10-31-2018 

Happy Halloween! My goal was to be a bull this Halloween, but in the weeks leading up to today, I just didn’t have the confidence to pull it off! That’s what happens when bears go on a rampage.. 

Nevertheless, there are probably better days ahead. Based on earnings analysis and DCF models, I have thought for months we will continue rising. But in the wake of a 12% technical selloff in less than 60 days, who really knows what Mister Market is up to?

The media is warming up to 3Q earnings, and wow, I am emboldened to say companies are outperforming even aggressive estimates. The projections indicate that earnings growth year over year will be greater than 25% for much of the S&P 500. Can you imagine? Let me repeat that – corporations that had $100 in net earnings last year will have $125 this year.. Looking at Feb 1968, EPS was $5.76 per share for the S&P. This February it is $122.48 per share (split adjusted, macrotrends.com). AKA 6.43% on average over the last 50 years. Again, to repeat – company earnings are growing 400% faster than a 50 year historical CAGR. 

This leads me to a very scary conclusion: the economy has never needed more capital! Last Friday, the government’s 3Q report came out. It makes me sick that investors cared more about the earnings report of Amazon.com, Inc versus the government. Off the soapbox – GDP rose 3.5% during the quarter (3.3 expected) and Inflation was 1.6% (2.2 expected). In english, we grew faster than expected as a nation and costs were less than 80% of what we expected. 

On the other hand, are we building an unsustainable debt level in the face of record earnings growth and consumer confidence? Tax refunds next year will be enormous, boosting already incredible M&A levels, increasing wages of employees, and so many great things for business. The downside, obviously, is that the government will fall deeper into debt. The real question then becomes, would investors rather the government have money or corporations? I think corporations are on the verge of fantastic technological advances, and the government will not be as efficient with capital allocations. Corporations will use the money better than the government based on growth rates discussed above. Thus, the ROI for corporate development would ultimately boost the entire US economy (including the government), rather than solely the corporations that are innovating. 

From a geopolitical perspective, this capital allocation will also seperate the US tech from other countries (ie China). 

Off the soapbox (again), I am liking where we are and I have no problem being a bull at this time based on my research.

In a marketing note, my book is currently 170 on Amazon’s list of “investment portfolio management” tag-list. If you haven’t picked it up, you can find it here. While I am very happy that people all over the world are actually buying it, I don’t expect to retire off of writing.