“Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.”
― Warren Buffett


Good Morning,

As the summer wears down its’ hazy pathway, the regularly-feared monsters will come and go.  Interest rates, inflation, oil costs, housing shortages, variants and vaccine reactions will come and go.  Heck, you can be assured that even good news will be cloaked as bad news.  I’ll give you an example:

“Lines create significant delays for security checkpoints as airports overwhelmed with return to summer travel.”

I don’t know where we collectively decided that we would feed a system that would deliver us strife and stress all the time – but we did.  You’d be amazed how well you feel the world is doing when you stop watching the news feed.   I digress.

The Numbers

I’ll keep it short this week as many will be working all week to plan on leaving work for the second long weekend of the summer.  The July 4th break likely starts about mid-week for most – LOL.  If you fall into that category, we wish you the best of the long summer weekend with family and friends.

Continuing their climb up the mountain, earnings numbers look solid.  It is all somewhat imaginary as one can be assured, the numbers will come up short overall as analysts continue their tepid acceptance that the pandemic completely reshaped the economy’s operations.  Margins are set to surprise as that onion is peeled.

The latest from Rifinitiv:

As this week comes to a close, and the quarter rolls over – the 4-quarter forward estimates will get their “bump”.  Indeed, $200/share in earnings is already here – and we still have two more 4-quarter bumps to unfold this year.  Let’s check in on the data stream:

The forward EPS curve estimate today, shows a $199.02 estimate (Rolls on Thursday)for Q3 ’21 through Q2 ’22.

The forward 4-quarter estimate jumped again this week to $192.56 from last week’s $192.17.

Recall that this expected run rate was just $159.02 back on 12/31/20 as the “pandemic year” ended.

The S&P 500 earnings yield this week is 4.50% vs. last week’s 2021 high of 4.61%.

Keep in mind that the real kick-off to earnings season for Q2 2021 is during the week of July 12th when banks start reporting.

The Larger Issues 

As we often note, there are much larger issues unfolding which are set to overpower the worrisome (and normal) elements along the pathway ahead.  I highlight a few below just to keep the proper thoughts in order.  The fear-driven thoughts keep you off your pathway so we suggest you continue to keep them as far in the background as possible as you enjoy the beach this summer.  And now, those upside thoughts:

We expect to see continued liquidity trends for at least another 18 months, favorable for risk assets as industrial production tries to catch up with demand.

We suspect the drive to relieve shortages and bottlenecks while rebuilding supply lines and upgrading infrastructure will continue for another 2-3 quarters.  Keep in mind, we spent the last decade creating expertly-designed “real-time inventory” controls here and abroad.  That didn’t allow for the massive demand just beginning from Generation Y – nor the global disruptions due to the pandemic.

While stressful – these are indeed positives.

Long-term investors will accept that we have entered a new, very advanced technological revolution which has very positive implications for all aspects of business.

That revolution will also lead to much higher productivity levels than we have had over the last decade, which will, in turn, reduce unit labor costs despite higher wages.

We suspect inflation, while grabbing lots of headlines, is set to remain constrained due to globalization, all that tech investment noted and the business model disruptors popping up – almost – everywhere.

The Result?

Given these driving forces and The Barbell Economy® at work, the surprise elements no one can seem to become comfortable with are pretty easy:  much higher levels of corporate profits, cash flow, net margins and ROIC than the consensus experts are suggesting.

In Summary – Buckle Up

Markets pay for patience and discipline.  They pay for fighting the emotional surges that plague so many results over time.  They pay for believing in the future ingenuity of this country and the people in it.  They pay for having faith in your plan and the forces that built our lives together.

This “fight” to recover – like all previous Armageddons – will pass with time.

In the end, there is no end, really.  Just a continuation of time (your greatest ally) and the trek up this very high mountain ahead.  There will indeed be treacherous spots and perilous moments that will terrify many.  It will be our job to keep one focused on the long-term current driving us all forward.

That said – the tectonic shifts ahead are massive.

We have stated this many times over and at the risk of sounding too darn boring, here we go again:

The leverage of change and the Generation Y technology waves ahead are creating massive changes in margins.

Earnings will be far more leveraged and see many more benefits than currently understood.

The pandemic shutdown had one benefit:  if a company was not killed in the pandemic, we would argue it is now “unkillable”.

The armor created, the tools built, the technologies unleashed, the systems implemented and the capital invested during the shutdown storm has set the stage for a complete remake of all that we “know” – and the Q1 numbers are just a tiny glimpse into that benefit.

The Bottom Line

This chop during May proved its value:  New doubts, many new fears and new monsters are all forming bricks in the new foundation being built for the next leg up as the spring dawns and the US builds into its “new normal.”

All capped off with even more cash on the sidelines, better earnings, higher results and a strong platform from which to build.

So what now?  Cinch that belt tighter.  And grab your popcorn.

The pace of change is going to be head-spinning – with plenty of gut-wrenching interruptions along the way.

Get comfortable with this process…as it is set to be with us, forever.

We must all remain diligent and prepared to always stand tall against the storms.  Standing apart from the crowd permits one to always be ready to do what most will not.

And remember, problems don’t come to stay – they come to pass.

Until we see you again, may your journey be grand –

and your legacy significant.