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Mr. Toad's Wild Ride

Disney raised the prices of its theme parks by 10% for 2018. They explained it was to improve the customer experience by reducing over-crowding. A one-day ticket to Disney World now costs $135. At $125 a ticket the parks were overcrowded. We think the economy is doing just fine. Although a 10% increase in ticket prices does sounds inflationary, our guess is the majority of the increase will make it to Disney’s bottom line. Speaking of which, most consumers are okay with capitalism, and our guess is they’d rather be told the truth than have their intelligence insulted. How about next time Disney’s press release says, “Our parks are full, and we expect them to continue to be full even if we raise prices. Since labor costs are going up by less than 3% a year this helps us improve our earnings and keep our shareholders happy.” We’re guessing Disney won’t call us about replacing their current spokesman. We will let them focus on “the happiest place on earth,” and we will focus on finance. Truth be told, we love Disneyworld. Our favorite ride is Mr. Toad’s Wild Ride. However instead of paying all that money to visit the Magic Kingdom, why not just take a wild ride in the stock market? As of last night’s close, the S&P 500 is up 1.31% for the year, which is an annualized rate of 10%. That’s about an average annual return. Pretty boring right? Actually, we feel like we just got off Mr. Toad’s Wild Ride, a mild case of whiplash and a little nauseous too.

Stocks peaked on January 26, up 6.57% for the year. From the high they lost more than 10%, closing on February 8 down 4.26% for the year. They’ve since bounced back almost 6%. Just like a good Disney movie, or maybe a traditional western is a better metaphor, good and evil are battling each other in the economy. Revenue and earnings growth are wearing the white hats and inflation and higher interest rates are wearing the black hats. As we’ve mentioned in our prior write-ups, we think the good guys will win. Revenue and earnings growth are the more important characters in this film. While stock prices swung around wildly, industry analysts continued to raise their earnings estimates for the S&P 500 to reflect the impact of the Tax Cut and Jobs Act (TCJA) passed on December 22, 2018. Estimates for the S&P 500 are up $10.62 to $156.88 per share. Their consensus estimate for 2019 is up $11.60 to $172.67 per share over the same period. Even the 2018 rate of growth for S&P 500 revenues per share on a year over year basis has increased from 5.6% just before TCJA to 6.2% last week. So despite stock prices going up and down, revenue and earnings estimates are going up. This is largely because industry analysts have received upbeat guidance on the impact of TCJA from companies’ management since Q4 reporting began at the start of this year. This is not to say the bad guys won’t cause trouble. They have, and they will. Eventually if rates and inflation continue to rise it will slow the economy and erode the present value of future corporate earnings. At this point the bad guys simply aren’t that bad. Core inflation is 1.9% and the 10 Year Treasury Yield is still below 3%. These are exceptionally low levels by historical standards and there are no signs of systemic inflation in the system. We will continue to watch this movie closely, but as of now the good guys are prevailing. Have a Magical Day, The GreenPort Team

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