“It’s not so important who starts the game, but who finished it.”

– John Wooden


Good Morning,

What a summer, huh?  I mean – wow.  Stunning, enlightening, stressful, boring, edgy.  Oh wait, it’s only two weeks old.  Sorry – early.

Ok, I am kidding.  Here is what I am not kidding about:  Traders lose – almost all of the time.  The effort to interact with a myriad of stimuli, in a reactive, emotional state, against some of the best in the business – with A.I. machines and algorithms to boot – is not a game I choose to play.  Neither should you.

I have included a chart below from Bespoke.  You will find it interesting.  It speaks to the losing nature of reaction and short-term viewpoints.  As you view the results in the data, consider all of the expert opinion that has been spilled in recent weeks.  Almost all of which will be wrong outside a timeframe of a few weeks.  More shortly…but first,

…read ’em and reap:

The data here are simple:  red and green.

The red line?  It shows what happens – consistently – back to 1992 (a long time), when one buys the opening bell and sells the closing bell – every single day.

The green line?  The opposite takes place, some investor thought it would be cute to buy the close and sell the open – interacting with no one overnight while sleeping – and shying away from the “day-trading” which takes place for 6 hours each trading session.

The lesson?  Simple:  don’t trade, don’t interact, don’t act on emotions – and whatever you do, don’t do what the guy in red did.  Why?  He lost 10% of his capital – over 28+ years.  Imagine that – losing for 28 years, consistently.  Oh – and the guy in green?  He made 812% while he was sleeping.

It reminds me of the movie WarGames – way back.  Long story short, it was about the futility of nuclear war or the threat thereof.  It ends with a message:

The same is true for reacting to every piece of news or action that crosses the board.  Here is a reality all investors following their plan must eventually accept:

  1. sometimes all portfolio decisions will “appear” poor, unwise or a waste, requiring massive change
  2. sometimes, it will “not be working”
  3. sometimes, setbacks occur, corrections occur, trade ranges occur and bear markets occur

The point to all of that is pretty simple:  the “sometimes” are vastly outweighed by “the rest of times.”

The problem?  It requires we wait for the game to unfold.  You and I cannot erase the threats, the risk, the corrections or all of the scary events, past, present and future.  Plenty more will come.  The next 40 years will, oddly enough, look a good deal like the last 40 years.  Think of the improvements in our lives from 40 years ago?   Think of the capacities we have today that we couldn’t even dream of 40 years ago.

That noted, it does not change that we are in summer.  Summers are boring with very. very light volumes.  Expect a “swoon” to test breakouts and support.  Embrace it if it comes.

I repeat – give me a few weeks of chop and red ink and I will show you a crowd that is as afraid as it was 20,000 DOW points ago.  

Stop Focusing on Problems

Why?  Because they will always be present.

We must instead accept that the process of being an investor – by nature – demands risk.  There is NO way around that fact.  If no risk is preferred, consider a different way of investing.  One could convince themselves that cash is safe.  It is, if no gain is required or desired and loss of purchasing power is preferred.

The odd part about it is this:  We now live in a time when more cash than ever before is sitting in consumer banks, money markets, CD’s, timed deposits, etc., etc.  Strange, no?  Has the $19 Trillion+ “cash for safety” accumulated in accounts saving anyone – from anything?

Consider that thought while considering this too:  Since 1990, we have lost more banks and S&L’s (through Fed rescue or forced mergers) than we have publicly traded companies through bankruptcy.

We must work together to help clients learn to ignore the vast majority of fears we encounter along an investing lifetime – even when it stinks.

Real-time Fear

Yes, we have been told by “experts” recently that the monster we should fear is no longer the COVID global pandemic.  Instead, it is inflation.

We were told rates were going to skyrocket as that reality unfolded.  We were told that Tech was terrible because rates were rising.

It is beyond comprehension how the mass of Wall Street experts can assume they will be remotely respected if emotional and not well thought out scenarios keep being expressed.

