As we get set for Alcoa to kick off the quarterly onslaught of data, I like to remind you of what we cover each quarter. In the days of HFT and short-term traders mentality, these quarterly reporting sessions have become mini-minefields as missing or beating by a penny can move a stock double-digits in seconds after hours.

Like the others, we are best served to ignore the short-term as we must accept mani-depressive reactions these days within the long-term scope of the “Barbell Economy.”

Note that I would not be surprised at all to see another bit of a roller-coaster ride as earnings begin to flow and we get closer to the round-trip of the worst of the “correction in earnings” coming from the oil sector.

Why a Barbell Economy?

As the news reel becomes more and more repetitive, filled with little more than future concerns, risks, overdone analysis and wasted fears…the market reaches these periods of pause more often. This congestion (or digestion) is what we refer to as the passing of the baton.

The Barbell Economy is dynamic – but hidden under the noise

On one end of our economy we have the previous largest generation of all time in America. They are entering the last 40 years of so of their lives – hinting at decades of newly-enhanced demand tailwinds for some sectors in the economy.

On the other end, we have the new largest generation of all time – Generation Y. They are just beginning to enter the first stage of their major economic thrust into our economy. That too will last for decades to come.

In the process, they will create rampant demand and increasing tailwinds for other sectors of our economy. Just as important, they will also create entirely new industries, new services, new technologies which will take our world to places we do not understand.

What I mean is this: Imagine for a moment telling your friend about an Apple Smartphone or iPad in, oh, 1982. Now that would have been freaky and met with harsh skepticism. Much like we see now.

These kids however, will change everything.

The Fog Lifts?

Funny things: fear and faith. They both ask the same thing of us. They ask us to believe something which we cannot yet see.

Fear is what has fogged the landscape ahead. Have you ever taken off from an airport that was surrounded by fog? The landscape was gray and it was very hard to see anything ahead. Indeed, as you sit waiting for take-off it is easy to be a bit fearful of just how the pilot will see through it all.

Then, you crest the clouds and bang – sunshine and blue sky for as far as the eye can see. You look back down from the higher altitude and what do you see? You see the fog was just a small patch surrounding the airport.

Fear has that same effect.

We have become so good at addressing fears that we have created a mental paralysis in the investing crowd – and way, way too many tools for hedging.

Under the surface during all the chaos of going from one monster to the next, the current is strong. It is strong if one is focused on the proper sectors.

The Barbell Economy is at work. There are sectors we should focus upon and sectors we can almost literally ignore for years to come. Remember: people make markets.

Oil Miscalculated – Part 2?

In your notes last week I covered the aspects of oil and the impending shift we the data were implying for many months before price changed.

I would add this aspect: Oil did not collapse just because fracking became effective. Sure – that helped – but oil is on its way to basic irrelevance by the time our kids get older. As a useful energy source, its impact is being eaten away at the fringes by many forces.

Think 30 years ago in the mid west corn fields. An acre of land produced X bushels of corn. Today that same acre produces 2 to 3X bushels of corn.

Likewise for engine technology. Cars today get 4 times the average mileage we got 30 years ago from Detroit. Meanwhile technology not only brought fracking but it also brought hydrogen, solr, wind and battery resources to bear. The pressures on oil usage going forward are not just from fracking.

Sure, oil will be around for awhile but its price movement up or down will have a lower and lower impact on the overall global economy as time marches forward.

In 2010, I provided an annual review to clients. One of the topics I suggested we could expect was a tectonic shift in oil. The death knell was described like this:

“The moment we can stand at a plug for the same amount of time we stand at a gas pump to buy 300 to 350 miles of mobility is the beginning of the end of what we perceive crude oil as today.”

While not there yet – we are closing in fast. The latest Tesla model I am told will provide 225 miles of movement after a 30-minute charge. Another few years of technology advances – via Generation Y – and the shift will be complete.

Surprise Is To The Upside – Not Downside

The funny thing about all of these trepidation is that markets have always feared downsides – right? Except history tells us the same thing – over and over and over. Things improve over time.

It is one long climb up a mountain – with rests, pauses and lunch stops along the way. We have been at a lunch stop for 18 months while witnessing a stealth bear market for some sectors. Fear is ripe as it has been for all the periods in red noted below over the last 200 years.

The blue dot at the top is where we are now.

A surprise is something one does not speak of – hence, almost no one would be surprised if we faced risk going forward – correct?

After all, the forward-looking risks are listed for us every hour of the day on any series of attention getting headlines….updated minute-by-minute.

The shock of 2008-2009 is so deeply entrenched that everyone is certain of one thing: They don’t want to be “surprised” again. The solution chosen since?

Make everything something to worry about.


The surprise is up, not down.

The surprise is solutions, remedies and ways to proceed around the mountain.

Of course that includes periods of correction – which is why understanding the Barbell Economy is so vital in the years ahead.

As the title of today’s not states – the Next 100% move in stocks is…up.

The Bottom Line?

The markets are feeling the trepidation over what earnings season will bring as data begin to flow this afternoon (AA is the official kick-off). I stand by the same thesis present for months:

The impact of the energy collapse is about complete. We should see a round-trip of the worst by end of Q2/early Q3.

The media will mistakenly focus on the “earnings recession” when the bulk of that “setback” is all in energy comps.

Corrective windows and/or periods of price panic – even a hoped for summer swoon – should all prove valuable for long-term investors with cash holdings. (pray we get them all by the way – fear is good for values)

I reiterate, this lengthy period of going nowhere in the markets (the S&P 500 is where it stood 18 months ago) feels like 1994/1995 all over again. The masses were afraid of another recession back then as well.

Growth did slow – like now – but recession never arrived.

Maybe I am getting too old for this : )