Good Afternoon,

Just in case you missed our note sent out over the long weekend (“Just a Hunch“), a cold, hard fact from Mr. Munger:

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

-Charlie Munger

Pretty blunt, yes? And surely not politically correct in these oh so sensitive days we live in. So there it is…just remember, he said it, not me. : )

The end of summer this time around is being addressed rather abruptly by the market – quickly grabbing back some of those summer profits as it wrestles with the very late summer swoon.

As far back as I can recall, a summer swoon was the norm. As we speak, with futures down hard pre-market, traders are in a rush to figure out what is going to happen in the next 8 minutes. Many of their brethren can’t think beyond the next 8 seconds without a shot of oxygen.

As one should expect, the biggest runners are getting hit the hardest. While stressful to watch – it is normal and we have seen it all before. The speed has picked up, the numbers are larger – and when combined, that makes it feel worse. It isn’t, but that won’t mean a hill of beans for the next couple weeks I suspect.

Recency bias will quickly drive the media headlines. Everyone and their brother already deem it fit to call this the beginning of the “coming crash.”

Expect disaster to be dripping from every 48-point, bold typeset letter – just as covered throughout your August morning notes.

Sentiment is rapidly turning bearish – cash is exiting in waves and bonds are once again being flooded with demand — at 67 basis points for the next decade. In a world being consumed by technological and digital advance, a decade is the new 50 years of advancement.

And the fear is so deep that 67 basis points for 10 years (P/E of 140+) looks like a good swap.

It is not just US bonds. The German and France bonds cost you to own! Japan’s 10-year is a paltry 2000 times earnings. The UK is a P/E of 500+. Makes the US look down-right valuable.

Incredible.

Friends, rampant fear + technology + debt + digital transformation does not equal inflation. It is a recipe for deflation – just as it has been since 2008-2009.

The tectonic shifts are everywhere – look for the US to benefit massively from manufacturing returning to our shores. No, it won’t be supporting as many jobs because we can do a ton more these days with fewer bodies. That is the reality of technology.

That just forms new layers of better jobs elsewhere.

Example? Wait until we see the 5G stuff from Apple over the next 6 weeks.

Fear is a Blinder

Always has been – always will be.

It is the same feeling I used to get when witnessing a squall line (like the image above) in the middle of a race, far away from any land mass out there on the ocean. Mind you my friends, this is when there was no GPS, no mobile phones and no tracking. You were indeed, on your own.

But…

Like all squalls, the storms are often very messy – but they pass through. They subside and life continues onward. Tech had a huge run – it should be expected to take a hit. Use it to your advantage.

The underlying current driving the future has not changed.

This storm is a perfect set-up for a market poised to surprise everyone once it is spring-loaded again. Ugly or not, surprises remain to the upside.

And if you felt I was being unkind when I suggested that the vitriol would likely only turn upward as the days march toward the election, note this on the main page of CNBC now:

We should step back to ponder one item. Could social media be causing us to do things we never would have done in person?

I mean have we really reached the point of dissecting movie credits to find out if they can be twisted into something wrong and then BE used as a weapon, solely designed to grab your attention long enough to a) feel negative and then, b) sell an ad?

We are all vastly better than that in my humble opinion.

Peering Through the Fog Bank

Were I to hazard a guess, I would look for a little bounce in here somewhere over the next day or two – and then a ton more chop as we grind away any remaining bulls who popped up out of their bunkers in the last few weeks.

Look for that chop and red ink to last for a bit – making September what is usually is on the calendar – the sloppiest month of the year. It’s history – so don’t sweat it too much. The real story and focus is not at all about right now – or the news in the current headlines.

Massive capital is positioning itself for 2021, 2022 and beyond. A brand new economy is forming right before our eyes. Some of it won’t make sense right away – and some of it still won’t make sense years from now.

The point? This is the disruption we have been highlighting. Technology and speed is simply making the pathway ahead a far more reactive one where emotions will unnecessarily continue to foil many an investment plan.

Stay patient…opportunity is forming again under all this mess. It’s just September:

The data in the image below does not change, no matter how sloppy it gets as we reset and refuel the foundation for the next leg up. Do NOT buy into the incessant chatter about crashes and such. The same crowd was telling you about S&P 3,700 just a week ago.

Read ’em and reap:

It is not all bad.

Early this morning the NFIB released the results of small business optimism for the month of August. The headline index rose 1.4 points to 100.2. That was better than expectations of 99.0 which would have been only slightly higher than July’s reading of 98.8. That indicates overall improved sentiment for small businesses in August though it assuredly remains far lower than levels from prior to the pandemic.

Earnings Update Summary:

  • The forward 4-quarter estimate from Refintiv rose to $146.00 this week vs. last week’s $145.97. While a tiny bump upward, there has been only one week of the last 10 that S&P 500 earnings didn’t improve sequentially.
  • We live in unprecedented times testing everyone for sure – but do note this is the opposite of the earnings pattern in more “normal” times. Recall from many prior notes, the forward 4-quarter estimate tends to instead start the quarter at its highest value and by the end of the quarter is near its lowest value of the 12 weeks.
  • And remember, even with that, analysts were way, way off the market in their expectations for the last quarter.
  • 2021 data still show earnings well above the 2019 data.
  • The average “expected” EPS growth for 2020 and 2021 is still averaging 4%, for the 21st consecutive week.

How could this be?

Under all the noise and chatter from slicing and dicing every single blip in the market (impossible),companies are adapting much more quicklythan the “audience of experts” understands.

Be confident of this:

I know this is repetitive but it is worth considering again during stressful windows of time:

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) – but the underlying 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.

In Summary

You bet – I hate red ink more than anyone. No one likes watching backward movement.

As disconcerting as it is at times, be confident you do not want to a see a market simply go straight up. Consider this comment below from Morgan Housel when you see ugly days and weeks like this in 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.”