Here is reality:  We live in a world being consumed by technology.   We live in a world of massive competitiveness.  NO long-term benefit awaits a company that requires they always raise the price of their product.  They will be replaced.  Instead, expect constant investment in technology as the landscape ahead is remade, over and over again.  Gen Y is why.

Yes, we have near-term pressures as our “real-time inventory” system is facing significant pressures due to the COVID interruption.  We suspect the “duel” will unfold over the next 2-3 quarters.  Then, the “pressure” will have been relieved as capacity and supply will catch up, matching better with new generational demands.

The bond market knows this far better than the experts on TV:

Notice the red star in the 5-year snapshot above:  The 10-year hit a yield of 1.75% at the start of inflation fear-mongering.  AFTER three “hit inflation” reports, it has fallen nearly 30 basis points.  More important – note the purple band.  It was in your notes months ago, defining that markets will very likely just try to get back to where we were pre-pandemic.  Indeed, that has unfolded.  Seeing a 2.00% yield down the road is not earth-shattering either, so don’t fear it.

Step back and look up – take a higher view of the massive benefits unfolding around us.  When did we decide to conjure up that things are horrible everywhere.  Sadly all massive shifts and recoveries place portions in a difficult spot.  I too wish that was not the case.  But everything being terrible as media narratives suggest?  Preposterous.

Indeed, It has Never Been Better…

Let’s take a look at the elements investors are better served to focus upon.  The graphs are from our friends at Calafia – and they are, well – good.  Before the pictures though, note the latest on earnings from Refinitiv as we prep for the Q2 data in a little over a month

  • The forward 4-qtr estimate rose to $191.93, vs. last week’s $191.52 – expect this to bump up $7-$10 on the Q2 rollover, and recall this was $159 on 12/31/20.
  • The PE ratio on the forward estimate is now a little over 22x (but only 18x on 2022 data)
  • The 10-year Treasury yield fell 10 bps this week to 1.46%
  • The S&P 500 earnings stood at 4.52% vs. 4.53% last week – but it was 4.23% as of 12/31/20

Back to the Great Benefits Unfolding

Take a look at these data points…

We are told debt is out of control.  Let’s keep it simple:  the cost of debt is what matters.  In half the world it is still a negative number.  In the US, as a percent of GDP, it is where we were in the 60’s.  Many overlook that it is very hard to kill a $23 Trillion+ machine without it fighting back and surviving all comers:

Household debt costs and leverage ratios have also plummeted since the ’08-’09 Great Recession.  The lesson was burned deeply into the psyche – and it shows.  It hasn’t seen these levels since the early 70’s:

How about record Household Per Capita Net Worth? – check:

Notice in the first image above that Net Worth has hit new records.  That should be obvious – but also note that debt has not moved up nearly as quickly.  Combine this with percent of leverage and one would find that the Households of America are far healthier than many may understand.

In the second image, you will see that the Net Worth growth has run about 2.3% per annum for decades.  Currently we are witnessing an acceleration – hinting that we should not be surprised to see some of this new asset level be “spent down” as the world opens back up.  That is not to suggest it is bad news to fret over – only that it should not come as a surprise later.

Last But Not Least

The trade range we have covered for a couple months has been breached with new records last week.  Already we are hearing it was a false breakout because it occurred on lower volumes.  We should expect a retest.  Not because of “lower volumes” as that is a given, but because it is summer and chop is normal.

Indeed, it is healthy, as it resets the stage for proving that what was previously a ceiling to prices (trade range) is now the new floor:

The snapshot of the S&P 500 above is again highlighting the trade range since early April.  We saw the new records set on Friday but again, I simply remind us all that it is summer.  Summer can be fickle in the near-term.  Summer swoons have proven in 100-percent of the cases, to be buys – not periods to fear.  I suspect nothing different this time around.

The blue arrows added above are merely a suggestion of what would be an ideal scenario, highlighting a “summer dip” back into the same, well-traveled, trade range.  It would serve to shake out remaining weak hands and bullishness, right before the earnings acceleration underway hits the next gear for 2022 and beyond.

That is a good deal to digest – but the rules remain the same:  patience and discipline are paramount.

Until we see you again, may your journey be grand

and your legacy significant.

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