as a larger share of the crowd chatters about the “peak.”

In Summary

The July chop is here…the internal churn noted above suggests weakness hidden by the averages.

The experts on TV are having a heyday scaring the crap out of the audience – again.  And, it’s working.  Volume is falling to a trickle – August will likely be even slower.  Yes, worse than watching paint dry.  The summer, so far, is unfolding just as long-term investors would want it to.   Now, we just have to let the rest come to us all.

Suddenly – soon – it will look different.

The experts will fall away as their senseless chatter turns out to be wrong – again.

“Peak” will turn into “wow, that’s better than we expected…” and then, the game will really start to unfold.

I smell many extra innings ahead.

Cinch that belt tighter.  Hold on to your popcorn….and, have fun at the beach.

Have another great summer week with family and friends.

This too shall pass.

Until we see you again, may your journey be grand

and your legacy significant.